The next economic era is here

The world my children inhabit looks superficially like the world I grew up in during the 1970s. The house they live in, the clothes they wear and the food they eat – none of these would be very strange to the kids of a generation ago (although even here there are notable differences.) But the way they spend their time is completely different to anything I dreamed of doing.

When I grew up there were no computers, no smartphones, no video games. There was no Facebook, no Google, no YouTube. I spent my time playing outdoors in the “real world” or in a make-believe world of my own invention, or playing with board games or toys.

My children live in a digital and virtual space. The world has been transformed in a generation, and not just for children. We have entered a new economic era.

Five economic eras

  1. The first economic era was the hunter-gatherer phase. This lasted for millions of years, and throughout this time, economic activity consisted of individuals and family groups collecting and consuming their own food and other essentials.
  2. Then, around 10,000 years ago, the agricultural age began. By raising crops and tending animals, it became possible to create a surplus of food. This could be traded with other groups for different types of food, or for other goods such as tools or clothing. Job specialization became possible for the first time, leading to a steady growth in technological development and prosperity.
  3. At some point one of the world’s greatest inventions was introduced – money. As soon as goods and services could be bought and sold instead of just traded, technological growth accelerated rapidly, and with it came increased job specialization and sophistication, although the overwhelming majority of people still worked on the land.
  4. The industrial age brought a further acceleration in economic growth, and a massive population shift from the countryside to the cities. Machines increased productivity by orders of magnitude, enabling people to take up a plethora of new jobs, and to enjoy new levels of affluence. The key resources of this age were capital, and physical resources such as coal, oil and metals. I believe that this era has now largely ended.
  5. I will call the next era the virtual age. While we still require just as much food, clothing and material goods as before, we are increasingly demanding virtual goods and services too. Computers and smartphones are machines, but their true value is as gateways to digital products and systems. More and more of us spend our time creating, using or selling digital products. If you work in accounts, or marketing, or teaching, or programming, the value you are creating is abstract and rooted in ideas, not physical objects. The economies that will progress most rapidly and create the most wealth for their citizens during this next phase will be those that create and deliver virtual products. And needless to say, knowledge and human creativity will be the key resources.

How wealth has changed

It’s interesting to note what wealth looked like in the different economic eras. In the hunter-gatherer age, wealth was what you knew, and what you could carry with you. In the first farming era, wealth was the land you tended, the animals and crops you had available, and the knowledge to transform them into food. With the invention of money, wealth was the gold and silver in your pocket, the things you could sell for money, and the things you could buy with it. In the industrial age, wealth was what you owned, and the wages or profits you earned in exchange for your labours and skills.

So what will wealth look like in the new era? Many of the new digital goods and services are free. Google, YouTube and Facebook cost nothing. Neither do most online news, entertainment and information websites. Subscription services like Netflix are cheap compared with the physical  devices we use to access them. And the cost of computing power is falling exponentially. Even the cost of traditional physical goods is falling. Food is cheaper than ever before in relative terms – in 1900, Americans spent 40% of their income on food, and now it’s just 15%. The number of people who own cars has increased enormously since the so-called golden era of the 1950s. And we all own incredible new devices that didn’t even exist a generation ago.

Material goods are becoming cheaper and more abundant than ever before, and more and more of what we consume is actually free. So the concept of wealth is being turned upside down in the virtual age, and wealth itself is becoming virtual. Will money be needed in the future? Perhaps not. Traditional measures of inflation simply don’t reflect this transformation, and can be deceptive. In the future, we will consume more than ever before, but it will be much cheaper. Perhaps it will be free, or so cheap that we won’t need to worry about it.

Employment

The number of people working in factories and making physical goods will continue to fall, as robots and automation increases productivity. The same thing happened in the move from the farming age to the industrial era. In the mid-nineteenth century, most workers were engaged in agriculture, but by the middle of the twentieth century, the number had fallen to around 20%. Today it is around 1%. Manufacturing, mining and other heavy industries are following the same downward trajectories, as more and more people work in the virtual economy.

Many commentators are worried about technological unemployment. Yet in the UK the employment rate is at an historic high. In the US, it is higher than at any time during the 1950s, 1960s or 1970s. There are arguments for technological unemployment, but there are arguments against. So far the evidence is mixed.

Perhaps employment will become optional, as less money is needed in order to live.

Inequality and poverty

Many people are convinced that the decline in manufacturing and traditional work is leading to poverty and inequality. Populist politicians across the United States and Europe exploit this concern, promising to return us to a mythical golden age of manufacturing and heavy industry. Yet employment levels and affluence are at an all-time high.

Average families have more disposable income than ever before. Life expectancy is at a record high and trending upwards, and people are enjoying longer, healthier retirements. In the developing world, the story is even better, with disease, poverty and infant mortality all trending down rapidly, and living standards moving closer to those in the developed world.

Poverty is in decline. What about inequality?

In the hunter-gatherer era, everyone was equal. But if you were old, or ill, or disabled, you would be dependent on the goodwill of others for your survival. In times of drought or flooding, everyone starved equally.

In the period of farming, land ownership was the key to wealth, and a tiny number of people controlled virtually all of it.

In the industrial period, control of capital and resources was the route to wealth. Most people didn’t have access to these. However, unlike land, which was fixed and finite, capital was fluid and expanding, and a huge amount of “new money” was created. A middle class was born.

Now, in the virtual economy, the critical resources are knowledge and creativity. These are potentially unlimited resources, and wealth will be created at an unprecedented rate. Who will create that wealth? It could be anyone. Inequality may soar this century as some individuals create vast virtual empires, or it may disappear as the cost of living tends towards zero and money becomes irrelevant. Either way, we will all be unimaginably wealthier as a result.

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20 responses to “The next economic era is here

  1. This is such a scary and depressing thought. Though I do find myself pondering about these things from time to time.

  2. A fascinating post.

    At the moment I doesn’t look like we’re becoming more equal in he virtual economy, but hopefully, I will be proved wrong

    The Science Geek
    http://www.thesciencegeek.org

    • Thanks, Science Geek. Everyone has access to the latest virtual products. Google, websites, blogs and podcasts – they are all available to everyone. Facebook has nearly two billion active users. Can you think of any previous technology that has reached so many people so quickly?

  3. Excellent essay Steve! It definitely seems like we’re on the cusp of a new economic age.

    Although I’m skeptical that the need for money will disappear. There will always be scarce resources, and some mechanism will be necessary to stop people from hogging them. Increasingly information is the new wealth, but for that to work, mechanisms will need to be in place to ensure content creators can make a living. At least until AIs can create all the content. When we reach that point (far in the future), we might all be on basic income.

    But in the meantime, just as the agricultural economy pushed back in the 19th century as manufacturing was becoming the new economy, so today the people suffering from the transition from the old economy are pushing back. I fear that’s one of the factors behind the resurgent nationalism we’re seeing in a lot of places. Part of the answer seems to be training for displaced workers, but people have been saying that for decades with little being done, pushing those displaced, or in fear of being displaced, into the nationalist fold.

    • Thanks Mike! You are right – every change threatens the established order and provokes a backlash. There’s certainly a huge backlash against globalization, etc, right now. But in the long run it’s impossible to hold back the tide.

      As for the decline in the importance of money, I’m projecting what I see as the falling cost of goods to its logical conclusion. If, as some commentators predict, AI and robots displace vast numbers of people from paid employment, then it’s clear that the old model of earning a wage or salary in return for work will be dead. At the same time, if all that work is being done with zero labour, then the cost of production will be almost nil. So technological unemployment and negligible cost of living go hand in hand, and seem to point towards a future where money is obsolete.

      As for scarcity, I wonder what will truly be scarce. Land will always be finite, but if we no longer need to live close to a place of work, then the value of prime real estate may actually fall. Energy, I believe, will become cheap and abundant as we move to large-scale renewables. And material costs should fall as robots take over production, and recycling increases the supply of basic materials. Scarcity, I imagine, will be limited to anything that cannot be automated – unique works of art, or hand-crafted goods, for example.

      • Definitely, what is scarce will likely change. But it seems like there are different levels of scarcity. Food is so abundant in the developed world that the modern problem is people eating too much of it. We live in an age where those in poverty are likely to be obese instead of starving. Yet it still costs something to purchase the cheapest grocery items. Zero scarcity seems like the speed of light. We can approach it to increasingly closer degrees, but never arrive there.

        A lot of information on the internet is free, but only because someone else is paying for it. Unless the advertising system can be rescued, the trend of desirable content being pushed behind paywalls seems poised to accelerate. And we still have to pay for ebooks, streaming TV shows, and music. Yes, it’s usually possible to get pirated copies of these things, but to the extent that’s successful, it undermines the economic model that makes that content possible.

        In the end, I fear the basic issue is that energy and resources, while possibly abundant by our current standards, will always be finite, while desires will never be. We’ll always desire what’s just beyond our reach. Of course, society in the future may be an utopia by our standards, just as ours would be to someone from 500 years ago. But just as our society doesn’t feel like an utopia to us, people in the future seem likely to be more aware of whatever they lack than what they have.

  4. This is really anecdotal, but most people I know seem to feel like they’re doing fairly well individually, and yet they’ll still complain that the economy overall is falling apart. This idea that everybody’s losing their jobs seems to be so deeply engrained in our culture and politics at this point that it’s hard to see past it.

    At least, that’s my perception of things, based on what I see and hear in my own community in this one small corner of the world.

    By the way, I wanted to let you know I’ve nominated you for the Mystery Blogger Award. I don’t know if you’re really into these sorts of blogging awards, so please don’t feel like I’m pressuring you. If you chose to accept the award, the rules are up on my blog.

    The important thing is I like what you’re doing, so keep up the good work!

    https://planetpailly.com/2017/05/08/mystery-blogger-award/

    • I think that’s right. We are hardwired to give more weight to bad news than good news. Potential disasters are always more attention-grabbing than steady progress – or even rapid progress. And yet, a mismatch between reality and perception can lead to very poor decision making …

      Thank you very much for the nomination! I don’t really do those kinds of blog posts, but I very much appreciate your choice. Thanks!

  5. You’ve given me a great many things to ponder, especially about human nature. I’m also optimistic about the idea of creativity as our future resource, but less inclined to think inequality might disappear.

    I agree with SAP that we’ll always desire what’s beyond our reach. Plus, people like to own things, to possess things, and I can’t see that happening without money…even if a good deal of that money is virtual and pays for virtual goods. There are apparently people who use real money to buy virtual money that only works in a video game, much to the dismay of parents. In other words, we seem to like money. Even when it’s very abstract and totally unnecessary.

    But I don’t think it’ll be unnecessary. Is technology really infinite? Maybe, but I doubt it’s usefulness will be. It seems technological advances must be tied to our desires, and some will be valued higher than others. This suggests some sort of currency as a reward for making better technologies. But at some point there could be a glut of useless technology, perhaps after our global material needs have been fulfilled and after all sorts of entertaining things have been made to keep us occupied. In that case, many could be left without the right skills to get better jobs, especially since I imagine there’ll be a great deal of specialization. In this scenario, I don’t see much change, except superficially.

    If technology cuts down or eliminates our manual labor, there’ll still be people who create and operate that technology, and people who don’t and won’t understand it, or those who don’t have the lucrative jobs. So then who gets the resources? Sure, there’ll be plenty to go around, but will the techies who rule this futuristic world want to share? To me it seems that wealth doesn’t depend so much on the availability of material resources, but on how we think about and distribute those resources as a culture. It’s hard to believe there are starving people in the world, but there are. And lately it seems the Ayn Rand philosophy of so-called ethical egoism has been revived, and I hate to say it, but maybe it’ll come back again and again, and maybe even more so as ideas and creativity become the currency. (I see Trump and some of his entourage as a reflection of this philosophy, although not in every detail.)

    • Hi Tina, I have to say that inequality doesn’t bother me, and never has. I couldn’t care less if some woman wears a diamond-studded dress, or some guy drives a gold-plated car. They don’t hurt me, or anyone else. What concerns me is poverty, and that is at historic lows and in decline, thanks to technological advances.
      Many people believe that wealthy people somehow take resources away from poor people, but in fact the same technological and economic forces that drive extreme wealth also lift the poorest out of poverty.
      In the short term, inequality will grow, I am sure of it. At the same time, poverty will diminish. The wealth distribution curve will move to the right. In another generation, hopefully nobody in the world will be poor, most people will be rich, and some people will be fantastically wealthy. But that wealth will be dematerialized as we push into the virtual era and will eventually become largely irrelevant. At least, that’s what I think 🙂

      • I’m not a interested in equality in the most extreme sense either, but a certain amount of equality brings stability to a society, and yes, I agree that poverty is a concern. But I’m skeptical that the economic forces that make extreme wealth possible will guarantee the elimination of poverty. Of course, I hope you’re right. I’m afraid that political corruption and vastly unequal power does contribute to poverty, despite the available resources, as does discrimination (consider India). The politics are extremely important, in other words, not just the resources.

  6. This was a very interesting post. Broadly I agree with everything you say, food is less expensive, Facebook is free and Netflix is relatively affordable. But there is no mention of the horrific housing shortage. Everyone needs someplace to live, and I am afraid that people haven’t quite adapted to that reality yet.

    • Thank you. I agree with you on housing. This is a human-created problem. Land exists, demand for housing exists, building houses is profitable – so why aren’t more houses being built?

      • …and why are new houses so god damn ugly? We need well designed homes, with natural light and access to (at least shared) outside space. We also need to train ourselves to live 21st c. Lifestyle.

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