I. The economic, managerial
2. Critical historical review
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2. Critical historical review & evolution
I. The political-economy review
a. Creative Destruction from the classics’ perspective
It was shortly after the Luddites began smashing the machinery they saw as the mother of all their evils, that the father of the classic economy, David Ricardo, conceived the abstract model that showed for the very fist time the possibility of technological displacement.
At the end of the XVIIIth century, the English economist had imagined that technology might be salutary for the entire economy for basically the same reason why modern analysts believe technology make productivity more dynamic. The optimism came from the idea that as automation permitted to lower production costs, as well as to raise the offer of cheap merchandises: it all would eventually results in more purchase power, growth of markets and industries, and creation of new jobs and high salaries. It is this same ideology that represents the pillar of most of the economic policies of all XXIst century industrialized countries. It is also this creed that has dragged us inexorably towards more technological unemployment in the last decades, as well as to a record decrease in purchase power from consumers worldwide, and cyclical economic crisis.
The original theory according to which these spectacular benefits generated from the mix of technological progress and increase in productivity ultimately end up being profitable for the masses of workers through less expensive products, more jobs and increase in wages, is attributed to the French economist Jean-Baptist Say. According to him, the accrued offer of cheaper merchandizes sooner or later creates its own demand. In more precise words, the low prices resulting from the productivity processes eventually stimulate the demand of available products and services. The accrued demand naturally pushes towards supplementary production and ends ups supporting more demand, in a virtuous cycle of ever growing production and consumption. Furthermore, the accrued volume of sales guaranties that any loss in the work force initially caused by technological improvement will be rapidly compensated by new jobs to satisfy higher production levels.
Jeremy Rifkin tells us that one of the corollaries of the trickle-down theory is that even if workers are displaced by the new technologies, the unemployment problem will somehow be
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raising number of jobless people in the labor market pulls the salaries down; employers usually respond to this situation by hiring more people instead of taking the risk of buying more expensive machinery, which moderates the impact of technology on jobs overall. A less optimistic approach to the classic and neoclassic theories sustaining that technology is salutary for the economy thanks to the constant renewal of the working force that it implies, came with the arrival of the socialist revolutions that took place in Europe throughout the XIXth century.Karl Marx, largely inspired from Ricardo’s views, partially understood that economic progress brought by the mechanization within capitalist societies, could also mean turmoil. He affirmed that the effort from employers to continuously reduce costs and control de means of production by replacing the employees by machines, anywhere and as often as possible, would create more problems than generalized value than expected.
The transfer of value coming from the traditional forms of work, and being capitalized through the automation of functions, inspired the German philosopher to believe that the elimination of the human factor from the production equation –having as a direct consequence the creation of an army of reserve– would lead capitalism to its end. It is the case nowadays that consumers in most developed nations, as well as in some developing economies, are spending less and less, and that the acquisition power of most of households has considerably stagnated. This fact will be discussed more in detail in the next section, but what is important to retain here is that the same debate that has been taking place for the last three decades, concerning labor precariousness or the fear technological displacement for a large segment of the industrial population, was already a main concern for the young European industrialized societies two centuries ago. Something interesting about Marx theory of immiserization, points out Joseph A. Schumpeter, is that “the base of the ‘industrial reserve army’ [concept], i.e., of the unemployment created by the mechanization of the process of production, [was almost entirely] based upon the doctrine expounded in Ricardo’s chapter of machinery17”.
The basic difference between Ricardo and Marx theories, tells us the famous Austrian economist, on the one hand, “Ricardo had at first been inclined to share the view, very common at all times, that the introduction of machines into the productive process could hardly fail to benefit the masses. [The English economist later] came to doubt that opinion, or at all events, its general validity and with characteristic frankness revised his position18”. He
17 SCHUMPETER, Joseph A., Capitalism, Socialism and Democracy, Harper, p. 35.
18 Ibid., p. 38.
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later produced an example well known to modern economist thanks to which he showed that mechanization could also turn out to beneficial to labor. Marx, on the other hand and less skeptically, assumed that along with the constantly diminished number of employments, as well as that of “magnets of capital who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers and disciplined, united, organized by the very mechanism of the process of capitalist production itself”. Famously as he is remembered, the German sociologist predicted that this centralization of the means of production, but also the imminent socialization of labor would at last reach a point where they became incompatible with the capitalist needs and mechanization irrelevant.
Even more notably and less extreme in his views; more conscious of the effects of mechanization, having personally experienced and deeply studied the effects of the Second Industrial Revolution that took place first in Europe, but almost immediately in the United Stated: Schumpeter predicted better than anyone else before him what the causes and the consequences of the “cooperation” between technology and capitalism on the modern societies.
It is worth taking the time to make a more detailed analysis of the main ideas that can be found in Part II of his book Capitalism, Socialism and Democracy, so as to better understand why we arrived to the economic point of inflexion in which we currently are. “Capitalism, he tells us, is by nature a form or method of economic change and not only never is but never can be stationary […] The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms, of industrial organization that capitalist enterprise creates and of course the new technologies.”
The emeritus Harvard professor prophetically explained that “the opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such […] illustrates the same process of industrial mutation –if I may use that biological term– that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism19.” An organic process indeed, in which modern economies are embedded more than any other industrial societies ever since the arrival of the First Industrial Revolution. We are able to assess “both as a fact and as a threat, that the
19 Ibid., p. 83.
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restricting output, at conserving established positions and at maximizing the profits accruing from them.” An observation that has become, in the turn of the XXIth century, the philosophical base behind the hypercompetition model that a well-known business strategy experts such as the Richard d’Aveni use as a referential mantra. In his book: Hypercompetition:Managing the Dynamic of Strategic Maneuvering, this Dartmouth College professor argues that competitive advantage for companies is no longer sustainable over the long haul.
Advantage, he affirms, is continually created, eroded, destroyed and recreated through strategic maneuvering (we will come back to this later)20.
Less notorious, or at least subordinated to his most preeminent concept of Creative Destruction, but maybe even more noteworthy given their numerous applications in the current context of entrepreneurial behaviors and modern economic practices, Schumpeter’s theories about rigid prices and monopolies will also help us to understand some of the roots and consequences of Uberization. In the same line of thought as Ricardo, for whom as it was mentioned before, the effects of technology in the labor market were unpredictable:
Schumpeter defines rigidity as “a price […] if it is less sensitive to changes in the conditions of demand and supply than it would be if perfect competition prevailed.” He tells us that there are no major instances of long-run rigidity of prices and asserts that “whichever manufacturing industry or group of manufactured articles of any importance we choose to investigate over a period of time, we practically always find that in the long run prices do not fail to adapt themselves to technological progress –they fall in response to it.”
Employment vulnerability is, in a period of economic uncertainty, more than anything else the real cause of price rigidity, being this one “motivated precisely by the low sensitiveness of demand to short run price changes within the practicable range. People who in depression worry about their future are not likely to buy a new car even if the price were reduced [for example] by 25 per cent, especially if the purchase is easily postponable and if the reduction induces expectations of further reductions21.” So the elemental question that arises from this asseveration is to know if the lack of rigidity in prices that we’ve witnessed for the last decade is the fruit of the newest digitalized technologies, and if this digital revolution has been more beneficial than harmful for consumers, seen also as employees. But before we get to this analysis, which will be useful either to prove or deny the expectations of those optimists
20 http://www.strategy-business.com/article/14886?gko=c7ef4
21 Ibid., p. 95.
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who believe that the exposition of the markets to the new technologies will eventually result in the traditional deflationary effect in favor of the consumers, lets get familiarized with the second scenario. For historical reasons, a more pessimistic scenario that reconsider the detriment caused on the supplier’s side in terms of competition, as said in the introduction of this paper, comes from the idea that a lack of it –of perfect competition– has always been detrimental for the economy as a whole, at least in the long term.
Schumpeter, skeptic as he always was and as prophetically as ever, tells us about this plausible situation which “the introduction of new methods of production [technologies] and the new commodities is hardly conceivable with perfect –and perfectly prompt– competition from the start. And [that] this means that the bulk of what we call economic progress is incompatible with it”. Furthermore, he affirms that “there are advantages which, though not strictly unattainable on the competitive level of enterprise, are as a matter of fact secured only on the monopoly level, for instance, because monopolization may increase the sphere of influence of the better, and decrease the sphere of influence of the inferior [or simply] because the monopoly enjoys a disproportionately higher financial standing.22” We will come back to this analysis given almost word-by-word by some of the modern pioneers of the Third Industrial Revolution, whose ideas both in economics and technology have paved the way to disrupt industries such as banking, the entire automobile sector and, even more impressively, aerospace.
The author of this eminent book that is Capitalism, Socialism and Democracy, whose careful reading is precious for the good understanding of what has configured our contemporary societies both from a unique perspective that synthesizes marvelously prudent political analysis and exhaustive economic research; also tells us how certain situations emerge in that process he called the creative destruction turmoil, in which many firms that could’ve been able to survive had they weather the first storm that separates the weak from the strong, might have to perish in favor of the latter. This veiled remark, which in more modern words doesn’t mean anything different from the term technological Darwinism already employed, illustrates a reality that can be only tolerated by democratic governments under the disguise of public concessions officially recognized by governments. On the author’s own words: outside the field of public utilities [fiscal monopolies for instance], the position of a single seller can in general be conquered –and retained for decades– only on the condition that he [the seller] does
22 Ibid, p. 101.
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not behave like a monopolist23.” And yet the first thing that is thought to the future generations of entrepreneurs is that practically any investment must entail a minimum of safeguarding so as to make the project we are working on attractive for investors in the first place.
As it was the case for the rigidity of prices, Schumpeter concludes, “long-range investing under rapidly changing conditions, especially under conditions that change or may change at any moment under the impact of new commodities or technologies, is like shooting at a target that is not only indistinct but moving –and moving jerkily at that. Hence it becomes necessary [for entrepreneurship at least] to resort to such devices as patents or temporary secrecy of processes or, in some cases, long-period contracts secured in advance. But these protecting devices which most economists accept as normal elements of rational management are only special cases of a larger class comprising many others which most economist condemn although that do not differ fundamentally from the recognized ones24.” What we know for sure, independently of the optimistic or pessimistic views we’re incline to sympathize with, is that any project or enterprise would in most cases be implausible if it wasn’t for a minimum set of exceptionally favorable situations, only likely to arise in a proper context and time; but also and more importantly at the risk of a minimum amount of collateral consequences that most of the time are suffered buy employees as we’ll see.
b. The price to pay for economic progress
Ever since the luddites launched the first organized public revolt against machines in the first decade of the XIXth century, workers have worried about the adverse effects of automation on the labor market. Their contemporaries, experts in the fields of a still nascent science called economics (tributary of a more ancient discipline known by French physiocratie), have tried to reassure them of the salutary effects of a trickle-down theory that states, instead, that new technologies rime with creation of new jobs while the old ones that are not suitable for our modern societies as a whole are naturally destroyed. And yet if it is true that for over 200 years these experts were right, this logic is not valid for a new generation of employees who, as it was mentioned in the beginning of this paper, see the end of the nine-to-five and the long-term contracts as the new normal. The main problem today, as Nobel Prize-winning economist Paul Samuelson proved, is that just like outsourcing and offshoring do not necessarily increase the welfare of all workers, it is also a proved fact today that technological progress is not a raising tide that automatically raises all incomes. “Even as overall wealth
23 Ibid., p. 99.
24 Ibid., p. 88.
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increases, as tell us Erik Brynjolfsson and Andrew McAfee from the MIT Center for Digital Business, there can be, and usually will be, winners and losers. And the losers are not necessarily some small segment of the labor force like [.] In principle, they can ne a majority or even 90% or more of the population25.”
The problem nowadays, as Jeremy Rifkin attested in his extensive study on the causes of The End of Work, is that this theoretical pillar of capitalism doesn’t stand as firm as it did for the last two centuries. As economist defended the idea that productivity enables companies to produce goods at a lower price and in higher quantities; that these same products being cheaper would consistently stimulate in exchange more demand; and that this same demand, in an already known virtuous cycle advocated by the adepts of the laisser-faire, laisser passer doctrine would be ever-lasting: jobs are being decimated as productivity keeps reaching historical records, this time affecting even the most developed economies and the most sophisticated professions.
In his famous preamble to the 2006 edition of his major book so far, Rifkin gives the name of productivity enigma to the situation the world has faced for the last 3 decades ever since the first neoliberal reforms were adopted in the US and the UK, but also other regions in the yet non-industrialized world. He argues that although certain observers blame globalization and the lower cost of labor in developing countries, and cheap imports, what he actually considered as being the fundamental cause of unemployment pretty much everywhere is the spectacular increase in productivity, as well as the most recent advances in technology. Taking as a reference the period that goes from 1995 (year in which he published The End of Work) and 2002, he tells us that according the a study made by the Alliance Capital Management, in a time where industrial productivity has augmented by 30% worldwide jobs in manufacture have decreased by a 16%, which according to him is just a hint of what the correlation between these two factors might be a in near future. Referring to the myth so in vogue during the last decade that a manufacturing hub such as China that was until recently undisputable in terms of cost and output, even this Asian giant was not except from the effects
25 BRYNJOLFSSON, Erik and Andrew MCAFFE, Race Against the Machine. How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, Digital Frontier Press, Lexington, Massachusetts, 2011, 92pp.
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of the productivity enigma since it also represented for the country the loss of 15 million jobs in the manufacturing industry, or 15%26 of the total sector of activity.
The services sector on the other hand, that we also know by the name of white-collar sector, goes through a similar situation of precariousness as smart technologies have signified a rise in productivity representing that an equivalent number of employees in activities as varied as banking, insurance, wholesaling and retailing are more and more exposed to the new paradigms. The observers from Alliance Capital Management had of
The services sector on the other hand, that we also know by the name of white-collar sector, goes through a similar situation of precariousness as smart technologies have signified a rise in productivity representing that an equivalent number of employees in activities as varied as banking, insurance, wholesaling and retailing are more and more exposed to the new paradigms. The observers from Alliance Capital Management had of