Erik Byrynjolfsson and Andrew McAfee, both at MIT, have written a very useful follow-up to their Race Against the Machine (2012) which bucked conventional economics and squarely faced our current era of jobless economic growth. Their new volume explores the causes of this latest challenge to all mature industrial societies, particularly in North America and Europe. Orthodox economic theories cannot account for this current malaise of jobless growth, inequality, offshoring and power law dynamics now producing winner-take-all outcomes unimaginable in equilibrium, normal distribution models. Most economists new to the party line deny the problems: blaming the losers, relying on GDP-averaged growth, "trickle down," and offering the usual bromides of retraining for the dis-employed by the march of digitalization.
Joining a few other courageous outliers, Dani Rodrik, Daron Acemoglu, James Robinson and computer scientist, Jaron Lanier in Who Owns the Future, the authors challenge the conventional "economism" that tries to squeeze these global system problems into their economics box. The Second Machine Age explores this exponential advance of digitalization as sector after sector from retail, music, media, newspapers, finance, banking, insurance, accounting and legal professions are transformed as automation and Moore's Law take over. As bits replace atoms in all these sectors and narrow corporate productivity increases, fewer humans are needed, poverty gaps and inequality grows and structural unemployment pervades these succession economies of this second machine age. Just as the flip side of this productivity is unemployment, so public sector productivity falls as taxpayers pick up the costs of social safety nets.
Clearly from the perspectives of futurists like me, this new digital prosperity requires a paradigm shift beyond economics, recognizing that today capital-labor ratios are reversing. Resources and capital of all six kinds: finance, built, natural, intellectual, human and societal capitals in new IRRC and SASB accounting standards are more valuable than the abundant raw muscle power of our still growing 7.2 billion human family.
I spent much of the 1970s in this debate on both sides of the Atlantic. We futurists embraced automation and the IT revolution ushering in a "leisure society." These digital machines and robots would take over the boring drudgery of dehumanizing toil and allow humans to aspire to their full potential with shorter work weeks, guaranteed basic incomes, negative income taxes and cooperatives or employee ownership of companies. If these machines were cheaper and better at doing our jobs, then we would all own our piece of those machines through Employee Stock Ownership Plans (ESOPs) pioneered by Louis and Patricia Kelso. Milton Friedman's negative income tax was tested by the Nixon Administration in the early 1970s but floundered on the Puritan ethic - "no workee, no eatee."
Much of our vision of the Leisure Society came to pass. Entertainment tourism and travel are among the world's biggest industries. Silicon Valley and companies such as Google (NASDAQ:GOOG), Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and LinkedIn (LNKD), dominate our economies - but provide many fewer jobs than the manufacturing firms of the 19th and 20th century Industrial Era. The Second Machine Age looks at the acceleration of the digital takeover of this earlier machine age which was based on the steam engine, railroads, the telegraph and later on electrification, mass production, the auto industry, steel - all fueled by fossil fuels.
The authors share the often naïve optimism of Silicon Valley, while based in MIT's Media Lab and Center for Digital Business. They all tend to forget that the entire apparatus of the Information Age is still reliant on electricity, largely generated by fossil fuels. Thus Brynjolfsson and McAfee often come across as promoters, ignoring the fragile based of their Second Machine Age, vulnerable not only to limitations of planetary boundary conditions but also the new hazards of cyber-warfare, hackers, digital crimes, identity theft, loss of privacy and civil liberties, dangers of "big data," sabotage of physical infrastructure (like Stuxnet's destruction of Iran's uranium centrifuges) and lately airborne computer viruses that spread through Wi-Fi in cities and neighborhoods.
The authors also miss the huge body of research on all such second order effects of innovation by the ill-fated U.S. Office of Technology Assessment from 1974 until 1996, when it was shut down by Republican believers in the free market orthodoxies as the authors also believe. The authors' deference to grandees of the economics profession is understandable but annoying, even to their unexamined conferring of "Nobel Prizes" onto various economists who actually won the Bank of Sweden Prize in Memory of Alfred Nobel, hotly contested by lawyer Peter Nobel and other descendants who now have publicly disassociated themselves from these prizes.
The authors have provided a considerable service in describing all of the technologies evolving so rapidly in the digital economy, as well as reviewing how statistics, macroeconomic indicators like GDP are now obsolete. I hope that they continue to dig deeper, for the need for greater oversight, regulation of such aberrations as high frequency trading now disrupting our financial markets; recognition that the internet and most Silicon Valley companies were launched on platforms created by government research and taxpayer funds.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.