I admit to being a junkie of historical economics. I believe that there is nothing new under the sun when it comes to economic activity. There are new processes and new innovations but there is much to be learned from the South Sea Bubble as it relates to the great mortgage meltdown. Enter Deirdre McClosky a much venerated economist that held sway for may years at the University of Chicago in the United States. To make it a bit more interesting (if not relevant) is that Deirdre started life as Donald and underwent a sex change. Her recent interview on the CBC program Ideas (you can download it free of charge from either iTunes or the CBC) is a must-hear for those who are even remotely interested in how the world is changing (in economic terms) but is much the same as it was in the 1700s and 1800s.
I have often subscribed to the view that the cataclysmic events of the British industrial revolution fundamentally changed the world as they new it at the time. According to McClosky this is because innovation became a generality accepted reality rather than what it was previously: any change was bad. According to McClosky this acceptance was an "accident". My position was that it was no accident. In Britain, second sons (who would not inherit the family fortune) went into business. Also, the rise of Protestantism freed workers from the burdens of the church and advanced the notion that each man was his own person (rather than a person owned by the local gentry or the church). The rise of real property concepts in Britain was key to economic development as was the rise of personal property such as intellectual property. Wealth was not longer measured in land but in money capital.
Whatever it was, the changes that were brought about were, as I said, cataclysmic. Wealth was created by innovation, manufacture and trade. Factories brought workers in from the farm. The farm had to become more efficient to feed all of the mouths that were now in factories and hence agricultural innovation. Yes, people worked at starvation wages in factories but innovation came through organized labor and unions. Innovation moved workers from horse and buggy to the automobile. Space exploration led directly to semi conductors which, in turn, revolutionized everyday life with consumer goods and computers. Economies have gone through cataclysmic changes before and they will do so again. In fact, they are going through a fundamental changes today. And change, as we know, is painful.
What does this have to do with economic circumstances today? McClosky posits that innovation in the past innovation was found in northwestern Europe. Because of fundamental sociological changes in Britain, the revolution in France, the revolution in the United States, the ability of the common man to innovate became a prime mover in both economic, political and social terms. Where it has effected society most is in labor terms. Each cataclysmic event has had a negative effect on labor. Because each innovative change has brought with it labor efficiency. Therefore fewer labor units were needed to sustain economic activity. As agribusiness took hold it took less people to work the farm and workers were displaced into the cities. These displaced workers had to be retained to work in higher value jobs. Many found work as auto workers. The semi conductor revolution let to a high level of automation: many auto workers were displaced by robots that did the welding and other tasks more accurately than humans and without the burdens of labor unions. Those displaced workers took jobs in other industries where labor had not yet been dealt an efficiency blow.
This economic phenominon can be seen in its stark reality in China and India. Politics aside, both those economies have embraced innovation to the extent that they threaten the "more advanced" economies such as the US, Japan and Europe. The world, in the words of Thomas Friedman, has gotten a lot flatter.
The key spoke in the wheel is education and training. If there are going to be periodic wholesale dislocations of labor then labor will have to be constantly retained to meet the new reality. Because there is a surplus of labor that will work menial jobs for low wages (Africa is the next India) the developed world will have to create workers who do higher value jobs. While the US has been innovator-in-chief for more than 200 years its world position is being threatened by its seemingly inability to educate its masses so as to get them ready for new jobs that will be recreated by the most recent dislocation. Unlike McClosky who is a diehard free marketeer, I believe that this is where government can and should play a role. Previous dislocations of labor have sometimes meant lost generations who never found work. Western economies can no longer support unemployable workers. They just don't have enough tax strength.
We live in interesting times. We will survive the present cataclysm. But only if our politicians are far sighted and understand the forces that they are dealing with. Fat chance.
Bernie.
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