4th Industrial Revolution: Myth or Reality?

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Stavros Mavroudeas
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Below follow the text and the links for downloading of my contribution title ‘The 4th Industrial Revolution: Myth or Reality?’ at the Workshop organized by Union of Economists of Secondary Education Teachers on 15/2/2019 in Thessaloniki

Workshop: ‘The Economy on the Horizon of the Fourth Industrial Revolution’

Thessaloniki, 15/2/19

‘’

Stavros Mavroudeas

Prof. of Political Economy

Panteion University

e-mail: [email protected]

Abstract

The term ‘4^th Industrial Revolution’ is extremely popular today. It was proposed by Klaus Schwab (president of the Davos World Economic Forum) and argues that the contemporary economy is undergoing a fundamental technological transformation because cyber-physical systems are created that integrate the physical, digital and biological dimensions (robots, artificial intelligence, nanotechnology, internet of things, 3D prints, fully automated vehicles etc.). It is argued that this technological transformation is revolutionizing the potential of the economy and opening up greater possibilities for economic growth. At the same time, however, it is debatable whether this benefits all categories of countries and all social classes or whether the respective inequalities are growing. But besides the headlines, a more critical study finds that it is the sixth time that a 4^th industrial revolution was announced, and all previous ones have been announcements have been disproved. In the field of economic analysis, the ‘Solow Paradox’ highlights the unsustainability of its past announcements. This paper examines whether the ^4th Industrial Revolution is currently taking place. It also analyzes under what conditions a radical technological change benefits the social majority and under which it does not.

1.The 4^th Industrial Revolution: A Journalistic Succes

The term ‘4^th Industrial Revolution’ is extremely popular today. It was proposed by Klaus Schwab (president of Davos World Economic Forum) in 2015 in Davos and was originally published in an article in Foreign Affairs and two years later in a hurriedly written book. He argues that the contemporary economy is undergoing a fundamental technological transformation because cyber-physical systems are created that integrate the physical, digital and biological dimensions (robots, artificial intelligence, nanotechnology, Internet of Things, 3D prints, fully automatic vehicles, etc.). These changes are supposed to be so profound that there has never been a period in history that involves so many possibilities and risks at the same time. In particular, it is argued that this technological transformation is revolutionizing the potential of the economy and opening up greater possibilities for economic growth. At the same time, however, it is debatable whether this benefits all categories of countries and all social classes or whether the respective inequalities are growing.

2. But it is not a scientific finding

There is no conclusive evidence that these journalistic dithyrambs are confirmed empirically. Any data reported are selective and extremely limited in time. Thus, the 4^th industrial revolution is just a hypothesis.

Instead of fancy declarations, it would be preferable to reflect on the blatant disproval of all previous modern announcements of a new technological revolution based on information technology.

This idea is quite old. It first appeared in the 1960s. However, where it gained the most popularity and attempted to be empirically documented, it was in the 1990s with the ‘New Economy’ label, supposedly based on information technology, biotechnology and telecommunications. It was accompanied by a huge rise in stock exchanges – particularly in the new technology index (NASDAQ). On the basis of this, Mainstream Economics pronounced the end of the economic cycle and the achievement of almost perpetual sustainable growth. Unsurprisingly, these grandiose declarations were soon refuted. In 2001, the dot.com bubble collapsed. Moreover, economic cyclical fluctuations have never been abolished and the crisis returned in its most acute form in 2008.

Indicative is the NASDAQ (composite) trend:

The ‘New Economy’ case was empirically tested primarily in the US economy. And that is where it failed utterly. As Solow (1987) has pointed out, ‘you can see computers everywhere except for productivity statistics’. In particular, the increase in productivity in the US economy from the mid-1970s to the mid-1990s was negligible. This was called the ‘productivity paradox’ or the ‘Solow paradox’ and since then he has taken all the assumptions about a new technological revolution based on information technology.

The adherents of the ‘New Economy’ tried a come-back in the mid-1990s with an occasional recovery in productivity in the US. However, as R.Gordon (2000) has shown, if some necessary technical corrections are made (computer use, economic cycle, change of type of measurement), then there is no labor productivity growth except only in the computer production sector. Similar results are derived in studies that calculated not labour productivity (as Gordon did) but total factor productivity (as Neoclassicals and Solow prefer). The only thing that increased was productivity in computer production that simply replaced other means of production without increasing production and overall productivity.

The attempts by ‘New Economy’ supporters (e.g. Brynjolfsson and McAfee (2011) to rebut these arguments (citing measurement problems, lagging behind in the implementation of new technologies etc.) have failed, with empirical evidence still disappointing. Thus, even ‘New Economy” supporters (e.g. Acemoglou et al (2014)) speak nowadays about the return of ‘Solow’s paradox’. To put it in empirical terms, US productivity in pre-‘New Economy’ decades was rising by approximately 2.1% per annum. From 2004 to 2014 productivity growth receded and increased by approximately 1.2%. Injuring further the ‘New Economy’ hypothesis, productivity has fallen since 2011 to 0.6% (Acemoglu et al. (2014)).

In addition to these empirical findings, it has been shown that – either in terms of labor productivity or in terms of TFP –  previous periods (and technological revolutions) have had far greater effects on productivity growth than the meagre results of the supposed 4^th industrial revolution. For example, Gordon distinguished three industrial revolutions in the US. The first (1750-1830) was fired by steam and railways. The second (1870-1900) was based on electricity, an internal combustion engine, transportation, communications (telephone and television), running water and many other innovations. The third (1960 to date) is the revolution of computers brought by microprocessors, the Internet and mobile phones. Gordon claims that this third industrial revolution was frustrating in terms of productivity. Apart from a brief period from 1996 to 2004, computer revolution did not significantly boost productivity growth.

Gordon has created a graph showing the decline in US labor productivity – which is different from TFP only in measuring employee performance – in different historical periods. This chart shows that the biggest gains in productivity came from the second industrial revolution, albeit with a time lag. Innovations in transport, communications and entertainment, at home and at work have all had permanent effects, leading to high productivity increases that continued in the post-World War II period.

3.There are additional denials of the case of the ^4th Industrial Revolution

• Biotechnology has a life of almost a quarter of a century and has not produced shocking results.
• The presence of robots outside manufacturing is limited.
• The use of computers is mainly in the office and in logistics (services) and less in production.
• The extremely large investment in enterprise resource planning (ERP) systems over the last 30 years (Davenport 1998) has produced insignificant results (Deutsch 1998)

4.While there is no tangible impact on growth due to new technologies, there are worrying trends in today’s capitalist economies

The labour share is decreasing and this is attributed to the substitution of workers by machines. It seems that the ‘race against the machine’ has already been run and that workers have lost. This results in worsening income inequality at the expense of labour. In Marxist terms this is a consequence of the secular tendency of the organic composition of capital (that is the ratio of constant to variable capital) to increase.

Another negative consequence is that new technologies are used to increase the control exerted by the enterprise on its employees. In K.Marx’s terms, new technologies augment the ‘despotism’ of the factory owner and lead almost to ‘Big Brother’ situations.

5.Why is this mania looking for new technological revolutions?

Behind these repeated claims of a new industrial revolution lay several practical elements.

The first is the capitalist utopia of the ‘compliant factory’. For every capitalist and the capitalist class as a whole paradise is a world of factories (owned by them) producing profits but without workers and their demands and resistance. Unluckily for them this is a mere utopia. If waged labour ceases to exist then capital also follows suit.

The second element is the expansion of an ‘industry’ of well-paid supposedly discovering or applying the new industrial revolution. This ‘industry’ – and the Davos Forum is a typical example – has to reproduce this myth in order to maintain its revenues.

Last but not the least, in historical periods as the current one that are characterized by falling profitability, capital hopes for a technological deus ex machina in the form of technological revolution. This deus ex machina is believed that it can restore profitability; that is act as a strong counter-tendency to that of the falling profit rate.

6.The Marxist interpretation of technological change in capitalism and the role of new technologies

Contrary to bourgeois and Mainstream fantasies, Marxist Political Economy offers a far more realistic understanding of technological change in the capitalist system.

Economic analysis distinguishes three basic types of technological change:

1. Capital augmenting and labour saving (in Marxist terms increasing the use of constant capital and economizing the use of variable capital)
2. Labour augmenting and capital saving
3. Balanced or neutral

Marx (and the majority of economic analysis) argues that the first is the dominant case. Apart from empirical studies (which predominantly verify this hypothesis0, Marxism offers also a theoretical explanation why this type of technical change predominates. It argues that the means of production (capital in Neoclassical terms) are the means through which the capitalist can control the worker and extract surplus-value from the latter. Moreover, intrea-capitalist competition pushes capitalists to adopt labour-shaving techniques. Labour-saving technical change increases both labour productivity (product per worker) and capital efficiency (constant capital per worker).

This role of technical change in the operation of the law of the Tendency of the Rate of Profit to Fall (TRPF) is typically presented in the following mathematical terms.

Profit rate:                                                     r = s / (c + V)                          (1)

Organic Composition of Capital (OSC):     g = c / v                                   (2)

Percentage of surplus-value:                       s΄ = s / v                                  (3)

From the previous equations it is derived:

r = s΄ / (g + 1)                                     (4)

or         r = f (s΄, g)

The capitalist system is trying to increase labour productivity by introducing new technologies. This leads to labour displacement and its substitution by machinery (increase of the organic composition of capital). This may lead to an increase in production and the opening up of new sectors to compensate for labour displacement. But over time, reducing labour means that less new value is created (as labour is the only creator of new value) in relation to the cost of capital invested. Therefore, after a period of recovery, profitability begins to decline as too much capital has accumulated that cannot be invested sufficiently profitable. This happens because ina capitalist economy investment and production depend on the profitability of capital. Thus, a capitalist economy that may increasingly rely on the web of things and robots will lead to more intense crises and greater inequality rather than increased prosperity and welfare for the society as a whole.

REFERENCES

Acemoglu D., Author D, Dorn D. & G. Hanson (2014), ‘ Return of the Solow Paradox’ IT, Productivity, and Employment in US Manufacturing, American Economic Review, American Economic Association, vol. 104 (5), pages 394-99, May

Brynjolfsson E. & A. McAfee (2011), ‘Race Against the Machine’. Lexington, MA: Digital Frontier Press.

Davenport, TH 1998. Putting the enterprise into the enterprise system. Harvard Business Review, (July / August), 121_ / 31.

Deutsch, CH 1998. Software that can make a grown company cry. New York Times, 10 January

Gordon R. (2000), «The New Economy Measure to the Great Inventions of the Past», Journal of Economic Perspectives 14 (4): 49-74

Schwab K. (2015), ‘The Fourth Industrial Revolution: What It Means and How to Respond’, Saturday, December 12, 2015

Solow R. (1987), We’d Better Watch out, New York Times Book Review, 1987, p. 36