Global Economy: What is happening and why?
02.09.2016 | Author: Prof. Milan Zelený
What does a fish know about the water in which he swims all his life?
A frog in a well does not know the great sea.
The world is standing at the edge of a fundamental change of its economy. Yet, the 2016 meeting of the World Economic Forum at Davos, Switzerland, was just fireworks of futilities and a bonfire of vanities.
Politicians, bankers, stock speculators, and their media henchmen from around the world attended, many from the remotest and fading, now irrelevant, headlands and provinces of human thought and spirit. You would not find an economist there, especially not an autonomous one, i.e. “without party affiliation”; just some pseudo-politicos at the service of the above listed attendee categories. While in the corridors however, everyone was eagerly asking about Trump (worried, perhaps, about getting a “slap on the face”).
Although the theme of this forum was “Mastering the Fourth Industrial Revolution”, after the first day nobody cared anymore: no one even knew how many of such “industrial revolutions” there were, let alone how to “handle” them. Mainly, there were passionless debates over negative interest rates, oil prices, China's stock exchanges, central banks, new migration, brexit, grexit and the breakdown of the EU – all about virtual, monetarist and speculative economics. Real economy was nowhere to be found. The bolder ones argued that the stock exchanges do usually go up and then down again, day after day, year after year, decade after decade. None of the political, banking or media defenders of the status quo in Davos knew what was happening and why. Oh vanity of vanities.
The broader, real world of “not Davos” is encountering completely different set of problems: big banks are in the midst of their “Uber-moment”, standing at the edge of radical disintermediation, if not dismantling. The economy is being devastated by imposed or forced austerity, deflation, money printing, elimination of the cost of money, trillion-ate debts, real unemployment, low workforce participation, negative interest rates, low productivity, secular stagnation, data dependent interventions, and so on. Each world oligarch now imposes and collects taxes, but the taxes for entrepreneurs are rarely reduced by anybody. Yet, it is the government that must stop suffocating entrepreneurship, innovation and education – otherwise it will be relegated into the notorious "junkyard of history".
Stagnation of GDP growth is reflected in the stagnation of productivity growth, as the newly emerging economy is still ignored, innovation and investment postponed, replaced by stock-exchange speculation and wastage of governmental financial resources. The malaise of dampening labor productivity will be felt later, as the decline in living standards for younger generations.
Indeed, the bankers and politicians of Davos found a cause of continuing global recession and stagnation: China. Yet, China is going through a typical transformation from a primarily industrial to a service oriented economy; they have experienced the same phase as did the other nations, today mature, earlier industrial powers. China's growth rate remains the highest of all post-industrial societies. It is obvious that China, unlike Eastern Europe, does not intend to remain a simple provider of industrial services with low productivity and low added value, at the service of the USA, Japan, and Western Europe (Germany). Such a role is not China’s ambition. Not even the smaller subordinate economies of eastern Europe should have ambitions for activities such as brown coal, coke, oil, or steelmaking, i.e. to be sentenced to the fate of the derived, non-autonomous, and "dirty", subjugated “colonial” economy in the era of accelerating deglobalization and relocalization to digital, local-regional, autonomous and competent economy, emerging in entrepreneurially-innovative localities, regions and small states.
German marketing ploy, called "Industrie 4.0", has not worked in Davos. It is not a revolution but a phase of technological development towards robotics, automation, digitalization, the “Internet of things” and similar advances. Its main feature is the increased productivity, reduced need for employees, and lower costs per unit. (The revolution would be if the need for employees was growing, not sharply decreasing). There was only one Industrial revolution, albeit spawning countless technological advances in the increasingly productive industrial sector with declining workforce.
German "StreikReich" is no longer willing to use (and pay) for Eastern European labor, but rather relocate the remaining jobs back to Germany - for Germans and increasingly unavoidable migrants. Of course, full automation employs only a small number of employees, at higher productivity and higher wage rates. Eastern European sub-suppliers are no longer needed; their low wages are already too "high" and incomparable with the new migrants. Germany may still become its own economic "engine", but no longer the financier of post-EU castaways.
Eastern European economies were voluntarily under the policy of foreign (German) dependency as the dubious policy of their "economic diplomacy" deprived them of independence, autonomy, and market entrepreneurship. Currently, at the stage of the German “Industrie 4.0”, they are no longer competitive within the EU: their businesses have no direct contact with the end/customers, do not understand high added value (just parts and components, rather than complex, integrated units), and have lost the massive entrepreneurial skills of national capitalism of the Bata era. There have remained only politically embedded, speculative, and media-controlling oligarch-entrepreneurs.
It is logical: the virtual “economy” of money, interest rates, and exchange rates, as well as stock speculation, and bank interventions, have significantly shifted the attention away from the real economy of productivity, growth, innovation, investment, and entrepreneurship. After eight years of state-monetary efforts of central banks, it is evident that continuing to ignore the real economy is not only lacking perspective, but it might also be self-destructive. Current political campaign in the USA shows that it could be too late for effective remedies after virtually wasting the past eight years.
For millennia, the interest rates (price of money) have played the irreplaceable role of the free market: once it went up, people saved, and when it went down, they invested.
Nearly a hundred years ago, a self-taught economist Lord Keynes was fascinated by the idea that when we would, with the help of the state, keep the interest rates artificially low, close to zero, we would ensure sustained investment and economic growth. (How innocently naive!) Likewise, after the war, M. Friedman had been lured by a similar vision: if we manipulated the quantity of money in circulation (with the help of state monetarism), then we would provide sufficient funds for investment and thus prevent deflation. (What a brilliant and noble error!)
Today we have printed more money than is appropriate, forced the interest rates all the way to negative values, so that for the coming recession or stagnation, central banks have nowhere to move. They have nullified themselves. It was also confirmed at the meeting in Davos: all of the strategic “ammunition” of the state has been spent already, and the upcoming global recession is, for every developed nation, a nightmare. Simply, what remains is to decrease taxes, restore the massive entrepreneurship à la Bata, and through locally-regional use of new technology, such as 3D printing, robotics, automats and similar tools, improve labor productivity in autonomous economic areas. New technologies, under the local conditions, serve as “collaborators”, while in the global framework they simply replace the labor.
What is happening and why?
The global economy is currently shaped by two fundamental, long-term phenomena, which are beginning to be visible through the peaking evolution of advanced economies and the unprecedented acceleration of change in the world. Short-term recessions and crises are only concurrent, accompanying happenings and their effects are often mixed up (and misconstrued) with the following fundamental forces:
1. Transformation describes long-term changes in dominant economic activity (sector), in terms of the prevailing involvement or employment of the labor force in a given society (see the main evolutionary series: hunting & gathering → agriculture → industry → services → state).
2. Metamorphosis is an outcome of a full sequence of transformations – a qualitative change of the economic organism’s form in a new context or environment – from globalization to re-localization. (Its metaphor is parallel with the transforming caterpillar, which at the end changes into a butterfly: i.e. the same organism – different forms.) In economics, it is the autopoietic process of the spontaneous (and natural) evolutionary cycle characterized by construction → destruction → reconstruction.
Even though one may not entirely understand the definitions and impact of both processes (we do not learn about them at schools), everyone can encounter and appreciate their accompanying emerging phenomena on a daily basis. Both of these fundamental and irreversible processes are accompanied by an extensive spectrum of manifested emergents and trends. Each of the following phenomena is a particular expression of transformation and metamorphosis in a specific environmental context, including local, regional, and national ones. Each of them represents an offer and a challenge to innovation, entrepreneurial intention, economic freedom and political autonomy.
Disintermediation. The elimination of intermediaries; seeking a direct link between manufacturer or service provider, and the customer. Modern mobile and communication technology changes the need for and the role of agents, dealers, intermediaries, facilitators and clerks.
Self-service (outsourcing to customer). The customer is always better equipped and ready to offer his/her own advanced self-service. The self-service today ranges from ATM machines, kiosks, and refueling at the gas station, all the way to on-line shopping, minor medical services, even pubs and airports, as well as the entire home economy. This “outsourcing to customer” has accelerated into the strongest global trend.
Mass customization. The customer demands more products and services to be “tailor-made”: individualization replaced mass (bulk) production, according to the principle “Sell first, produce later” of the re-localized economy. In particular, local customers prefer “massive” customization, self-customization, and individualization of everything.
Reintegration of work, tasks, and skills. After the extreme division of labor of the mass-production era comes reintegration: larger portions of processes are being managed, smaller number of parts and components are used in products, knowledge of the whole increases, not just of one or a small number of operations.
From information to knowledge, implies the move from the symbolic description of an action to the action itself. Knowledge is a purposeful coordination of action, while information is its (digital) description. To know about or of something, does not imply the ability of doing it. As information gets cheaper, knowledge becomes dearer.
Customer intervention point. Any value chain is divided by the point of customer´s intervention into two parts: supply (before) and demand (after) chains. Supply chains are being shortened, while demand chains are expanding. The customer specifies wanted attributes of the product before the actual production.
Home office (home-sourcing). Home is becoming an effective economic unit. A home office is now an economic resource. A remote workplace now competes with the networks of local home offices.
Sharing of resources. Resources do not need to be owned: resources are being rented or shared; see e.g. sharing capital resources (Komatsu) or renting commercial premises (Pop-up store). It is all a part of the so-called Share economy (see Uber, Lyft or GrabTaxi). Striking against the natural innovation is a sign of bonding with the status quo.
Substitution of resources. Traditional, expensive, dirty, and limited resources are being replaced by better, lighter, cheaper, cleaner, safer, and renewable materials and composites. New material sciences are feeding into 3D-printing based design and manufacturing.
Digital technology. A customer can buy what he wants, not a package with what he does not want or care for. Systems such as pay-per-view, pay-per-song, pay-per-program, pay-per-page, etc., reflect these new options for digitalization: separation of the demanded from the not demanded, wanted from the unwanted.
Digitalization of production. Instead of globally hauling physical goods, it is more effective to digitally distribute information, knowledge, programs, and recipes for utilization at local production. (Like 3D printers, modular construction, sharing capital products and resources).
Colocation. A customer does not just buy parts and components, but primarily already installed and fully functional parts and components. The supplier is collocated, sharing the same area with the customer. The supplier installs his components directly, using the production processes of the customer, directly on his assembly line.
High technology. The technological support network is qualitatively restructured and disrupted by key innovations. Instead of the continuous improvement of the old, there comes a jump improvement towards the new (discontinuous) and breakthrough (disruptive) technologies.
Support network: Bypass. Resentment and state or media organized resistance to innovation and change can be overcome through the use of innovative bypass and parallel networks which leave the “resistor” isolated and works in the interest of customers, users and citizens.
Cooperation complements and replaces both competition and solidarity. The companies in the network or alliance cooperate; only their networks compete. Solidarity is a political concept which does not belong to business. The re-localized networks of the shared use of resources enhance and strengthen long-term relationships and connections.
Complementary entities do cooperate more effectively through mutual, reciprocal leveraging. When everyone is doing the same thing, then only the competition remains. The purpose of benchmarking is to expand differentiation, not enhancing homogenization and “Gleichschaltung”. Copying so called “best practices” is steering the EU towards suicidal “sameness” and innovation decline.
Entrepreneurial networks. Big companies are being decomposed into networks of strategically autonomous resources. Small companies are grouping into alliances, clusters, partnerships, and cooperative networks. Traditional companies are transforming into flexible entrepreneurial networks, thriving especially in local contexts.
Strategic flexibility and organizational adaptability are more effective than traditional operating performance. Rather than doing things right, it is better to do the right thing. Minimizing the costs is superseded by maximization of the added value for the customer and the company.
Cyclical organization. It fortifies the autonomy and self-sufficiency of resource utilization, energy, water, and materials. It maximizes the residual value (after-use utility) of used up products through deconstruction, recycling, recirculation and the continuous renewal of skills and knowledge.
Elimination of waste. Nullifying all waste and defects in material, organizational, and knowledge-based systems. Effective "redesign" of products and services, elimination of decision compensations (tradeoffs) transforms waste into resource, reduces the waste of human potential, effort, time, and application.
Unconditional basic income. Development of autonomous, regional production systems enables the introduction of an unconditional basic income level for citizens, elimination of state intervention and bureaucratic costs, enhancing the autonomy of localities and regions. Unconditional basic income referendum is today being prepared in Switzerland, Finland, Norway and in the USA, e.g. locally in Youngstown, OH.
There are certainly more of such associated accompanying phenomena of transformation and metamorphosis. Every attentive reader can generate his own series of manifested trends: they are all around us. Virtually nothing of the above is being currently taught at schools; that is the worldwide challenge of our time: We will have to do it ourselves!
Zeleny, M. (2012) Crisis or Transformation: On the corso and ricorso of human systems,” Human Systems Management, 31(1): 49-63.
Do not tell the summer breeze of the gathering storm, the well frog about the vastness of the seas, and a half-educated man about what he never heard at school.