Tag: economics of complexity

Back to the village? Globalisation is changing direction

The human mind is hard-wired to think that present trends will continue, as many a study cited by behavioural economists attests. It takes a real effort to see things another way, even when there is evidence aplenty. So it seems inevitable that technology change and globalisation will continue to hollow out society, destroying jobs while a rich elite enjoys the high life in specially protected enclaves. But a change of direction is coming.

Recently I read a review in the Economist of a book by Richard Baldwin: The Great Convergence Information Technology and the New Globalisation. This is another variation on the same old story of advancing globalisation, but it offers a narrative that is useful.

Mr Baldwin sees the advance of technology affecting the human economy in two waves. Originally mankind was stuck in a village economy, forced to produce virtually all it consumed. The first wave of technological revolution detached production from consumption through advances in the technologies of transport. Goods (and energy) could be moved cheaply and easily. Society rearranged itself around industrial centres that produced things that were distributed worldwide. But knowledge, ideas and skills did not move so easily, which meant that production was concentrated in integrated geographical clusters.

The second revolution came with information technology, which allowed the spreading of knowhow, which in turn allowed the traditional clusters to fragment. Sub-assemblies could be manufactured far away. And indeed whole factories could be transplanted from Detroit to Mexico. This proved wrenching for the developed countries, but a big opportunity for the rest of the world. It is a backlash against this process which is behind the current wave of political turmoil. Mr Baldwin seems to assume that this process has further to run, and that we should facilitate its progress.

He may be right, but we should not miss two further dynamics, both based on conventional economic theory. The first dynamic is convergence – a different aspect to that suggested in the book’s title. Just why is it that so many factories have been relocated to developing world countries? The knowledge economy facilitates the move, but does not tell us why it is happening. It happens because workers in the developing world are paid less than those in the developed countries. But why?

The reason is that developing world economies have very low productivity. This low productivity is mainly because they have very inefficient agriculture, which ties up a huge proportion of the workforce, and which is massively uncompetitive in world terms. This drags down the cost of labour. But as developing world societies adopt modern technologies, and as more of their populations flock to cities, the productivity gap between town and country reduces. We have witnessed this in Japan, followed by South Korea and Taiwan. Now mainland China is following these exemplars. This means that what economists call comparative advantage (driven by the balance between different sectors of an economy, and considered to be the main engine of trade) is equalising. It’s quite a subtle point (which I explore in my economics essay on trade on why global trade is going into reverse), but the upshot is that the economics of outsourcing overseas is becoming less attractive.

There is plenty of evidence that this trend is quite advanced. It does not mean that large numbers of manufacturing jobs are coming back to developed countries though – because many of the jobs have been automated away. It does mean that future disruptions wrought by technology (and there are more to come, especially in white-collar work) will be less international in scope.

The second dynamic comes from looking at the economic impact of consumption. Not so long ago, the world’s consumption was mainly food. The agriculture sector comprised most of the economy. Now agriculture takes up a tiny share of national consumption in developed economies, and we take it for granted. That same process is evident with so much else of what we consume. Manufacturing industry is vanishing as a proportion of the economy. Various parts of service industry are following suit. So what does that leave? Increasingly our economic activity is about interpersonal contact with people in or around our neighbourhoods: hospitals, care homes, schools, gyms, restaurants, cabs and so on.

And what about technology itself? Though we hear much about it driving a process of mass automation, including through the use of algorithms in artificial intelligence, we may not have noticed that much technology is not about this at all. It is about the empowerment of individuals. Think about what you can do with your smartphone. Think of the personal liberation that comes about through such services as Uber (though not for the drivers perhaps, admittedly). And think about additive manufacturing (or 3-D printing) that makes it more economic to have a production run of one. And think of energy technology. The idea of massive nuclear power stations at the heart of a huge grid of high voltage cables is fading, as it becomes harder to make the economics work. It is being replaced by the idea of localised renewable energy sources, much more efficient consumption, supplemented by medium-sized power stations.

Put these things together and you might start to see the village coming back together again. The centrifugal forces are becoming centripetal. Not yet, to be sure, but the idea is becoming more technologically viable. And there is human need: most people crave denser social networks where recent trends have weakened them.

The new village will be very different from the old one. The old village was very insular, with people rarely mixing with their neighbours. In the new village people will travel freely, and the interchange of ideas will be global. And the new village remains dependent on national and global supply networks and information infrastructure. But most economic activity will be within the village (which could be a small town or suburb or network of actual villages in fact- or perhaps even a large town). The old village was a prison. The new village, or the liberal vision of one, should not be.

Let me hazard a further guess at this new village economy: public services will comprise a very high proportion of what it does. Education, health care, public protection, social care; I do not think these will be marked by high productivity gains in the future, so their importance in the overall economy will rise. And much of the infrastructure that the new society will depend on will be provided by natural monopolies, many of which will end up being run publicly, if not run publicly already. That poses some big challenges for governance and tax.

Those challenges will be among the many for public policy posed by this trend. Another is the status of that liberal icon, free trade. We are stuck in an old way of thinking about it, appropriate to older phases of technological advance. We will be still be dependent on the free trade of things, even if the distances shrink: but things will be less important to us, compared to the services we receive from our neighbours. Free trade may hollow these out by sucking resources away to centres of power elsewhere. Compare a Starbucks to a locally run café.

And another point is that I am coming at this with a very optimistic and liberal gloss, but there may be darker ways that these trends can take shape, with a return to insularity.

But that said, we need to adapt our political ideas to the world as it is, and what it is becoming. We should neither expect current trends to continue forever, nor for the past to return. Not enough political thinkers are responding to this challenge.

 

What TalkTalk can teach us about the modern economy

I don’t often read George Monbiot. He is far too polemical for my taste. But for some reason I read an article of his last week in the Guardian, and I found myself mainly agreeing.

The article was an attack on the idea that Donald Trump’s victory will bring prosperity back to the rustbelt. Its conclusion was that war is becoming more likely. That was not what drew me to the article, though. It was the way he invoked society’s failure to deal with complexity as one of the real cause of its economic and political malaise. And here he is onto something very important. He links to an article by blogger Paul Arbair as his source, which he rates as “the most interesting essay I have read this year”. Well, see for yourself by all means, but I found that the article uses a lot of words to say not very much that is new. Attentive followers of this blog may remember that I have raised this issue myself, through the book by Cesar Hidalgo, “Why Information Grows”.

The thesis runs that the human mind can only handle a certain amount of complexity, and that we find arbitrary ways of trying to make our lives fit within that limit. The result is that we are continually hitting sub-optimal solutions, and we find the world running away from us. In Mr Arbair’s and Mr Monbiot’s view this human capacity to manage complexity is one of the main limiting factors to our current society’s development. I agree.

Let’s now try to make this less abstract. Over the last few weeks I have been trying to get a new landline installed for my 90-year old aunt, who lives on her own and has never succeeded in grappling with mobile technology. How she lost her phone line in the first place is another revealing story, but the issue for now is how to get a new connection. This has involved dealing with a major phone company, TalkTalk – though I am sceptical that their competitors manage these things any better. This initially involved an hour-long phone call, which I could only start by working out how to break the system so that I could talk to a human being – albeit that the human being only spoke with an accent that I could understand 75% of the time over my mobile connection (my aunt herself, when her consent was needed at one point, could understand almost nothing at all). Whether intermediated by a human or not, it meant navigating a set of pre-mapped options, without access to any real context. For example we were told that she could not have access to her old phone number – but I had no idea what the problem with this was. On the date installation was due I called again (even though the line offered to check progress required you produce a current TalkTalk number to proceed – before a number had been allocated!) and was then told  that the whole order had been lost. I started the process again, though, having thrown my toys out of the pram, I was talking to somebody more senior with a stronger command of English. I was given a distant future date for connection, which was blamed on BT Openreach, whose lines carry the calls. This date is later today; we will see what happens.

This story will be familiar to anybody who negotiates the modern world. At every turn you are made to conform to a simplified structure that makes as few concessions as possible to context. Navigation requires a degree of cunning on the customers’ part or  they end up in a dead end. It often takes the customer a lot of their time – though suppliers limit any time spent by their operatives. And disappointment is usually blamed on somebody else. Companies that use a more contextualised, intelligent approach can’t compete in the market, apparently – or else they only can do so if part of an exclusive service aimed at the wealthy. There is a limit to the complexity that a company like TalkTalk can handle, and you must pay that price if you want to use their services. Many people, like my aunt, could not hope to navigate this system without somebody to do it for them. The many failures that this approach leaves are simply shrugged off.

Now let’s reflect that so many politicians and economists tell us that one our society’s biggest problems is a lack of productivity growth. But more productivity means more experiences like ordering a new phone line with TalkTalk. To most people it is simply replacing one imperfect world with another that is not necessarily better. Is it really any wonder that progress is so slow?

In my view, this kind of problem – information processing and our capacity to deal with it – lies behind many of our society’s problems, including the rise of inequality between people and regions. It hollows out jobs while leaving many human problems unsolved. And yet amongst the intellectuals who analyse society’s problems it seems largely unrecognised. We lack a clear language with which to communicate and analyse it. One important question, for example, is how much artificial intelligence can help, or whether it can help at all.

What is the way forward? We need to recognise that limits to handling complexity affect how efficient political and economic organisations can be designed. You have to be able to manage complexity somehow. One favoured method, used by the likes of TalkTalk, is to create a system of simple scope but far reaching extent – able to deal with a small number of needs for large numbers, millions, of people. This thinking is grounded in the way modern societies have embraced the world since scientific discovery took hold in the 18th Century. You tackle a large scope by breaking it into pieces and then examining each piece in depth. This gets you a long way – but how do you fit the pieces back together again?

The other to tackle complexity way is to broaden the scope but reduce the reach – deal with smaller numbers of people, but handle a much broader array of issues. This is a commonly used technique in business and politics. The 1990s craze of “business process reengineering” was based on the idea – I built a large part of my professional career applying it to financial services. But it has fallen from favour. It would be interesting to understand why –  I think it is because there are strong incentives for business leaders to increase the size of their organisations, because their own wealth and prestige grows with it. This delivers a natural bias towards large organisations of narrow scope – even though these are not necessarily the most efficient. Our legal, political and regulatory systems have in inbuilt bias towards such large organisations too. When the BSE crisis hit the British meat industry in the 2000s, for example, the men from the ministry simply assumed that small abattoirs had to be closed down, and so produced regulations that made it virtually impossible for them to operate.

Which is not to say that the world does not need big businesses, and big government too – but we need to rebalance these to make small government and small businesses more viable – because these will deal with more complex problems more efficiently.

But what on earth will it take to make people realise that?