Technological Advances Cause Economic Distress

The manufacturing sector has suffered twelve full months of stagnation or decline in production. Of course it has! We are in the midst of an economic shift of historic proportions, driven by changes in technology and booms in the information, entertainment and service sectors. This is generally considered great, the"New Economy"! But every major production revolution has produced an economic downturn in lower value-added sectors. This time the shift from service to information is putting pressure on the agricultural and manufacturing sectors; even the service sector, once the hallmark of a truly advanced economy, is seeing its share of the pie shrink. Let's look at some of the great economic dislocations created by changes in productive technology, and how this really works.

The first significant change in production in human history was the shift from hunter-gatherer to settled agriculture. This is usually credited with increasing nutrition and creating surpluses that allowed for greater specialization, the beginnings of modern exchange economies. In the short term, though the shift was associated with a significant drop in average life expectancy, from 25 years to 19. In the long run, agriculture became the foundation of human society for centuries, occupying 90% or more of the economy and population until the growth of cities and trade in the late medieval period.

THE AGRICULTURAL CRISIS

The first agricultural crisis caused by economics, not weather, began in the period of the Renaissance (14th - 15th century), and extended well into the Reformation (16th century). The integration of local economies into a"world system" by seafaring merchants created both opportunities and pitfalls for farmers. At the same time, more efficient agricultural practices and new agricultural products (like New World potatoes, maize and tobacco) increased the surplus production of farmers. As we know, increases in production depress prices, particularly in an international trading environment where competition is not just local. Many farmers switched from subsistence farming to market specialization, which has higher potential for both profit and loss. Increased productivity also reduced the labor needs of farmers, so more population moved to cities and became skilled and unskilled labor. Mercantile activity increased in this period, and the profit margins of farmers were substantially reduced. The population reduction of the Black Death also raised wages for laborers, drawing people away from farming and increasing the economic divide between farm and non-farm labor.

The Industrial Revolution (18th and 19th centuries) created another agrarian crisis, which manifested itself in an increase in farm workers who worked second jobs and the rapid urbanization of workers who no longer could be supported on farms. The addition of industrial products to the economy decreased the share of the economy occupied by agriculture below 50 percent for the first time in history in some countries beginning in the late 19th century. The increase of unskilled rural emigrants in cities created the first slums, and in rural areas the industrial wage labor opportunities provide farm women and men with chances to make up some of what they were losing by farming.

THE INDUSTRIAL CRISIS

The second industrial revolution (late 19th century) fueled by chemicals and mechanization created stagnation and economic weakness in Europe. Germany and France went through decades of bank failures. The term"unemployment" was created in this period to describe the pockets of unskilled laborers without sufficient work to support them. The farm economies of every industrializing society were depressed, particularly because the chemical industry and improved tools were increasing farm productivity by another quantum leap. Steam power, both in ships and trains, further integrated rural and urban economies, reducing the cost-of-living advantage of the countryside and increasing opportunities for farm workers to migrate to higher-wage jobs.

THE CRASH OF 1929

Automation and the factory revolution (Fordism) created the Great Depression, not speculation. The higher productivity of mechanized labor and factory production prompted a massive reduction of labor needs until the economy could expand to create new jobs: this came with World War II, which drew labor into the military and into related industries.

What goes around comes around: The rise of true information industries is creating both agricultural and manufacturing crises. The increase in the share of the economy occupied by service and information activities has raised the bar for manufacturers, who have responded by increasing productivity (and escaping inflationary wage increases). Increases in productivity, though, almost inevitably produce unemployment in the short term, and increases like those created by electronics and computerization are likely to produce medium to long term unemployment. Unless there is a massive increase in demand, there is no reason for employment to increase. The sectors experiencing growth are going to stagnate until the rest of the economy stabilizes and enough labor has moved into new high-wage areas to create new demand.

The boom in Internet and technology stocks was an expression of historical faith: the only real growth in the US economy is going to be in high-value-added information services. The"bust" is a transient phenomenon, a speculative bubble much like the 1929 crash. The problem with technological change is that it always comes with economic and social changes. If we are aware of that, we can try to manage the transition, emphasizing education, high-wage jobs, and steadily raising the international standard of living along with our own.