The 21st century economy

Last year, getting started on my book I posted some facts and claims about the 21st economy. The key points (slightly elaborated)

(1) Most economic activity in the 20th century, including ‘primary’ industries like agriculture and mining and services such as wholesale and retail trade, was fairly directly related to the production and distribution of manufactured goods

(2) This is no longer true: around half of all employment is now related to human services, information services and finance, and these are at most indirectly related to goods production.
On the basis of (1), the 20th century economy could properly be described as ‘industrial’. The economy of the early 21st century is harder to classify. Information technology and communications play a central role in the economy and society, and are the main focus of technological progress, but don’t employ all that many people. Service industries employ most people, but it’s critical to distinguish between services that are part of the industrial goods economy and human services like health and education. So, neither ‘service economy’ nor ‘information economy’ captures the whole picture. ‘Post-industrial’ carries too many implicit assumptions, as does the use of the ‘post’ prefix in general.

But that’s just semantics. The key point for the book is how the pandemic changed the different parts of the economy, and to what extent those changes will be sustained. A general observation is that the changes most likely to be permanent are those that reinforce processes that were already underway. So, some thoughts

The goods economy

The pandemic exposed the vulnerability of the global (goods) trading system, a point emphasized by the fact that China was (and remains) the world’s largest producer of surgical masks. In the early days of the pandemic, supply chains for goods of all kinds were disrupted, leading to calls for a greater degree of self-sufficiency. The supply problems are less severe now, but it seems unlikely that we will return fully to the complex global supply chains, characterized by “just in time” delivery that were the most distinctive feature of late C20 globalization. As I argued last year, these complex chains were already under threat as the neoliberal consensus broke down, reflected in Trump’s trade wars, Brexit and more recently China’s largely undeclared trade war with Australia.

The human services economy

The human services sector has been hardest hit by the pandemic, in multiple ways. The burden of dealing with the pandemic has fallen hardest on workers in health, aged care and education. Non-essential services involving human contact, like restaurants, have borne the economic brunt of lockdowns. The process has exposed the disastrous effects of decades of wage stagnation and labor market reform. People holding multiple insecure jobs, without sick leave, have been forced to work even when they are ill, ensuring the spread of the disease. The patchwork nature of much modern employment has created significant difficulties in providing assistance to workers displaced by the pandemic.

The information economy
  • The information economy has been the big gainer from the pandemic. Reliance on information technology the expense of both the physical goods economy and service activities centred around human contact.

Again, this is an acceleration of pre-existing trends, but in many instances we’ve seen a qualitative rather than a merely quantitative change. Most strikingly, at the beginning of a year holding a meeting virtually using Zoom or one of its rivals required a fair bit of organization (often, more than flying all the participants to a single location), it’s now become the default*. That’s unlikely to change, and it implies a permanent reduction in demand for business travel and accommodation (at least relative to the pre-existing trend). By necessity, the regulatory obstacles to things like telemedicine have been removed, and are unlikely to be restored.

The information economy is different in crucial respects, which will be spelt out in more detail below. First, information is inherently a public good: it can be shared without being diminished [econ jargon- nonrival], and it is hard, though not impossible to lock up [econ jargon- nonexcludable]. That makes any kind of pricing problematic. Second, information technology is characterized by rapid capital-saving innovation. A modern smartphone has more computing power than a 1990s supercomputer and (thanks to the information encoded in software) does a vast range of things that a supercomputer could not. Even allowing for the R&D embodied in the smartphone, the capital requirements of the information economy are much smaller than those of the physical goods economy. That means much reduced investment demand, which in turn pushes interest rates down.

More to come on all this, but for now I’d very much appreciate comments and criticism

  • Just as the Internet went from being a tool for nerds in the 1990s to a (near) universal communications platform in the 2000s]

17 thoughts on “The 21st century economy

  1. JQ, Multinational corporations, while on a distinguishing feature of the 20th century (they have existed for many centuries), they nevertheless play a crucial role in the 20th century globalisation. They carry out direct foreign investment and they are major players in international trade of goods.

    IMHO, it is direct foreign investment, both in China and from China, which is at least a partial but important source of so-called ‘trade tensions’ if not trade wars.

    I am aware you are aware of it. I am noting it to remind.

  2. A couple of points about interactions with other trends and issue sets.

    – The welcome move away from JIT supply chains will surely be reinforced by lower interest rates, making it cheaper as well as more prudent to hold more stock. The vulnerability created by JIT is illustrated (as well as the Covid PPE case) by the prospective damage to the UK economy from a no-deal Brexit. The system also creates large environmental externalities of congestion, air carbon emissions and air pollution, from delivery vans carrying one parcel for Amazon to your house, to jams of hundreds of trucks carrying car parts in Kent. 3D printers will make it more feasible to build prototypes in-house rather than buying in.

    – An update on dematerialisation of growth would be handy. I don’t know if Wiedmann has updated his findings from 2013 showing relative but not absolute decoupling in the world as a whole, crucially including China. Crucially, there is no law that GDP growth requires an ever-greater material footprint, and it should be a policy goal to reduce the latter.

    – Still less if you switch to a better welfare indicator than GDP. Unpriced production is largely services (child and elderly care, Internet content like this, gardening, etc.) The grotesque policy bias towards Real Manly Jobs Like Digging Coal is just the tip of an iceberg of bias. Cf. sword-wearing at Versailles, made obligatory at a time when the French aristocracy was largely being deprived of its function in fighting real wars.. The case for better and more inclusive welfare indicators is now overwhelming.

  3. PS. Following Ernestine, a paragraph or two on the ending of tax havens might fit. The service economy has fostered grotesque levels of tax evasion by multinationals through forum shopping – you don’t even need the paperwork behind rigged transfer pricing of goods, cf. Google and Ireland. The OECD has made a lot of progress at the technical level towards unitary taxation of corporate profits. What’s missing is the political will. There’s hope here from Janet Yellen, working with the EU.

    As with shipping flags of convenience, the tax haven jurisdictions are laughably weak in the face of real pressure from the governments of major countries and regional groups like the EU. I was brought up in Jersey: they get away with it by always fielding Team A and never giving up, while political attention from he big players is intermittent and it seems only lasts a few news cycles.

  4. “human services sector”

    Does this brit example not expose everything that’s wrong with neoliberalism in our time?

    https://www.theguardian.com/world/2020/dec/21/firm-with-mystery-investors-wins-200m-of-ppe-contracts-via-high-priority-lane

    Another example at the Guardian, the 500,000 Centrelink breaches since the end of the covid moratorium.

    https://www.theguardian.com/australia-news/2020/dec/21/welfare-suspended-500000-times-since-august-but-new-policy-making-a-difference

    No doubt, someone will write in complaining about how she resents her taxes she likely doesn’t pay in real life anyway, why are these used to feed loafers?

  5. Research coming out of Europe suggests that woman have been more adversely affected by the pandemic. They are seen to be what the researchers call “triple tasking”. That means that they have to: 1. Work at their jobs, often under conditions mentioned by JQ;
    2. Do home duties either, alone, or, with help of partner; and
    3. Supervise home schooling during lockdowns/ activities during school holidays.
    This research involves 110 000 participants ( mainly woman) answering questions designed to check up on their mental health for 2020. Its preliminary finding is that the pandemic/lockdowns are having a harsher impact on females over the impact it had on males. As yet there is no age related data being released.
    A value judgement was given by the team leader of this research effort that maybe women were just more open about the impact on their lives than were the men – in this survey.

    Now this was a mental health survey. It only covered the Euro zone as far as I am aware. So it has its limits as far as generalizations are concerned.

    But, ceteris paribus, economists may draw some observations from its early data. Safely enough economists can say that mental health impacts of the pandemic are a social cost. Further it can be claimed that these are long run social costs. That is, mental health impacts are not going to disappear even after a full roll out of any vaccines. Less safe is the claim that this will impact on labour productivity, especially for women in the workforce WITH children under thirteen years of age.
    Now JQ mentioned the ‘new normal’ (my usage) due to Zoom conferencing. He failed to look at, or simply did not mention, the social costs of home office employment. This survey, when the data is fully available, MAY indicate three such social costs:
    1. Deteriorating mental health among sections of the workforce;
    2. Family breakdowns due to isolation periods; and
    3. Lower educational standards for school age students.

    Now none of this is certain. Even the leader of this European research project admitted that more participants would be better in terms of dependable data outcomes. My suggestion is that mental health questions be mandated for all future Census question forms. Not just the one next year but ALL future census forms. Then economists would have a larger database on which to base their analysis. Governments would have no excuse for not spending more on mental health recovery programs in 2021-31. And businesses would have even fewer grounds for demanding the suspension of industrial relations laws/procedures that protect workers in stress.
    .

  6. Professor Quiggin

    As always I stand in awe of your analytical mind. This is brilliant stuff. Thanks for sharing with me. Good luck with your new book.

    Merry Christmas.

    Gregory J. Mckemzie

  7. 1. ONTOLOGY MATTERS

    The issues J.Q. raises cannot be understood correctly until economics reforms its ontology. Until conventional economics develops a real ontology (properly related the objectively real), it can tell us nothing about what is really happening in our world and how we should manage resources. The paper liked to below outlines the ontological problem of economics from the point of view of ecology and biophysics. I’ve posted this link before. Please read it if you have not already done so.

    The Aggregation Problem:Implications for Ecological and Biophysical Economics : Blair Fix.

    Click to access 20190100_fix_the_aggregation_problem_bpearq_preprint.pdf

    Again, I will throw down the gantlet. Will anyone here seriously discuss the ontology of conventional economics? On past experience, I think not. This topic is entirely avoided by conventional economists who do not want to have the ontological foundations of their discipline questioned. My prediction is that once again nobody will pick up this gauntlet and seriously debate this topic in a Sandpit or in a post set up expressly for the purpose.

    Any discussion of the methodological foundations of hard science, social science or even of purely formal disciplines like mathematics or computer languages, needs to be grounded in a discussion of ontology. Because ontology is a part of philosophy and specifically metaphysics, the immediate presumption by a great many is that such a discussion, an ontological discussion, must be entirely speculative. There is no basis for this prejudicial assumption. Ontological investigations may be divided into those related to what we know exists [1] and those related to what we speculate might exist. Only the latter discussions are part of speculative metaphysics.

    There are two fields of ontology other than the purely speculative. These are formal ontology and empirical ontology. The term formal ontology is used to refer to an ontology defined by axioms in a formal language. Euclidean geometry has a formal ontology. The fields of logic and mathematics have formal ontologies. The fields of programming and information science develop formal ontologies.

    “In computer science and information science, an ontology encompasses a representation, formal naming and definition of the categories, properties and relations between the concepts, data and entities that substantiate one, many, or all domains of discourse. More simply, an ontology is a way of showing the properties of a subject area and how they are related, by defining a set of concepts and categories that represent the subject.” – Wikipedia.

    The definition above shades into the issues of Empirical Ontology. An empirical ontology is an ontology based on the scientific method; on scientific empiricism as data gathering, hypothesizing, hypothesis testing by experimentation and so on.

    Economics as a subject is an amalgam of formal (axiomatic and/or prescriptive) ontology and empirical ontology. It is this difficult, complex and hybrid nature of the discipline which conventional economics has not come to terms with. Conventional economics has not derived and defined a formal, supportable ontology of economic objects. “Objects” here means all objects, energies, and processes in the physis and all of, or many of, the “objects” in the nomos, meaning culture, customs, legal laws, legal entities, legal objects, regulations, practices and so on, at least as they have an economic instantiation.

    From a short discussion paper – “An Ontology Of Economic Objects” – Zuniga, Gloria L. – we find these interesting statements:

    “The relevant question here is this: what makes any one thing an economic object? Based on the discussion above, the quick and easy answer is that an economic object is a product of beliefs and physical things.”

    “The chief point that I would like to drive home in … epistemic clarification is that economic objects are not reducible to either beliefs or to some intrinsic property of things. Economic objects, as social phenomena, are the product of beliefs and objective properties of things, some of which are physical facts and others are social facts.”

    These are interesting statements but they do not adequately cover the ambit or sweep of the complexity of the collection of economic objects. Zuniga fails to refer explicitly to the reflexive and iterative interaction of beliefs (or more broadly of the nomos in total) with the physis. She also fails to refer to the certainty that unknown facts and ignored facts about the physis are, or can become, significant economics objects despite our ignorance about them.

    What method could we possibly develop to deal with this sort of complexity and uncertainty in the delineation of economic objects? The problem seems insuperable. The first step is to debunk the conventional theory surrounding economic objects (posited and accepted by conventional economics) about which objects do not meet the tests of empiricism. Some can empirically be proven to be fallacious. Fix does this in relation to “value” and its supposed ubiquitous measure money, or the numeraire. Fix follows the general theories of Bichler and Nitzan in making his specific refutations. Even when one does not know what is right, one can stop accepting and doing what is provably wrong. Aggregating in a non-scientific dimension and measuring it with an unstable measuring stick is wrong with respect to determining solutions and approaches to ecological and biophysical conundrums for economics.

    OPPORTUNITY COST

    Fix’s insights can be extended into the heart of conventional economics. I refer here to the issue of opportunity cost. The same aggregation problem highlighted by Fix occurs in relation to all opportunity costs. Indeed, opportunity cost is the general case of which ecological sustainability and biophysical concerns are crucial specific cases.

    In many ways the theory of opportunity cost is at the heart of economics, orthodox or otherwise. The opportunity cost thesis in and of itself is empirically valid. At the empirical material level, it posits that real resources (materials or energies) put to one use, where that use is exclusive of another use, imply an opportunity cost, as the loss of that other possible use. The real resources consumed in one application foreclose other mutually exclusive possibilities, or opportunities, as the resources used obviously cannot be put to any other mutually exclusive uses. For example, one cannot eat a cake one has baked and put it up for sale as well.

    Another example I like to use is related to the fact that Australia is a hot, arid country. Assume that on a hot, outback track the radiator on your 4WD boils and steams off all your cooling water. Assume you have one large cask of potable water equal in volume to your cooling water requirements. If you put the water into your radiator, you cannot drink it. You then might die of thirst before reaching a safe destination with a water supply. If you drink the water, you cannot put it into the radiator and drive to seek a safe destination. The decision on which opportunity cost to pay will depend on your assessment of factors and the risk weightings you give to each choice.

    When proponents of conventional economics used opportunity cost reasoning on me in the past, including J.Q., I had to admit the empirical validity of the basic concept. But as soon as they started counting opportunity costs in money and making choices that way, I became uncomfortable with the application of the concept and immediately felt there was a fallacy somewhere in their reasoning. I stated (or blogged) as much, saying my logical intuition was that there was a fallacy in one of the steps of their reasoning but I could not yet pinpoint it. I did go so far as to say that when we reckon opportunity costs in money the principle is no longer valid. However, I could develop no formal proof of this claim either from logical or empirical principles. Recently, I began to think about this issue again and coming back to this irritant of the orthodox economic application of the opportunity cost principle. I suddenly realized, Eureka! Fix’s “Aggregation” paper which I had read sometime previously had already fully elucidated the method necessary for the refutation of the application of opportunity cost in and by valuations in money as per orthodox economics.

    CONCLUSION

    These are serious issues I raise. I’ve demonstrated, I think, the case for the validity of my interpretations, including those founded on Fix’s work. Conventional economic theorists continue to ignore any disconfirming empirical evidence and analysis which raises serious questions about the fundamental ontological validity of their discipline, let alone its scientific or ethical validity. There is a strong flavor of ideological and even faith-based fundamentalism and rigidity about conventional economics. There is nothing else to call it.

    My ontological challenge stands. Lack of return argument might well indicate the lack of a case. That’s the only conclusion I can come to. Yes, that’s a fairly confrontational statement and I make it precisely because I am very disturbed at the state of the world, as any person who is paying attention to events will be. The state of this world I attribute to a number of factors. One factor is this convention, bordering on religious devotion, of money-value aggregation in conventional economics.

  8. I think the ability of firms and governments to ignore opportunity costs and externalities is being eroded – not quite sure why, perhaps information being more widely available.

    The apparent acceleration of divestment from coal seems like an analogy – or perhaps its simply that as the human impact on the planet and ourselves rises, the consequences rise non-linearly, and so become apparent. and then the response starts rising non-linearly.

    So I wonder whether the pandemic, coupled with heightened concern about climate change, is either a tipping point (in the sense of being a cause), or a sign that we are at a tipping point.

    Circling back to my first point, one possible attribute or feature of the 21st century economy is therefore that feedback loops become overwhelmingly obvious, and we start dealing with them in real time … information technology becoming vital in the same way that our nervous system is.

    You could explore the idea that we make Gaia central to human activity. And the consequences of not doing so.

  9. “2) This is no longer true: around half of all employment is now related to human services, information services and finance, and these are at most indirectly related to goods production.”

    This is usually viewed as a functional development. Whereas its possible to think of some aspects of these developments as unnecessary complexity. Joseph Tainter has made a study on the collapse of civilisations. He’s boiled it down to the idea that societies collapse with a sudden loss of complexity. My form of socialism is to do with intervention, not to end free enterprise, but to simplify it. So that we can’t face a loss of complexity that would lead to collapse.

  10. To get a flavour of what Joseph Tainter is about, here he is at an energy symposium. If it was up to me we would reverse a lot of employment patterns and have more people on the land and in manufacturing. One famous local economist has talked about segregation and simplification of banking. Segregating any risk-taking and putting that risk-taking form of banking into a corner of its own. Plus rolling out public banking with simple goals through the post office. This sort of simplification is the way forward. Simplification in many areas is vital for getting more value out of any energy consumption. And therefore reducing unnatural levels of CO2 production.

  11. 21st C or just capital saying “we can do this”? Or bau line ” work but different”. We are all robo-techicians now.

    RATs.

    Robot Automation Tax soon, for the third unemployed and “Those who did find work suffered a 59 per cent fall in their wages on average.”.

    “Coles workers face bleak Christmas as wave of automation sweeps industry

    “At Smeaton Grange about 350 workers have been locked out until February after they went on strike to push for higher wages and rights to more redundancy pay when the site eventually shuts down.

    “Data collected by Australian Catholic University researcher Tom Barnes for the United Workers Union shows the prospects for warehouse workers who lose jobs to automation are not good.

    “Dr Barnes’ surveys of former workers from Woolworths’ now-shuttered Hume distribution centre in Melbourne show about a third were unemployed in August this year after the centre closed at the end of 2019.

    “Those who did find work suffered a 59 per cent fall in their wages on average.”…
    https://www.smh.com.au/politics/federal/coles-workers-face-bleak-christmas-as-wave-of-automation-sweeps-industry-20201222-p56pko.html

  12. “”(2) This is no longer true: around half of all employment is now related to human services, information services and finance, and these are at most indirectly related to goods production.”

    I think it would be worthwhile to make the point (if it’s true), that this is partly the result of improvements in efficiency. We need fewer people to make the same amount of stuff, therefore we can afford to have more people doing activities other than making stuff.

    I think that’s important to mention because it grounds the argument in the notion of productive capacity, which is fundamental to convincing economic analysis, in my view. It also helps guard against the kind of neo-Luddism that rails against the loss of checkout jobs at supermarkets to automated checkouts without realising that retail jobs are not great jobs. On the other hand, if it’s not true, then we’re just exporting yet more of our hard work and environmental degradation to the Global South, which is not a step change by just the continuation of a process started in the 20th century.

  13. Just to clarify, are you writing about Australia’s economy, only? Apologies if that’s a dumb question. Is everyone on the planet post-industrial? (I never think about that. So, maybe they are.)

    Is technology more central now than it used to be? I question this. Couldn’t it be that we just have newer stuff now? Railroads and telegraphs changed the world too. Although otoh – and I forget who it was, on a different thread – in some sense, we … “we” … can all look at the same thing now, at the same moment. Which *is* new.

    Bc I tend to agree a bit with seqaugur – people have time to sit around watching cat videos bc the industrial processes became so productive, efficient, or whatever. (Whereas, I disagree that it makes you a luddite to care about people having jobs. Doesn’t a publican “retail” beers to people? Do all retailers hate their jobs? Well … perhaps just now, they may. If you’ve never been unemployed though, I wouldn’t assume.) Demand for cat videos came bc people had leisure time for it.

    However, the food and the heat and so on … they are still massively more important, if not valuable, than any of that new fancy stuff. Value v worth.

    Plus, it’s not like any of my techie things were made here. And, they don’t last that long, and I assume they create a pile of waste somewhere, a point made also by seqaugur. This also makes me feel less post-goods.

    Perhaps most likely, I just don’t understand the point of worrying about whether or not I am in a services economy. I am my own minion, after all, for many tasks. And otoh, I am ever so grateful I don’t have to grow my own food.

    After the pandemic, I think people – if allowed – will work from home a bit more. But, not the whole week. People like to be around other people. And when you aren’t around, the people who are in the office start to resent you. Whereas, I do hope business travel declines, bc no one seems to miss it much.

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