If you had been an economist in, say, September 1929 and were asked to provide a prognosis for how strong you felt the global economy was, it is likely you would have produced a glowing report.
The previous 50 years or so had seen extraordinary change.
It seems that the 47-year period which ended as the First World War broke out was a kind of big bank of innovation.
In 1879, for example, Thomas Edison filed a patent for an electric lamp using “a carbon filament or strip coiled and connected to platina contact wires”. In 1910 General Electric introduced the first tungsten lamp.
In 1879 Karl Benz was granted a patent for his two-stroke internal combustion engine; in 1908 the Model-T Ford was launched. In 1914 Henry Ford offered workers the wage of $5 a day, double the prevailing rate. If any one development shows how greater specialisation and greater productivity benefit workers, that move from Ford is it.
According to Vaclav Smil, in his book Creating the Twentieth century: Technical innovations of 1867-1914 and their lasting impact, the period between those two dates saw the foundation of nearly all of the 20th century’s innovations put in place.
It appears that most of the 20th century’s innovations can be traced back to that period. Smil calls it the age of symmetry and says: “Neither the pre-1860 advances nor the recent diffusion and enthusiastic embrace of computers and the Internet are comparable with the epoch-making sweep and with the lasting impacts of that unique span of innovation that dominated the pre-WWI generations.”
Interestingly enough, Smil’s age of symmetry was literally begun with an explosion, because between 1866 and 1868 dynamite was invented. Another key breakthrough was the formulation of the second law of thermodynamics in 1867 (bet you thought you had heard the last of that law), says Smil.
But what it is quite interesting is the time lag between these founding discoveries and the golden age of Western economic growth.
For while the Victorian and early 20th century period might have been a golden age for discoveries, the golden age for economic growth did not begin until after the Second World War.
So there was a time lag of forty years or so before the global economy began to reap the harvest of extraordinary innovation.
Maybe the Great Depression and world war caused this forty-year delay.
Or maybe the relationship was the other way round. Maybe the time lag caused the Great Depression and world war.
Economists seem unanimous. The Great Depression was above all else a problem of insufficient demand. Monetarists argue that banking collapse led to a shortage of credit, and the crisis could have been eased by pumping more money into the system. Keynesians argue that the solution would have been more government spending, a good old fiscal boost, similar in fact to the policies being advocated by Gordon Brown at the time of writing.
But both these schools of thought are based on the implicit belief that global capacity was greater than global demand.
And if you think about it, this makes sense. Technology had changed so fast that the economic infrastructure had surely failed to keep pace. In fact, with the benefit of hindsight, you could say it would have been a surprise if this infrastructure had kept pace.
In a way the Luddites were right. In the short term the advent of the machine inevitably meant unemployment.
Now forward wind the clock to today. The parallels with 1929 are clear. Not so long ago a young businessman called Bill Gates had this dream of a PC on every desk. Now it seems that not only are there PCs on every desk, but there are PCs on our laps, and thanks to the technology inside a mobile phone, in our pockets too.
The Internet has created an extraordinary new means of communication. Academics, scientists and researchers across the world can swap ideas and advance knowledge at a pace that previously would have been considered impossible. Producers and customers can contact and trade with each other in a way that would have been beyond imagination.
Globalization has been facilitated by the Internet, that is obvious. But maybe we can go a step further than that and say the current wave of globalization would have been impossible without the Internet.
Robert Solow, a former member of the Nobel prize for economics, once said: “Technology is everywhere but in the productivity,” meaning that the advances in technology had not had the impact upon labour productivity that one would have expected.
But that is surely no longer true.
And it seems that as the world’s capacity to produce grows, once again we find the global economic infrastructure fails to keep up.
The music industry moans about piracy, and how modern technology poses a threat to its very existence. And yet, for two decades from the mid 1980s the music industry barely move forward. Music labels pinned their hopes on the latest releases from the Rolling Stones, or the latest Beatles album. It was as if nothing had changed.
But, thanks to the Internet, a new vibrant music scene has emerged. New bands found they could bypass the record labels. They were happy to see their music available for free on the Internet, because it helped their profile and promoted live gigs.
The traditional music industry may be losing out because of the Internet, but the customer has more choice, and bands greater opportunity.
So the Internet changed it all. And it takes time before the full benefits of change are felt.
The Royal Mail is talking about the threats posed to its business model by the Net and SMS messaging. The customer benefits from new technology, but traditional postal service jobs will be lost.
We know that for much of the first decade of this century, there was surplus capacity. It was to try and bridge this gap with potential output that some central banks slashed interest rates during the early noughties. By the time of the economic crisis, this problem had become compounded.
During 2008, the Internet was often blamed for making things worse. The speed with which the crisis unfolded took everyone by surprise, and maybe this speed was down to the Internet itself, promoting almost instantaneous reactions to the latest developments.
But does it not follow that if the Internet helped accelerate the pace with which the crisis unfolded, it can also accelerate the pace with which it could potentially come to an end?
If the problem today is that potential supply is outstripping actual demand, then the Internet can provide the means by which this gap is bridged.
Just as change has created the economic crisis, more change can hasten the recovery.
On several occasions throughout 2008, Alan Greenspan was quoted as describing the economic crisis as a ‘once in a hundred years event’.
But it seems unlikely that is right.
The Internet means the modern world moves faster. We are more interconnected too. Change changes faster than before, and it seems likely that ‘once in a hundred years events’ will start occurring every few years. A precedent will be set for seeing unprecedented events occur with more frequency.
But these events don’t have to be all bad. We will see ‘once in a hundred years’ positive developments occur every few years, too.
That is why government plans to subsidize traditional business, such as large motor manufacturers, are flawed. These subsidies will mean new businesses will be crowded out, and the great new opportunity will be held back, and as a result a true recovery from the crisis will be delayed. We will pay the price of technology, but not reap the benefit.
Money that is spent on saving old tired businesses would be better spent on supporting bold new ideas.
Plans to support the economy via cuts in VAT are little more than an attempt to hold back the tide. The money should instead be made available to established and – and this is important – start-up businesses.
One of the major problems with the UK is a tax system which is completely lacking in transparency. There is nothing wrong with paying more tax as you earn more, but the system as it stands is far, far too complicated. There are so many means tested benefits that it is nigh on impossible to calculate the true cost of coming off unemployment or of securing a higher salary.
It does seem that the financial benefits of coming off unemployment are often insufficient to encourage workers to make that move. The result of this is large swathes of the UK economy where unemployment is endemic. Those in work are often dis-encouraged by the tax and benefit system from striving for promotion.
The government should accept that only by thinking outside the box can these problems be solved. And it can start by continuing to provide benefit for a limited period of time when someone who has been unemployed for an extended period finds work. Then the benefit should be phased out only gradually.
Even more importantly, entrepreneurism could be facilitated by providing a more friendly benefit system for those who attempt some form of self-employment, again with a gradual phasing out of benefits.
This would create the kind of dynamic society that can benefit from the opportunities that new technology brings.
Instead, if we try and live in the past by maintaining old businesses with old ideas, the economic crisis of our time will deepen.
Some say we are in danger of talking the crisis into becoming more serious than it needs to be.
The truth is, we are in danger of talking ourselves into ignoring, even deliberately reacting against, the way out.
The challenge of 2009 surely lies in ensuring we don’t confuse the good things that have happened over the last few decades with the bad things, and don’t then turn our back on the one way we can get out of this crisis in a truly sustainable way.
© Investment & Business News 2013