The Third Industrial Revolution

Why yesterday's plan for the economy won't work for tomorrow

BY DAVID ROTHKOPF

In the late 19th century, roughly half of Americans worked in agriculture. By 2000, that fraction had fallen to under 2 percent. During the last century alone, we have seen those involved in the production of goods (from mining to manufacturing to construction) fall from about a third of the population to just under one in five. Over the same period, the proportion of Americans involved in services more than doubled, from 31 percent in 1900 to almost 80 percent by the turn of the last century. Since 1900, the number of farms in the United States has fallen 63 percent, and the average farm size has grown by two-thirds.

The U.S. economy has, in the past 150 years, seen stunning changes. It has gone from agrarian to industrialized, from primarily rural to primarily urban and suburban -- from one in which primarily men worked to one in which by 2010 more than half of professional workers were women, from one in which most people did not complete high school to one in which 40 percent of 18- to 24-year-olds are enrolled in college, from one in which most American companies made their money in the United States to one in which about half the sales of S&P 500 companies come from other countries.

We should be comforted by this story of adaptation. The result has been unprecedented benefits across society, from GDP growth to rising standards of living. This has been not one industrial revolution but a whole series of upheavals culminating in the massive shift in recent decades from manufacturing to services, powered by globalization and new technologies.

Naturally, the folks in charge had to adjust. Protectionism that may have worked in the 19th century proved a calamity by the early 20th. Gold-based currencies were ultimately replaced by fiat alternatives. New data were needed to judge economic health. New regulations were needed to protect society and individual citizens. Indeed, national economic institutions like the Federal Reserve and the Securities and Exchange Commission have had to be augmented by coordination with similar groups in other countries to ensure market stability, liquidity, and crisis response.

Now, however, signs suggest that another enormous change is afoot -- only this time, the folks in charge are not adjusting.

Once upon a time, the U.S. economy grew in tandem with the productivity of American workers, leading to the creation of jobs and wealth across society. During this century's first decade, however, this relationship no longer applied. GDP grew and productivity climbed, while job creation slowed to a crawl, median incomes fell -- and the rich got richer.

This is not just a problem for the United States. Emerging economies -- even China -- are facing a similar phenomenon. Erik Brynjolfsson and Andrew McAfee, digital-business specialists at MIT, describe the disconnect in grim detail in Race Against the Machine, their book about what might be called a third Industrial Revolution. They explain that massive increases in productivity due to the happy marriage of information technology and advanced manufacturing techniques are having a chilling, unprecedented effect on job creation.

The potential consequences as fewer jobs are created for the middle classes, while wealthy investors rack up the profits, are great and unsettling. Brynjolfsson and McAfee argue that what's happening will have the same devastating effect on white-collar jobs that recent technological advances have had on traditional middle-class jobs -- in other words, lawyers and accountants may well start feeling the same pain that assembly-line workers have been experiencing for decades.

Profound as the impact of such changes may be, they are not the only global market shifts that will demand new thinking from policymakers. For one thing, the dependable engines of economic growth -- developed countries -- have stalled. Second, the new engines of growth -- the big emerging economies -- have also hit idle speed. One top IMF official recently predicted to me that Europe will be in recession for the next five years and that growth in the BRICS might well fall to 60 or 70 percent of current levels for the same period.

Four years after Lehman Brothers imploded, we're still unsure what risks are being built into the global economy thanks to the ongoing proliferation of complex, opaque financial instruments like derivatives, which now carry more value than all the printed money on Earth many times over. It gets worse: With increased computing power, markets are growing vastly more volatile, and the advent of trading based on previously unmanageable data sets is only going to accelerate this trend and give special advantages to those able to gather and process massive amounts of information rapidly.

So the economy of tomorrow is unlikely to look much like that of yesterday. But did you even once hear anyone discuss this paradigm shift during the U.S. presidential election season or over the course of the never-ending debates about the European debt crisis? As argued in books like Race Against the Machine and confirmed daily in the headlines, the new global economy will force us to rethink our most fundamental assumptions, whether it's how many hours we should work each week or an education system that stops once people enter the workforce -- to say nothing of government's role in redistributing wealth from the few who harness the technologies to the rest who will be dislocated by the changes.

Perhaps with election seasons and leadership changes behind us, world leaders will be able to begin discussing what the transition to this new economy will entail. But we already know what won't work: trying to use the same old dog-eared playbook to address an entirely new set of challenges. A good place to start would be setting aside our hopes of simply going back to where we once were, creating manufacturing jobs we'll never see again, ones that haven't been outsourced to another country but to the past. Another is to recognize that the keys to growth will be the new infrastructure and education demanded by a rapidly reconstituted labor force.

But that means embracing the future, not running away from it. You can't run an entire economy on nostalgia. That's why it's so frustrating to be stuck with leaders whose main idea for a better tomorrow is to go back to the ways of yesterday; listen to them talk, and you'll have a hard time deciding whether their approach is that of an ostrich burying its head in the sand -- or a deer frozen in the headlights.