Sunday, December 8, 2019

"Rethinking the Knowledge Economy"

Something to think about.
From American Affairs Journal:

About the Author
Roberto Mangabeira Unger is the Roscoe Pound Professor of Law at Harvard Law School. His most recent book is The Knowledge Economy (Verso, 2019).
A new practice of production has emerged in all the major economies of the world. The simplest and most telling of its many names is the knowledge economy. It holds the promise of changing, to our benefit, some of the most deep-seated and universal regularities of economic life and of dramatically enhancing productivity and growth.

Its effects, however, have so far proved modest. Instead of spreading widely, it has remained restricted to vanguards of produc­tion, employing few workers. Entrepreneurial and technological elites control it. A handful of large global firms have reaped the lion’s share of the profits that it has yielded. It appears in every part of the production system; the habit of equating it with high-technology industry is unwarranted. In every sector of the economy, however, it remains a narrow fringe, excluding the vast majority of the labor force. Even though its products are used ever more widely, its revolutionary practices continue to be quarantined.

The true character and potential of the new practice of production remain disguised: by virtue of being insular, the knowledge economy is also undeveloped. The technologies with which it is most recently associated, such as robots and artificial intelligence, have riveted worldwide attention. Nevertheless, we have barely be­gun to grasp its significance for economic and social life or gained insight into its possible futures.

The established body of economic ideas is useful and even indis­pensable but also insufficient to an understanding of these problems. Received economic theory leaves us short of the insights that we need to guide the institutional and policy changes required to take us from the insular knowledge economy that we have to the inclusive one that we need. The effort to think through the agenda of an inclusive vanguardism prompts us to reassess the alternative futures of economics as well as the alternative futures of the economy.

Secular Stagnation

Under Alvin Hansen’s old label of “secular stagnation,” many economists have proposed to explain in recent years the persistent slowdown of economic growth. The figures measuring the growth of productivity chart the dimension of this slowdown. Consider the well-studied example of the American economy. From 1947 to 1972 labor productivity, which roughly tracks total factor productivity, rose in the United States by an average of 2.8 percent a year; from 1972 to 1994 by 1.5 percent a year; from 1994 to 2005 by 2.8 percent a year; and from 2005 to the present by 1.4 percent a year. After a period of slow growth, productivity spiked in 1994–2005, and then fell back again.
The slowdown in the growth of productivity since 1972, interrupted only by the turn-of-the-century spike, has been attributed to many of the factors emphasized by Hansen in the 1930s:  the decline of population growth, the inadequacy of aggregate demand, and a “savings glut”—an excess of savings over consumption. One factor, however, largely absent from the older discussion of secular stag­nation, has now taken center stage: the supposedly more limited transformative effect of contemporary technologies, especially in communication and information, when compared to the technological innovations of a hundred years ago.

Consistent with this line of argument, we can explain the temporary rise in productivity growth in 1994–2005 as the result of a one-time phenomenon: the adoption of computers and other digital technologies by a wide range of mega, large, and medium-sized firms, such as Walmart, whose operations otherwise bear few traces of the now most advanced practice of production.
The effect of the discourse of secular stagnation has been to cast on the decline of economic growth in general and of productivity growth in particular an underserved halo of naturalness and neces­sity. There is no reason to believe that contemporary technologies are any less revolutionary in their potential than the mechanical innovations of a century ago; there is better reason to suppose that we have barely begun to tap their potential and, by tapping it, to encourage the innovations that they may inspire. The effects of technologies, however, are always mediated by the institutional and cultural setting in which they take place.

I conjecture that a major cause of economic stagnation in the period from the early 1970s to today has been the confinement of the knowledge economy to relatively insular vanguards rather than its economy-wide dissemination. There is nothing natural about this phenomenon: it presents a riddle requiring explanation.

The Confinement of the Knowledge Economy:
The Fact and the Riddle

Throughout the world the knowledge economy remains restricted to insular vanguards: advanced manufacturing, knowledge-intensive services (often associated with advanced manufacturing), and preci­sion, scientific agriculture. Even as it has lost any exclusive association with industry, it has remained, in each sector, a fringe.

Its appearance solely as an insular vanguardism has now gone on for so long that we may be tempted to think of this quarantine as natural, as if it called for no further elucidation. There is, however, nothing natural about it. Mechanized manufacturing and industrial mass production rapidly influenced the transformation of every part of the economy, with the notable exception of traditional small business, which was inhibited by its limited scale from assimilating the scale-dependent technologies and procedures of mass production.

Unlike earlier advanced practices of production, the knowledge economy has no intrinsic bond to any particular sector of production. Its ability, supported by its characteristic technologies, to produce goods and services at almost any scale would open to it the world of small business, if that world did not remain largely inac­cessible to it for other reasons. Yet its confinement to insular vanguards has stubbornly persisted.

Not only has the knowledge economy escaped a restriction to industry without avoiding insularity, it has also overcome an exclu­sive connection with the richest economies in the world without as a result moving toward an economy-wide presence in any of them. In the heyday of mass production, the axis of the international division of labor, as well as the core topic of analysis in theories of international commerce, was trade between capital-intensive and labor-inten­sive economies. The most advanced practice—industrial mass pro­duction—was headquartered in the richest economies, more primi­tive, labor-intensive production in the rest, the vast periphery of the developing world.
The emergence of the new advanced practice of production has coincided with a striking change in the world division of labor. The new productive vanguard has gained a foothold in all the major economies of the world: in the major developing countries (such as China, India, and Brazil) as well as in the richest economies. The advanced parts of these economies are, to a greater or lesser extent, in direct communion with one another, exchanging people, procedures, and ideas, as well as technologies and resources. Indeed, the network of these vanguards has a better claim than any other set of economic agents and forces to be regarded as the commanding force in the global economy. By comparison, international finance is a sideshow.

The worldwide presence of the knowledge economy, manifest in the changed international division of labor, only deepens the puzzle presented by its arrest within the fringes to which it is now confined. It is present in every major economy as well as in every part of each of them. Yet it remains the prerogative of an elite. In this circumstance forces related to the confinement of the knowledge economy work in concert to favor economic stagnation and aggravate eco­nomic inequality. Slowdown in the growth of productivity and deepening of economic inequality are the price for the insularity of the knowledge economy.

We must be careful not to mistake the insular knowledge econo­my for what I shall call pseudo-vanguardism: the existence of a wide range of firms that make use of the technologies we most often associate with the emergent vanguard—especially its information and communication technologies—without otherwise mastering and deploying the new most advanced practice of production.

The most common occasion for pseudo-vanguardism has been the adoption of digital technologies to manage complex information—for example the information with which a mega-retailer like Walmart must deal. By managing information more effectively, such businesses have been able to develop efficiency-enhancing and capital-sparing practices such as the “just-in-time” replenishment of inventory. Their large scale has given them a decisive advantage in dealing with the fixed cost of the required technological apparatus. Their successful use of that apparatus has in turn helped them grow yet larger, consolidating their market position. Yet none of these in­itiatives has converted such mega-firms into exponents of the know-ledge economy. Pseudo-vanguardism makes the knowledge-inten­sive advanced practice of production seem more widespread than it is.
The real knowledge economy remains stuck in a narrow circle. The incentives to accumulate profit and market power reinforce the narrowness. The large global firms that dominate the knowledge economy find ways to factor out parts of their process of production that can be routinized or even commodified. They assign these routinized parts to businesses staffed largely by semiskilled labor, working by the methods of conventional mass production, in parts of the world remote from headquarters....

The author, Roberto Mangabeira Unger, was  Minister of Strategic Affairs in Lula da Silva's government and unlike his former boss is not in prison. Unger hangs his hat at Harvard Law School and the Harvard Kennedy School of Government.
This piece is the short version of what is currently a 304 page book (PDF), available online at the good Professor's personal website.