September 1, 2014 Leave a comment
In reflecting on the current workforce, global economy, technology, and labor markets, I revisited the origins of the U.S. Labor Day, which is celebrated on the first Monday in September, similar to the International Worker’s Day on May 1.
While the tipping point for political winds appears to have been the Haymarket riot in Chicago in 1886 that eventually led to a national holiday, many other factors occurred during the industrial revolution that are relevant to the present day and so leaders should examine. The two eras are similar in many respects, yet very different in others.
The Haymarket Affair appears to have been triggered by several factors, including a global anarchist movement that fed off of widespread inhumane labor conditions, severe economic swings, enormous wealth gaps, political corruption, and traveling agitators exploiting conditions which led to violence. The actual bomber in the Haymarket riot for example was never found, while others paid the price, including policemen and laborers.
Fighting the Last Economic War?
Some have argued that the FRB has been fighting the last war of the Great Depression, which was after all the specialty (and thesis) of Ben Bernanke. I see more similarities in the current global economic situation today with the Long Depression of the late 1800s, which was the ‘Great Depression’ until the severity of the 1930s took the title. The underlying economic shifts driven by the information revolution, while different than industrial revolution, appear more similar to the late 1800s than the 1920s and 30s.
The most stunning similarities between the present day and the late 1800s are reflected in economic statistics. The Long Depression began with the panic of 1873, which was precipitated by the collapse of Jay Cooke & Company (considered the first investment bank in the U.S.), is the longest lasting U.S. contraction in the NBER records.
While e-commerce contributed to bubbles and crashes in our era, similar dynamics occurred in the late 1800s with industrial production and the opening of the Panama Canal. As is the case today, war was a factor in both the U.S. and Europe, with dynamics of monetary policy contributing to recoveries and triggering failures. Today we deal with the uncertainties of quantitative easing, while in the 1870s the halt to silver currency caused severe shocks and ripples worldwide with economic collapse in regions that had become dependent on silver mining.
The American Civil War ended in April 1865, which was followed by a deflationary period that lasted until 1896. The Franco-Prussian War in 1870-71 was apparently caused in part by German unification during the same period, with repatriation helping to fuel a large regional speculative economic bubble followed of course by a bust. One can see dynamic influences from the dissolution of the Holy Roman Empire and Napoleonic Wars in the early 1800s.
During the period of the Long Depression between1873–96, Europe experienced a sharp decline in prices, resulting in a depression for the majority while some industries boomed as production increased due to transportation and manufacturing efficiencies. The Long Depression finally ending in 1896 after yet another panic.
Similarities Between the Industrial and Information Revolution
- Excess capital invested poorly caused multiple bubbles and crashes
- Great productivity increases in each allowed companies to lower prices sharply
- Modern day wealth gap peaks are found during these two eras
- Severe exploitation of workers was a significant causal factor in crises within both revolutions, though in very different forms
- Volatility led to various forms of backlash, including the rise of extreme socialists and anarchists, which then caused even further structural decay
Differences Between the Industrial and Information Revolution
Bonds fueled much of the Civil War and industrial revolution, including door-to-door sales by investment banking sales reps. The information revolution has been funded primarily by institutional VC and IPOs that boycotted small investors through SEC regulations until valuations were mature, or in some cases post mature (aka ‘pump and dump’). While both revolutions required and justified funding based on solid economic fundamentals and legitimate ROI, with very real productivity increases in each—the information revolution is really a continuance of industrial—irrational behavior, oversupply, corruption, and reactions are more similar than not.
While the industrial revolution observed massive displacement of small family farms with tractors (majority of the U.S. population), and railroads replaced wagon trains, the information revolution displaced bookstores and newspapers with search engines, and physical retailers with e-commerce. The later stages of the industrial revolution resulted in interstate highways and intercontinental flight, but we can only speculate on the late stages of the information revolution, due less to technology forecasting than potential backlashes by markets and/or regulators.
Exploitation of workers manifested in much different ways during these two eras. The industrial revolution required large numbers of workers who were experiencing increased buying power, but were not experiencing improved quality of life due to long hours, unhealthy and even deadly working conditions. The information revolution witnessed a severe bubble expansion in the late 1990s and contraction in 2000, followed by subprime mortgage bubble leading to a severe financial collapse in 2008, with enormous losses transferred directly to national debt in Europe and the U.S. Unlike the 1800s when industrial workers toiled long hours in dangerous conditions, today’s workers in the U.S. are physically safe by comparison.
However, today we have vast numbers of workers at all levels of competency supplying content and data with no compensation from the financial beneficiaries for products they supply, which has enabled some of the wealthiest individuals and companies of any era. A large portion of these product suppliers are subsidized by government or corporate compensation, and millions of others by the welfare state. Freeism and lack of protection of intellectual capital on the Internet and Web have been terribly destructive to the structural underpinnings of the global economy; particularly to wealthy nations. Some may see this as justified wealth transfer. I see it as simply historic levels of greed, exploitation, and unhealthy destruction, not to be confused with more healthy forms of creative destruction that replaces outdated industries and companies with newer more beneficial models, products, and services. While our era has all types including highly beneficial models, I’ll save that focus for another day.
The most important contrast between the two revolutions for the average American worker is that real wages increased considerably during the industrial revolution, while they are generally decreasing in the information revolution, with liabilities being transferred to national debt and FRB balance sheet. Translated to every day reality, the average American worker is experiencing a long-term decline in discretionary income while rapidly piling up a long-term increase in share of public debt. It represents a rather unholy relationship between big business and big government as governments borrow to create dependent citizens who are increasingly the product and supply chain as well as end consumer of free products during the information revolution. This trend is surely temporary as it is absolutely unsustainable in any known form of economic model, thus extremely unwise and irresponsible. The question is not whether reforms will come, but rather in what form, when, at what cost, and type. Wars have been fought over much smaller economic tensions, which is one reason the current trajectory is so concerning to many of us.
10 Recommendations For Stronger Economy
While every era of economic crises has experienced serious policy errors, sometimes driven by self-interest and/or politics, and others genuinely well intended, a few strategies are timeless. Below are 10 examples that I think are wise, translated to today’s environment:
Avoid moral hazard, as it tends to create the foundation for the next crisis. Never allow too big to fail, and if it occurs break them up ASAP. Any such event should be fatal not only to the companies involved, but the regulatory bodies that failed to prevent it. Saving failed institutions is extremely toxic to the rest of the economy, and it’s entirely unnecessary.
Never ever tell an entrepreneur “you didn’t build that”, especially from a leader who has never done it, in which case he/she would almost certainly never say such a thing. Anyone who isn’t aware of the benefit of public infrastructure is unlikely to have much of a chance to build anything as our job is in part to find ways to build value on top of that public investment for job and wealth creation, which is apparently much more difficult than most are aware of. Most entrepreneurs take enormous risk and make huge personal sacrifices that few politicians, government workers, or corporate executives will ever comprehend. It is therefore a good idea to limit lectures to topics one has direct experience with and thus avoid doing great harm.
Tie all public funding other than the genuinely disabled to a menu of contributions that align with taxpayers who fund it, whether vocational training, education, civic work, volunteer work, or best of all: subsidized on the job training. Germany has a good public/private program that provides a basic model, which encourages retaining employees in downturns while retraining. Permanent dependency on government is a terrible thing to do to anyone as it damages confidence, reduces self-worth, and is very self-destructive from a socio-economic (and any other I can think of at the moment) perspective.
Stop rewarding toxic behavior to extent possible, including government, education, finance, and/or industry. For example, bankrupting government entities with life-long golden retirement parachutes is toxic and has nothing to do with public service or protecting legitimate worker rights. Indeed, public sector pensions tend to punish other workers in a variety of ways. It should be self-evident, but insolvent governments can’t make good on political promises, whether contractual or not. For mature economies, increasingly ‘the enemy is us’.
Decentralize capitalism. Our era contains very strong natural and unnatural bias towards consolidation of power and wealth. Silicon Valley, Wall Street and London are examples of financial centers that have a long history of protecting local strategic and personal interests with OPM. Eventually this leads to economic collapse and/or can lead to war, which is directly opposed to beneficial capitalism that encourages diversification, meritocracy, and peace through mutually beneficial trade. To date Wall Street and SV have failed to self-regulate, as have their investors. We may have no choice but to regulate in order to prevent even more severe crises if the current financial consolidation trajectory persists. Financially engineered profitmaking is a completely different task requiring different skills than building durable industries. We need to decentralize back to regional centers with more focus on structural entrepreneurial economics.
Keep politics out of investment, including partisanship & cronyism. That any politician would think they are qualified to understand the complexities involved with investing in technology is frankly a stunning demonstration of hubris. Whether corporate, public, or institutional investor executive, anyone spending most of their time in meetings, raising money, or other activity other than total immersion for decades couldn’t possibly be in a position to appreciate the challenge. Blunt macro instruments such as QE & slinging noodles against the VC wall do great harm to structurally sound economic growth; it just isn’t as visible at the macro level.
Curtail strategic mandates by institutional investors. A form of politics in investment, especially PE/VC mandates, have proven to be among the most toxic brews for the global economy in the past few decades. The needs of a sustainable economy and markets should drive and reward investment, not the internal perceived needs of portfolio management. Often has been the case where a mandate in one arm of institutional investment shared by many others—like subprime mortgage—risks an entire fund, if not entire economy. Take each investment on its individual merit, including best attempt at understanding level of toxicity. Anyone who can’t should not be at decision levels at large funds.
Stop creating monopolies. There is an old saying shared by many seasoned economists and entrepreneurs that states ‘monopolies can only exist with the assistance of government’, whether directly or indirectly. Very well understood is the unhealthy relationship between big government and big business. Attempts to recreate this wheel result in broken economies. Healthy economies require diversification, allowing both failure and success by customer choice rather than government force or corrupted political system.
Do not play God. Power, wealth, and popularity does not necessarily equate to competence. Rather, it almost always leads to hubris, which is of course dangerous. The most effective leaders understand their weaknesses and can identify strengths in others. They do not surround themselves with those who share the same ideology, rather seek out contrarians and devil’s advocates in the decision making process. In economics the evidence is very clear: while unification and central governance on a few issues are necessary, the collective Main Street is far more intelligent and wise than corner offices on Wall St., Sand Hill Road, Capitol buildings, or the Oval Office. We need leaders in those positions who understand their own limitations and that of their roles.
Prevent anarchists while building leaders. One program from the Great Depression that worked well that we still enjoy today was the Civilian Conservation Corp (CCC). Below is a short video on a youth conservation corps program in Idaho that serves as a good example of what could have been done on a much larger scale with stimulus funds, providing much needed life experience for millions of youths rather than wasting most of the money on political favors or fermenting disenfranchisement and anarchists. For heaven’s sake, let’s allow and encourage people to engage in the positive as an alternative to the many negative options that exist in our society today.