The economy and the paradox of technology
- August 30, 2022
- Samuel Gregg
Since the Industrial Revolution, technology has greatly enhanced humanity’s capacity to shape the world through manufacturing and finance. However, these technological developments also have the potential to exacerbate crises and stoke division.
‘If the heavens proclaim the glory of God, machines proclaim the glory of man,’ wrote the Jesuit theologian and later cardinal Jean Daniélou in his 1961 book, Scandaleuse vérité (The Scandal of Truth). Technology, Daniélou understood, was in many ways a definitive feature of modernity, and represented the sharp end of humanity’s ambition to master the world. In the early seventeenth century, Francis Bacon had described the scientific method’s application to the natural world in his Novum Organum Scientiarum (1620) as restoring humans’ ‘rights over nature’ as they use all their ‘efforts to make the course of art outstrip nature’. In these words, we find much of the inspiration for the modern technological project.
Technology is a manifestation of empirical reason, and one sphere of life in which the application of empirical reason to our world has especially affected humans is the economy. The publication of Adam Smith’s Wealth of Nations in 1776 launched the revolution of ideas that helped radically transform Western economic life, starting in Britain and then extending in rapid succession to continental Europe and the Americas. But while concepts like the division of labour and the mutually beneficial effects of free exchange proved critical in delivering millions of people from poverty, equally important was the emergence of devices such as the steam engine, pioneered by the English inventor Thomas Newcomen and enhanced by the Scottish engineer James Watt. What the Greeks called tékhnē — the knowledge of making and doing things — was as important as the new social science of economics.
The acceleration of technological change from the late eighteenth century onwards enabled humans to transform increasing amounts of raw materials into energy, to use that energy to create new tools and products out of combinations of other materials, and then trade these goods faster and more efficiently across the world. Since then, every successive generation has built upon their predecessors’ technological achievements, to the point whereby people in developed economies today can order goods and services from across the world to their front door with a few clicks on their computer.
The pervasiveness of sophisticated technology is thus one of the defining features of modern economic life. But it has also had considerable spill-over effects that go beyond the economy. Some of these are especially evident in two sectors of Western economies: manufacturing and finance.
In many ways, the rise of modern capitalism was defined by manufacturing. The economist and historian of economic thought Joseph Schumpeter did not exaggerate when he wrote in his History of Economic Analysis (1954) that ‘by the end of the fifteenth century most of the phenomena that we are in the habit of associating with that vague word ‘Capitalism’ had put in their appearance, including big business, stock and commodity speculation, and ‘high finance’. Technological change, however, was slower to follow. Manufacturing on the scale to which we are accustomed only started to take off towards the end of the eighteenth century with the dawn of industrial capitalism. This transformed the physical and demographic landscape of the Western world. Factories and widespread industrialisation came to be seen to represent a modern economy. In a relatively short period of time, millions of people moved from the agricultural areas in which their ancestors had lived for centuries to cities to work in these newly constructed edifices, with tools and equipment that their forebears would have found incomprehensible.
Technological innovation was central to these developments. The production of cars on a mass scale, for instance, was greatly enhanced by the use of new machines and production methods in the early 1900s. Only 50 years ago, to walk into a factory in Detroit, Glasgow, Lille, Milan or Cologne was to see many people (mostly blue-collar men) working with machines to mass-produce products ranging from cars to boats, planes and dishwashers, at prices that even most people at the lower end of the income spectrum in Western nations could afford.
If, however, we walk into a manufacturing plant in advanced economies today, a rather different sight confronts us. Overwhelmingly, we see machines doing most of the repetitive work that humans were still doing as late as the 1970s. And the people that we do see walking around the factory floor tend to be highly educated technicians, computer specialists and scientists. Many of them are women with advanced degrees in fields such as engineering.
At the same time, these changes have enabled other developments, most notably in the number of people employed in manufacturing in developed economies. America exemplifies these trends. Between 1979 and 2016, manufacturing jobs in America declined from 19 million in 1979 to about 12 million in 2016. That trend, as well as manufacturing’s declining share of overall US GDP, mirrors long‐term trends in developed nations. Yet that same fall in jobs has gone together with rising manufacturing sector output throughout developed countries, including the United States. Real manufacturing production in America grew by 180% between 1972 and 2007. By 2019, it was back to pre-Great Recession levels. Today America continues to be a major global manufacturer and a priority destination for manufacturing investment.
It is also worth noting that total employment in America grew from 99 million to 151 million throughout the same period, especially in the services sector. Not only did this dwarf the loss of manufacturing jobs, it also meant that millions of individuals who might otherwise have been employed in manufacturing a few decades previously were employed elsewhere.
The reasons for this net manufacturing job decline owes much to America embracing the shift in its comparative advantage towards high-skilled, high-end manufacturing — that is, in imagining, designing, logistics and engineering — while developing countries now have a comparative advantage in unskilled manufacturing tasks, such as assembling the various components. That comparative advantage for America and other developed countries owes much to their edge in technology. Many manufacturing jobs that existed from the 1950s to the 1980s have been replaced by machines, rather than shipped abroad, as advocates of protectionism regularly claim.
But the transition of the working population occasioned by the deployment of ever more sophisticated technology in the manufacturing sector has not been seamless. Not everyone who saw their job in the local factory disappear as a result of technological changes found new employment. Others had to settle for lower wages.
Dissatisfaction with these circumstances has contributed to the upsurge of populist movements in America and Europe. Large segments of blue-collar America and working-class Western Europe have turned to unconventional political figures and movements who have made the reversal of these employment trends in manufacturing a prominent part of their political platform. The changes in the economy’s sectoral composition, and associated changes in labour markets, are usually blamed on the lowering of trade barriers and the offshoring of jobs. The solutions proposed invariably involve some form of state intervention. The fact that technological change is estimated to be responsible for anywhere between 80 to 90% of the decline in, for example, American manufacturing jobs is rarely mentioned.
The good news is that, over time, most communities in what is called the Rust Belt have adapted. Of the 185 US counties identified as having a disproportionate share of manufacturing jobs in 1970, approximately 115 had managed to switch successfully away from manufacturing by 2016. Of the other 70, some 40 had exhibited ‘strong’ or ‘emerging’ economic performance between 2000 and 2016. Places such as Pittsburgh, for example, can no longer be dismissed as Rust Belt cities.
That said, manufacturing remains a prominent example of how the knock-on effects of technologically driven changes in the economy go beyond economics. In his famous debate with the Marxist historian Eric Hobsbawm, the Oxford economic historian Max Hartwell demonstrated that, thanks to nineteenth-century industrialisation, there were remarkable improvements in overall living standards, lifespans and general health levels throughout the Western world. Yet it is also true that the same transitions, occasioned in part by technology, also helped usher in Marxist and socialist movements determined to undermine the very economic system that was largely responsible for such progress. A similar dynamic is at work today. The transformative effects of technology on manufacturing have generated great wealth and resulted in many people working in far less physically strenuous jobs than their grandparents. But it has also left significant groups feeling abandoned, disenfranchised and wanting to change, through politics, some of the economic dynamics associated with technological change.
A different set of challenges is associated with another sector of the economy that has been transformed by technology. Like contemporary capitalism, the roots of modern banking lie in the medieval period. The financial revolution that occurred during this period produced new legal arrangements such as partnership contracts, accounting tools such as double-entry bookkeeping, and banking devices such as the cheque, the drawing account and the bill of exchange. Above all, it was during the early Middle Ages that Western Europeans came to recognise that money was not simply a means of exchange. Under certain conditions (most notably, those of economic growth), they saw that money could acquire the character of liquid fungible capital. That, in turn, encouraged the advent of new ways of estimating the different risks associated with different uses of capital.
In their own way, these were technological changes. After all, technology goes beyond machines and embraces other tools and instruments by which humans transform the world around them. In the late medieval and early modern worlds of finance, these included economic and legal tools such as life annuities, mutual funds and share ownership in what we would call limited liability corporations. These devices allowed people to mobilise monetary capital in ways that provided the fuel needed by entrepreneurs to transform their ideas into reality. They also allowed those with capital to shift resources quickly to bolster successful initiatives, minimise the losses associated with failed enterprises, and invest in businesses and enterprises whose owners they would never meet in person and whose activities were often carried out thousands of miles away from where most investors lived.
Today the financial sector continues to spur forward economic development in much the same way: by managing risk, investing with an eye to the time-horizon preferred by their clients, and moving capital quickly to those parts of the economy that need it. A world without monetary capital and managed risk would be a very poor world indeed. That said, it is precisely because of the financial sector’s pivotal role in modern economies that instability in banking and finance can lead to broader and more systematic economic volatility and therefore political instability. The causes of financial meltdowns and runs on banks can range from bad decisions on the part of its practitioners to a fundamental lack of confidence on the part of large segments of the population in the overall economic lookout. But whatever the causes, problems in the financial sector cannot help but spill over into every other economic sector.
Contemporary technological developments have exacerbated these strengths and potential weaknesses in the financial sector. Technology has, for instance, resulted in ever greater automation of financial activities, ranging from everyday banking services to investments, trading, risk management and insurance. Whether it is banking a cheque on your phone or the application of computer-generated mathematical algorithms by major investment firms engaged in risk assessment, technology has accelerated the speed at which the financial sector performs its vital functions.
New technologies such as the use of smart analytics have, for instance, permitted financial businesses to explore the consumer data at their disposal in ways that enhance the predictive power of their modelling. Other technologies allow real-time financial transactions to occur in ways that once took weeks, thereby diminishing the degree of risk and uncertainty. The ability of banks and financial houses to monitor the performance of their investments has also been dramatically enhanced. Even insurance services are being transformed. Car insurance once focused on indirect indicators — the age of drivers, for instance — to determine insurance premiums. That, however, is being replaced by closer computer analysis of data concerning how, say, certain types of vehicles are used or the impact of weather on patterns of driver behaviour.
Yet for all these improvements, banks continue to fail, hedge funds go bust, mortgage markets collapse, stock markets occasionally behave with bewildering unpredictability, and fraud and financial crimes have not been eliminated. In short, while technology has helped diminish uncertainty and risk in some areas, it has proved incapable of eliminating human fallibility, weakness or our inability to know everything that would allow us to determine far in advance that a particular investment is guaranteed to produce a certain level of return.
There have also been occasions when excessive reliance on new technologies has contributed to spectacular failings in financial markets. Many of the financial instruments developed in the late 1990s and early 2000s were based on quantitative risk modelling for setting capital levels and assessing risk. Much of this modelling was reliant on highly sophisticated risk assessment technology. In many cases, banks and financial enterprises were encouraged to embrace this technology by regulators who believed that it would reduce the potential for extreme upheavals in markets. Use of the same models and technology also meant that many of these banks and financial houses also reacted in the same (mistaken) way when things did not go as predicted. To that extent, excessive reliance on computer-generated models and algorithms meant that prudence and common sense often failed to prevail.
Likewise, technology’s contribution to the tremendous speed of contemporary financial transactions and investments can be a double-edged sword. When so much is automated, the potential for the effects of major errors in capital investment or lending to magnify quickly throughout economies and across borders is raised. What took weeks and months during the Great Depression can now take place in hours and days thanks to the speed at which financial information is transmitted. One of the first and most vivid manifestations of this occurred during the 1997 Asian financial crisis as the fallout of a financial meltdown in one country — Thailand — was rapidly transmitted to other Asian nations such as Indonesia, South Korea and Malaysia, because of the increased integration of these financial markets that had been enhanced by technology. Financial contagion, as it came to be called, had a significant technological face.
As in manufacturing, technology has greatly enhanced humanity’s capacity to shape the world through banking and finance. Few of us, I suspect, would want to go back to an economic world in which the technologies deployed in the manufacturing and financial sectors remained relatively primitive by our standards. In both instances, though, we also see that new technologies generate as many challenges as opportunities for human betterment.
As Jean Daniélou noted, ‘Technology awakens in man a sense of his power.’ We cannot, however, know all the effects of the power associated with new technologies. This is all the more reason why the hubris that technology can generate in its human creators needs to be disciplined by such decidedly un-technological virtues of humility, temperance and prudence.