Thursday, May 25, 2006


The death late last month of John Kenneth Galbraith helps to illustrate just how much the American economy -- and indeed the world's -- has changed over the last four decades. Galbraith could plausibly write in 1967's The New Industrial State, that large corporations were immune to market forces.

And yet, a mere three years later, the enormous Penn Central Railroad, itself born of a desperate 1968 shotgun marriage between the Pennsylvania Railroad and the New York Central, declared bankruptcy. It was eventually bailed out by Conrail, initially created by the federal government, which itself was acquired in 1998 by Norfolk Southern, and CSX.

Beyond Penn Central and Conrail, as Thomas Sowell recently noted, "Eastern Airlines has gone out of business. The Graflex Corporation has gone out of business." Japanese car manufacturers have completely dominated the seeming monopoly the American "Big Three" automakers had on the US auto market.

Despite all that, Galbraith's theories will be taught in universities for decades to come. Which probably wouldn't surprise Alvin Toffler (interviewed in a recent TCS podcast) in the least. In his latest book, Revolutionary Wealth, co-written with his wife Heidi, Toffler diagrams the varying speeds in which institutions change. In one chapter, the couple uses a series of figurative cars on the freeway to make their point. Zooming along at 100 MPH "is a car representing the fastest-changing major institution in America today -- the company or business," the Tofflers write.

By contrast, a car driven by government and regulatory agencies would be puttering at a speed of 25 MPH. Meanwhile, bringing up the rear, at 10 miles per hour, shuddering along "with a flat tire and steam coming out its radiator" is the American school system. "Is it possible that it costs $400 billion to maintain this broken heap? The answer is yes, every year."

April 1st, 1976: The Second and Third Waves Clash

Perhaps no day illustrates the rate that varying institutions change better than April Fool's Day 1976, when two divergent businesses began operation. The government-funded, rustbelt-oriented Conrail began operations on the same day that a corporation called Apple Computer was formed by three young Californians: Steve Jobs, Steve Wozniak, and Ronald Wayne (who left shortly thereafter, becoming the computer industry's equivalent of The Beatles' Pete Best). And it's been the computer that has transformed how wealth is created in the last 40 years, just as the railroad did in the 19th century.

Besides tremendous changes in the economy and wealth creation, the 1970s was a decade full of fuzzyheaded thinking, and a load of doomsday books predicting economic and environmental doomsday. The Tofflers' 1980 book, The Third Wave (the concepts of which Revolutionary Wealth builds on) bucked this trend. In the midst of the hyperinflation, astronomical interest rates, and rampant unemployment of the Carter-era 1970s, the Tofflers were able to look past that to see the actual long-term causes of many of these trends: much of the free world was making the transition from what a rustbelt mass-production assembly line economy of heavy manufacturing to a high-tech, on demand, service-oriented economy.

In 1980, as the American economy was bottoming out, the Tofflers must have sounded wildly optimistic themselves when they predicted the rise, over the next couple of decades, of networked computing, telecommuting, flex-time, the end of the dominance of mass media, and standardized mass production replaced with one-off customization.

The title of The Third Wave refers to three great changes to civilization. The First Wave was an agriculturally based economy that lasted from approximately 8000 BC until 1750 AD. The Second Wave was the industrial revolution, which the Tofflers define as running from then until to 1955, after which the Third Wave began. The Tofflers use 1955 to mark the approximate beginning of the Third Wave, since that was the first year that white-collar and service workers outnumbered blue-collar workers.

The Second and Third Waves, and their incumbent economies, take their cue from the dominant technology of each period. The industrial revolution was organized around big machinery: locomotives, steamships, assembly lines, and steel mills. Mass production was the norm, and for that reason, civilization was dominated by mass media, mass advertising, and mass politics.

The economy of the Third Wave builds not from the machine but from the microchip. One of Toffler's favorite words is "Demassified" -- including customized one-off production instead of a mass assembly line. Similarly, in place of a mass media with three TV networks and one or two big newspapers per city, there is now cable and satellite TV serving up hundreds of narrowcast magazine-like channels, and billions of Websites. As I write this, Technorati is tracking 38.8 million Weblogs, with probably 150,000 or so updated daily. And these are all revolutionary changes to society, which are occurring under many people's radar screens -- not the least of which are the old-line "legacy" media, traditional economists, and large segments of the educational system.

The Prosumer Explosion

One element of the economy that virtually all economists ignore is the role of what the Tofflers call "the prosumer," something they first described in The Third Wave. "We invented the word prosumer," the Tofflers write in Revolutionary Wealth, "For those of us who create goods, services, or experiences for our own use or satisfaction, rather than for sale or exchange. When, as individuals or groups, we both produce and consume our own output, we are 'prosuming'."

This first decade of the 21st century has seen technologically-enabled prosumers blossom: home musicians, bloggers, and podcasters are the more exciting and visible examples of the prosumer movement, but for every well-known blogger, there are a million more prosaic examples, as the Tofflers note, such as the homeowner who puts a new roof on his house, who is consuming raw materials, something that is visible in sales figures. But he's also adding invisible (until he sells) value to the house, and the neighborhood.

Some of the concepts in Revolutionary Wealth may be familiar to regular readers of TCS Daily, as well as residents of the Blogosphere who eagerly devoured Glenn Reynolds' An Army of Davids. But taken as a whole, the Tofflers' new book shows just how dramatically the economy is being transformed -- and how rapidly -- even if Galbraith's successors can't see it occurring, or rue the seeming chaos of constant change.


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