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Are we in a post-industrial society?

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Important social and economic changes are often anticipated long before they become reality. The phrase ‘post-industrial society’ has been used for decades but only now is it becoming unmistakeable. We are starting to move beyond capitalism as well.  

The declining significance of the industrial era is plain enough. According to Statista agriculture contributes less than five per cent of global gross domestic product (GDP), and industry just over a quarter. Services accounted for almost two thirds.

In OECD countries, secondary industry, the manufacturing that we associate with the industrial era, fell as a share of GDP from 18 per cent in 1998 to 13 per cent in 2021. Decades of efficiency gains, largely because of computerisation, have meant that much less capital is needed for industry to meet demand.

The end of the industrial era is in turn undermining capitalism, at least as it has existed for over a century. The management thinker Peter Drucker wrote his book Post-capitalist society in 1993. Thirty years later what he anticipated is coming into view.

Capitalism is dressed up as a sophisticated ideology but in the end it depends on simple arithmetic. There has to be sufficient growth to meet the cost of capital (initially defined by the base interest rate). That ‘growth’ is an increase in the value of transactions (GDP is simply a measure of transaction volumes). ‘Growth’ is not increased consumption, as is often assumed.

For the last quarter of a century the required ‘growth’ has come from excessive bank lending which heavily inflated asset values, especially housing. But that excessive money creation, known as ‘financialisation’, is largely over as debt levels around the world become unsustainable.

So where will the necessary increase in transaction volumes come from? One tactic has been to monetise things that previously were not financialised. The global sports industry, which was once largely amateur, a leisure activity, now generates close to $US500 billion in revenues. The weight loss industry, which is essentially designed to get people to consume less food – it is perhaps the best example of how ‘growth’ and consumption are not the same – generates almost $US250 billion in revenue globally. The global babysitting industry is worth over $US20 billion. My favourite is the global nail care industry, manicuring, which produces revenue of over $US10 billion.

 

'What does it mean when ideas of scarcity – supposedly the driving principle in understanding supply and demand – are no longer the only or best way to think about economic activity?'

 

Then there are new technologies, especially those that, in effect, monetise human attention. The social networking market is worth over $US130 billion. Internet access revenues reached $US757.7 billion in 2022. The global video game market, which only started its spectacular growth this century, accounts for almost $US250 billion.

In theory, ways can be found to invent new forms of transactions indefinitely, but the question is: ‘will it be enough to meet the cost of capital?’ Probably not, especially as the populations of developed economies age.

It is why the capital markets are so attracted to the climate change agenda, which is by far the biggest post-industrial play. The markets are betting that it has the potential to be a massive money spinner, perhaps enough to save capitalism. Estimates range from $US80-150 trillion in capital requirements over the next quarter of a century, which are massive projected sums (the annual world economy is about $US100 trillion).

A glance at stockbroker reports to the large institutional investors, which routinely rate companies’ environmental performance – measured using a metric called Environment, Social, Governance (ESG) – show how obsessed the financial markets have become with the zero-carbon agenda. They are not doing it to save the planet, they are doing it because it is where the big money is going.

The consequences can be seen in a startling statistic from the consultancy Thunder Said Energy. In just two years energy costs as a proportion of global GDP have doubled: from 6.5 per cent in 2021 to 13 per cent in 2023.

That unprecedented jump is not due to increases in the cost of fossil fuels. The prices of coal, gas and oil initially rose in that two-year period but then started falling; they are roughly in line with long term averages. Rather, it is the cost of changing the way energy is generated, configured, distributed and taxed. It is two sides of the same coin. What makes the new energy systems so attractive to investment markets is what makes it more expensive to users.

The risk is that endeavouring to rely heavily on sustainable energy may end up making the system itself unsustainable. Certainly, China and India have come to that conclusion, which is why they are increasing their use of fossil fuels, including coal. Modern life depends on cheap and available energy. At the very least it looks like a much greater proportion of budgets will go towards energy consumption.

In the end the push for zero carbon will not provide the ‘growth’ being sought. There are signs it is faltering. For instance, Larry Fink, chief executive of the world’s largest fund management firm Black Rock, is starting to back off from his aggressive prosecution of the climate change agenda.

Two years ago, Fink was publicly threatening companies that Black Rock would sell their shares if they did not rate well on ESG, lower their carbon emissions. Now, he is saying he does not even want to mention the term ESG. One reason is that his claim that a good ESG rating both helps the environment and provides good investment returns has been exposed as false. Another is that state governments in the US are withdrawing their pension money from Black Rock because of the ESG ideology.

The success of the industrial era in the developed world has meant that meeting basic human needs like, food, clothing and shelter have largely been met. Industrialisation transformed human life mainly through the creation of infrastructure: sanitation, energy grids, housing and commercial property systems and transport systems for complex food supply chains. None of this appears in the ‘economic growth’ statistics, except for maintenance costs. Modern economic theory largely ignores it, treats it as invisible.

So what happens next? What does it mean when ideas of scarcity – supposedly the driving principle in understanding supply and demand – are no longer the only or best way to think about economic activity?

What is needed to understand the post-industrial environment is a new way of thinking about economics and finance. Moreover it is necessary to move beyond the tired and increasingly irrelevant dichotomy of capitalism versus socialism. Both are industrial era ideologies that are losing their relevance. Socialism just uses a government-driven cost of capital instead of one defined mostly by the private sector, which is no solution. In fact, it has proven to be worse because it tends to be against markets, which are a basic human activity thousands of years old.

If new ways of thinking about economies and finance have not yet become available, one thing is clear. Money must be made to serve society, not rule it.

 

 

 


David James is the managing editor of personalsuperinvestor.com.au. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Main image: Chris Johnston illustration. 

Topic tags: David James, Economics, Industrial, Capitalism, Finance

 

 

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Thanks for your thoughts on our current economics, David.

You state that "the success of the industrial era in the developed world has meant that meeting basic human needs like, food, clothing and shelter have largely been met." However, it has to be said that this is not the case for all. Even in the largest capitalist economies, there are significant numbers of people who find it difficult to have an adequate diet, shelter and access to adequate health, educational and social services.

In the developing world, people have had it much tougher because the large capitalist corporations have exploited their countries' resources. In addition, as the corporations have reduced their presence in the developed world, they have shifted to the developing world where they have greatly exploited the working people there as well as their environments.

At present, we are seeing the profits of the large corporations soaring while ordinary people in both the developing and developed worlds are struggling to survive.

I was particularly interested in your comment about China and India continuing to use fossil fuels on a large scale.

I have visited both those countries and spoken to Chinese and Indian people about the use of fossil fuels. In many of the large cities in both countries, the pollution is so bad that it is literally killing people prematurely.

The UN's World Health Organisation (WHO) has calculated that there are 12.6 million premature deaths per annum because of pollution-related diseases.

The Indians I met urged me to oppose Adani's coal projects because the burning of coal is killing so many Indians.

In addition, we are seeing the current catastrophic weather events because of the pollution from fossil fuels causing global warming.

Could it be that humanity will have a healthier and safer environment and be better cared for if we adopted the lifestyle of the early Christians which happened to be a primitive form of socialism?


Andrew (Andy) Alcock | 21 February 2024  

Always instructive and interesting. Thanks David


Steve Sinn | 22 February 2024  

Interesting article. I too have been thinking that the economic measurement of GDP could perhaps be leading economists into false assumptions about the robustness of economies because it counts spending across domestic, industry and government rather than
a measure of economic efficiency. The article mentions that economic infrastructure although fundamental to economic success is invisible in the economic growth statistics. Usually governments provide the necessary infrastructure and their spending is included in GDP. So economic infrastructure is essentially a national and state asset that facilitates commerce and industry. Its value should sit in the national balance sheet. It should therefore not be counted in GDP as economic output. What should be counted and is a more relevant measurement of economic efficiency is, the total net profit (before tax and shareholder dividends) of all Australian businesses + the value of trade (surplus or deficit). The definition of "productivity" needs to change from how many units an employee can deal with in a given time frame, to an organisational profit perspective. Profit is the true measure of economic efficiency. The relevance of all the current elements used in the calculation of GDP is therefore questionable. Economists and Government say the economy is on positive track however consumers have not done it harder since the last depression. It leads me to think that the experts counting the wrong data?.


Cam RUSSELL | 23 February 2024