Breakthrough: A Growth Revolution

By Martin Fleming

This book examines the economic logic of the significant variation in growth over long periods.

What’s necessary for the U.S. and other developed nations to realize stronger growth and more equal incomes? What’s necessary for families to feel vacations, college educations, and retirements are possible? Will artificial intelligence (AI) automate or augment workers’ jobs? Will the 2020-2021 global pandemic be sufficiently disruptive to deliver fundamental transformation?

Economic success in the decades ahead will depend on the willingness of households, businesses, and governments to innovate and change ways of living and working.

To explore these questions, the 4th Industrial Revolution is a unique frame to assess global economic transformation, providing a point-in-time reference for placing current events in the context of sustained, multi-decade periods of faster and slower growth. Political, social, and economic metamorphoses have accompanied each revolution.

This book examines the economic logic of the significant variation in growth over long periods.

Climate change and the global warming consequences of fossil-fuel technologies will need to bring about a new energy technology and, if successful, result in renewable energy sources, reducing energy expense.

The success of the 4th Industrial Revolution is not assured. While the future is uncertain, history suggests success requires that barriers are addressed, workers and businesses engage in the necessary change, and a positive policy response provides the needed leadership.

The book proposes a Growth and Fairness Agenda and a New Social Contract through which stronger economic growth and more equally distributed incomes can be possible.

• Recognize traditional policy actions may be insufficient to achieve stronger long-term growth.
• Promote improved confidence and a positive outlook among small and medium enterprises.
• Encourage advances in AI technology while addressing risks and fairness issues.
• Support deeper worker engagement between business leaders and workers.
• Seek a new social contract among workers, businesses, and governments.

• Language: English
• Publisher: Business Expert Press
• Release date: Oct 10, 2022
• ISBN: 9781637423103

Martin Fleming

Martin Fleming is a Fellow at The Productivity Institute, a U.K.-based research organization, and Chief Revenue Scientist, Varicent, a Toronto-based software provider. Martin is the former Chief Economist and Chief Analytics Officer, IBM.

Book preview

Breakthrough

Breakthrough

A Growth Revolution

Martin Fleming

Breakthrough: A Growth Revolution

Copyright © Business Expert Press, LLC, 2023.

Cover design by Kostis Pavlou

Interior design by Exeter Premedia Services Private Ltd., Chennai, India

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 400 words, without the prior permission of the publisher.

First published in 2022 by

Business Expert Press, LLC

222 East 46th Street, New York, NY 10017

www.businessexpertpress.com

ISBN-13: 978-1-63742-309-7 (paperback)

ISBN-13: 978-1-63742-310-3 (e-book)

Business Expert Press Collaborative Intelligence Collection

First edition: 2022

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Description

What’s necessary for the United States and other developed nations to realize stronger growth and more equal incomes? What’s necessary for families to feel vacations, college educations, and retirements are possible? Will artificial intelligence (AI) automate or augment workers’ jobs? Will the 2020–2021 global pandemic be sufficiently disruptive to deliver fundamental transformation?

The growth dynamics of the developed economies experience significant variation over long periods. This book examines the economic logic of such variation and whether the long-term movement is the result of random events or whether improved outcomes arise from within the system.

To explore these questions, the Fourth Industrial Revolution is a unique frame to assess global economic transformation in the decades ahead. The industrial revolution framework provides a point-in-time reference for placing current events in the context of sustained, multidecade periods of faster or slower GDP and productivity growth. Political, social, and economic metamorphoses have accompanied each revolution.

In each revolution, a new general-purpose technology, such as information technology, initially gives rise to mushroom growth with scattered success popping up, while latter yeasty growth takes hold with economic activity leavened by increased capital investment, education, skills, knowledge transfer, technology diffusion, and labor income share.

Successful economic performance in the decades ahead will depend on whether households, businesses, and governments are willing to alter behavior, engage in innovation, achieve improved balance between traditional and nontraditional values and beliefs, and respond to pressures to bring about a future of more rapid growth and more equal income distribution.

Energy technology evolution will address the climate change and global warming consequences of fossil-fuel technologies and, if successful, over the long-term result in renewable energy sources, reducing energy expense.

The book proposes a growth and fairness agenda through which stronger economic growth and more equally distributed incomes can be possible.

•Recognize traditional policy actions may be insufficient to achieve stronger long-term growth.

•Promote improved confidence and a positive outlook among small and medium enterprises.

•Encourage advances in AI technology while addressing risks and fairness issues.

•Support deeper worker engagement between business leaders and workers.

•Seek a new social contract among workers, businesses, and governments.

Keywords

growth revolution; fairness; equality; new social contract; income distribution; wage increase; worker engagement; small and medium business; Fourth Industrial Revolution; Artificial Intelligence; capital investment; tangible investment; intangible assets; growth dynamics; general-purpose technology; knowledge diffusion; absorptive capacity; labor income share; capital income share

Contents

List of Figures

List of Tables

Testimonials

Foreword

Preface

Acknowledgments

Chapter 1 Introduction: The Growth Revolution Ahead

Chapter 2 Industrial Revolution, Growth, and Technological Change

Chapter 3 Four Industrial Revolutions

Chapter 4 Superstar Firms, Knowledge Transfer, and Labor Income Share

Chapter 5 Resource Transformation as Growth Recovers

Chapter 6 Conclusion: Is a Growth Revolution Possible?

Epilogue Know Unknows

Appendix A Dating Major Global Financial Crises

Appendix B Long-Lived Capital With Embedded Tangible and Intangible Capital

Appendix C Capital Investment and Income Generation

Appendix D Shifting Labor Income Shares in the First Industrial Revolution

Appendix E Technology and Changing Elasticity of Substitution

Appendix F Employee Trust and Productivity

References

About the Author

Index

List of Figures

Figure 2.1 U.S. and UK GDP growth

Figure 2.2 Breakthrough patents (top 5 percent significant patents per capita)

Figure 2.3 U.S. nonresidential investment as a percent of capital stock

Figure 2.4 U.S. nonfarm business sector productivity growth

Figure 2.5 U.S. nonfarm total factor productivity growth

Figure 2.6 Average age of fixed nonresidential assets—total and structures

Figure 2.7 Average age of fixed nonresidential assets—equipment and intellectual property products

Figure 2.8 Average age of fixed nonresidential assets—as reported and 1940 composition

Figure 4.1 U.S. nonresidential investment as a percent of capital and U.S. top 1 percent pretax income share

Figure 4.2 U.S. net business establishment formation rate

Figure 4.3 U.S. domestic income real factor income

Figure 4.4 Value added per worker

Figure 5.1 Net additions to government sector nonresidential capital stock—total and structures

Figure 5.2 Net additions to government sector nonresidential capital stock—equipment and intellectual property products

Figure 5.3 U.S. federal minimum wage

Figure 5.4 Real minimum wage index

Figure C.1 U.S. household and nonprofit asset growth as a percent of fixed assets

Figure C.2 U.S. household and nonprofit asset growth as a percent of fixed assets and capital services

Figure C.3 U.S. real long-term treasury rates and S&P 500 growth 160

Figure E.1 U.S. capital–labor ratio

Figure E.2 U.S. real factor prices

List of Tables

Table 1.1 Four industrial revolutions

Table 1.2 Economic logic of industrial revolution

Table 2.1 Industrial revolution dates and eras

Table 2.2 U.S. GDP growth by industrial revolution

Table 2.3 Capital deepening by industrial revolution

Table 2.4 Labor productivity growth by industrial revolution

Table 2.5 U.S. per capita GDP growth rates

Table 3.1 Industrial revolutions eras

Table 4.1 Developed economies labor productivity

Table 4.2 Developed economies services sector value added

Table 4.3 Employee satisfaction and company performance, including shareholder value

Table 6.1 Gen Z and millennial job switching

Table 6.2 Growth and fairness agenda

Table A.1 Major financial crisis dates

Table C.1 Household financial asset flows as a percent of household asset stock

Testimonials

Martin Fleming lays out a road map for hope. He sees the potential and a way to overcome some of our largest economic hurdles.—Diane Swonk, KPMG, Chief Economist

Martin Fleming has written an engaging and important book that identifies actionable pathways for inclusive growth in the post-pandemic recovery. A must-read for anyone interested in our economic future.—Susan Lund, Vice President, Economics and Private Sector Development, International Finance Corporation, World Bank Group

Martin Fleming has penned an outstanding book, laying out the dynamics of the ongoing AI-industrial revolution. It deserves reading by a wide audience of economists, policymakers, analysts, and students, across disciplines.—Stuart P.M. Mackintosh, Executive Director, Group of Thirty

Foreword

Over five decades, the developed world has experienced the great inflation, the great moderation, the great recession, the jobless recovery, secular stagnation, a savings glut, and a once in a century pandemic among other crises and economic events. Through it all, economic growth, productivity growth, and capital investment have remained disappointingly weak. The advent of a stream of new digital technologies, a wide array of fiscal and monetary policy actions, and a broad set of new worker skills, all have failed to compensate for economic volatility. The fear is that employment and incomes are threatened by the impact of artificial intelligence (AI) automating workers’ jobs.

The Productivity Institute was created by the UK government to bring together scholars, business leaders, and policy makers to consider these challenges and explore what productivity means for businesses, workers, and communities—how it is measured and how it truly contributes to increased living standards and well-being. The aspiration is to contribute to improved outcomes in terms of productivity and more inclusive economic development, not only in the United Kingdom but also across the entire developed world.

Already the institute’s work has focused on how a longer-term perspective and a decentralization of public policy could provide benefits broadly across income groups and regions. The institute’s work has also looked at how heightened uncertainty, following the 2020–2021 global pandemic in combination with supply chain disruption, labor shortages, and rising costs, has impacted the business sector, public policy, and household decisions in regard to investment and economic activity. Can crises force more agility and resilience?

In Breakthrough: A Growth Revolution, Martin Fleming confronts these challenges and provides a long view of economic activity to consider the growth dynamics of developed economies. The book examines the economic logic of the variation in growth performance over two centuries and whether the long-term movement is the result of random events or whether improved outcomes arise from within the economic system. To explore these questions, the Fourth Industrial Revolution provides a unique frame to assess global economic transformation in the decades ahead.

Building on decades of scholarship, Fleming defines an industrial revolution as the economic and social transformation occurring as a result of the lengthy and complex interaction of capital investment, technological change, and creative destruction along with the redefinition of how work gets done and how businesses are organized. Over the course of an industrial revolution, investment in machinery, equipment, and intellectual property can shift from substituting for the skill of workers to complementing the skill of workers. Industrial revolutions create the need for new worker skills to build, deploy, and use the new technology, as well as time to adjust to the new social norms implied by the revolutionary transformation.

Each industrial revolution brings amazing and previously inconceivable technological advances that drive unimagined innovation in business, work, and life. Industrial revolution shifts activity from an existing legacy era to a new era dominated by new technology and new capital investment. But new business models and new ways of working are as much the essence of industrial revolution as is technology, innovation, and creative destruction. Importantly, industrial revolution transforms economies to unequal degrees, shifting the nature of the competition for wealth among nations.

In each revolution, a general-purpose technology, such as the new digital technology, initially gives rise to mushroom growth with scattered success popping up with firms and sectors. Knowledge diffusion and absorptive capacity is limited as firms at technology’s leading edge attract the necessary skill, engage in innovative activity, and achieve early success. The successful innovators become industry superstars with new technology rapidly appearing.

With maturing technology, business models transform, and a new regime emerges, bringing much greater knowledge diffusion and deeper absorptive capacity across a much wider universe of firms. Yeasty growth takes hold with economic activity leavened by increased capital investment, education, and skills. With stronger economic and productivity growth, labor demand strengthens, and labor’s income share begins to climb.

As the technology simplifies and a broader set of firms absorb the new technology, success requires that workers see their interest in gaining new skills, transforming practices, and changing behavior. With AI, the new digital technology is especially meaningful in services sectors, where worker engagement is critically important in determining service delivery quality. Worker engagement—and the service quality it allows—is a result of workers’ skills, satisfaction, career paths, and compensation. More engaged workers are more productive and, thus, better compensated and supported in their careers. With services sectors continuing in importance in the period ahead, worker engagement will take on added significance as a broad set of firms absorb the newly available technology and business models. Creative destruction and transformation will be widespread.

Successful economic performance in the decades ahead, according to Fleming, will depend on whether households, businesses, and governments are willing to alter their behaviors, engage in innovation, achieve improved balance between traditional and nontraditional values and beliefs, and respond to pressures to bring about a future of more rapid growth and more equal income distribution.

Fleming is also careful to point out that there are topics such as shifting demographics and China’s emergence in the global economy after a century and a half of relative quiescence that have not been fully explored. There is also the big elephant in the room of economic growth, which is climate change. If the Fourth Industrial Revolution is to successfully improve economic outcomes, energy technology evolution will be required to address the climate change and global warming consequences of fossil-fuel technologies. If successful, over the long term, such a transformation will result in renewable energy sources, reducing energy expense.

Fleming does not assume or predict the success of the Fourth Industrial Revolution. Rather, he focuses on the conditions necessary, and the actions required for the realization of benefits comparable to those of earlier periods. More robust economic and productivity growth along with improved income distribution are very possible but change, transformation, and creative destruction will certainly be necessary. To realize a more satisfying future, Fleming proposes a Growth and Fairness Agenda through which stronger economic growth and more equally distributed incomes can be possible.

—Bart van Ark, Managing Director, The Productivity Institute

Preface

The Fourth Industrial Revolution continues to receive attention from a wide array of business leaders, investors, and senior public officials. To date, deep work has been largely limited to Karl Schwab and the World Economic Forum. Among economists, industrial revolution has been a central concept in the work of economic historians as 250 years of progress has been explored, most notably the 18th and 19th centuries’ industrial revolutions. However, among economists, not working in economic history, industrial revolution has received little attention. Consequently, the use of an industrial revolution framework as an analytical device is a novel contribution.

The purpose of this book is to understand the growth dynamics experienced across the developed economies over long periods. This book examines the economic logic of such variation—the economic, social, and political forces underlying the variation—and whether the long-term movement is the result of random events or whether improved outcomes arise from within the system. The short answer is that there is some of both. Understanding the economics of long-term growth and using an industrial revolution framework, a view of the conditions required to bring about a future of stronger growth with more equal income distribution may be possible. Imagining a more prosperous future begins with an understanding of the successes and failures of the past.

Acknowledgments

This book would never have been possible without the strong interest and encouragement of Bart van Ark, the managing director of The Productivity Institute. Bart has been a friend and colleague for nearly two decades. Bart has given his time generously and read carefully the paper that was the basis of this book. Bart has encouraged and supported the book project over its entire recent journey. My long-time friend and former IBM colleague, Jim Spohrer, watched this work grow and mature over many years. Perhaps it shouldn’t be surprising that Jim quickly came across the original paper on The Productivity Institute website and, in his role as a Business Expert Press editor, encouraged me to expand the paper into a book and join the Business Expert Press family. Jim’s comments on the manuscript are much appreciated.

Diane Coyle of the University of Cambridge also read the original paper in detail and provided valuable comments. The book and my work are a better product after much long discussion with Tony Venables of the University of Oxford who patiently read much of my initial work. My friends and Conference of Business Economist colleagues, Diane Swonk, Chief Economist, KPMG; Stuart Mackintosh, Executive Director, The Group of Thirty; and Susan Lund, formerly, McKinsey and Company and now Vice President, Economics and Private Sector Development, International Finance Corporation, The World Bank, each read and commented on the manuscript.

In all intellectual endeavors, there is a long legacy that can hopefully bear fruit. Most recently David Autor and Daron Acemoglu of MIT, and Erik Brynjolfsson, now at Stanford University, have provided support in sharing their time and insight. Having spent 20 years at IBM, the last 10 of which as Chief Economist and Chief Analytics Officer, many friends and colleagues have influenced this work. The current work’s origin finds its way back to the three years I spent in IBM’s corporate strategy group, having been introduced to Carlota Perez and her work by Joel Cawley, Dan McGrath, and Bruce Harreld. Finally, having spent a year—many years ago—as a research assistant to Jay Forrester at MIT, I grew to appreciate the dynamics of complex systems along with, importantly, what it means to do quality work.

It has been a pleasure to have joined Varicent as Chief Revenue Scientist. Marc Altshuller, Varicent CEO, and Marcus Hearne, Chief Marketing Officer, have been supportive throughout this effort. The opportunity to both see and contribute to the innovation and deployment of new technology on a first-hand basis has been immeasurably helpful.

The publication process has been made relatively pain free due the effort of Scott Isenberg, Managing Executive Editor, and Charlene Kronstedt, Director Production and Marketing, both of Business Expert Press. My thanks go to both. David Yaun has provided important support in communicating this work to the broader world. Anna Sekaren has also provided her coaching and guidance.

As ever, the love and support of my wife, best friend, and partner, Patricia, has made it all possible. I am delighted to dedicate this book to her.

CHAPTER 1

Introduction

The Growth Revolution Ahead

Pandemics have plagued the world for centuries. While the 2020–2021 pandemic is often viewed as a time unlike any other, in fact, the current pandemic has joined a long history of global pandemics. Dating back 700 years, each has profoundly altered social and economic activity in the decades that followed (see Jordà, Singh, and Taylor 2020). The current pandemic will likely be very similar.

What gives the 2020–2021 pandemic a unique flavor is the very rapid appearance of life-saving science and technology delivering vaccines and antiviral drugs, limiting illness and death. The availability of a robust global technology network also uniquely allowed many to work from home and to shop in comfort, privacy, and safety.

But the current pandemic is also unique in that it appeared just as the global economy is poised to enter a period of robust growth, offering the possibility of both greater wealth and more equally distributed incomes. The pandemic-induced dislocation, which has inflicted widespread death and suffering, may very well accelerate the potential for a robust social and economic revival in the decades ahead. While the future is uncertain, if pressures arising from the pandemic compel business leaders, workers, families, and elected officials to transform behaviors, the global economy might very well breakthrough to an era of robust growth and more equally distributed incomes.

Stronger long-term growth is no small matter. Small year-to-year differences in economic growth can have large cumulative effects over the long term. Small improvements in tangible and intangible capital investment as well as productivity growth over decades and even centuries can potentially result in as much or more impact on economic growth