Technology, Populism, And How Britain Won The Industrial Revolution

Luka Bravo/Queens, United States

A transition has been underway since the 1970s from industrial economies, characterized by manufacturing and the production of physical goods, to “post-industrial” economies. More jobs now require specialized knowledge, credentials, and good judgment, rather than physical skills. The Anglosphere in particular has faced the most accelerated change. Transitioning nations have been plagued by low productivity growth, stagnant wages, and rising inequality, resulting in populist attacks from both left and right on the post-war system of free trade and free markets. These trends are closely related to new technologies, like computers and the internet, that have reshaped economic organization and increased the importance of so-called “knowledge work.”

This process of post-industrialization has put legal and cultural institutions from a more industrial era to the test.

Similar events occurred during previous economic shifts. During Great Britain’s transition from an agricultural to an industrial economy, productivity grew, but wages did not, resulting in widespread misery. Oxford economic historian Robert C. Allen has referred to this period, which was associated with the growth of radical movements, as Engels’ Pause.

In a speech earlier this year, Mark Carney, Governor of the Bank of England, warned of another Engels’ Pause that may spur populist activity across the developed world, though the speech was in effect already retrospective, given the rise of democratic socialism and right wing populism in the Western world. He argued that economic conditions today are similar to those in the early decades of 19th century Great Britain.

Institutional malaise in adapting to these technology-induced economic changes could accelerate the political effects of a new Engels’ Pause. Traditional industrial jobs have been hollowed out. The United States is particularly vulnerable to this fallout. Populist surges are likely only beginning.

Britain’s Industrial Revolution

The First Industrial Revolution’s effects on productivity and GDP can neatly be divided into two eras. From 1760-1800, the burst of new inventions had yet to be implemented at a scale to increase productivity or impact wages. On the other hand, urban populations were expanding as people moved en masse to the cities to find jobs. Britain’s trade policies following this period encouraged rapid urbanization, while reducing the demand for labor in agriculture. In the second phase, between 1800-1830, productivity growth rapidly increased. Britain’s GDP spiked. Wage growth in this period, however, largely stagnated and in some cases even declined. Allen found that the period of Engels’ Pause coincided with the rise of socialist and anarchist critiques of capitalism.

The Pause brought dire political ramifications, but around 1840, wage growth started to pick up, though at a lower rate than productivity. It was only after 1860, 100 years after the beginning of the First Industrial Revolution, and around the start of the Second Industrial Revolution, that both wage and productivity growth were stable and rapid. Wage growth occasionally exceeded productivity. This dynamic persisted into the late 20th century.

During the Engels’ Pause, competing theories attempted to explain the rise in inequality. One of the major camps consisted of the Classical economists, most prominently David Ricardo and Reverend Thomas Malthus, who believed that as societies became more productive, the increase in living standards would lead to larger populations that would consume all gains.

The other major theory advanced at the time was popularized by Karl Marx and Friedrich Engels. According to this theory, technology had a labor-saving bias. As technology improved, less labor would be necessary; therefore, beyond the subsistence wages needed to maintain a workforce, the only investments would be based either on the need for skilled workers, in the form of education or training, or as a result of a “historical or moral element,” which capitalism would eventually eradicate.

But by the time the Communist Manifesto was published in 1848, wage growth was on the rise, and by the time of Marx’s death, it exceeded productivity growth. Allen’s account focuses on the incentive for capital formation that rising profits enabled. As productivity increased and the capital-labor ratio widened, increased profitability enabled the wealthy to save more. But the ability for owners to outcompete each other via capital investment dropped off once major industries had become fully industrialized. Competition then depended on hiring more workers to increase production. Once this crucial switch occurred, wages began to rise.

However, the political influence of the movements which had sprung up during the pause continued to impact economic life. The establishment of unions and coordinated labor movements increased labor’s ability to bargain around the same time.

Britain was able to profit more than other European countries during this period, due to the unique legal and cultural environment it provided to industrialists. Liberalism had come to define British culture, as it did America’s, which made it more supportive of private entrepreneurship and laissez-faire economics than continental Europe. The liberal vision that animated Britain throughout the Industrial Revolution provided a political will to manage the transition and shape society.

Throughout the early phases of the First Industrial Revolution, the state gradually lifted restrictions on the creation of corporations. In 1844, incorporating became a simple registration procedure. In 1855, the Limited Liability Act lowered the risk associated with setting up a corporation, an important step in the increased capital formation that led to higher wages.

The institutions of industrial capitalism that eventually became ubiquitous were important to ensuring that investments were protected. The “labor-saving” technologies Marx had referred to had in fact vastly increased the demand for low-skilled labor. The operation of rote machines supplanted the once-complex artisanal crafts that comprised most of Britain’s large textile industry, which in turn boosted output. The demand for more operators reduced the power of artisans, leading to the Luddite Rebellion of 1811. Artisan power had been gradually weakened for nearly a century as guilds lost their prominence in British labor, though their power across the continent continued until the First Industrial Revolution was well underway. In 1812, the UK Parliament outlawed the destruction of machinery under the punishment of death, protecting the investments made by industrialists, and intensifying capital formation.

A key lesson to take from the industrial transition is the role updated social and political institutions played in creating the right incentive structures. The present underlying conditions are eerily reminiscent: there are constant headlines of new technologies being introduced into the market, but their overall national-level productivity effects remain low. But the fact that certain trends existed during the First Industrial Revolution does not necessitate their existence in the present.

If the institutional adjustments that occurred during the First Industrial Revolution fail to occur, or are representative of a failure of vision, it may not simply be an Engels’ Pause that occurs. Current waves of populism will escalate if social benefits are not widespread.

The year 1848 saw numerous revolutions break out across Europe, particularly in France and the German-speaking countries. The political effects reverberated long after wages began to rise, with German and Italian unification occuring in the final decades of the 19th century. Great Britain remained remarkably peaceful due to its earlier reforms.

The ability to make structural reforms will determine whether the post-industrial transition will effectively be managed. But major Western powers have been unable to coordinate on key issues. Take Brexit, for example, where the EU was unable to retain a core member, but that member seems unable to actually leave. Even among economically healthy countries, such as Germany, populist movements have gained power, due to gridlock on social issues like immigration and involvement in international bodies. In the U.S., executive orders have played an increasing role in policy as democratically elected bodies are unable to function to due political gridlock and the constitutional dispersion of governing powers.

Post-Industrial Society and Marx’s Return

The structural response depends on the particular effects of the economic transition. A useful model for gauging the transformation currently underway is Clark’s Sector Model, which divides the labor force into primary, secondary, tertiary, and quaternary activities. Primary activities are those such as agriculture, fishing, and mining, which focus on primary inputs; secondary activities are those in manufacturing and construction which formed the backbone of industrial society; tertiary activities are those in the services sector that make up the majority of jobs in the developed world today, and the vast majority of those in low productivity growth countries like the United Kingdom. Quaternary activities contributed to an insignificant amount of labor prior to the information technology revolution and form the “knowledge economy,” which includes roles like consulting, communications, the culture industry, and increasing amounts of the public sector. The present transition to quaternary roles is likely to accelerate many of today’s political strains.

Recent developments in the post-industrial era have differed significantly from the First Industrial Revolution. Whereas the spinning jenny made a complex artisan task more methodical, and the moving assembly line made a strenuous physical task more monotonous, information technologies like CAD and software tools are now demanding significantly more cognitive effort. Industrial technologies are termed “skill-unbiased,” in that they increase productivity regardless of the skill level of human workers. But the technologies that have proliferated over the last 40 years are “skill-biased,” as their productivity gains are relative to worker skill.

Skill-biased doesn’t necessarily mean technical skills. Tertiary activities tend to be dominated by soft skills that require empathy and pleasantness, rather than technical training. In certain cases, the demand for soft skills displaced demand for technical capabilities, which are easier to automate. Jobs in STEM-related fields in the U.S. shrunk by 3.3 percent between 1980 and 2012, whereas jobs requiring a high degree of social skills grew by 12 percent over the same period.

The skills demanded by the market, however, have not been in high supply. An illustrative example of this is the introduction of the automated telling machine (ATM), which freed up time for bank tellers—-who had previously mainly counted cash and updated accounts—to deal with customer complaints and provide higher quality customer service. The transition from rote numeric skills to personability and communication skills raised the bar for entry into the telling profession.

Skill bias in the transition from secondary to tertiary, and now quaternary, activities has played a significant role in altering the pace of innovation diffusion since the IT boom of the late 1970s. Service sector jobs tend to exhibit low productivity growth without some kind of technological change. While a manufacturing plant can incrementally improve year on year, a nurse can’t be improved in the same way, and she cannot physically attend to more than one patient at a time. Low-productivity jobs are growing in demand, at the same time competing for labor with other industries. Aging populations require more nurses, and the education bubble requires more professors and administrators. This has contributed to rising costs in these tertiary activities for little consumer gain, a phenomenon known as Baumol’s Cost Disease. The resulting increase in costs of education and health care eat into the capital available for innovation.

The effects of the quaternary sector are even more pronounced, given the difficulty of accessing the necessary human capital. So-called “superstar firms” have been vastly more productive than laggards, attracting most of the small pool of talented human capital, and leading to some level of industry concentration.

As top graduates go into finance and high tech jobs, fewer of them revitalize traditional industry with new technologies. This is problematic, as quaternary industry skill sets are not as easily transferable from one firm to another. This has meant that the learning curve for firms attempting to leverage productivity-boosting technologies has increased dramatically. The period following the IT boom has been one of increasing inequality as a result of this changing dynamic.

New technologies like artificial intelligence add to these challenges, which may in turn restrict gains even further. Even if it only creates full-scale transformations in a handful of industries, the heavy firm concentration and reliance on highly specialized intellectual capital will create economic disruption. Companies can quickly adopt the technology across departments and subsidiaries, thus creating fluctuations in competitive job markets and causing worry across other industries. Those who can leverage AI well will be vastly more productive, offering higher wages and earning higher profits, but entry into those firms will be competitive and demanding. Automation presents a policy challenge, since AI is able to perform certain tertiary activities—chatbots replacing customer service representatives, drones taking over delivery, and autonomous vehicles automating transportation. The services sector will increasingly focus on those skills of which existing AI is incapable, such as social competence, complex communication, and human interaction.

The shift to roles driven by soft skills in the tertiary sector, and the rising demand for jobs in the quaternary sector, is likely to result in a lack of qualified workers, as well as difficulties in retraining. The institutions of law and culture that developed during the industrial era are no longer capable of grappling with a post-industrial world.

Straining Institutions

While the transition is economic and technological in origin, the institutional strain it causes is not so reducible to matters of calculation. Present institutional strains are intensifying and radicalizing normally stale and bland policy discussions, especially in the United States. Policy debates which defined a previous era, such as the size of government, are being thrown out. Political battles on the future of education, the nature of the corporation, and the governance of emerging technologies directly impact how the transition will be managed and the future it will entrench.

Due to the weight given to post-secondary qualifications across quaternary fields, political demands to reduce or abolish the major financial cost a degree requires are growing louder. There is growing support for universal free college tuition; decades of institutional pushes for post-secondary education, and the resulting near-mandatory nature of degrees for many jobs, have created a $1.5 trillion dollar student debt crisis borne by around 44 million borrowers. This political current ties in economic success with access to the post-secondary education system. Supporters argue that good jobs require more education, and that the current system of tuition fees and markets in education present barriers that harm national productivity. This retains the view that universities are assets through which students acquire real intellectual and technical value, which translates into both economic growth and cultural flourishing.

Another view is that there aren’t too many barriers to education at all; rather, universities are failing students by not focusing on useful skills and excessively extending program lengths. The demand, then, is for greater prioritization of STEM subjects, and the reworking of primary and secondary education to increase mathematical ability. Moreover, many in this camp draw on the fact that university degrees generally function as signalling mechanisms on the job market. Rather than intellectual or technical skills, the primary benefit of holding a degree is to signal intelligence and transferable soft skills such as group work, complex project planning, political conformity, and the like. If technological trends accelerate competition for judgment-based positions, it will only be natural for students to ask why they should spend their twenties on education and accumulate immense debt to enter the workforce. In fact, if fewer people go to university, and more alternative education avenues open up, everyone will be better off, according to this education-skeptic view.

These disagreements reflect differing priorities and goals. If the free education movement wins out, the power of post-secondary institutions will be cemented, and the costs will be redistributed to the broader tax-base on the justification that this is a strategic national investment. However, this would do nothing to mitigate the problem of inflated degrees and the costs of spending years pursuing validation for intellectual ability. Further, this would signal the victory of an educational policy focused on domestic social issues. Conversely, STEM-first approaches, like the one currently underway in China, direct human capital towards innovation. This would mean a shift towards outward-looking policy with the goal of ensuring American economic prominence.

Deciding which course to take is a pivotal political battleground. Academic institutions maintain a privileged political and social position. Ceding any part of this privilege will not come as a welcome change. While public investment in easily accessible training programs and even online courses could mitigate the costs of tertiary and quaternary training, the contest will pit beneficiaries of the academia-focused domestic strategy against those of a skills-focused international competitiveness strategy.

The size of corporations like Google and Facebook has taken on greater political focus than the size of government and has become a contentious point on how to shape this transition. The dynamics of competition which enabled the growth of corporations of unprecedented size amidst a general productivity slowdown are increasingly viewed as a political failure, particularly among the U.S.’ resurgent socialist left. Just as in education, however, views of the problem share only an institutional target, but neither a diagnosis, nor a cure.

An emboldened antitrust movement sees the rise of these new giants not as inevitable aspects of a post-industrial economy, but rather a result of the eradication of political concerns in competition policy. Such a perspective has already taken a hold in Europe, where Margarethe Vestager has been referred to as an “antitrust czar” for renewing the European Union’s zeal in enforcement. Many of those convinced of the need for more aggressive action against the tech companies and financial firms that dominate western economies harken back to an older trust busting-era and the “curse of bigness.” According to this view, competition policy was better when it was motivated not by concerns of economic efficiency, but by political and moral convictions.

The small is beautiful argument also animates decentralization advocates, who are less keen on using political tools. This tendency is popular among technologists, particularly those working in the blockchain space, and most radical in its crypto-anarchist variety. Their desire is not to embolden the state to restrict corporate power, but to use technology to develop new models of both state and corporation. These actors build and operate alternatives, from cryptocurrencies and crowdfunding platforms aimed at challenging financial control, to decentralized legal systems that challenge state control. Their priorities, however, differ wildly from antitrust advocates, as does their vision of a post-transition future.

While these views dominate American circles critical of corporate power, there is also the Chinese vision, which harkens back to a mid-20th century American order, and which is slowly gaining traction. Chinese corporations may not all be owned by the Chinese Communist Party, but they are heavily influenced by it. China uses market mechanisms as a means for state-directed ends, which allows it to tolerate large enterprises.

Mapping this view onto a country like the United States provides an alternative diagnosis of the problem of corporate power. It is not necessarily that a few companies are too large, as a result exacerbating inequality and causing social strain, but that they are not directing their vast means towards the right ends. The vision held by Silicon Valley is in conflict with many factions in the U.S. government itself. These divisions are attested to by Google’s conflicts with the Department of Defense, contrasted by its close ties to institutions like the CIA and State Department. During the Cold War, however, American companies were not only large, but aligned with national interests. A strong and prosperous future, then, is not accomplished by state power quashing corporate power, or technology quashing state and corporate power, but by state power harnessing corporate power.

In both the debates surrounding education and corporate power, the focus of each approach differs in technique. There are moral concerns, political concerns, economic concerns, social concerns, and military concerns, and the prioritization of any one of these itself changes how the problem is defined, the analysis of its cause, and the solutions proposed. This conflict is even more intense when discussing the most important factor causing post-industrial transformation: the new technologies reshaping the world.

Whereas camps can be clearly defined on narrower issues, the question of technology governance as such remains a mere subset of more well-established policy questions, such as trade and foreign affairs. While politics has certainly interacted with new technologies increasingly, from Germany’s Industry 4.0 to China’s Military-Civil Fusion, these have all treated technologies as strategic means. The broader philosophical discussion of understanding emerging technologies has only just begun. As Henry Kissinger warned, “We started too late.”  

The builder of a product, while essential to providing its shape, does not entirely determine the product’s impact on the world. Policy makers, corporations, media, the general public all have internal debates about how they fit into a post-industrial world. Each is under pressure to adapt to rapid interconnectivity, intelligence machines, and overabundance of information.

Political action has started on narrower issues where the questions are easier to digest. Researchers, corporations, and nations have vowed to prevent lethal autonomous weapons systems. Labor movements around the impacts of the “gig economy” have started to challenge existing systems of benefits and employment. A green technology movement is growing that prioritizes investing in research that serves both practical and moral ends. None of these, however, form coherent new ideologies that can push for the development of institutions. While it is possible that an invisible hand could lead piecemeal actions without conscious design, it is not necessarily the case that this will be desirable.

Looking back, there are very few who would argue that the consequences of industrial societies have been a net negative for the human race. But it is easy to imagine things being different. Should the British approach to industrialization never taken off, what would have been left is the revolutionary upheaval that plagued Europe during the time. The institutions that evolved during the First Industrial Revolution, such as developments in law and societal values, enabled a particular vision of the future to be advanced and achieved.  

However, this means that many of the countries currently experiencing populist upheavals will become less likely to adapt properly, not more. The U.S. and Britain, the nations that successfully led the vision of an industrial society, have experienced massive increases in gridlock in the past few years. Clashes among political parties, within state administrative bodies, and in international institutions have collectively made it extremely difficult to plan and coordinate in a unified way. While economic transitions are often measured in decades, politics is a matter of electoral cycles only a few years long.

These are the sorts of questions which require political will and a vision of the future in order to be properly answered. Unfortunately for those countries which led the 20th century transition, their current political crises are occuring in the vacuum of precisely these qualities.

Ryan Khurana is Executive Director at the Institute for Advancing Prosperity. He tweets at @RyanKhurana.