The Bear's Lair: The De-Industrial Revolution
Britain got the Industrial Revolution largely because of good policy (deo volente, there is a book in my future about this.) Now those good policies have been reversed. Savings are discouraged, the short-term and financial juggling are benefited over the long-term, industrial enterprise is hampered while sloth is subsidized and surplus capital is seized randomly by governments. Guess what – this is leading to a De-Industrial Revolution, a tendency that will be intensified in the West by our not-very-friendly competitor China.
The Industrial Revolution got started in Europe because a number of intellectual advances necessary for it happened in Europe. Europe's geopolitics of relatively small competing states produced rapid intellectual and technological advance, especially in technologies that could be used for warfare or exploration and exploitation of less technologically sophisticated areas of the world. However, in 1600 Britain was a small and relatively impoverished part of the European region; several other states, notably France, Spain and the Holy Roman Empire had an equal intellectual endowment and far greater resources.
Britain benefited from some elements of luck, notably immense coal deposits, that made industrialization more likely. Its concentration on ocean-going transport and the Navy, rather than land forces, gave it an advantage in exploiting the New World and producing cash crops there to provide both state and private revenues. However, through the Civil War and Interregnum, followed by the new limited monarchy after the Restoration, it developed policies that were especially fertile in leading to industrial development.
Most important, Britain gave the security of private property an importance it had never had in any prior society. Britain's financial policies were arranged to provide private property with secure returns and Britain's political policies safeguarded private property from state expropriation or baronial looting. This allowed small businesses to be developed and passed down between generations and generated an exceptionally favorable business climate. Even by the time of Daniel Defoe's "Tour through the Whole Island of Great Britain" (1724-27) Britain, while not industrialized, had a vibrant and diverse commercial economy not matched elsewhere, even in Holland. In France, for example, private property was never so secure and the disaster of the Mississippi Scheme (1716-20) de-capitalized the French middle class.
A second useful 17th Century development in Britain was the stabilization of the legal system, and the subordination to it of all elements of society. By 1700, Britons were subject to a well-defined rule of law, without major Royal, governmental or aristocratic exceptions.
The security of private property, the lack of domestic military threats, the rule of law and the development of a capital market with low interest rates and no inflation (Newton took Britain effectively onto the Gold Standard in 1717) made British businessmen long-term oriented, interested in ways of building fortunes that did not happen overnight. Given the decades it took to develop James Watt's steam engine, for example, or the first passenger railway, this long-term orientation was essential.
British governments stayed relatively small, financing their overseas wars through well-oiled capital markets, and imposing taxes largely on the land and on "sumptuary" items, while taxing enterprise lightly. They also passed laws that could not be over-ridden by the rich and that fostered industrial enterprise rather than hampering it.
The early industrial economy of 1825 Britain was one in which the industrial entrepreneurs were not particularly rich, and their enterprises remained quite small by later standards – generally no more than 5,000 employees. As industry developed and spread to the United States and the world in general, we got the industrial behemoths with much greater economies of scale, the managerial capitalists, and the non-participating small and institutional shareholders of today's capitalism. It has become clear, however, that the "General Motors 1955" economy also does not represent our future. Two major trends in particular, driven by technology and government, will make the economy of 2050 very different from that of 1950 or even 2000.
Technologically, we are moving towards an economy of much smaller units. Much of the manufacturing that required large workforces can now be done almost entirely by robots. The outsourcing of manufacturing to countries with low labor costs was an intermediate stage, but the last few years have shown that very long and complex international supply chains are not cost-effective or secure, and that political and management problems of large, low-wage workforces in a different culture are close to insuperable.
The future of manufacturing, if technology is allowed to drive it, is thus a Tesla-style "Gigafactory" in which almost all processes are automated and the workforce is quite small (and can therefore be well-paid and located in a Western economy.) Much of the value added in the global economy will come in services, research and design, all of which can be carried out remotely, in very small units indeed. Manufacturing itself will increasingly take place in small units located much closer to the consumer, using 3D printing techniques and advanced materials. This could even extend to combined manufacturing/retail operations, where consumers would select and design their own products, with the help of the retailer.
Provided the world remains solidly capitalist, therefore, and the protections built into the industrial economy since 1750 remain in force, our future can be a bright one of small manufacturing workforces, each controlling robotics and equipment of gigantic value.
New businesses, even though small, will not be instantaneous; they will require years of effort and experimentation to build up and, as in the early years of industrialization, major conceptual leaps forward will often take an entire lifetime to realize. Co-operation between different small enterprises will be essential, but the venture capital paradigm will be useless. Venture Capitalists both meddle too much with the companies they invest in and demand fast returns at the expense of long-term achievement.
There is however every indication that the "political economy" policies so successfully pursued in the 18th and early 19th centuries are being abandoned in the 21st. Probably the most dangerous such abandonment is the relentless assault on "rentiers" who hold bonds, shares and savings. Interest rates are held persistently below the rate of inflation for decades at a time, yet rentiers are taxed as if all the income they receive were real, and not just a replacement of the inflationary erosion of their capital. Money supply is expanded ad infinitum, so there is no solid price basis on which asset owners can depend. Every now and then, a leftist government is elected, which attacks savings and capital accumulations more directly.
With governments of gigantic size by historical standards and showing every sign of growing still larger, private property is now not at all secure. To prevent political blowback, governments assault private property through inflation and low-interest-rate erosion of capital rather than through taxation and outright expropriation. In the long run, however taxes will rise and expropriation through wealth taxes will become increasingly popular. In addition, "green" policies will hamper enterprise at every turn, producing regulatory jungles that prevent innovation. With bubble stock markets and urban real estate markets, there will continue to be an impression of wealth, but it will be built on short-term speculation, not on the long-term reality of productive enterprise.
If these political forces continue, they will produce de-industrialization. Productivity, which has grown steadily and at generally accelerating rates since 1750 or so, will go into irreversible decline. The small, innovative businesses that would naturally steer our industrial future will not appear. They will not get financing and will be drowned in "green" regulation and overwhelmed by short-termist rubbish financed by gigantic pools of venture capital. The big corporate behemoths, which in a free market would disappear or be broken up, will linger on, extracting rents from governments and forcing regulations protecting their positions against innovation. Capital will be poured into wasteful un-innovative politically-driven "green" rubbish while true productivity- enhancing innovation will be starved of it.
By 2050, political destruction may well have overwhelmed technological innovation. The world will be becoming gradually poorer (though official economic statistics will be massaged so as not to reveal this.) Billionaires, or by that time trillionaires (inflation having taken its toll) will still be with us, but they will primarily be known for funding leftist political campaigns rather than for producing economic innovations. China will be a major economic and political threat, but its own economy will also be un-innovative and declining, since its political system stifles dissent and true creativity (again, its own economic statistics will paint a picture of continuing growth.) The Chinese people will on average be considerably poorer than in 2010, though possibly still richer than in 1976. In the West, however, the living standards of ordinary people will be in steady decline, reversing the gains of the glorious 250-year period 1750-2000.
We can stop this; we do after all live in a democracy. But it is very unlikely that we will summon the political will to do so.
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