Brian Arthur and the “Second Economy”

Introduction

The Irish-American economist W. Brian Arthur is a true polymath, with degrees in electrical engineering, operations research, mathematics, and economics. At 37 (1982) he became the youngest endowed professor at Stanford University, in economics and population studies. Arthur has greatly influenced the development of complexity economics, and complexity theory generally, at the Santa Fe Institute in New Mexico. Formed in 1984 by eight scientists including Nobel Prize-winning physicist Murray Gell-Mann, the Institute is a breeding ground for polymaths across the physical, biological and social sciences.

The search for “a more realistic economics” followed only a year after the scientists founded the Santa Fe Institute, with Brian Arthur taking a leading role and being associated with the Institute ever since. He was joint winner of the Schumpeter Prize in Economics in 1990, when the theme for the prize was evolutionary economics. In 2009 he was joint winner of the inaugural $110,000 Lagrange Prize in Complexity Science.

There is an important link between Brian Arthur and the Austrian-American economist Joseph Schumpeter (1883-1950), and not just because of Arthur’s 1990 award. Schumpeter fought a lifelong battle to establish the essential role of technology in economic development theory, in contrast to orthodox economic thinking that treats technology largely as an external or “exogenous” influence. Brian Arthur has demonstrated how technology drives growth as an integral part of an economic system inspired by biological and evolutionary science rather than physics. This differs from the mainstream macroeconomic thinking that developed in the 1940s and eventually was seen by many as a precursor of the current Global Economic Crisis.

The Nature of Technology describes Brian Arthur’s 2009 book of that name. Almost at the same time that the knowledge base published the book summary, the McKinsey Quarterly published a paper by Arthur on what he calls The Second Economy – a paper based firmly on his views on technological development as an integral force but going far beyond it in its possible consequences. Following its publication in October 2011 the paper has sparked vigorous debate and it would be remiss not to refer to it and open a discussion of what it might come to mean for the music sector and cultural activities generally.

Hence this article and the subsequent extension of the note on The Nature of Music Sector Technology. Contributions are invited on the possible consequences of Arthur’s model being substantially correct. What is the possible technological impact? Generally, if “the second economy” is going to transform productivity and employment opportunities, will the impact on musical activity be positive or negative, what would be the consequences for musical education policy, policies of distribution from rich to poor, and from rich to poor countries, and much else? How, in short, might we have to adjust our thinking to fit the brave new world that may be already growing rapidly under our feet? ¹

The Second Economy

Arthur notes: “Every so often – every 60 years or so – a body of technology comes along and over several decades, quietly, almost unnoticeably, transforms the economy: it brings new social classes to the fore and creates a different world for business.” He cites the transformation to the American economy from 1850 when it was “not much bigger than Italy’s” to becoming the largest economy in the world only forty years later, aided by the east-to-west expansion of the railways.

A similar deep change is taking place today with information technology, he says, possibly even more dramatic than the “railroadization” of the United States that was Schumpeter’s standard example of capitalist evolution. The transformation of information technology “goes well beyond the use of computers, social media, and commerce on the Internet. Business processes that once took place among human beings are now being executed electronically. They are taking place in an unseen domain that is strictly digital. … It is quietly creating a second economy, a digital one.” The right-hand box presents one of multiple possible examples – one with which most airline travellers will be familiar.

Looking for adjectives to describe the second economy, Arthur suggests vast, silent, connected, unseen, remotely executing and global, always on, and endlessly configurable. Above all it is autonomous, meaning that human beings may design it but are not directly involved in running it.

How Fast is the Second Economy Growing?

Arthur offers what he admits is a rough estimate. Since 1995, when digitisation “really started to kick in”, labour productivity (output per hours worked) has grown at some 2.5 to 3% annually in the United States. What Arthur calls “pretty good studies” suggests that 65-100% of productivity growth is due to digitisation. An annual 2.4% increase means doubling every 30 years, so if these trends continue, “in 2025 the second economy will be as large as the 1995 physical economy. … In two to three decades, it will surpass the physical economy in size.”

Actually, it can be viewed as the logical result of an inexorable development process, which started in the developed western economies. From the 1760s, the Industrial Revolution saw the economy develop a muscular system in the form of machine power, progressively more productive than the existing agrarian economies. “For centuries, wealth has traditionally been apportioned in the West through jobs, and jobs have always been forthcoming. When farm jobs disappeared, we still had manufacturing jobs, and when these disappeared we migrated to service jobs. With this digital transformation, this last repository of jobs is shrinking – fewer of us in the future may have white-collar business process jobs – and we face a problem.”

The muscular system is being rapidly replaced with a neural system. “Around 1990, computers started seriously to talk to each other, and all these connections started to happen. The individual machines – servers – are like neurons, and the axons and synapses are the communication pathways and linkages that enable them to be in conversation with each other and to take appropriate action.” A very biological model, in tune with Arthur’s general technology concept.

Impact on Jobs and Possible Outcomes

The downside is the impact on jobs. If productivity increases at 2.4% it means either that the same number of people can produce 2.4% more output or that we can get the same output with 2.4% fewer people. “Both of these are happening. We are getting more output for each person in the economy, but overall output, nationally, requires fewer people to produce it.” The difficulties that the US and other western countries are experiencing in reducing the unemployment rate are at least partly due to digitisation. “Physical jobs are disappearing into the second economy, and I believe this effect is dwarfing the much more publicized effect of jobs disappearing to places like India and China.”

“There’s a larger lesson to be drawn from this. The second economy will certainly be the engine of growth and the provider of prosperity for the rest of this century and beyond, but it may not provide jobs, so there may be prosperity without full access for many. This suggests to me that the main challenge of the economy is shifting from producing prosperity to distributing prosperity. The second economy will produce wealth no matter what we do; distributing that wealth has become the main problem.”

“The system will adjust of course, though I can’t yet say exactly how. Perhaps some new part of the economy will come forward and generate a whole new set of jobs. Perhaps we will have short workweeks and long vacations so there will be more jobs to go around. Perhaps we will have to subsidize job creation. Perhaps the very idea of a job and of being productive will change over the next two or three decades. The problem is by no means insoluble. The good news is that if we do solve it, we may at last have the freedom to invest our energies in creative acts.” (Our emphasis)

Arthur concludes: “This second economy that is silently forming – vast, interconnected, and extraordinarily productive – is creating for us a new economic world. How we will fare in this world, how we will adapt to it, how we will profit from it and share its benefits, is very much up to us.”

Some Implications

The second economy is a plausible model. It is already happening, with systems run entirely without human intervention becoming ever more sophisticated and complex. Given the reality of the model there is no end in sight as far as this process is concerned.

Rich western-type nations have been the main beneficiaries, and on the downside are those first hit by the new kind of structural unemployment caused by digitisation. However, unless other developments like climate change aggravate global issues that remain uncontrolled, the membership of the rich club will expand. The main challenge, as Brian Arthur points out, will be to shift from producing prosperity to distributing prosperity. Without such a profound shift, not noticeable in today’s world of increasing inequality nationally as well as internationally, the second economy may become a source of major conflict (adding to the conflicts from failing to tackle climate change).

It all adds to the complexity of living in the 21st century world. The current economic crisis and growing inequality are the downside of change that could produce wonderful benefits but are also subject to great risks unless the medium- and long-term implications are properly understood and acted upon politically.

If one sentence in Arthur’s second economy story stands out, it is the opportunity for creativity to literally save the world: We may at last have the freedom to invest our energies in creative activities. That is if we get it right, which is unlikely to happen without a great deal of conscious policy-making that is not currently evident.

Creativity is not limited to music and the other arts, and to science and technology, but promoting these have to be basic factors in the effort to ensure that our societies benefit in the emerging new world of the second economy. This may sound naive, and the readers of this knowledge base are invited to make more constructive and concrete strategic proposals on how to deal with the issues. On the plausible assumption that Brian Arthur is basically right, the potential benefits and the risks are too great to ignore.

Author

Hans Hoegh-Guldberg First entered 11 November 2011.