"The fourth industrial revolution - isn't that an IT thing? We have a Minister for Digital looking at it", said a policymaker. "Yes, it is changing business models which is why we are fostering an ecosystem for start-up innovation", said another minister

Siddiqi, Lutfey

LSE Research Online

Confronting	the	macroeconomic	challenges	of	thefourth	industrial	revolution“The	fourth	industrial	revolution	–	isn’t	that	an	IT	thing?	We	have	a	Minister	for	Digital	looking	at	it”,	said	apolicymaker.	“Yes,	it	is	changing	business	models	which	is	why	we	are	fostering	an	ecosystem	for	start-upinnovation”,	said	another	minister.The	implications	of	the	current	wave	of	technological	change	at	a	mechanical	and	commercial	level	are	fairly	well-understood.	Policymakers	and	businesses	are	rightly	focused	on	harnessing	digital	technology	for	better	delivery	ofpublic	services	or	enhancement	of	their	competitive	advantage.	Interventions	are	typically	at	the	micro-level,	serviceby	service,	business	by	business.What	is	often	overlooked	are	the	macroeconomic	and	social	policy	implications	at	a	structural	level.There	is	hardly	any	acknowledgement	that	both	the	levers	of	macroeconomic	policy	(interest	rates,	taxation,	publicspending)	and	the	framework	of	debate	(on	a	traditional	left-right	spectrum)	are	in	rapid	need	of	redesign.	Mostmacroeconomic	aggregates	such	as	growth,	inflation,	trade,	capital	expenditure,	productivity	and	money	supply	arecurrently	in	a	state	of	flux,	the	reasons	for	which	are	not	completely	understood.	Not	enough	is	being	done	toextrapolate	from	the	world	of	micro	to	that	of	macro.What	does	it	mean	at	a	macroeconomic	level	when	a	company	with	55	employees	can	be	acquired	for	20	billiondollars?	What	does	it	mean	for	industrial	relations	when	a	privately-owned	artificial	intelligence	product	can	learn	allthat	there	is	to	know	about	chess	(and	defeat	the	reining	world	champion)	in	just	four	hours?	What	does	it	mean	forinfrastructure	investments	and	shopping	malls	when	I	do	virtually	all	of	my	shopping	using	Amazon	Prime?	Whatdoes	it	mean	for	‘manpower	exports’	from	South	Asia	when	Dubai	builds	an	entire	office	building	using	3-D	printingand	appoints	the	world’s	first	Minister	for	Artificial	Intelligence?	What	does	it	mean	for	inflation	and	productivityestimates	when	tools	of	communication	are	almost	free	at	the	point	of	usage?Today,	the	top	six	of	the	largest	companies	in	the	world	are	‘platform	companies’:	Apple,	Google	(Alphabet),Microsoft,	Amazon,	Facebook	and	Alibaba.	The	top	four	have	greater	market	value	than	the	top	12	banks	worldwide.While	we	are	in	the	midst	of	a	technology	revolution	–	characterised	by	extreme	automation	and	extreme	connectivitywith	rapid	feedback	loops	–	its	implications	reach	way	farther	than	the	current	reach	of	technology.It’s	not	just	“robots	with	artificial	intelligence”	that	can	develop	skills	previously	only	humans	possessed.	It’s	‘cobots’collaborating	with	each	other,	manning	an	entire	factory.	Or	the	Internet	of	Things	where	my	fridge	places	an	orderfor	milk	even	before	I	realise	that	I	have	run	out.	That	milk	will	either	be	delivered	by	drone	or	by	a	driver-less	car.LSE Business Review: Confronting the macroeconomic challenges of the fourth industrial revolution Page 1 of 3		Date originally posted: 2018-01-17Permalink: http://blogs.lse.ac.uk/businessreview/2018/01/17/confronting-the-macroeconomic-challenges-of-the-fourth-industrial-revolution/Blog homepage: http://blogs.lse.ac.uk/businessreview/Uber	and	AirBnB	are	emblematic	of	the	fact	that	many	industrial	factors	of	production	are	now	accessible	to	you	andme	in	smaller	units	of	usage.	Together	with	low-cost	connectivity	and	data	analytics,	we	can	challenge	establishedbusiness	models.	In	fact,	in	many	cases,	we	can	challenge	the	‘theory	of	the	firm’	that	earned	Ronald	Coase	hisNobel	prize.Uberisation	is	accompanied	by	‘servicification’	of	manufacturing.	(I	apologise	for	these	horrible	nouns).	I	will	probablynot	buy	another	car	as	a	product	if	I	know	that	you	will	provide	me	with	transportation	services	using	spare	capacityin	your	existing	car.	At	a	macro	level,	spare	capacity	means	low	investment	and	companies	can	either	sit	on	cash	orbuy	their	stock	back.3-D	Printing	and	AI-driven	robotics	might	also	be	shortening	supply-chains,	bringing	back	(‘reshoring’)	labour-intensive	manufacturing	to	the	west.	As	reported	in	the	World	Bank	publication	“Trouble	in	the	Making?”,	Philipsshavers	in	the	Netherlands	and	Adidas	shoes	in	Germany	have	apparently	done	that,	bringing	down	unit	cost	ofproduction	in	each	case.	At	a	macro	level,	this	could	slow	down	international	trade	in	tangible	goods.The	fourth	industrial	revolution	presents	us	with	an	incredible	paradox:	In	aggregate,	we	are	witnessing	the	rapidunfolding	of	technology	that	has	the	power	to	give	everyone,	virtually	everything	that	we	need	around	the	globe.	Inaggregate	–	across	health,	education,	food	and	energy	–	we	have	the	technology	to	usher	in	the	age	of	sustainableabundance	virtually	for	free.The	problem	however,	is	not	in	the	aggregate.	It	is	in	the	distribution	of	benefits.	We	face	a	massive	leadership	andcoordination	challenge	that	can	snatch	defeat	from	the	jaws	of	victory.	If	it	is	left	to	its	own	device	and	subject	to	ourcurrent	systems	of	governance,	this	revolution	is	not	only	disruptive	but	it	is	structurally	polarising	in	an	exponentialmanner.	By	default	and	without	active	re-shaping,	it	exacerbates	inequalities	and	concentrates	economic	surplus	infewer	hands.In	macroeconomic	terms,	those	fewer	hands	have	a	lower	marginal	propensity	to	consume,	keeping	overall	growthrates	subdued.	Arguably,	they	will	deploy	much	of	their	money	in	the	stock	markets,	driving	up	asset	bubbles,bringing	down	potential	yields,	distorting	systems	of	public	finance	and	pensions.So	what	can	be	done?Firstly,	in	our	policy	and	public	discourse,	we	need	to	acknowledge	the	change	in	our	backdrop	with	greater	honestyand	clarity.	It	is	not	possible	to	keep	pace	with	exponential	change	with	linear	responses.	It	is	not	possible	to	keeppace	with	felt	experiences	of	citizens	with	stale	conceptual	analysis.Secondly,	everything	should	be	open	for	debate	and	potential	re-design,	including	sacred	cows.	In	the	UK,	two-thirdsof	National	Health	Service	trusts	are	in	deficit.	Pension	plans	are	in	deficit	almost	everywhere	in	the	world.	There	isprobably	no	scenario	in	which	these	will	return	to	surplus,	without	root-and-branch	changes.Thirdly,	countries	need	to	do	‘the	vision	thing’.	We	need	to	articulate	our	desired	end-state	and	work	backwards	fromthem.	Singapore’s	governing	mantra	of	“think	ahead,	think	across	and	think	again”	is	effected	through	articulatingand	updating	its	broad	direction	of	travel.	By	contrast,	national	discourse	in	the	UK	can	be	dominated	by	incremental,piecemeal	measures	(for	example,	around	police	numbers	or	hospital	beds).	It	is	a	marvel	that	the	entire	debatearound	Brexit	was	conducted	without	reference	to	a	steady-state	vision	and	what	it	means	for	stakeholders	within	it.Fourth,	we	must	approach	each	dimension	of	the	challenge	as	a	system	–	system	by	system.	The	United	Nations	putforward	17	sustainable	development	goals	(SDGs)	that	countries	and	corporations	can	use	as	yardstick.	The	WorldEconomic	Forum	has	articulated	14	systems,	each	one	of	which	provides	a	unique	point	of	entry	and	the	ability	totrace	linkages	through	transformation	maps.	Fresh,	creative	thinking	from	multiple	stakeholders	can	emerge	fromthese	systemic	approaches.For	example,	the	council	on	Long-term	Investing,	Infrastructure	and	Development	(of	which	I	am	a	member)addresses	the	behavioural	and	institutional	blockages	that	prevent	funds	from	flowing	into	infrastructure	and	othersocially	impactful	investments	from	private,	public	and	blended	sources.	It	explores	creative	solutions	such	as	asset-recycling	and	connects	with	the	wider	question	of	the	purpose	of	finance.LSE Business Review: Confronting the macroeconomic challenges of the fourth industrial revolution Page 2 of 3		Date originally posted: 2018-01-17Permalink: http://blogs.lse.ac.uk/businessreview/2018/01/17/confronting-the-macroeconomic-challenges-of-the-fourth-industrial-revolution/Blog homepage: http://blogs.lse.ac.uk/businessreview/Fifth,	we	need	a	clearing	mechanism	for	conflict.	How	we	engage	in	constructive	conflict	and	how	proactively	weseek	out	diversity	will	help	us	avert	blind-spots	and	rise	above	the	‘false	binary’	of	Westminister-style	debate.	It	is	notcapitalism	versus	socialism;	it	is	liberalising	labour	markets	and	intervenionist	policy	around	training	and	transition.	Itis	deeper	capital	markets	and	better	regulation,	governance	and	boardroom	accountability.	It	is	meritocracy	andsocial	mobility.	Navigating	disagreement	between	genuinely	held	beliefs	is	the	hallmark	of	leadership.It	is	high	time	that	the	full	import	of	the	fourth	industrial	revolution	is	brought	out	of	the	niche	domains	of	technologyand	business.	It	must	directly	inform	policy	at	a	macroeconomic	level.♣♣♣Notes:This	blog	post	is	based	on	the	author’s	contribution	at	the	50th	anniversary	celebration	of	the	Centre	forInternational	Studies,	LSE.	The	post	gives	the	views	of	its	authors,	not	the	position	of	LSE	Business	Review	or	the	London	School	ofEconomics.Featured	image	credit:	Earth,	by	TheDigitalArtist,	under	a	CC0	licenceWhen	you	leave	a	comment,	you’re	agreeing	to	our	Comment	Policy.Lutfey	Siddiqi	is	a	visiting	professor-in-practice	at	LSE’s	Centre	for	International	Studies.	He	is	alsoan	Adjunct	Professor	at	the	National	University	of	Singapore’s	Risk	Management	Institute	(RMI),having	been	a	part-time	member	of	the	faculty	since	its	inception.	Previously	a	Managing	Director	andmember	of	the	global	executive	committee	for	foreign	exchange,	rates	and	credit	at	UBS	investmentbank,	Lutfey	is	a	member	of	the	World	Economic	Forum	Council	on	Financing	and	Infrastructure,	theBretton	Woods	Committee,	the	advisory	board	of	the	Systemic	Risk	Centre	at	the	London	School	ofEconomics	and	of	the	Official	Monetary	and	Financial	Institutions	Forum	(OMFIF),	the	forum	forcentral	banks.LSE Business Review: Confronting the macroeconomic challenges of the fourth industrial revolution Page 3 of 3		Date originally posted: 2018-01-17Permalink: http://blogs.lse.ac.uk/businessreview/2018/01/17/confronting-the-macroeconomic-challenges-of-the-fourth-industrial-revolution/Blog homepage: http://blogs.lse.ac.uk/businessreview/

Confronting the macroeconomic challenges of the fourth industrial revolution

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Confronting the macroeconomic challenges of the fourth industrial revolution

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