The underbelly: Changing trajectory of economic behaviour

Economic disruption has long been the underbelly of technological changes: not all of them can be traced to an innovation, indeed, not all technological changes produce economic disruptions. Yet, the few occasions of economic disruption directly aligning with technological changes inform us plenty of the distinction between short- and long-term changes, the intimate relationship between long-term changes and industrial revolutions, the emerging and evaporating industries, and the nature of world leadership.
Short-term changes represent market corrections: investors largely adjust to market irregularities, insufficiencies, and interferences, often with state compliance, for example, through interest-rate juggling. They often catch investors awaiting a green signal or some incentive to return to a shaken market, and often convey a sputtering bull-market. Bull-markets belong to a growth trajectory with temporary hiccups: though the stock-exchange is a composite of several firms, some growing, others contracting, yet others simply floating, it moves as much by the weight of an individual firm as an aggregation of firms/industries. Thus, one industry can change market direction, as oil is doing today, generating the far more encompassing ripple effects that even the oil industry cannot alone resolve.
Reflecting a sinking trajectory, a bear market involves investors refraining from engagement: the longer they hold on, the higher the likelihood of some structural changes, to the point that an excessively long bear market cannot but produce an industrial revolution, defensively to get out of the rut, or aggressively to generate new frontiers.
Against that simplified appraisal of rather complex and complicated dynamics, we noticed how 2016 began with the Shanghai Stock Exchange (SSE Composite Index) crashing, in turn echoing through other Asian and European stock exchanges until it jolted the Dow Jones Industrial Index and the S&P 500 Index (Standards & Poor's) in New York. Then, as the Chinese went to sleep, the same havoc on Wall Street became the bad news that China's stock exchanges woke up to the next day. Only state intervention or some dramatic improvement in market conditions prevented a ricocheting effect. After two weeks of January (as this article is being written), the Dow Jones has lost a little over 15 per cent of its 2015 ending value, while Shanghai's loss exceeds 20 per cent. Both are huge, and what started off as a bull market had entered bear territory. How long it stays there is a puzzle we shall return to.
Industrial revolutions (IRs) change the trajectory of economic behaviour. The first one, in the 1780s, witnessed the emergence of a mechanical substitution of a cottage industry (clothes), with the factory replacing farming eventually; the second blew the size of the factory one century later and spread its reach so globally that competition became cut-throat; the third, in the 1970s, shifted the playing field from the factory's assembly-line to the computer's print-out line; while the current one unfolding is also blowing up the digitalisation revolution through physical and biological inter-connections, the typical citizen will have many more lines to wait in (based on how many transactions/communications get done over the smart-phone each day), thus both easing life's experiences compared to previous generations, but also complicating matters immensely (any software change necessitates infrastructure replacement at a faster rate than the factory infrastructure was changed). One notices the time-span being telescopised, with the factory-based trajectories boasting a longevity lasting several generations, but the computer-based service sector trajectories barely lasting one full generation, even then threatening to diminishing rapidly.
Different industries have enjoyed their place in the global sun at different moments. Textiles clearly dominated the late 18th Century and early 19th Century, as we might expect: after food, clothing ranks as the human's most essential need. Yet, by the 1870s, as textiles production diffused from Manchester, more hardcore manufacturing, based on steel, stole the limelight: from cutlery and guns to automobiles, airplanes, and skyscrapers, steel created the great powers of the time. It still remains central to power today, even as the spotlight is shifting to pure soft power: information-based industries, tepidly from the 1970s, pervasively today.
Regardless of the sector behind the steering wheel, markets have been choppy at the time of IR (industrial revolution) transitions: economic downturn in the 1780s, 1870s, and 1970s, as well as mid-second decade of the 21st Century. Innovations and free-riding were directly and indirectly involved: the spinning jenny of the 1780s was copied on the continent and elsewhere; German, Japanese, and U.S. free-riding of British free-trade policy of the 1870s permitted Germany to divert resources to invent the needle-gun and, later, the submarine, among other contraptions, just as the United States took the first steps toward building the first car and airplane on the basis of the British invention of steel; the computer and various software programmes in the 1970s became independent developments in countries with appropriate infrastructure that only the 1st IR could have supplied; and both the free-riding of U.S. software and the deepening/widening of software programmes in the 21st Century follow the same trajectory. That these innovations and long-term market restlessness presaged war in the first three cases should not alarm us in 2016, since the positive consequences far outweigh the negative, but that possibility cannot be ruled out.
    Remarkably, through the four industrial revolutions, the planet has been economically socialised: we still have textiles and steel as the leading industry today, but among the hitherto less developed countries, though that does not necessarily mean all previous developed countries are at the 3rd or 4th IR frontiers (some at the frontiers are generating inventions; others copy those creations). Given a nuance or two, what Adam Smith envisioned with the assembly-line and David Ricardo anticipated with his comparative advantage thesis are basically what communist China and backwater Bangladesh profit from today.
Pushed to the limit, the combination of economic disruption and industrial revolution inform us of world leadership, and not necessarily because the most competitive country in the dominant concurrent industry is the world leader. A large literature confirms Great Britain, the "workshop of the world" since the 1870s, became the single world leader from 1846 when it alone adopted free-trade (Otto von Bismarck was the first to tell us why: it is a policy of the strong state), a position it held, through an upswing and slow decline, until World War II. Though the United States took over then, one can recall how, in the 1970s, many analysts were expecting Japan or the European Union to challenge the sinking United States, since the dollar was shockingly devalued in 1971, the year the first U.S. trade deficit occurred since 1888, and the U.S. multilateral baby, the Bretton Woods institutions (the I.M.F.  and the World Bank), went off the gold standard. That was as flimsy an expectation then, as the continuation of U.S. hegemony today may be: it won the Cold War (through no specific action of its own: the Soviet Union simply collapsed by 1989), today it is not only economically spent, but economic momentum is now shared with too many countries for either the United States or China to alone anchor global stability.
This brings us to the 2016 stock-exchange jitters. Affected by a December 2015 U.S. interest-rate hike, oil-price plunge, a saturated Chinese economy, and a strong U.S. dollar forcing devaluation demands the world over, these jitters reflect more the market corrections that were belated, necessary, and expected to last a few more months: they do not constitute the nucleus of any stand-out innovation to claim a 4th IR catalyst since the U.S. fundamentals of growth-rate trend, employment, interest-rates, and trade composition have been strengthening. Yet, in how a series of small-scale innovations might, over the course of 4 or 5 years, drastically change the economic landscape, they are signals and symbols of the forthcoming 4th IR. This series examines the broad implications, with particular references to Bangladesh, next.
Dr. Imtiaz A. Hussain is Professor of International Relations, formerly in Universidad Iberoamerica, Mexico City.
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