Shouting FIRE in a crowded world

“Developing World Catches a Fresh IT Wave” looks like the title for some completely disposable fluff piece, possibly in a trade publication or even an investment brochure, featuring interviews with a Sri Lankan computer geek and an Indonesian businesswoman addicted to her I-Phone, but economist Andy Xie’s latest essay works its way to high speculative adventure on current events and future history.

Xie begins with fairly commonplace observations on the “third wave” of Information Technology – “cloud computing, optical fiber lines and mobile devices” – seen as supplanting the personal computer-based second wave and mainframe-based first wave.  His expanded analysis is very much worth reading in full, but one of the more interesting passages compares IT first to other macro-level forces, and second to other theoretically way-of-life-altering technologies:

Alongside IT, globalization and aging are shaping the global economy. The first two forces enlarge the pie but change the way incomes are distributed among people, industries and countries. Aging makes the pie smaller. Eventually the pie may be bigger as the new IT revolution changes economies, even though the process will be quite painful.

Yet of all technologies, IT remains the most powerful force influencing the global economy. Green energy survives on government subsidies. We will not see a day when it will be more than a niche phenomenon. Biotech is constrained by a long gestation period for product development. The IT revolution, on the other hand, races forward at lightning speed.

Much of the rest of the essay describes the economic functions that 3rd Wave IT replaces, suggesting a massive process of “Schumpeterian creative destruction” that will be on balance positive for the developing world, but frightening and de-stabilizing in the developed world.

This problem for the latter “world,” us, centers on in what progressive economist Mike Hudson calls the FIRE sector –  Finance, Insurance, Real Estate.  In short, 3rd Wave IT makes much of what those who profit from and are employed in FIRE do, and how and where they do it, superfluous.  As a result, the developed world’s highly developed financial and other service sectors  put them increasingly at a competitive disadvantage with a developing world that has never burned its capital on FIRE, at least to anything approaching the same extent.  Not-yet-developed economies therefore can take advantage of the kind of leapfrogging that saw cell-phones and satellite dishes spreading in countries that had never invested in land-line and VHF-UHF infrastructures.

Xie pauses to put the 2008 financial crisis and the ongoing economic slump in this context, making a nice observation as to how the FIRE sector, whose debilitating effects on the economy were dramatically exposed in 2008, escaped being overthrown:

As financial services industry loses value-added to customers and the real economy, it is increasingly dependent on gaming the system and profiting from customer ignorance. This makes the industry and financial market more volatile and bubble-prone. In the last financial crisis, the financial sector survived by holding the real economy hostage.

Bringing us to the present:

Unless policymakers understand that the financial industry isn’t necessary for the real economy anymore, and that it should scale down dramatically, the sector will remain a gigantic parasite on top of the real economy.

Yet, as the prior observation demonstrates, removing this parasite is something that was too painful to contemplate for us two years ago, and FIRE remains immensely wealthy and therefore immensely influential, and immensely able to protect itself.  The hostage situation appears to have re-settled into trans-epochal, transnational Stockholm Syndrome.

The last section of the essay draws the economic outlines for a major transition phase in world history.  Reviewing the competitive disadvantages and related structural unemployment problems afflicting the developed world, an inevitable by-product of FIRE dependency, Xie closes on a speculative note:

The global economy has bifurcated into the weak developed world and the booming developing world. The contrast is partly due to liquidity from the former to the latter. When the current liquidity bubble bursts, the developing world may suffer a growth slowdown. But its cost advantages will sustain it with stronger growth performance.

The third wave of the IT revolution could amplify this outperformance. And if the world remains at peace, a convergence between what are now two worlds may occur this century.

“And if the world remains at peace…”:  I’ve been reading Andy Xie for a couple of years now.  I believe that the above represents the first time he has mentioned matters of war and peace in any context, even obliquely.  As for the underlying analysis, not only do I think he is right, I think that everybody knows that he is right:  An impetus toward “convergence” is irresistible.  Unfortunately, what everybody does with that knowledge may not be the same, or predictable…  or good for children and other living things, as the saying goes.

Achieved convergence, at higher levels of technological and cultural development, might even be subjectively more satisfying for many or most of the citizens of the already-developed world, even if in raw measures of consumption of resources they would be objectively “poorer.”  If Xie’s analysis is accurate, then the question of the century would become whether and to what degree this next major economic, political, and cultural transition can take place unlike every other one known to history – that is, “at peace.”


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19 comments on “Shouting FIRE in a crowded world

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  1. Well therein lies the 60,000 dollar question, what will we replace the FIRE economy with, more manufacturing would be the ideal, but there
    are a series of obstacles to doing that.

  2. MC/The FIRE economy isn’t the problem itself;it’s the tax advantages and other structural advantages that the Government has bestowed on the FIRE economy.

  3. Naturally, I contest the idea that there has never been a transition that took place “at peace.” The peaceful ones just never ended up in the history books. Too boring for the researchers. Same problem in Hollywood. “Wings of Desire” is the only movie I know that even addressed the issue. Peace is not dramatic. All writers like to deal with dramatic subjects, even economists.

  4. @ Scott Miller:
    History is the trees falling in the forest that someone hears. What is unknown to history, is unknown. This isn’t just a phenomenological question, though it has a phenomenological basis: Human beings seek recognition. A totally peaceful transition would be a transition from one unknown to another unknown, from nothing to nothing.

    Your being in a position to make your observation – your actual observation here today, not the abstract possibility of the observation – your assertion of the historical significance of the non-historical, rests on the bloody work of ages. Dismissing this concrete reality as some mere fetish for “drama” assumes the possibility of a “non-dramatic” existence, but “dramatic” becomes a deceptively minimizing word for “knowable.”

    My observation stands. Whether the butcher’s bill for the transition to a convergent world is 1 death or 3 billion deaths or the death of everything may be of no significance to the purely peaceful and un-cognizing/un-cognized universe. We can presume the sun will burn as brightly whether or not a single person is left to squint at it.

    If someone does survive, their lives will be made up as much of peace as of war. For many people, it may be a totally “peaceful” transition, but not for history, presuming that, as appearances suggest, there is still some history to get finished with.

  5. The leapfrogging phenonomen is possibly one of the necessary (but not sufficient) conditions for these kind of fundamental economic transitions.

    Political dysfunction of the more developed world (at whatever historical stage) allows the seed of the process to start, and then quickens its maturation. It also.I think, raises the level of conflict.

  6. Scott Miller wrote:

    The peaceful ones just never ended up in the history books.

    I’m also curious what you imagine took place historically “offscreen.” Again, serious question. The archeological evidence tends to suggest that people who didn’t record their histories, or didn’t do very much recording, weren’t necessarily living lives that we would call “peaceful.” And they tended to require vast amounts of time to manage whatever “major transitioning.”

  7. Here’s a slow learner:40 years slow

    David Stockman on the American Economy
    Peter Wehner – 09.17.2010 – 2:42 PM
    David Stockman, who was President Reagan’s first OMB director, gave an interview to the Wall Street Journal’s Alan Murray. I certainly don’t agree with everything Stockman says. He has almost nothing to say about how to create growth in the economy. And Stockman’s betrayal of President Reagan (when he published The Triumph of Politics: Why the Reagan Revolution Failed) was troubling then and remains troubling today. (In the interview, Stockman addresses the SEC criminal charges that were made against him, charges that were later dropped.) Still, Stockman is not a stupid man, and his analysis of America’s precarious fiscal situation, while alarming, is worth listening to.
    http://www.commentarymagazine.com/blogs/index.php/wehner/359291

  8. The invention of agriculture might be a candidate for peaceful transition, but more recent archeological evidence points to a lower life expectancy, more disease and violent deaths for centuries after.

    Certainly the Sumerians and Egyptians greatly expanded their territories when they aquired agriculture before their neighbors.

  9. @ bob:
    Of course, we don’t really know what those wacky characters were doing, but some see the invention of agriculture, or in other climates of storage, as the beginning of “history” and the origin of much violence and oppression as well, since it was then that life-sustaining surpluses could be developed and accumulated socially, and therefore hoarded, guarded, stolen, etc. Even then, in that case we’d be transitioning from non-organization to organization, and couldn’t tally up the death toll until the transition phase was complete… Or, to Sumerize:

    http://en.wikipedia.org/wiki/Sargon_of_Akkad

    But, really, I was referring to historical transitions like feudalism to bourgeois democracy, or the fall of any major empire, or the rise of new historical forces. Xie is talking about the convergence of the 1st and 3rd worlds and the establishment of a single effectively equal global society.

    That’s a pretty big deal (though not if viewed from Jupiter or further).

  10. @ bob:
    Nice assist, Bob. I was too lazy to respond to CK’s question. There’s a long list of peaceful societies listed at the end of Joseph Chilton Pearce’s “Biology of Transcendence.” Sometime I’ll write a post about that. Quakers also are a good source of information on the history of peace. Where I got lazy, however, wasn’t in respect to peaceful societies but in respect to the economic transition part. There, I was just assuming something I couldn’t easily substantiate and probably won’t be trying to substantiate any time soon. So I’m glad for Bob’s post even with the “disease…” part.

  11. @ CK MacLeod:

    I know you were. But as you show, there’s a relevance too. I suspect those whacky paleo’s were more like us than we would like to think, whatever their level of IT.

  12. bob wrote:

    Scott, I was supporting Colin’s point. The archeological record shows a lot of conflict in that transition.

    Bob, you know me well enough to know that the facts are relatively inconsequential in my world. In lieu of research, it was as close as I was going to come to support, so I jumped on it. Again, for the millionth time, just go with me here. It will be easier on both of us in the long run.

  13. Xie idendifies 2 mechanisms for all this: output measurment of service sector activity and collapsing communication costs. Of these, I think output measurement is the more significant.

    Progress in IT cuts two channels for decreasing white collar inefficiency. First, output measurement becomes possible. For example, the progress of a doctor’s patients can be tracked at little cost. Data on every doctor’s efficiency and effectiveness could be available to each patient and hospital. Other professionals such as accountants, lawyers and bankers could be subjected to the same measurements.

    Much of the changes in the health care system we have seen from the days of home doctor’s visits is a result of this process. It is occurring in the other professions as well. The probelm is not now with the information processing, but with the central problem of how to to weigh the various factors involved.

    The factors tend to be in a dynamic relation with each other and with the measurement system. Cost efficiency and patient/client positive outcome are frequently and maybe fundamentally at odds.

  14. @ bob:
    Interesting observation. A very tentative point from a Marxist perspective might be that the process describes the proletarianization of “white collar” professionals, equally the commodification or extended commodification of service labor. It even touches on one of your favorite subjects, neuro-capitalism, which represents the same process along on a different axis. So the convergence of the two worlds might also be convergence of petit bourgeois professionals with the global proletariat, eventually also a convergence of incomes expressed as exchange values, pointing toward the day after hyperinflation or currency breakdown, when what a surgeon or hedge fund manager earns (or has saved) in Manhattan really is in the same range as what a factory worker outside of Djakarta earns, foreshadowed by immigrant nuclear engineers and medical doctors driving taxi cabs.

    Except the endangered can be expected not just to diversify their investments, but also to consider measures to head “the day after” off. Moreover, the parasite of non-productive consumption that Xie points to is only one of two or more parasites. Another big parasite is the defense complex, also very rich and powerful. We can choose to be optimistic, as Mr. Miller seems to prefer, but doing so requires us to envision, among other things, the main concentrations of temporal power in our society succumbing peacefully and cooperatively to persuasion. A more complicated struggle seems more likely.

  15. @ CK MacLeod:

    The White Collars have been increasingly proletated (?) for at least 20 years. The thought just occured to me that the symbolic beginning of this could be Reagan breaking the air traffic controller’s strike.

    Anyway…the other commodification at work here is that of the cultures of the developing world participating in Xie’s dynamic.

    I’ve dipped my toe in Ardono, so dare I say, in their being sucked into the univeral fungibility of culture for the culture industry?

    At any rate, we can expect an increase in fundamentalism in these places as a result.

  16. I saw Elizabeth Warren on Morning Joe this am and she presented the consumer protection agency partly as a measure to help fix the broken credit market’s inability to properly price its products.

    Since consumers can’t figure out how much a credit card costs, they can’t make rational decisions about which to use.

    Xie seems to assume that mere info processing power will result in more accurate pricing. Part of the problem is that at least financial services don’t want to properly price their products. I wonder if he sees a role for govt here.

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