TLDR;
- There are reasons to believe that the previously described trends may not hold true in the future;
- The gravity of economic activity is shifting away from tangible products, to intangible services.
- This shift presents big challenges for modern economies - many of which are yet to be addressed properly.
Things are Changing
As earlier described, from a cyclical point of view - the world is at an inflection point of great change. Further complicating this, is an unprecedented development, effectively rewriting the rules of the game. This is:
PREMISE 4: The Commodification of the Tangible; The Increasing value of the Intangible
Lets relook at the Chapters laid out in the earlier post:
- Consumption
- Resource Development
- Manufacturing and Craftsmanship
- Global Trade
- Modern Services
- Digitalisation
- Platforms
It appears that another pattern emerges.
While the initial 4 chapters focused on fundamental human needs (resource collection, manufacturing), the later 3 chapters mark a shift towards a knowledge - based economy - which are not material in nature. This, by the way, is every developmental economist’s goal. It is similar to how nations have “progressed” from primary (resource extraction) to tertiary sectors (services). As highlighted earlier too - each successive chapter represents a new paradigm in profitability, investment and good jobs. Therefore, we see that services /intangible activities, in this day an age are far better paid and valued more than the material.
One (rather loose) correlation to make is comparing how economies have developed in accordance to Mazlowe’s Hierachy of Needs. For example, Resource Development and (to an extent) Manufacturing Chapters were designed to meet our basic physiological needs, while later chapters also evolved to make these more efficient (trade, services).
In my view, this new economy tells a tale of climbing to the pinnacle of Mazlowe’s Hierachy. Anecdotally, the emphasis of many citizens from rich, developed nations has driven a demand in what I perceive as “Transcendental”, rather than physiological demand. This includes areas such as sustainability, well-being, mental health and more. Simply put, the physical economy addressed things that people need, whereas the intangible economy is susceptible to things that people want.
The Struggle of the Intangible
So, to answer one of the core questions why I think past models (including my own) are not sufficient to explain what we see today - I believe that the vast majority of economic analyses and systems were fundamentally built on tangible, and not intangible, economies. This has produced what I feel are two core issues with the intangible economy and are a source of considerable confusion in today’s societies.
Why We Still Struggle - The Curse of Measurement
The first is the inability to properly and adequately measure the inputs, outputs and transactions of an intangible economy. While this was less of an issue in the past, most modern countries now see a substantial portion of their economic activity flow between services, digital and now platform companies.
Thematically, there is great demand and interest in terribly intangible areas such as Sustainability and Happiness - what I see as a persistent lack of a solution (and numerous insufferable advocates harping about the same points repeatedly) suggest a structural inability to get our current economic system to deal with areas like these. Similarly, newer ideas around Artificial Intelligence and Innovation, while desirable by governments and companies alike, struggle to define the actual true value of it.
Further, whilst there certainly are many brilliant minds trying to quantify these values - it remains a huge challenge to accurately capture both upsides and downsides in measurable terms. What are the trade-offs associated with a hyper happy, AI enabled, sustainable society? Can humanity really have this amazing cake and eat it too?
If one day, we were to expect most of the world to have completely commoditized the physical aspects of an economy, I am loath to imagine a world where most of our economic activity is engaged in ambiguity, mismeasurement and mismanagement. I feel that our current environment of hype and volatile markets are but the start of this scary path.
Why We Still Struggle - Institutional Catch Up
Perhaps this is less of a long term principle as I think the world is headed towards the right direction - but a second struggle relates to the lack of institutional infrastructure to adequately deal with this new economy. This discussion can go far deeper into a commentary on governance, but for simplicity, I’ll address the underpinning frameworks first (which has a downstream impact on policy formulation).
One example - which I carry over from being an economic analyst in my previous professional role:
Spurred by modern global trade, the importance of a standard system to accurately capture economic activity and products cannot be understated. The International Standard of Industrial Classification (ISIC) and the Harmonised System (HS) of codes were two such examples. Generally, they sought to track and characterise goods sold and economic activities. This has given rise to a general ability and language to quantify and assess the performance of various “sectors” and served as the starting point for economic analysis and policy recommendations.
Yet, if that was already a challenging-enough problem (and not without its existing challenges today), I can only dream of a system that accurately captures the explosion of possibilities of an intangible economy. While there are physically a finite number of things that humans may truly need at scale, it is unfathomable to consider the sheer number of things that humans want at scale. Personally, having done economic analysis in the past - the “digital” codes always fell into some form of catch-all. It made for terrible decision making, with a level of granularity that did not truly reflect what was happening in the economy.
For modern advanced economies (which have a significant impact on the rest of the world), these frameworks are still relevant, but are not enough - the intangible economy has grown to be the dominant source of “production”, employment and consumption in terms of value. Again, this has been a natural consequence of us living time where the intangible Chapters will continue to be a strong feature of our lives and economy.
Don’t even get me started on Tax frameworks.