Economic Tectonics and the Crash of '08

Conventional wisdom says the focal point for the most critical story of our time - the Economic Collapse of '08 - is an overheated, over-levered, greed-riddled financial system. It's a common refrain during sharp contractions - a call for the heads of the perceived culprits who it's believed put us here.

And the consensus media narrative seems to be going even farther this time. This thread says that materialistic American consumers and money-mad Wall Streeters - with an assist from self-aggrandizing Washington politicians -- are responsible for a set of actions which collectively have brought the capitalist system to its knees. It's suggested that Americans are now concluding that something more "caring," more "community-focused," more "values-based" is needed, and that the animal spirits of capitalism are now menaces rather than tonics to our prosperity and well-being.

But I believe that conclusion to be fundamentally and directionally false.

It's not that there wasn't plenty of self-serving, money- and power-loving bad behavior going on. There was. Bankers, mortgage brokers, consumers, Congressmen, Presidents, Fed Chairmen, hedge fund managers...all these groups (and many others) were guilty of some combination of avarice, hubris, and short-sightedness.

But that's a sidebar to the story of the gigantic forces changing our economy - not the headline. Getting the headline right matters immensely, since the two elected branches of the United States government are now taking dead aim at the wrong people and the wrong problems.

So if it's not the speculative excesses of capitalism that put us here, what's going on?

A Complete Re-Ordering of the Global Economy

I believe what we witnessed last Fall, and are continuing to witness, is the visible result of a complete re-ordering and reorganization of every single facet of the global economy, and in fact the very substance of the lives of every human being on the planet, by the combined power of information technology and the Internet.

I believe this re-ordering is the fifth, and quite likely most impactful, technological change in the history of the human race -- following the development of language and writing, the development of agriculture, the invention of moveable type, and the rapid-fire creation and simultaneous deployment of the steam engine, the railroad and the telegraph.

The degree of change being wrought by this combined information ubiquity is stunning, and is occurring on a scale so large that it's confounding our ability to understand it. But a good analogy for what's happening is that our entire world is experiencing a massive earthquake, with a major tectonic fault line running between our former 20th century, pre-digital society, and our now totally connected, globally-instantaneous 21st century reality.

But our elected leaders and media commentators don't see or feel this earthquake.

Instead, they think we've simply relied on an inappropriately capitalistic societal design. "We cannot rebuild this economy on the same pile of sand," said President Obama recently, implying that nothing's happening that's not attributable to bad economic site selection.

Surely the financial system has taken a violent shaking in this earthquake, and outdated "building codes" for it have played a role in the severity of the damage it has sustained. But if our main response to this crisis is to pillory the institutions and individuals involved while our government creates an awkward, inflexible, belt, suspenders, and duct-taped new financial regulatory system, we will miss and under-exploit the real and powerful forces that are literally remaking our society and our economy.

The Great Restructuring

Can the degree of change now cascading through our world really be all that great? Yes. Like the other epic technological developments before it, the broad global availability of the Internet is a fundamental enabler for communication and interaction that changes human realities of proximity and productivity.

Imagine the degree of fundamental societal change wrought by each of these technological innovations:

• The development of language and writing allowed man to transmit thoughts and intentions to others quickly and accurately. The ability to describe a dangerous situation or a prodigious source of food accurately with words made humans increasingly successful as a species, and writing removed the need for the originator of a given thought or fact to be present for its retelling. It began to reduce inefficiencies of human effort and also allowed for the origins of trade and specialization by helping humans to work cooperatively, but with decreasing need for constant physical presence to transact.
• The development of agriculture turned man from a nomadic wanderer-gatherer to a being with a completely different mindset: Now rather than moving on when local food supplies ran low, people began to be anchored permanently in a specific geography, and began to turn their brainpower toward ways of improving their nascent farms and communities.
• The printing press launched the first information era, with original texts and philosophies being created for the first time since antiquity. The ability to project ideas broadly had profound impacts on the world order, especially in the areas of religion and governmental power.
• The development of the steam engine in the late 18th century, which in turn spawned the railroads a few decades later, and the sprouting of telegraph wires alongside many of the rails, unleashed a vast industrial revolution and dramatically increased the speed with which news and ideas spread. The rail lines offered tantalizingly rapid transportation of goods, which allowed further specialization of work, which created more efficiency and more prosperity. People came unanchored from the land on a broad scale for the first time in millennia.

Now, here in the early 21st century, comes the marriage of extremely efficient information technology and the near-globally omnipresent Internet. This union is changing our world completely. Again.

The governors that existed on the speed of the distribution of thought have been obliterated. In addition, the requirements for companies and organizations to maintain physical proximity to minimize costs and maximize communication have been ground down to a nearly insignificant nub.

Corporations and other institutions no longer need maintain great vertically integrated structures to thrive. The very idea of a "job" is called into question, and a set of rippling effects will inevitably be felt across our entire society. The nature and layout of cities will change. The reasons and ways consumers make decisions will change. The way information is distributed and received will change. The nature of politics and the function of governments will change.

But this isn't the kind of change for which President Obama campaigned. This is a tidal wave of change on a more profound and awesome scale than any one person could possibly bring on their own, and it's already cresting and pounding ashore in our society.

And as has happened throughout human history, this tsunami of innovation will both scour and re-order the known world.

Comments

[btheoburke]

More of Dave's economic commentary at: http://www.rollickingeconomy.com

[Dave Maney - Huffpost Blogger]

Thanks to everyone for the interesting comments. As a first-time Huffington Post blogger, it sure is eye-opening to put your thoughts out into the arena and see the reactions.

My impression is that most reporting, but ESPECIALLY economic reporting, lacks historical context. If economics is the dismal science, economic history must be something exponentially less sunny and interesting. As a result, what we normally get in both the media and the blogosphere is discussion that is either: 1) Completely statistically oriented, matching only this year’s stat with one from 27 years ago; 2) Untethered from reality or analysis to make an ideological point; or 3) Reportage of current performance numbers or indicators with no connection to any larger pattern, trend, precedent, or cause…and therefore utterly useless.

So what I attempted to do was to connect the dots, and to put into a satellite-level view (because that’s the level I think it takes to step back from how-much-is-my-IRA worth dithering) what I believe is happening.

Several comments were really interesting while disagreeing with me, like Mr. Butler’s and Articulator’s. Some were of the I’m-a-soci­alist-so-d­on’t-bothe­r-me-with-­reality variety. I apologize for theses left incompletely “proven” and “and so’s?” left unanswered. You can only do so much in 1100 words. More to come. Thanks. Dave

[JayJay333]

Your article talks about technological advances and the economic crises separately but does not connect the two. After reading your article, I have no idea why you think one caused the other.

The Democratic Party caused this financial meltdown. The CRA, when enacted, was very needed and justified legislation. However, when it was pushed into destructive overdrive by the Clinton Administration, it resulted in the Banks throwing away their lending guidelines, lowering their standards and due dilligence, and making bad loans in order to meet the ridiculously high goals. The legislation to reign in Fannie Mae and Freddie Mac which McCain, Bush, and other Republicans tried to pass, was blocked by the Democrats. If that legislation had been passed, the financial crises probably would have been avoided. The Republicans were in fault by reducing oversight, although after hearing how many times Maddock was reported and nothing was done, I have my doubts about whether the financial problems would have been found.

Instead of flippant replies, I would love replies which would point out errors in my claims, if any are found.

[John Anthony Butler]

Interesting article Dave. However, I am not sure you proved your thesis. Certainly the Internet and communications technology portend major change, perhaps even to the degree you imply. Unless I am not understanding your article, you don't fully articulate how those technologies supersede the other "culprits" to whom the crash of '08 is attributed. Maybe they do. But your article implies more than specifies how or why the crash is primarily a result of the technological change you say is underway. Nor does it suggest what alternative approaches government and business might consider in light of the "tsunami of innovation", though I recognize such suggestions may be beyond what you want to articulate in this piece. Poor regulation, derivatives, greed, hubris, technological obfuscation, stupidity were all "exponentiated" by technology for sure. But I would still argue those other factors were the primary causes of the crash. The technology that you describe as fueling so much social change remains a tool albeit with perhaps greater powers of amplification than we have yet to understand or figured out how to control.

[Paul]

The problem with the capitalist system is that most of the efficiencies, savings and benefits from the digital revolution went straight to the top. Middle-class income is stagnating or declining but income in the top 5% is increasing exponentially.

If I can do my job in half the time using a computer, I should have a 20 hour work week at full pay.

But that is not what happened. Instead I'm doing the work of 2 people at the same pay - the savings goes to the corporation, not the workers.

This latest meltdown of capitalism is just the symptom of the wider problem. Socialism will re-order the system to allow the benefits to be shared by everyone.

[malmond]

Thank you for your fascinating post. Your ability to place our current economic situation within a greater, far more significant paradigm shift is inspiring, to say the least. This is the "big story" and it's playing out at a dizzying pace. Every aspect of human civilization is undergoing rapid change. This is particularly interesting to me because I wrote a piece a couple years ago that made the case, however light weight it might have been, that we are in the early stages of a second renaissance. The changes that have occurred since then only reinforce this idea. Thanks again for fleshing out the topic!

[huff reader]

I agree with the idea that the telecommunications revolution is having and will have tremendous impact on society in ways we don't begin to understand, yet.

However, this had absolutely nothing to do with the current world-wide economic mess, other than to allow it to be world-wide and fast, rather than isolated to one nation or continent.

The individual and collective human actions that led up to the boom and bust mess (greed, lack of regulation, group-think, tunnel-vision, etc.) would have been executed by word of mouth and pencil and paper, had the technology not existed to speed up and spread the process. There is nothing fundamentally different in this cycle from the 'Tulip bubble' or the 'South Seas bubble,' other than the fact that telecommunications has rendered it a 24/7 game for perpetrators and victims alike.

But you are right about interconnectedness fundamentally changing world society right before our eyes, in ways we (and you) don't understand. Wish ourselves luck with this experiment!

[mac03m]

The article brings up some great points but I do not believe the conclusion to be correct. The cause of our financial crisis is non other than our federal reserve system. The distortions they create in the market place lead to the bubbles that later burst in everyone’s face. People dont seem to realize that the interest rates set by the fed are not just random numbers picked from a hat. In a true free market economy with a sound currency like gold, interest rates are set by the market place and represent the ratio of present consumption vs. future consumption which inevitably signals the economy the need for savings/investment or consumption. Having the interest rates set by the fed sends false signals to the economy causing the malinvestments which inevitably lead to a crash.

The only way to fix out economy is to get it running on a solid foundation once again. The bill in congress to audit the federal reserve could indeed be the most important piece of legislation of our time.

[tlawyer56]

While I agree that there is a shifting of the world economy. I call it a reset or reboot. I am not making the connection to how use of the internet itself translates to wealth. The fact that information is stored on the internet does not translate to currency for necessities or luxuries of life. I would have loved the article to explain in depth how this works. The hypothesis and the conclusion fall short without explaining how the information age translates to wealth for individuals or nations.

[zaneblue]

There is a countervailing force that you are overlooking, and that is the anti-globalization effect of efforts to fight global warming. This will cause the cost of transporting goods to skyrocket.

Ironically, this will mean that manufacturing jobs will return to the United States, but jobs requiring intellect, that can be done remotely through an Internet connection, will be relegated to the cheapest worker. IT workers will become the new minimum wage labor, and factory workers will return as large part of the middle class.

[NewIndy]

This is nothing but a fluffy assertion of some vague theory without any kind of logic or reason and absent any facts to back it up. I would be very interested in exactly how the technology that enable me to access massive amounts of information in seconds is responsible for my retirement savings being cut in half in four months.

Yes, there is a technological revolution going on that impacts almost every person on the planet. Yes, there is an ongoing meltdown in global finanace do to greed and corruption. Exactly how are they tied? Is there some type of internet protocol for vaporizing real wealth and replacing it with credit default swaps?

This looks like another attempt to convince people to ignore the fact that the "too big to fail" corporations have subverted governments around the globe to serve their rapacious greed. And, honestly, it's not a very good attempt.

[DavidJames]

Dave,

I think you are right . This latest economic perturbation is just part of the "Information Economy" power shift that theTofflers have written about. Strangely enough it may mean that capital is no longer as valuable. It may not even be worth worrying about much.

The Tofflers pointed out that as we shift from the industrial economy to the "Information Economy" the ability to use knowledge will become the new meta currency.

I think what this means is that the capital of the industrial economy is no longer the primary source of economic value. Knowledge use systems like Google and people themselves are becoming the dominant source of economic value.

Regards,

[Articulator]

The financial collapse is a result of the way globalization is implemented. Every modern country that had an industrial revolution went through a following labor movement. The US had theirs in the late 1800's. It occurred because a tiny few were controlling almost all the immense wealth that was created by workers who got paid next to nothing and were literally dying on the job. In the US it was a very bloody battle of the classes. Out of it came labor standards that paved the way for the middle class which in itself was a boon to business - plenty of customers to buy products. Places like China and India are going through their industrial revolution but have not made it to the labor movement yet. The free trade agreements are written without any enforced standards regarding labor or the environment. Agreements as currently written are a way to get around the current labor and environmental standards. Unless the US worker is willing to go back to the days of working for pennies, no benefits, no vacations or holidays, there is not competing. Jobs are going overseas, those who benefit most from the jobs overseas have the most control in Washington and use taxes as the scapegoat. Taxes are less now than they were in other very prosperous times in US history.

[crease]

The Free trade agreements that have been put into place and cheerleaded on by the like of Greenspan,­Rubin,Summ­ers and others frm theReagan,Bush 1,Clinton and the Shrub are what is killing this country`s middle class and working class.The middle clas of this country used to be very powerful in terms of purchasing and consuming what we made in this country,while we still made more for the rest of the world all the while making decent profits for the stockholders and CEO`s made very good coin from t.Greed,dergulation which was also cherrleaded on by the same folks from the Reagan thru Shrub regimes plus more has done most of the damage to the world economy and this country.Our whole banking and financial sytems need to be reregulated and return to the Glass Steagall regulations of old,just because these regulations are 70+years old deosn`t mean they can`t work now.Greenspan said the"wall street folks will police themselves", well they didn`t even come close and lok what they did.For this country to move ahead we need a New New Deal for the 21st century where America manufactures low carbon vehicles,wind turbines,s­olarpanels­,retrofits existing plants to it and putspeople back to work with good livable wages and demand for low carbon green technology will be there and we will be back to where we were before,this will take time so we all have to be vocal and send this message to your congress persons and president Obama.

[Kojerk]

100 percent correct.

[kamachanda]

Mr. Maney
Conventional wisdom also says people in your business support Republicans who represent them in Washington, conventional wisdom is right. The economic collapse of 08 was caused by greed and corruption in an unregulated financial services industry (on top of 30 years of trickle down economics). If you are in the financial services industry and may face re-regulation to prevent such avarice as crashed our economy last year, it might behoove you to point the finger away from the financial services industry. It might potentially be worth more money than the average American will earn in a lifetime. It seems that is what you are doing with this article.
The internet is changing things but, you cannot eat the internet. You cannot turn on your cell phone, search for house and step into the results page to get out of the rain. People don't live in an electronic world, they live in a physical world where things of value are produced and exchanged. Your vision of the internet reminds me of those futuristic drawings of the world (popular in the fifties) where all the families flew around in personal hovercrafts. It may be in your interest to continue selling credit to people and businesses so that you can get your cut, but it is not in the best interest of the majority of Americans that this unprecedented transfer of wealth to the elite continues.

[usna73]

Bravo. Yours is the only relevant response. Mr. Maney is full of hot air. So-called "merchant bankers" just find leveraged deals and spew nonsense enough to get the funding done.

Get real. Technology is a tool. Save the mumbo jumbo and get busy folks.

[kamachanda]

Thank you, I appreciate the feedback.

[ghiemstra]

The most important revolution of all is left out -the oil revolution of the late 19th and all of the 20th century. Leaving this out does not necessarily change the final conclusion, but does miss the most powerful of the changes. Virtually all significant economic and political power still, today, flows from those who control oil. If you missed it in the 90's, read The Prize, which makes clear the dominance of oil on the political stage. Today's "auction" of Iraqi oil to a consortium of BP and Chinese oil interests illustrates. Info tech is important but power still comes, fundamentally, from oil.