April 2018
Text by Erik Haendeler. Translated by Translations4IT

Image: © alphaspirit/istockphoto.com

Erik Haendeler is an expert in economic with special knowledge of the Kondratieff theory. Against the background of this knowledge he sheds an unusual light on today's working world and its potential for development. After his cadetship and work as an editor, he studied economics and economical politics. Today he works as a journalist, book author and futurologist.


haendeler@aol.com
www.erik-haendeler.de

This article was originally published in German in tekom's trade journal 'technische kommunikation'.

What drives our growth?

Most people are waiting for a new technology to trigger the next upswing. But it will be the knowledge workers who will promote prosperity in the future.

The unstable situation of the world and the economy are causes for concern. But zero interest rates and allocation conflicts are normal when a technological network is fully invested. This occurred, for example, in 1873 after the railway construction and in 1929 after electrification. With the proliferation of computer technology nowadays, we must look for the next upswing in the scarcity of today.

The next years could be uncomfortable – in spite of zero interest rates, spending programs like the one in Japan, and central banks' worldwide glut of money. Although computer technology generated a stormy growth and made us more productive over the decades, it has now exhausted its potential of handling structured knowledge work such as salary calculation, databases, and robotic control. This is the reason why the world economy is stagnating in relation to the potential of people who could work. Unemployment rates of more than 20 percent, primarily in Southern Europe, are the result. This leads to allocation wars and relapses into nationalistic and religious group ethics. People are insecure because they cannot comprehend the changes. Explanations will only cover certain aspects or might just look for a scapegoat such as the "system", the "EU", or the "West".

Anyone who believes that we would just have to wait for a new technology to trigger the next big upswing to cope with this instability will have a long wait ahead. Because the world is not transforming fast enough from an industrial society to an information-based society: The largest share of value creation in knowledge work of the future will take place in the imagined world: planning, organizing, analyzing and deciding, developing; understanding what the other means. However, as there is no "technology" available to make these fuzzy, unstructured thought processes more productive, the large reserves of prosperity can only be promoted within the intangible parts of value creation such as psycho-social health, a constructive work and debate culture as well as new organizational forms of work. Also, because economics until now has mostly considered monetary parameters instead of real economic processes, we are not yet sufficiently prepared for the success patterns required for this process.

Nothing new

History shows us that this situation is normal: In the years after the end of the railway construction and the recession of 1873, interest rates were next to zero, profits were minimal and unemployment skyrocketed. Social problems grew. A similar situation occurred around 1929, at the end of the electrification period. Investments are profitable as long as a technological network promotes decade-long prosperity, as it saves resources and makes companies more productive.

The demand for money triggers high interest rates that can be paid well, because the new technology provides even higher profits. But once the railway network has connected all business spaces with each other and almost all factories have been electrified, productivity stagnates: There is nothing left for the entrepreneurs in which they can invest profitably. Therefore, they need less capital, and the interest rates drop towards zero; a construction boom follows as well as increased consumption because even the poor can afford loans. The freed-up money flows into assets and fuels the prices of real estate, stocks and gold.

When this bubble bursts, as it did during the panic of 1873 or on Black Friday at the New York Stock Exchange (and perhaps soon again), consumption also nosedives along with the prices. Investments that were stagnating until now collapse. What does grow, however, is unemployment, tariff barriers and the search for a scapegoat that the demagogues can present to the people. For many years prices will drop slightly, due to the fierce competition among companies for margins in the stagnation; employees must work additional hours without pay and pressure is piled on suppliers. Deflation happens irrespective of how much money the central banks pump into circulation, because the speed of the monetary circulation is the deciding factor. And this will decline when the amount of money is boosted artificially.

Long structure cycles

The Russian economist Nikolai Kondratieff (1892–1938) described these long structure cycles of the real economy in 1926 [1]. Having studied the coal consumption, prices and industrial production of western countries since the end of the 18th century, he identified two and a half (47- to 60-year long) waves of economic dynamics, with the current third wave indicating a downward shift (Fig. 1). With the help of these dynamic waves, he accurately predicted the global economic crisis of the ‘30s long before the stock market crash. His statement that this was not the collapse of capitalism, as Karl Marx had always predicted, but just a deep cyclical economic slump between two techno-social cycles, led to his execution in 1938.

Kondratieff provided an explanation for the severe crisis that monetary economies were helplessly facing: Companies always work with a specific mix of production factors. However, these factors do not grow in the same proportion as the entire economy and thus change their relative cost ratios with each other. Eventually a specific production factor cannot be increased any more physically; it becomes too expensive. This is the point when the entrepreneur stops expanding the production, because it’s not worth it. The industry stagnates, margins drop to almost zero, and layoffs are the consequence. Kondratieff referred to the scarcest production factor as the “real cost limit”. By using this phrase, he highlighted that this is not a problem that can be solved with money. This bottleneck of production generates a strong pressure to change. It forces the economy and society to develop new ideas.

A basic innovation with related technologies and organizational patterns requires vast capital investments. When it gains momentum, it breaks through the real cost limit and leads to a new level of prosperity. It spreads slowly at first, and then dynamically and finally reaches its maximum saturation. With the help of its S-shaped distribution, one can identify the course of a so-called long Kondratieff. The time of the highest growth impact of the computer was until the beginning of the 21st century. Where is the relative scarcest production factor now that is keeping growth low?

Image 1: The previous economic waves and what triggered them. The next waves define health and handling information.
Source: Erik Händeler

 

Knowledge work as the future

When transport was the greatest shortage, railways had to be built; the computer had to be promoted due to information overload. What is scarce now? Although many expect the future in new technologies, a major part of today’s labor is immaterial thought work. And this means completely new rules for economic success.

When English entrepreneurs were no longer able to drain their mines and blow bellows for the iron melt, they commissioned the scientific staff of the University of Edinburgh to develop a steam engine. James Watt tinkered with it for twelve years, until it was finally efficient enough. The railways were not built because people did not feel like traveling by carriage anymore, but because the lack of transport options was the greatest restraint on economic activity at that time. The entrepreneurs had to enforce it against the initial opposition of society. When information overload was no longer manageable by using index cards, there was sufficient economic pressure to further develop computers.

According to Nikolai Kondratieff, inventions were made around the globe simultaneously, because people faced the same growth limits. The pressure to change can be found in the relative scarcest production factor and this indicates the future. And today? Renewable energies are good for the climate, but they are only replacing carbon-based energy sources with others and are not additional prosperity factors. Industry 4.0 is another step of development in information technology, but it does not address the present scarcity – our houses and apartments are filled from top to bottom, there is no shortage of goods. It is much more than just a technical problem: It is not enough to replace technology A with technology B, then lean back comfortably and continue as before.

Growth in the imagined world

It is primarily the mental performance of humans that prompts machines to control themselves and to communicate with spare parts and warehouses. Humans are the ones who determine what needs to be done, when and how. And there will always be paid work in this process, as work per se is solving problems. The radical change from the industrial society to the economy of knowledge also affects work: Work is no longer about directly working with your hands on the material world. Nowadays, to a great extent, robots perform the screwing, milling and mounting. In the imagined world, work now denotes creating value: planning, organizing, developing, analyzing and deciding, designing as well as understanding what the customer means; retrieving from the gigantic flood of knowledge the information one needs to solve a problem.

Thus, there are limits to economic growth in terms of refrigerators or cars, but not for the economy itself: it grows in the imaginary world, and there are no limits for growth there. From the point of view of resource consumption, it makes no big difference if someone sits at home unemployed, works in research, or designs presentation slides; however, these are additional services for prosperity. Therefore, we do not need a new economic system, but rather an economic policy and companies that develop value creation in the imagined world.

We know how to make material- and energy-related processes as well as structured information work more productive, but this has already been exploited to the greatest possible extent. Even emerging economies have accomplished a lot in these areas. We are now facing the task of making that part of work more efficient, where it relates to the use of fuzzy, unstructured knowledge. Because for economists who think in terms of real economy like Kondratieff, the economic cycle depends primarily on the degree to which resources are saved or the productivity of the entire society is increased.

This is an entirely different perspective as compared to most economic schools, which concentrate on the monetary indicators and variables: It was not the money for the construction of the railways or for tickets that drove the Railway-Kondratieff. Rather, one saved resources and time, in which one could work more – this was the growth. The economy is not driven by charges for cellphone calls. Rather, productivity is increased because one can use the smartphone to work or coordinate more efficiently, e.g. during a train ride. Thus, today’s employees can use their time more efficiently. The real gains in efficiency generate the growth. It is not the payment for mediators that increases prosperity, but rather when two department managers communicate well and information flows freely, so that a great solution can emerge – this increases efficiency. And health does not become an engine for growth because we spend even more money for medication and support stockings for the abundance of senior citizens, but rather when we take the stress out of our working life and work longer and more flexibly with less work. Then the additional prosperity is the extra service that was provided: the longer and therefore more productive work life as well as a better amortization of human capital.

Stagnation due to passivity

However, long structure cycles are not just an economic reorganization process, but also a social one that involves the society as a whole: Each of them has its own success pattern to overcome the new real cost limit and to optimally use the next technological network: Management methods, organizational structures, educational requirements.

An example from England around the year 1800 shows this clearly: Anyone who used the new network around the steam engine and, later, the railways, was the most productive and advanced. But anyone who then stuck with the old success pattern, like England did, was rapidly overtaken by the German Empire, which invested in the new basic innovation around electricity. Cheap petroleum energy helped the Soviet Union to become a world power, but it collapsed when its rigid structures could not overcome the new real cost limit of the information flood, which the computer did. Japan advanced because it used and further developed computers. The country then stagnated because the scarcities of today lie in the intangible area of knowledge work, which cannot be developed with technology.

For the first time we are faced with an intangible scarcity barrier in an increasingly intangible economy: Many indicators such as inner resignation or communication problems show that information work is not sufficiently efficient. Employed persons are under pressure to transform, primarily with respect to their social behavior, in order to work together more efficiently and to make better use of knowledge. This is the new paradigm that we must develop now to stabilize the global economy: Improve the work in the imagined world in such a way that it becomes much more productive than it is today.

New momentum

As work is becoming more and more complex, we are increasingly dependent on the knowledge of others. This affects hierarchies, the role of the individual, and the culture of cooperation: Only those who overcome pure individualism, develop a fair culture of debate and pursue higher goals will be able to live in a prosperous country in a knowledge-based society. We now have the task of making intellectual work in the imagined world more productive. The focus is not so much on individual achievements – as it has been before – but rather on the productivity of groups and their ability to cooperate.

As individuals are becoming less and less proficient in a subject area, we are increasingly dependent on the knowledge of others. Instead of being the obedient, replaceable wheel of the old industrial society, every individual will suddenly become an indispensable specialist for an intermediate step of production or for a field of knowledge. This individual is suddenly responsible for the entire organization, at least with respect to his field of expertise. One’s actual relevance does not depend on a formal hierarchy anymore, but varies according to the competence required at that time. Thus, the employee who is allegedly lower in the hierarchy becomes the master of expertise and dethrones the boss of the old school. But this also provides the necessary space for the actual task of the new managers: The higher one’s position within the formal hierarchy, the more one’s tasks involve moderating resources and the information flow, analyzing people according to their strengths and weaknesses, and assigning them respectively. And to always ask: What do you need to complete this task in the best way?

New hierarchies are necessary

The step towards knowledge work changes existing hierarchical structures. All of a sudden, even co-workers who have the same formal rank must rearrange their relations with each other. No one can continue to master a project, a situation or a specialist area alone. After all, the volume of information to be considered has become too complex and too large. Instead of working in separate departments such as development, production or sales, and only meeting each other once a year at the company’s Christmas party, now individual princes of the knowledge kingdoms are thrown together into teams. Only together can the task be completed: Someone knows the customer and knows what he needs. Another employee can handle the machine, and the third person can develop a prototype on the computer. These specialists now should work together on an equal, fair, and goal-oriented basis.

A new requirement emerges for employees that has nothing to do with expert knowledge or organizational structure. Rather, it has to do with how evolved a person’s sense of responsibility is – even beyond his or her own cost center. Also, whether he is sufficiently self-confident to get along without status symbols and corporate power proofs. Price differences of the same products by different companies are due to productivity differences – and these will be primarily behavioral differences in the future.

This is the really new thing about this Kondratieff cycle: In a globalized economy capital, knowledge and machines are replaceable and available to everyone worldwide. The only crucial location factor will be the ability of local people to handle information. However, dealing with knowledge is always dealing with other people, whom we might know better or worse, whom we might like more or less, and with whom we have different legitimate conflicts of interest. The necessary teamwork creates a supposed power vacuum, because it is not obvious anymore who is in charge.

Destructive behavior comes at a cost

The flat organizational structures and project-related teamwork that are necessary for information work multiply the intersections within a company and thus the reasons for conflicts of interest and personal tensions. They not only cost time and money but also increase the number of sick employees. Differences of opinion transform into power struggles that continue right through to retirement and suppress the flow of information. Lots of energy is wasted on self-assertion. Suddenly bullying becomes an issue. In fact, inner resignation damages the German economy in the amount of the federal budget: Anxiety costs about 75 billion Euros.

Age-old problems rear their head in the working world of the information society: men and women often don’t understand each other due to the different wiring of their brains; seniors stand corrected by the sometimes more current knowledge of the youngsters, but the youngsters fresh from the university and lacking experience are also not always right; plus the fact that we don’t have a sufficiently objective and fair culture of dealing with one another.

Hiding and power struggles

We lack behaviors that promote knowledge progression rather than hindering it. If an employee suggests something ingenious, but errs about five percent, we nail him due to the five percent instead of accepting the good idea – because this could increase the status of the colleague. During meetings we signal the others subliminally: "Don't you dare criticize me, or I won't talk to you anymore". However, putting someone down is highly unproductive. But those who step out of the cover and address undesirable developments in order to create a long-term healthy corporate climate and an honest basis for decision-making are quickly left alone. This is because we team up with those who appear to be more useful to us, or at least less threatening in case of arguments within the department, instead of boosting those who assume greater responsibility for the whole department beyond their own terrain.

We hide conflicts or eventually carry them out head-on, if necessary until the other is destroyed, using the law of the jungle or the power of better relations (who plays golf with the Executive Board on Sunday afternoons). However, the war at the office leads to a loss of productivity, which costs billions every year. Anyone who believes nothing will change in this regard because this is how people are misjudges the formative power of the market.

Anyone who does not resolve information work with sufficient efficiency will evidently have a cost problem in the future – and disappear from the market. Due to this pressure to change, new standards of behavior are emerging. They have less to do with organization or expertise, but rather with how evolved the sense of responsibility of a person is, and if he or she has enough self-confidence.

What is needed is transparency instead of scheming, reconciliation instead of eternal quarrels, authenticity instead of imitation, competence instead of status orientation, cooperation instead of power struggles, long-term orientation instead of short-term vision, and a sense of responsibility that extends beyond one’s own career and cost center.

Improvement in sight

When the dust of the structural change finally settles, those companies will remain that have come as close to reality as possible because they perceive information via all sensors. In order to mobilize the entire knowledge of an organization, a "servant"-management culture will prevail. People will no longer perceive fluctuating relevance as an insult to their self-worth but will rather encourage each other and enjoy each other's achievements. They will not manipulate information according to usefulness, but will truly pass it on. They will resolve conflicts fairly and reconcile their relationships. Instead of focusing on self-interest, they will be oriented towards the long-term and legitimate interests of partners, customers and suppliers – also because we can’t foresee the consequences of our actions in the long term at all.

Organizations will invest in further developments as well as in people and will provide the necessary time for some employees to mature in such a way that they will eventually advance the organization with groundbreaking discoveries. Dazzlers and free riders will increasingly have to retreat to any remaining reserves of major organizations. Once this new culture of cooperation prevails globally, the economy will gain momentum. Isn't the world improving after all?

Related literature

[1] Kondratieff, Nikolai (1926): Die langen Wellen der Konjunktur (translated into English as The Long Waves in Economic Life in 1935/1979)