Crisis or Transformation

Trend of customization and relocalization
Parallelism of crises and transformations
The triggers that induce the catharsis of a crisis often coincide with and are undistinguishable from the triggers launching qualitative transformations of the economy, business and society at large. While crises are cyclical recessions or slowdowns within the same paradigm, transformation represents a paradigmatic change in the way of doing business: the things can never return to where they ended, but move towards new standards and quality, in a unique and non-recursive way. Most developed and mature regions of the world (USA, Japan, Western Europe) are undergoing long-term transformation towards a “new normal” of doing business, state governance and ways of life. Crisis is just a parallel, accompanying phenomenon, subject to different causes, special rules and separate dynamics.
Confounding both crisis and transformation as one phenomenon brings forth the confusion, inconsistency and guessing. While many changes in the market system are cyclical, there are also evolutionary changes which are unidirectional and qualitatively transformational. The transformations of the US economy from agricultural to industrial, or from industrial to services, were not a crises, although there were cyclical crises along the way.
Underlying pattern of recessions
When we look at major US recessions since 1980, as in Fig. 1, it is clear that they have been getting deeper and longer in terms of the initial employment recovery. Only the first is classical V shape, there are several W, U and finally L shapes. There clearly is an underlying causal phenomenon which is getting stronger and more persistent over time. Such underlying causations are of interest, not just individual crises themselves.
Even the Great Depression of the 1930s was not just a crisis, but a long-term transformation from the pre-war industrial economy to the post-war service economy in the U.S. However, in early 1980s service sector has started slowing down its employment absorption and growth potential, ultimately leading to the jobless economy of 2011. No comparisons with the 1930s are useful: one can compare recessions but not transformations. Industrial economy of 1930s and the post-service economy of 2000s are two different “animals” in two different contexts. Now emerges a new transformation. The key question is: what comes after the service economy, and what after that?
The unrecognized confluence of crisis and transformation, and our inability to separate them, lies at the core of old tools (keynesianism, monetarism) not working properly. The new tools have not been yet developed and we do not even realize it. An example of a paradigmatic transformation would be the shift from geocentric to heliocentric view of the world. Within both views there can be any number of crises, cyclical failures of old and searches for new theories and practices. But there was only one transformation, from geocentric to heliocentric and there was nothing cyclical about it. It was resisted with all the might of the mighty: remember Galilei and Bruno. While crises are cyclical corrections and adjustments, transformations are evolutionary jumps or revolutions towards new and different levels of existence.
Where are the jobs?
The arena of employment, especially in the US, provides clues to transformational qualities of the current global crisis phenomena. This crisis is intertwined with underlying transformation and so it displays untypical dynamics and unusual persistence, presenting new challenges to conventional economic thought, business practices and government interventional “toolbox”.
Sometimes the clues come from uninformed and unlearned circles; from new and powerful intuitions rather than from well-reasoned but tired old arguments. We do not know where the new jobs are but we do know where the old ones came from. Nobody knows where and how to create new jobs or which sectors to promote to facilitate a reduction in unemployment or increase in participation rate.
Sector dynamics
The key, according to Zeleny, lies in exploring the sector dynamics of US economy. Economic sectors evolve (in terms of employment levels), albeit through fluctuations, in one general direction (along so called S-curve): they emerge, expand, plateau, contract and exit—just like any self-organizing system or living organism. We are naturally interested in the percentage of total workforce employed in a given sector. The dynamics of this percentage provides a clue where and how the new jobs are generated.
Sector’s percentage share of employment evolves in dependency on sector’s productivity growth rate. Agriculture has emerged and virtually disappeared as a source of employment. Today, only ½ percent or so of total workforce is employed in US agriculture - the most productive sector of the economy. No politician would even propose creating new jobs in agriculture. Manufacturing had emerged, peaked and contracted. Services have emerged and started contracting - all due to incessant, unavoidable and beneficial productivity growth rates.
A new sector of employment has emerging: government, welfare and unemployment, based on tax-financed consumption rather than added value production, sheltered from market forces, producing very little. Can we create jobs in this GWU sector? Of course we can: artificially and temporarily, at the expense of productive sectors, i.e. only at the risk of major debt accumulation, in a non-lasting way and with low added value. Creating such artificial employment pockets is not a stimulus but a temporary patchwork. If we do not do the work of crisis voluntarily and ourselves, the crisis will do the necessary clean-up work for us.
The Four Basic Sectors
The US economy has now become the most mature in terms of its sector evolution. It has entered the stage - perhaps as the first economy ever - of declining employment share in both the service and government sectors.
Productivity growth rates are now accelerating in the US services and its employment creation or absorption potential is declining rapidly. Accelerating productivity growth rates are dictated by global competition and human striving for better standards of living - they cannot be stopped at will. In the US there are only three areas where jobs are still being created: education, health care, and government. The first two are subject to market forces and will undergo accelerating productivity growth rates and declining employment levels in the near future. The third one, GWU, is sheltered from competition, can expand its share substantially but it does not produce much of anything, depends on taxes from other sectors and its employment growth is unsustainable.
Slowly and imperceptibly, US economy has shifted towards sectors with lower added value, leading to lower income and increasing reliance on the bubbles of debt. That is a systemic condition which no amount of half-baked regulations and Keynesian or monetarist stimuli (i.e. wasteful spending) can ever address. Even desirable piercing of speculative, employment and debt bubbles has ceased to be politically correct. Even 100% taxation of all incomes would not balance the US budget!
So, the US is at the transforming cusp and hundreds of years of sectoral evolution comes to a halt. There are only four essential things humans can do economically: 1. Produce food, 2. Manufacture goods, 3. Provide services, and 4. Do nothing. US economy has exploited (from employment viewpoint) all three productive sectors. There is no new sector lurking in the offing, this is it: qualitative transformation is taking place. Other economies still have time left, some still have to industrialize and some still have the services to expand. Bur the US economy is now the harbinger of the things to come, the role model for others to follow or reject, but hardly ignore. For the first time in history at least one economy has reached the end of the old model (or paradigm) and is groping for the new ways of organizing its business, economy and society.
A new sector has emerged: GWU ( government, welfare and unemployment ), based on tax-financed consumption rather than added value production, sheltered from market forces. Can jobs be created in the GWU sector? Essentially, yes. But because this sector is the first fully taxation-based, the three productive sectors have to remain able to finance growing GWU sector. That is not self-sustainable.
In Fig. 2, observe that the US economy has become the most mature in terms of its sector evolution. It has entered the stage - as the first economy ever - of declining employment in the service sector and now even in the GWU “sector”.
Productivity growth rates are now accelerating in US services, as its employment creation and absorption potential are declining rapidly. Accelerating productivity growth rates are dictated by global competition for better standards of living - these rates cannot be depressed at will. Financial, health and educational services are all having their unprecedented productivity upturns ahead.
Still well under the macroeconomic radar, most advanced economies have shifted towards sectors with lower added value: i.e. services and GWU. That is where this “crisis” (more precisely transformation) hits the hardest. Emerging markets still have industrial, services or GWU sectors to create new jobs in the near future; continuing to grow, albeit at decelerating pace. However, with no new sector emerging in advanced economies, there is no new absorption space to transfer the newly unemployed to. No such new sector is in the offing: the economy of Fig. 2 has reached not only its transformation point but also the end of its sector evolution: the US is at the transforming cusp.
Nothing but transformation left
The US economy has exhausted (from employment viewpoint) all three productive sectors and has reached for the 17% in GWU. The same is true for EU and Japan. Their attempts to “grow” employment in GWU have lead to heavy overall indebtness in advanced regions, characterized by growing budget cuts and social unrest. What about debt reduction, balanced budgets and GWU employment reduction? In Fig. 3 we separate the last workforce bar from Fig. 2. In order to see the impact: no improvement.
All sectors are subject to accelerated productivity growth rates in the near future. The only expanding space of the workforce is the grey region “?” in Fig. 3, essentially reflecting decline in work participation rate. This grey area is the space of the new transformation: that’s where those who left unemployment registers gather to start new ventures, enterprises and regional economies.
Even when the recession ends, the transformation shall continue and accelerate. Pressures for increased productivity growth rates and budget cuts shall grow unabated. Due to automation, sector GDP can grow even under the conditions of declining employment.
Self-service, disintermediation and customization
It is increasingly self-evident that US economists and government have missed the boat with respect to the transformation. It is clear that government can be of little help in this respect. That is why we still talk the mechanistic language and use old “levers and pulleys” in the age of internet. For a long time to come we shall not even acknowledge the transformation. The only clues to the new paradigm can be glanced from the self-organization of the market economy itself: its rates of self-service, disintermediation and customization.
Because there is no new productive sector to emerge, the economy seeks to reinstate its new balance through these new modes of doing business. Producers and providers are outsourcing their production and services to customers and technology. Outsourcing to customers is a natural and necessary self-organizing process, including disintermediation, customer integration and mass customization, all driven by the global productivity at the cusp of transformation. Instead of the information society we have entered knowledge society. Instead of the service society, we are venturing into self-service ways of life. The shift towards self-service is a part of natural and spontaneous evolution of human and economic systems.
Due to its productivity growth rates, each sector must emerge, grow, persist, stagnate, decline and dissipate in terms of its employment generating capacity. The high-productivity growth sectors are emerging and dissipating first, the low-productivity growth sectors (like services) are completing their life cycles only now. Different productivity growth rates in different sectors are accompanied by virtually uniform growth rates in wages and salaries across all sectors, as required by free market forces.
As a consequence, the goods of high productivity growth sectors (food, manufactured goods) are getting cheaper and the products of low productivity growth sectors (health care, education, insurance) are getting more expensive, as is captured in the Figure 4:
Fig. 4. Uniform wage growth vs. differential productivity rates.
In many third-world nations this may still be the other way around (due to the reigning stage of sector evolution): food and manufactured goods more expensive, while services still relatively cheap. In developed countries, chicken, bread, computers and cars are getting cheaper, while insurance, health care and education costs are skyrocketing - without adequate quality, productivity or availability improvements.
Rational economics agents tend towards substituting relatively cheap and capital intensive manufactured goods for relatively expensive and labor-intensive services. Consumers will use goods instead of services wherever economical and possible. So we observe the emergence of automated teller machines instead of bank tellers, self-service gas stations instead of full-service stations, self-driving instead of chauffeurs, do-it-yourself pregnancy kits rather than hospitals having such testing services, self-handled optical scanners rather than cashiers, and cloud computing instead of central mainframes. In other words, mature economies are entering the era of self service, disintermediation and customization. One of the fastest-growing areas in developed economies, especially in the US, is “work at home”: self-employment, part-time self-employment, self-service and do-it-yourself, using home office, telecommuting, remote work, neighborhood networks, virtual office, cloud computing, mobile phones and similar technologies.
Modern production is primarily based on the processing of information, not on the hauling of goods, humans and machinery over large distances. One can more effectively “haul the information,” to produce goods and provide services locally. Information and knowledge travel effortlessly through electronic superhighways, through telecommunications networks and the internet. Citizens and employees working at home are in control of their time, can take care of their children, and can invest in home technologies; they do not have to pay excessively for gasoline, insurance and childcare, nor waste most of their precious off-work hours in commuting to work. The U.S. economy appears to serve as an experimental laboratory for many new forms of work and leisure, from work at home and telecommuting to self-employment and virtual offices.
Transformation - to what? Relocalization
Because there is no new productive sector to emerge, the market system seeks to reinstate its new balance through new modes of doing business (as long as the government does not interfere in protecting and fixating the “old ways”).
Integral part of the ongoing transformation is relocalization, a manifestation of deglobalization, in the sense of returning to the original slogan of “Think globally, act locally,” which we interpret as exploiting global information and knowledge in a local action, under local conditions and contexts.
Globalization refers to a restructuring of the initially distributed and localized world economy into spatially reorganized processes of production and consumption across national economies and political states on a global scale. In deglobalization we move towards relocalization: the global experience and knowledge becoming embodied in local communities. So, the corso-ricorso of socio-economic transformation is properly captured by the triad of localization → globalization → relocalization.
In globalization, national-state boundaries and autonomy are ceded upwards to supernational institutions, unions and assorted leagues; in relocalization, national-state boundaries and autonomy are distributed downwards to subnational regions, localities and communities.
With relocalization, an entire new cycle of societal corso-ricorso is brought forth. Local services, local production and local agriculture, based on distributed energy generation, additive manufacturing and vertical farming, are enhancing individual, community and regional autonomy through self-service, disintermediation and mass customization. Both requisite technologies and business models necessary for relocalization are already part of our daily business and life experience. Hence, the transformation is well on its way.

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