Saturday, December 16, 2017

A Century of Change - by Gary North

My mother was born on December 15, 1917. She died just shy of 98 years old in 2015. These time-marking dates got me thinking about the world that she entered.
Public health policies had overcome most pandemics by 1917. There was only one pandemic still ahead, the flu epidemic of 1918. That was the last one the West ever saw. While there have been tremendous developments in medicine since 1917, most notably penicillin and the development of sulfa drugs, the great breakthroughs in terms of increased life expectancy had been made by 1917 in the West. They were more a matter of public health policies than of specific medical inventions.
The world of 1917 had technologies that we know well: electricity, telephones, phonographs, roll-film cameras, automobiles, airplanes, movies, and air conditioning. There were electrical household tools: stoves, washing machines, toasters, refrigerators, and vacuum cleaners.
So far, 1917 sounds like today. The improvements technologically have been cumulative.
What about politics? The Progressive movement was in control of both political parties. That had become clear in the election of 1912, when all three presidential candidates were openly Progressives. In 1913, the United States ratified the federal income tax and the direct election of Senators. In December of that year, the government created the Federal Reserve System. The United States was still on a gold coin standard, but Europe had abandoned it shortly after the war began in August 1914. The world had begun to enter into a new era: the era of fiat money.
Politically, the nation had a steeply graduated income tax in December 1917: 67%. This had been imposed earlier that year by Congress, after Congress voted in April to enter the European war, thereby launching World War I.
The biggest difference between the world we live in today and the world of 1917 is in the cost of information. That cost has been driven down to levels inconceivable in 1917. The change had begun in 1844 with the invention of the telegraph. There has never been a technological change in history that was comparable in social impact to the changes that the telegraph brought. I like to use this illustration. In the time of Jesus, high-speed communications in the Roman Empire averaged about one mile per hour. In 1800, it averaged about 1.25 miles per hour. The development of the railroads in the 1830's began to speed up the transmission of information. Then came the telegraph. The first message was sent from Washington D.C. to Baltimore. The speed of information transmission went to 186,000 miles per second, minus the time it took for the telegrapher to tap out the message, and for the person at the other end of the line to write it down. The first message was appropriate: "what hath God wrought" -- without a character for a question mark. I can think of no other event since approximately A.D. 31 to which that phrase better applies. The telegraph, within a decade, became universal in what today would be called the developed world. The transatlantic cable was completed in 1858.
Yet even in the case of the telegraph, the full economic implications were not well understood. Three shortsighted investors started the Pony Express in 1859. It lasted 18 months before going bankrupt.
In my mother's youth, she listened to commercial radio. The first commercial radio broadcast was in the presidential election of 1920. Radio station KDKA of Pittsburgh broadcasted the results of the election. Within five years, radio stations were all over the nation. Radio in 1925 was becoming the universal entertainment medium in the United States, except on farms. Most farms did not yet have electricity.
Electricity was the distinguishing mark of America's two societies. Access to electricity was the great leveler -- socially, culturally, and economically. Nevertheless, in 1917, the differences between urban living and rural living were being narrowed. This had been going on ever since the late 1880's. The great leveler in that era was the Sears catalog. The first one was distributed in 1888. By 1894, it was changing the lifestyle of America's rural residents. The Sears catalog brought middle-class urban living to families in rural areas. They could see what middle-class people in cities enjoyed, and it was now possible for rural families to begin to participate in the far different lifestyle that residents of cities enjoyed. In the imagery of the children's story about the country mouse and the city mouse, with the exception of electricity, the lifestyles of the country mouse and the city mouse were similar. Rural electrification was the last great social change in American society.
These technological transformations were driven by the profit motive. Profit-seeking entrepreneurs for a century, 1817 to 1917, had been pursuing mass market demand by means of technological innovation. The great changes began sometime around 1800. The cotton gin was invented in the mid-1790's. Innovation began to accelerate around 1800. Nobody really knows why. Why did it happen around 1800? Why did it happen in English-speaking North America and the British Isles, but nowhere else? This is the greatest unanswered historical question of the modern world, but only economic historians bother to ask it.
The free market made possible the establishment of great fortunes. Nevertheless, the oldest American family fortune was established by the DuPonts in the early 1800's. That fortune was based on the development of explosives that were used primarily by the military. The free market responded to demand, but military demand in weaponry was dominant. Governments were willing to pay for advanced weaponry. That is the one competitive advantage that governments have long possessed over the free market: the ability to kill people and break things. In imposing destruction, government has specialized, and it has established a legal monopoly. Yet, even here, the government is dependent upon the free market to pursue its ends. Nevertheless, as I shall cover later in this essay, governments are losing this advantage. Only in the case of nuclear warfare, which no government has been willing to implement since August 9, 1945, is the ability of national governments to use overpowering violence against armed resistance movements still questioned.
Someone who was born in 1800 and died in 1898 saw more social change than any generation in history. There was no railroad in 1800. The first railroad engine was invented in Britain in 1803, but it was not commercially successful. Only after 1829 did the railroad began to penetrate Western culture. That penetration was comprehensive within two decades. It made possible the feeding of cities, and this in turn led to the development of the mechanical reaper in the 1840's. I can think of no other single technological transformation prior to the telegraph that had a comparable impact on the Western world. This impact was based on speed.
After the telegraph, the most monumental changes were the results of electricity. The oil revolution began to change American society in the 1860's, but the main product of that revolution was kerosene. Kerosene made possible the inexpensive lighting of homes. It extended the work day in winter, and it expanded self-education after dark. It also expanded home entertainment. These benefits were shared by urban people and rural people alike. Electricity began the separation of rural living from urban living.
The changes from 1800 to 1900 were not nearly so great as the changes that took place between 1870 and 1970. I use two events to mark the differences between 1870 and 1970. The first is the defeat of Custer by Indian tribes in the summer of 1876. The second is Neil Armstrong's walk on the moon in 1969, which was seen by half a billion people in their homes.
An American who was born in 1870 could have read about the annihilation of Custer's troops. That person would have been about six years old. The telegraph brought that information to the East Coast in a matter of minutes after the U.S. Army found out about it. It was inconceivable to most Americans that Indians could have defeated the United States Army on that scale. That person could have lived to 1969. He saw televised images of Neil Armstrong walking on the moon. It is difficult to imagine the extent of the social change that took place between 1870 and 1970. It would be relatively easy for somebody living today to function effectively in the world of 1970. But it would have been almost inconceivable for somebody used to the lifestyle of 1970 to function in 1870.
I could have selected a different set of boundaries. Military technology in 1845 had yet to take advantage of the railroad. The railroad had nothing to do with the battles of the Mexican war in 1847. On August 6, 1945, the Enola Gay flew over Hiroshima and publicly inaugurated the nuclear age. But I prefer to use Custer to Armstrong, because I'm talking about the effects of technological change on the average American.
Because of Moore's law, the decline in the cost of information is now exponential. The doubling of the number of chips on an integrated circuit occurs at least every two years. The cost of memory storage is declining even faster. Think "YouTube."
A fundamental economic law is this: when the price declines, more is demanded. Nothing in the history of the world has verified this law more effectively than the cost of information. Cost-cutting has been accompanied by the spread of information technology around the world into almost every nook and cranny of the world. The smartphone arrived in 2007. It is now an almost universal technology around the world, and in another decade, the penetration will be virtually total. Cost-cutting is why the smartphone has penetrated world culture so rapidly. Within two decades, the transformation will fundamentally change the world we live in. The villages of the world will be brought into the 21st century within half a generation. The spread of this technology is far faster than the spread of social and economic change on American farms between 1840 and 1890. Yet that comprehensive social change was completely unexpected in 1840. Nothing in recorded history had rivaled it prior to 1840. Unlike people in 1840, we can see this coming. The world is not going to be taken by surprise this time.
I still do not own a smartphone. I went to look at smartphones this week. I have decided to stick with an upgraded version of my dumb phone. It lets me make telephone calls. I rarely make them. It lets me receive telephone calls. I rarely accept them. I don't need a smartphone. I also don't want to climb the learning curve of getting competent in the use of the smartphone. I rarely leave my office basement, which has two desktop computers and two desks. I have three walls of bookshelves that are filled. I don't need anything else. But I don't live in a village in India or China. If I did, I would be ready to purchase a smartphone if I had the money. It would not be a difficult sale to make. The only resistance today in an Indian or Chinese village is the price of the technology and the price of access to the Internet. The price of smartphones is falling rapidly, and within 20 years, access to the Internet will be free. It will be delivered by Facebook, Google, and Amazon from satellites high overhead. These satellites will be carried by either high-altitude balloons or solar-powered drones.
The combination of solar panels and smartphones will improve the lifestyles of the rural masses of the world over the next 20 years more than anything invented in the last 220 years. This combination will not have any major effect on urban residents, who are rich beyond the dreams of avarice in terms of the history of wealth, but it will radically change the lives of the poorest three billion people.
Let us not forget that all of this is being pioneered by profit-seeking entrepreneurs. Other than inventing the Internet as a military technology, the federal government has only slowed these developments. There has been more liberty of communications over the last two decades than the world has ever seen. The governments' gatekeepers who have, from the beginning, controlled the flow of information lost their dominance with the development of the graphical user interface and access to the World Wide Web. That came in 1995. Matt Drudge's 1998 report on Newsweek's spiking of the story of Bill Clinton and the unnamed intern is the supreme symbolic marker of the loss of control over information by gatekeepers. I said so at the time, and I have not changed my mind.
The main reason why the national civil governments of the West are in gridlock is the breakdown of the gatekeepers' control over the flow of information. The political structures of governments throughout history have all rested on the ability of the civil government to control the flow of information to the masses. The governments have been able to pay the news media to toe the line regarding what they report to the public. This control is now forever broken. This fact is transforming world politics as nothing has in the history of man. It has taken place as a result of the World Wide Web.
No longer are obscure, isolated, and marginalized religious and ideological groups dependent on the government-run post offices to deliver newsletters and books to their constituents. This control over the flow of information goes back to medieval China. This is why national governments have always demanded monopolistic control over the mail. Such control over mail delivery is today irrelevant. It has become irrelevant in just two decades. This has taken place under our noses, yet voters barely recognize it.
The NSA can monitor our telephone calls, our emails, and our bank accounts. But the NSA and other government agencies are more paralyzed today than ever before. They are all bureaucracies. They are filled with time-serving employees whose two main career goals in life are these: (1) more people under their authority, which will enable them to get promoted; (2) a safe retirement. These people have one career strategy above all others to achieve these two goals: not making a mistake. This is an anti-entrepreneurial, anti-innovative mindset.
In stark contrast, the telecommunications market is advancing far ahead of any government's ability to monitor, let alone control, what is going on. Political hierarchies today are now almost entirely reactionary. They react to government-threatening innovations that are being created constantly on a decentralized international basis. These innovations are being made possible by profit-seeking entrepreneurs in the free market. This has tilted power in the direction of the de-centralized masses.
As usual, there is only one area in which politics and bureaucracy have combined to stay ahead of the free market. This is the area of warfare. In the social division of labor, national governments have the advantage of implementing destructive force. Here, innovation is continual. Governments pay for advanced weaponry. Yet even here, national governments are falling behind the ability of non-state resistance movements, more widely known as guerrilla movements. Think "Afghanistan." As the cost of biological weapons declines as a result of technology, the ability of non-state terrorist groups to inflict damage on mass urban populations will increase. There is almost nothing that national governments can do to stop this. Once again, we see the results of the fundamental economic law: when the price declines, more is demanded.
The handwriting was on the wall during the Vietnam War. A bunch of men in black pajamas defeated the United States military. That was the visible turning point. If you want one photograph that marks this change, I recommend this one.
All of the high-tech tools of destruction that the United States military possessed could not overcome the decentralized Vietcong, which was being subsidized by the North Vietnamese Communist government.
Resistance to the expansion of central government is not limited to military resistance. It applies just as well to politics and the courts. Over 30 years ago, I wrote an article on the desktop computer as the Saturday night special of decentralized political resistance against the expansion of the federal government. Today, the smartphone is the Saturday night special. The ability of loosely organized groups to organize for specific purposes, especially short-term purposes, is undermining the ability of the government to pursue any kind of long-term planning. The uncertainty facing government bureaucrats because of the widespread use of smartphones is leading to the paralysis of national governments.
When Western national governments run out of money as a result of old-age retirement programs and subsidized medicine, which they all will face over the next 30 years, the legitimacy of centralized government planning will be steadily overcome. This rollback of government spending and the control associated with this spending will inaugurate a new era of political development all over the world. Politicians do not want to face this. Bureaucrats do not want to face it. But the handwriting is on the wall. Actually, it is no longer handwriting. Handwriting is disappearing. The text messaging is on the wall.
Because of the free market, individuals can adjust to changes that are being forced on them. They can also respond to opportunities that have become available to them. They face negative sanctions and positive sanctions. The free market enables them to respond effectively to both types of sanctions.
In contrast, it is much more difficult for governments to adjust. They are centrally administered. They are bureaucratic. They are resistant to change. They are not innovative. They are fundamentally reactionary. They do not stay ahead of the curve. They do not adjust easily. Individuals adjust at the margin, but the margins at which government bureaucrats adjust are large. You and I adjust to little changes at the margin. We do this especially if we can figure out a way to profit from such adjustments. The free market rewards us for making such adjustments. Almost nothing rewards government bureaucrats for making adjustments, which is why they don't make institutional adjustments often. Their top personal career strategy is to avoid making mistakes, not staying ahead of any curve. This puts bureaucrats at a tremendous disadvantage in comparison to somebody who owns a smartphone.
Over the next generation, people are going to see greater technological and political decentralization than men have seen since the fall of the Roman Empire. The breakup of the Soviet Union is the wave of the future. If there is one book that describes this best, it is Martin van Creveld's The Rise and Decline of the State. It was published in 1999. The final section of the book describes what is likely to take place. So does the final section of a book that was published the next year, Jacques Barzun's From Dawn to Decadence. Both authors were thinking along the same lines. They both recognized that the modern welfare state has promised to provide healthcare and security from crime to voters. These promises will be broken when the money runs out. Both authors recognized the problem of the unfunded liabilities of the old-age retirement systems of Western governments. National governments' statistically inevitable default on political promises will inaugurate a new political order, all over the West. This will be a far more decentralized political order than what we have today.
Few political conservatives understand this. Even libertarians don't understand most of it, although it is certainly consistent with libertarian social theory. I assure you that the vast majority of government bureaucrats do not understand this. They actually think they are going to receive their pensions after they retire. These people live in a fantasy world. Why should we expect them to understand any of this? They are paid above-market wages not to understand it.
Developments today should not be reasons for despair by people who want to see the modern welfare state rolled back. Think of the ever-popular cartoons of a man in robes who carries a sign: "The end is near." Instead of imagining him as a long-haired scruffy prophet, think of him as a government bureaucrat. For him, and for millions of bureaucrats just like him, the end really is near.