The Asians had it, the Latin Americans had it and now the Arabs are having it. I refer to the transition from an agrarian or nomadic society to an industrial one. The transition has been a painful moment for these societies as much as it has been for the societies that made a similar sort of transition a century or two before. These were the societies in Europe and in America that took turns at staging their own revolutions and civil wars, each bloodier and more savage than the other, and certainly more so than anything we see today. It has been known for some decades that when a society reaches a certain level of development, discontent among the masses reaches the boiling point then erupts into unpleasant occurrences such as we have seen happen among the various societies. And the Arabs are proving to be just a different flavor of the same old dish.
The crucial point to highlight is that the societies which are now industrializing (known collectively as the emerging nations) have several blueprints they can study and draw lessons from. This is because there has been more than two centuries of industrial development on this planet, and those societies will find it easy to search for a model to follow and pitfalls to avoid. The big problem, in fact, is not what is happening now but the flip side of the equation. I refer to the nations which are already industrialized and find themselves in a changed situation because the emerging nations are presenting them with a formidable challenge in that they have markedly altered the economic landscape of the world and they continue to do so. Up to now the industrial nations have held seemingly well but the signs are here to the effect that they too must undergo a massive transformation to remain on their feet. The fear is that in the absence of such transformation, they may reach the boiling point and erupt into unpleasant occurrences of their own. But unlike the developing nations, these societies have no blueprint to follow or to draw lessons from which prompts the question: What can they do? The answer is that we should try to understand what is happening to the global economy beginning with the injection of some precision in the language of economics that we use everyday.
Innovation, development, productivity and competitiveness are the four words most often used when discussing the economy now but when they are used haphazardly, they create so much confusion that the message they intend to convey becomes almost incomprehensible. For this reason, it is worth stopping for a moment to take a fresh look at them, perhaps even try to restore to them the definitions they once had. As it happens, it is better to discuss these words in pairs because this is how they become misidentified most of the time. That is, the two words innovation and development are often used interchangeably when in reality they are two different things; while the two words productivity and automation seem to carry the same sense in the mind of some authors when in reality they are different from each other.
To begin with, most of the people in the media and in politics who instinctively dislike science, math or technology do not seem to take seriously the notion that two words which seem to mean the same thing on the surface may mean different things in reality. These are the people who use the words innovation and development interchangeably as if they were synonymous. But when these people proceed with the discussion and you see them attribute to innovation what is of the realm of development and vice versa, you realize how confused they are in their own mind about the entire subject, and how erroneous can be the ideas and the messages that they try to communicate to their audiences.
Perhaps the worst example of this sort we encounter when discussing economics and the related subjects is the attribution to the military or to NASA innovations like the computer and the internet among other things. The people who make these attributions rightly point to the fact that because of their need for products based on such inventions, the military and NASA have provided the money and the impetus that made the inventions the success they are today. This is correct but neither the military nor NASA have contributed an ounce of the creativity that alone is responsible for the innovations. When you probe deeply into the matter, you find that these institutions only contributed financially toward the basic research and/or the development of the technologies that were already there. Such institutions normally engage in what is known as government procurement which is the use of the enormous purchasing power they have to acquire what they need. This, in turn, supports the inventions that are made by individuals such as the thinkers and the tinkerers who work alone and come up with inventions, something that no institution or even a committee of people can ever do.
The individuals that think and tinker dream up new ideas (also known as innovations) which are turned into parts and components that are themselves assembled into products like the computer and the internet. The development of the ideas into components, and the assembly of the components into products are done for the institutions that need them, procure them and pay for them. The work itself is done by small and large corporations that own research labs, development facilities and production lines. They get rich in the process of doing the work, and this stands in stark contrast to the luck of the innovators who are paid very little if anything at all. But there are times when the innovators turn out to have acquired enough entrepreneurial skill to start a business by themselves, mass produce their own inventions as well as those of others and do well in life. Microsoft is one such example. These people are the innovator-entrepreneurs who may hold the secret to the salvation of the vulnerable Western economies as we shall see.
We can also go back in history and make the same argument with regard to the highways and the railways neither of which was innovated by the government yet both were financed and developed by it. In any case, it is important to make and to emphasize the distinction that exists between the words development and innovation because the latter has become the indispensable word that people insert into every discussion on the economy these days. Such people speak of innovation as if it were something that can be snatched out of thin air or produced on demand at the snap of a finger and sprinkled like a miracle cure over the difficult problems plaguing the economy. These people seem to argue that any and every problem can be made to vanish in an instant if only we innovated our way into the magnificent world of their imagination. We'll come back to these points in a moment.
Meanwhile, let us look at the two words productivity and competitiveness which are also used interchangeably when discussing the economy and where a great deal of confusion is generated. When used to describe the output of a worker, the word productivity refers to the quantity of goods or services that he or she can produce per unit of time like an hour or a day. In this case, the worker would be competing against the self or against time which is different from when you use the word productivity to compare two or more workers. Here you need to specify what tool or machine each worker is using because these contraptions affect the output of the workers.
This brings us to the word automation which refers to the tools and machines that a worker can use to produce goods or services at a higher rate. To be sure, automation refers to the machines that need little or no human supervision to produce the goods or services they are hardwired to produce or programmed to produce according to a predetermined set of specifications. For example, a factory with 32 identical machines requiring 32 operators to run them can be upgraded by outfitting the machines with automatic systems that will allow one operator to run as many as 4 machines at a time. This means that you can now reduce the number of workers in that factory to 8 people because each one of them will be 4 times as productive as before. Not only that but the operator can program one or all the machines to produce the goods with the same set of specifications or with different ones so as to comply with the demands of several customers. And the operator can do all this with only a few touches on a keyboard.
Now, when people say we need to boost our productivity to compete effectively against the emerging nations, they say the right thing but when you listen to them explain in depth what they mean, you find that they are making false assumptions which render their point of view meaningless. For one thing, these people assume that the emerging nations are not using automatic machines or cannot use them for some strange reason. And so they imagine that if only we gave our operators the most automated of machines, they will be able to outproduce the Asian workers therefore compete against them effectively. There are at least two reasons why this view is even more erroneous than it seems on the surface. First, competitiveness is not only a function of how much you can produce per unit of time but also how much you are paid per unit of time. For example, if a Western worker and an Asian worker are given the same machines and they produce the same amount of products or services per hour, the Asian worker will be called more competitive because he or she will work for less money therefore will have a “competitive advantage” over their Western counterpart.
Second, no one nation has a monopoly on automation any longer because no one jurisdiction controls innovation or development in this age of globalization. This reality stems from the fact that in the modern world, the multinational corporations will take their basic research, technological development and production lines to the jurisdiction that will offer them the best of incentives. These are packages of concessions which, in the aggregate, give the multinationals a competitive advantage of a different sort. That is, in addition to or in lieu of accepting low wages, these jurisdictions may give tax concessions, offer relaxed labor laws, exempt from obligations that pertain to the environment and so on.
And this stands in contrast with the old days when the nations that had a head start were able to keep hidden their inventions and the processes by which they produced goods and services from everyone else. They enjoyed monopolies that lasted for a long time and got wealthy at the expense of the rest. What happens nowadays is that the individual innovators are granted a patent which they may sell directly to the corporations that will develop them, or sell to companies that specialize in acquiring such patents. The latter then turn around and resell the patents to the multinationals for a hefty profit and a royalty. The multinationals are given a limited period of time during which they alone can use and profit from the inventions while everyone else is forbidden from competing against them. But at the end of the period, everyone that wants to get into the act can do so, can have access to the invention and thus be able to produce generic replicas of it.
What all this boils down to is that if you want to get wealthy or remain wealthy as a nation, the practice of innovation alone will not do it for you. Simply put, you cannot live well by innovation anymore than the thinkers and the tinkerers can live the high life selling ideas. There are many more things you must do to become competitive and be able to stand up to the challenges of the emerging nations. One important thing you can do is replicate the approach taken by the innovator-entrepreneurs which is to produce what you invent. But this will mean that you must revamp many of the social and financial structures that were fought for, hard won and erected over the decades. It will not be easy, and this is why a full blown and honest debate must begin as soon as possible before we are told we have passed the point of no return.
One way or the other the emerging nations will succeed because they are the ancient civilizations that know how to survive adversities and because they have accepted to change. Let us not, here in the West, resist change and see ourselves slip back because we like to hang on to the dogma that our social and financial structures are sacrosanct and cannot be altered.