The Fourth Industrial Revolution by Klaus Schwab: Profound and Systemic Change

The Fourth Industrial Revolution by Klaus Schwab

1.2 Profound and Systemic Change

The premise of this book is that technology and digitization will revolutionize everything, making the overused and often ill-used adage “this time is different” apt. Simply put, major technological innovations are on the brink of fuelling momentous change throughout the world – inevitably so. The scale and scope of change explain why disruption and innovation feel so acute today. The speed of innovation in terms of both its development and diffusion is faster than ever. Today’s disruptors – Airbnb, Uber, Alibaba and the like – now household names - were relatively unknown just a few years ago. The ubiquitous iPhone was first launched in 2007. Yet there were as many as 2 billion smart phones at the end of 2015. In 2010 Google announced its first fully autonomous car. Such vehicles could soon become a widespread reality on the road. One could go on. But it is not only speed; returns to scale are equally staggering. Digitization means automation, which in turn means that companies do not incur diminishing returns to scale (or less of them, at least). To give a sense of what this means at the aggregate level, compare Detroit in 1990 (then a major centre of traditional industries) with Silicon Valley in 2014. In 1990, the three biggest companies in Detroit had a combined market capitalization of $36 billion, revenues of $250 billion, and 1.2 million employees. In 2014, the three biggest companies in Silicon Valley had a considerably higher market capitalization ($1.09 trillion), generated roughly the same revenues ($247 billion), but with about 10 times fewer employees (137,000). [Note: James Manyika and Michael Chui, “Digital Era Brings Hyperscale Challenges”, The Financial Times, 13 August 2014]. The fact that a unit of wealth is created today with much fewer workers compared to 10 or 15 years ago is possible because digital businesses have marginal costs that tend towards zero. Additionally, the reality of the digital age is that many new businesses provide “information goods” with storage, transportation and replication costs that are virtually nil. Some disruptive tech companies seem to require little capital to prosper. Businesses such as Instagram or WhatsApp, for example, did not require much funding to start up, changing the role of capital and scaling business in the context of the fourth industrial revolution. Overall, this shows how returns to scale further encourage scale and influence change across entire systems. Aside from speed and breadth, the fourth industrial revolution is unique because of the growing harmonization and integration of so many different disciplines and discoveries. Tangible innovations that result from interdependencies among different technologies are no longer science fiction. Today, for example, digital fabrication technologies can interact with the biological world. Some designers and architects are already mixing computational design, additive manufacturing, materials engineering and synthetic biology to pioneer systems that involve the interaction among micro-organisms, our bodies, the products we consume, and even the buildings we inhabit. In doing so, they are making (and even “growing”) objects that are continuously mutable and adaptable (hallmarks of the plant and animal kingdoms). [Note: The designer and architect Neri Oxman offers a fascinating example of what I just described. Her research lab works at the intersection of computational design, additive manufacturing, materials engineering and synthetic biology. https://www.ted.com/talks/neri_oxman_design_at_the_intersection_of_technology_and_biology].

In The Second Machine Age, Brynjolfsson and McAfee argue that computers are so dexterous that it is virtually impossible to predict what applications they may be used for in just a few years. Artificial intelligence (AI) is all around us, from self-driving cars and drones to virtual assistants and translation software. This is transforming our lives. AI has made impressive progress, driven by exponential increases in computing power and by the availability of vast amounts of data, from software used to discover new drugs to algorithms that predict our cultural interests. Many of these algorithms learn from the “bread crumb” trails of data that we leave in the digital world. This results in new types of “machine learning” and automated discovery that enables “intelligent” robots and computers to selfprogramme and find optimal solutions from first principles. Applications such as Apple’s Siri provide a glimpse of the power of one subset of the rapidly advancing AI field – so-called intelligent assistants. Only two years ago, intelligent personal assistants were starting to emerge. Today, voice recognition and artificial intelligence are progressing so quickly that talking to computers will soon become the norm, creating what some technologists call ambient computing, in which robotic personal assistants are constantly available to take notes and respond to user queries. Our devices will become an increasing part of our personal ecosystem, listening to us, anticipating our needs, and helping us when required – even if not asked.

Inequality as a systemic challenge

The fourth industrial revolution will generate great benefits and big challenges in equal measure. A particular concern is exacerbated inequality. The challenges posed by rising inequality are hard to quantify as a great majority of us are consumers and producers, so innovation and disruption will both positively and negatively affect our living standards and welfare. The consumer seems to be gaining the most. The fourth industrial revolution has made possible new products and services that increase at virtually no cost the efficiency of our personal lives as consumers. Ordering a cab, finding a flight, buying a product, making a payment, listening to music or watching a film – any of these tasks can now be done remotely. The benefits of technology for all of us who consume are incontrovertible. The internet, the smart phone and the thousands of apps are making our lives easier, and – on the whole – more productive. A simple device such as a tablet, which we use for reading, browsing and communicating, possesses the equivalent processing power of 5,000 desktop computers from 30 years ago, while the cost of storing information is approaching zero (storing 1GB costs an average of less than $0.03 a year today, compared to more than $10,000 20 years ago). The challenges created by the fourth industrial revolution appear to be mostly on the supply side – in the world of work and production. Over the past few years, an overwhelming majority of the most developed countries and also some fast-growing economies such as China have experienced a significant decline in the share of labour as a percentage of GDP. Half of this drop is due to the fall in the relative price of investment goods, [note: Carl Benedikt Frey and Michael Osborne, with contributions from Citi Research, “Technology at Work – The Future of Innovation and Employment”, Oxford Martin School and Citi, February 2015; http://www.oxfordmartin.ox.ac.uk/downloads/reports/Citi_GPS_Technology_Work.pdf] itself driven by the progress of innovation (which compels companies to substitute labour for capital). As a result, the great beneficiaries of the fourth industrial revolution are the providers of intellectual or physical capital – the innovators, the investors, and the shareholders, which explains the rising gap in wealth between those who depend on their labour and those who own capital. It also accounts for the disillusionment among so many workers, convinced that their real income may not increase over their lifetime and that their children may not have a better life than theirs. Rising inequality and growing concerns about unfairness present such a significant challenge that I will devote a section to this in Chapter Three. The concentration of benefits and value in just a small percentage of people is also exacerbated by the so-called platform effect, in which digitallydriven organizations create networks that match buyers and sellers of a wide variety of products and services and thereby enjoy increasing returns to scale. The consequence of the platform effect is a concentration of few but powerful platforms which dominate their markets. The benefits are obvious, particularly to consumers: higher value, more convenience and lower costs. Yet so too are the societal risks. To prevent the concentration of value and power in just a few hands, we have to find ways to balance the benefits and risks of digital platforms (including industry platforms) by ensuring openness and opportunities for collaborative innovation. These are all fundamental changes affecting our economic, social and political systems which are difficult to undo, even if the process of globalization itself were to somehow be reversed. The question for all industries and companies, without exception, is no longer “Am I going to be disrupted?” but “When is disruption coming, what form will it take and how will it affect me and my organization?” The reality of disruption and the inevitability of the impact it will have on us does not mean that we are powerless in face of it. It is our responsibility to ensure that we establish a set of common values to drive policy choices and to enact the changes that will make the fourth industrial revolution an opportunity for all.