Will AI Generate a New Growth Wave of Creative Destruction? | Herman Mark Schwartz

In Episode 393 https://hiddenforces.io/podcasts/new-ai-growth-wave-of-creative-destruction-herman-mark-schwartz/ of Hidden Forces, Demetri Kofinas speaks with Herman Mark Schwartz, a professor in the Politics department of the University of Virginia and the author of three books on economic development, globalization, and the geopolitics of the subprime mortgage crisis. Demetri and Mark discuss an article that he recently co-authored in American Affairs about AI's potential to create a new growth wave of creative destruction that could rival or surpass those of previous innovation cycles, with enormous implications for business, society, and the role of government in the economy. They discuss what these so-called "Schumpeterian" growth waves typically look like, how they create complex interactions across all facets of the economy, and how they ultimately exhaust themselves, making room for the birth of a new innovation cycle. In the second hour, Mark and Demetri apply this framework to the growth wave that we have been living through for more or less the last 50 years and which now appears to be in the late stages of endogenous decay. They examine three scenarios for what might come next. The first is an extension of the current wave, the second is a new paradigm driven by AI as the key general-purpose technology, and the third is neither an extension of the current wave nor a transition to a new paradigm, but rather a series of crises characterized by commodity shortages, energy insecurity, political polarization, and global conflict. You can subscribe to our premium content and access our premium feed, episode transcripts, and Intelligence Reports at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed listening to today's episode of Hidden Forces, you can help support the show by doing the following: Subscribe on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 | YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg | Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP | Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces | SoundCloud https://soundcloud.com/hiddenforces | CastBox https://castbox.fm/channel/2629539 | RSS Feed http://hiddenforces.libsyn.com/rss Write us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Subscribe to our mailing list at https://hiddenforces.io/newsletter/ https://hiddenforces.io/ Producer & Host: Demetri Kofinas http://www.demetrikofinas.com/ Editor & Engineer: Stylianos Nicolaou Subscribe and Support the Podcast at https://hiddenforces.io https://hiddenforces.io/ Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 12/02/2024

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Herman Mark Schwartz, a professor in the Politics Department of the University of Virginia and the author of three books on economic development, globalization, and the geopolitics of the subprime mortgage crisis. I asked Mark on the podcast to discuss a recent article he co-authored in American Affairs about AI's potential to create a new growth wave of creative destruction that

• 0:44Demetri Kofinas?

  could rival or surpass those of previous innovation cycles with enormous implications for business, society, and the role of government in the economy. Mark and I spent the first hour of our conversation discussing what these so-called Schumpeterian growth waves typically look like, how they create complex interactions across all facets of the economy, and how they ultimately exhaust themselves, making room for the birth of a new innovation cycle. In the second hour, we apply this framework to the most recent growth wave we have been living through, whose earliest origins begin with US industrial and defense policy in the 1960s and 70s, and which now appears to be in the late stages of endogenous decay.

• 1:26Demetri Kofinas?

  We examine three scenarios for what might come next. The first is an extension of the current wave. The second is a new paradigm driven by AI as the key general-purpose technology. And the third is neither an extension of the current wave nor a transition to a new paradigm, but rather a series of crises characterized by commodity shortages, energy insecurity, political polarization, and global conflict.

• 1:53Demetri Kofinas?

  If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io/subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q and A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page. And if you still

• 2:34Demetri Kofinas?

  have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. And with that, please enjoy this informative and eye-opening conversation with my guest, Herman Mark Schwartz. Herman Mark Schwartz, welcome to Hidden Forces.

• 2:59Speaker 01

  Thank you, Dimitri.

• 3:01Demetri Kofinas?

  It's great having you on, Mark. I reached out to you because I was binge reading American Affairs' new quarterly issue, their winter edition. Russell Napier was on the podcast last week. He had just published an article in American Affairs in this issue, and yours was one of the other articles that I found really most interesting. The title of the article, for people that want to read it, is "Will AI-Generating New Schumpeterian Growth Wave?" We're going to talk about that today, but before we do, just tell me a little bit about your background. How would you describe the field of study that you're in or your expertise?

• 3:36Speaker 01

  That's actually a difficult thing, because I'm not really in a discipline as such, although I'm housed in a political science department. But I think of myself as a historically-oriented economic geographer who's interested in questions of power. And so, I don't really fit well in an economics department, or a history department, or a political science department. But I'm here, and I'm happy to have a job, so I can pay my taxes and feed my kittens. Yeah.

• 4:06Demetri Kofinas?

  So let's talk about that. I told you that we've done all sorts of episodes on this podcast over the years that intersect with what you wrote about in the article, whether it is the the transformation of the global neoliberal international rules-based order into the new multipolar or bipolar order with a more state capitalist mix, potentially dirigist policies, some of the stuff that we talk about with Russell. As an example, we've done episodes on AI. Most of those have been technical or philosophical in nature. Some of those have been economic. For example, one with Brian Janus on the energy transition. This article seems to focus more on both the economic, policy and social dimensions of AI. I'm curious to understand how you would describe what the article is about

• 4:50Demetri Kofinas?

  and what sort of interested you in writing it.

• 4:54Speaker 01

  Sure, the article is basically speculative. I and Yusuf Robinson, who's the other author of the article, both think that we are at an inflection point in geopolitical, geo-economic terms and in technological terms. So we're at a point at which things might change radically. And that kind of inflection point is nothing new historically. And Joseph Schumpeter, who's the provides the framework for the article, is famous for arguing that capitalism is not an equilibrium system, but rather one that expands explosively as new technologies are on boarded. And when he says that, when he says new technologies are on boarded,

• 5:39Speaker 01

  what he's thinking about is a whole package of technologies. And here's the important part of the sentence. Given the proper policy framework and the proper social framework, a whole set of new technologies that drive massive waves of investment. And those new technologies change everything, how things are made, how they're moved, how corporations manage their labor force, how things are marketed. And then the harder parts, macroeconomic management, and what you could call the mindset of the population that's adopting these technologies.

• 6:15Speaker 01

  So the motivation here is to understand what AI and some other associated technologies might mean in terms of making, moving, marketing, managing, macroeconomically managing, and how we think about things going forward. And we wanted to link this new technologies that we see today, like AI, but also, very importantly, the big changes in biotechnology, biogenomics, back to the Schumpeterian framework so we have some kind of historical basis for our claims. Mark Twain, of course, is famous for saying, "History doesn't repeat, it rhymes."

• 6:59Speaker 01

  And I think that is essentially true. And that's why we wanted to have this made, marketed, moved, managed, et cetera, framework to assess AI and biogenomics.

• 7:10Demetri Kofinas?

  So this is partly what you mean when you write in the article that the critical issue is not only the technologies themselves, but by whom, how, and how fast they're implemented?

• 7:19Speaker 01

  Absolutely. Because the technologies essentially, in some sense, are ethically neutral in Max Weber's terms. You can implement new technologies in lots of different ways. You can implement new technologies in good and bad ways. So the real issues are who controls the implementation? And that's the important part behind the management of labor force, or as Marx would say, "control over workers." And that's the important part behind the macroeconomic management. So you could imagine, you don't have to imagine, actually, you could look at the current electrical generation sector in the US, and you can see that solar and wind are essentially price

• 8:01Speaker 01

  competitive with coal, and in many instances, price competitive with natural gas. But implementing these technologies requires changes in the regulatory regime around permitting. It involves efforts to block lobbying by coal interests and other fossil fuel interests that want to preserve their business model. It involves repositioning of the labor force around this and the acceptance that this is the right way to do things. None of these things can be read automatically off the technology itself. That's the sense in which it's innovative in Max Weber's sense ethically neutral.

• 8:41Speaker 01

  He means ethic, not in the sense of good or bad, moral or immoral, but ethic in terms of what's the understanding people have of how this technology should be used.

• 8:55Demetri Kofinas?

  So in your article, you go through a number of previous growth cycles or innovation cycles, going at least as far back as the first industrial revolution. We're going to spend most of the first hour templating what these growth waves look like. But before we do that, how do we think about where we are in these cycles? What's the growth wave that we're currently living through?

• 9:19Speaker 01

  Sure. So actually, it's best to answer your first question first to understand where we are today. So at the heart of Schumpeter's model and later elaborations by people like Carlota Perez is the idea that these new growth waves involve a new source of energy, a new mode of transportation, a new way of managing production, which is to say labor control, a new big consumer or producer product, and a new way of governing corporations. So we could say monitoring. And then Schumpeter kind of stops there and what Perez adds is you have to think about macroeconomic management and mindset.

• 10:00Speaker 01

  So we can look at the growth waves that started back at the time of the industrial revolution. And what you see is each of them involved a new energy source, new transport mode, new form of production organization, new form of corporate organization, new ways of marketing, and then macroeconomic management and mindset changes. And the one we're living in right now, which you can think of as the information communication technology boom, but I like to say it's ICT, information communication technology, plus biotech 1.0. Biotech 1.0 is the Cohen, Boyer. Recombinate DNA process.

• 10:44Speaker 01

  That boom starts more or less at the end of the seventies, beginning of the eighties. And what it's doing is taking advantage, as all these booms do, of increasingly cheaper, increasingly cheap resources that allow you to overcome some fundamental limit, some exhaustion of material and social resources from the last growth wave. So the ICT boom overcame limits of the prior growth wave. What it did was create ways of, new ways of managing corporations, because you could have vertical disintegration of corporations, but still have, at the beginning, not so instantaneous,

• 11:28Speaker 01

  but today, basically instantaneous ability to see what other firms are doing, be inside their inventory and production systems because of the internet and digitalization. It saved on energy by digitizing. I would say speculatively that nuclear power would have been, should have been, the major new energy source for this boom. But here you see, actually, the political, social problem. Nuclear was perceived as being dangerous. So we doubled down on fossil fuels, particularly oil. And then in terms of what was being made, and of course, the internet moves things. In terms of what was being made, obviously, computers,

• 12:10Speaker 01

  with the apotheosis of the whole electronics boom, being the cellphone, which embodies, these days, dozens of prior products. And in terms of macroeconomic management, we had an anti-inflationary regime, which I will say was a bit problematic in the sense that it slowed growth. And I also would say, in terms of products, this is the era in which we get all the first-generation biotech products, which transform basic commodity agriculture. So this would be things like herbicide-resistant cotton and soybeans, corn, which generated natural pesticides, and human insulin. And so, these are the things that powered the boom

• 12:54Speaker 01

  from the, let's say, late seventies, early eighties, until the big housing crash. And what you see there is basically that we have an exhaustion of those cheap resources. If you think about the key thing here being in electronics, ever cheaper compute, what happens from about 2010 forward is that the cost of compute starts rising. And that's because we hit some physical limits in terms of the ability to produce semiconductors. For your audience that's not technical, what I'll say is the physical limit here is that the circuits get so small that the quantum effects

• 13:38Speaker 01

  around the positioning of electrons basically make data unreliable, data being processed by the chip unreliable. And what that means outside of the narrow technical issue is that the cost of building a fabrication facility to make semiconductors gets extraordinarily expensive. And so here you can see the transition into a political or social or market issue different from a technology issue. And the issue is as these fabs get more and more expensive, the number of companies that are able to finance a fab starts dropping. And we're right now left with basically

• 14:21Speaker 01

  three companies in the world, or maybe four, that are capable of making the most sophisticated, that is to say, highest level of integration, smallest gate-sized chips. And so we have an oligopoly. And in oligopolies, the temptation to restrict output and maximize profits is very high. And the risks involved in new investment that might create overcapacity are also very high. And so all the investments in fabs, semiconductor fabs, et cetera, that powered growth in the past stop happening. And that's a corporate governance issue. Similarly, with biotech 1.0, what we've seen is a massive expansion.

• 15:07Speaker 01

  Of bioengineered agricultural products. And again, what that runs into is not a technical limit, but a political limit. People are afraid of GMOs, of genetically modified organisms. And on the health side, because pharmaceuticals have patents and also are subject to a very strict regulatory regime in terms of production, costs start rising. And given that most health systems are publicly financed, and that includes the US, where more than half of all health spending comes from the state, one way or the other. Given that health systems are publicly financed, you start to get political resistance to rising drug prices,

• 15:50Speaker 01

  which you can see, for example, in the Biden administration's effort to use the IRA, the Inflation Reduction Act, to negotiate drug prices. So the biggest picture here is all these growth waves are based on overcoming some resource limits. Again, resources being not just physical, but also social, that no longer are cheap. So these growth waves are built on new technologies to overcome those now costly resources and implement cheaper resources, again, both raw materials and social resources, to power a new wave of growth. But because implementing them are political

• 16:34Speaker 01

  and social processes, there's no guarantee that you actually get to implement these technologies.

• 16:40Demetri Kofinas?

  So that was awesome. That raises so many questions. I also love that you brought up the bioengineering and regulation of pharma, because we see that with HHS, with the head of Health and Human Services nominee, Robert Kennedy Jr. The expectation is that he's going to be much more restrictive when regulating these industries. What exactly it's going to look like, I don't know. But is it typical to see tightening regulatory oversight toward the exhaustion phase of the growth cycle?

• 17:11Speaker 01

  I would say that's exactly the opposite, which is to say, what usually happens is the implementation of a set of regulations is what makes it possible to have expansion. And then, as you get a growth wave, of course, the companies that are associated with that expansion are political animals and they will lobby to get the kind of regulatory regime that they want. So, again, by way of example, of course, the internet firms lobbied for Section 230, which freed them from liability for things that were posted on the websites that they were running.

• 17:50Speaker 01

  So, for example, a Facebook under Section 230 is not responsible for what gets posted there, right? So, they will lobby for a favorable growth regime. And then, towards the end of the cycle, actually, what they'll be lobbying for is things that protect their model even more as incumbents. What brings these growth waves to an end, aside from actual raw material constraints or physical constraints, is usually the social constraint, which is to say, you get unrest around the old compromises that made the expansion possible. So, I'll give you an example here from the 1940s, 1970s, or 1930s, 1970s growth wave.

• 18:33Speaker 01

  Academics like to call that growth wave Fordism, after Henry Ford. But basically, that growth wave was built on petroleum as an energy source, the mass production of consumer durables, so continuous flow, assembly line production, and each of those words means something important, so maybe I'll say something about that later, but continuous flow, assembly line production by semi-skilled workers, making consumer durables, moved largely by fossil fuel-powered vehicles, and corporations were multi-divisional firms, vertically integrated. And macroeconomic management there involved in expansion of the welfare state and Keynesian management of the business cycle.

• 19:17Speaker 01

  So if you think about that, it's regulation of labor relations that enables this to work. You cannot run a continuous flow assembly line factory unless two conditions are met. One condition is that folks show up to work and actually do their job. If someone's missing on the assembly line, the assembly line's got to stop. And the second condition is that you have to have stability in inputs because, again, it doesn't do you any good to run the assembly line and a car comes down the line and, oh, we don't have an alternator for the car. You can't just keep pushing the car down the assembly line and then put the alternator in later.

• 19:59Speaker 01

  So you need stable sources of components. And that's what gives you these big political compromises around labor relations where the state intervenes to make companies recognize unions and where management and unions come to an agreement, come to an exchange, in which the unions allow management to run the assembly line, but management concedes that workers will get wage increases proportional to productivity gains. Classically, the famous example of this is the 1949 deal between the UAW and General

• 20:41Speaker 01

  Motors, where General Motors says, you will get wage increase every year equal to the average increase in productivity in the US economy plus the inflation rate. And GM there was betting that because it had control of the actual organization of the assembly line, it would get productivity gains greater than the average. And so you can see how this works. GM gets higher profits, invests in new output, workers have money to buy this output, so supply and demand match up. And GM controls a vertically integrated production system where 70% of value added is internal, which makes it

• 21:24Speaker 01

  Comfortable makes it secure in terms of knowing that there will be the appropriate numbers of components at the right place, at the right time, in the right quantities on that assembly line, which otherwise you can't run. So those kinds of compromises, those kinds of regulations make things work. The way things break down is when people walk away from those compromises. And so by the 1960s, 1970s, if we say there were three crucial deals that made Fordism work, each of those broke down. The assembly line needed docile, semi-skilled workers,

• 22:06Speaker 01

  folks that were willing to put up with a monotony of assembly line work. Those were almost all men outside of a few industries. By the time you get to the 60s and 70s, nobody wants to do those jobs anymore. And so you get a series of wildcat strikes everywhere in the rich country universe. So the cheap resource that powered the initial boom, which was a whole bunch of returning soldiers who were used to military discipline, who had experienced the Great Depression, who were willing to put up with what was really crappy factory work because in exchange, they got enormous material benefits and job stability. That resource disappears by the time you get to the 60s.

• 22:51Speaker 01

  The new intakes are kids who have not experienced, for the most part, military discipline, have not experienced the Depression. They don't like this kind of work. And their demands were all basically demands that attacked managerial control of the assembly line. They wanted some kind of economic democracy. They wanted a say in the speed of the assembly line. They wanted a say in how the assembly line was organized. So the strikes were not about money. These folks were well-paid. It was about would work be humane. The second big resource that gives out that's social is docile housewives. Again, one reason wages were high for these men

• 23:33Speaker 01

  was that women were systematically excluded from the labor market after the Second World War. That was a policy decision. Governments everywhere, again, in the rich countries, governments everywhere had learned from World War I that you have to put these returning soldiers back into jobs or you're going to have problems, political problems. And so they encourage employers to hire men, fire women, not because men were somehow superior workers, because famously during World War II, of course, women proved themselves to be perfectly competent at building airplanes, running machine tools, but because they wanted these guys to have jobs. So women are pushed into the house. But again, by the time you

• 24:16Speaker 01

  get to the 1970s, the generation of women that are entering the labor market are the daughters of these women who are incredibly frustrated by being pushed back into the house. And so you have an end to women accepting a division of labor in which they don't do much wage labor. And they're, you know, in the iconic example, staying at home and self-medicating with Valium, as the Rolling Stones song has it. And then the third big social decay looks like a raw material decay, but is actually political and social. And that is that this whole growth wave was powered on petroleum. By the time you get to the 60s

• 24:58Speaker 01

  and the 70s, the major suppliers are now in the Mideast and other countries that had been either overt colonies, formal colonies, or informal colonies of the US, Britain, France. And again, in the 50s, 60s, in the 40s, 50s, 60s, when these deals are being set up, they're happy to get anything. If you're a king Saudi of Saudi Arabia in 1945, and folks are offering you a couple million dollars in royalties, this looks great because you're basically a semi-literate desert nomad. But by the time you get to the 60s, 70s, again,

• 25:39Speaker 01

  the kids of these now rich, newly independent colonial elites who have gone to Harvard Business School and know that they're getting ripped off, coming back and saying, well, we're the major suppliers, we can enforce higher prices and we're going to do it. So cheap oil famously disappears. So.

• 26:02Speaker 01

  The big shock in the, that brings down Fordism is not a regulatory problem. It's revolts actually against the regulatory regime. Oil prices had been regulated by the seven sisters, the seven big oil companies. They captured most of the revenues. But of course, if you're on the other side of that and you're a producer, you want your share. And so you attack the regulatory regime by forming OPEC to regulate production and prices. In the current era, what you can see is consumer resistance and irritation to what Cory Doctorow talks about as enshitification of the internet.

• 26:44Speaker 01

  I will say personally that I largely agree with his argument because my experience using that well-known search engine that we all use has definitely decayed for anything that has nothing, well, aside from its academic platform, general search by the major search engine has definitely decayed. Too many sponsored ads, misinterpretation of search terms. And so you have a lot of anger there and you have a lot of consumer anger at other monopolies. Those of you who had to deal with internet service providers and their customer service,

• 27:26Speaker 01

  of course intuitively understand the problem there. And then finally, growth has been slow since 2010 and growth was already slowing before 2010 and people are not happy about that.

• 27:40Demetri Kofinas?

  So just to clarify a few things.

• 27:42Speaker 01

  Yeah.

• 27:42Demetri Kofinas?

  The argument that the person, I didn't catch the person's name. He calls it enshitification of the internet?

• 27:47Speaker 01

  Yeah, yes.

• 27:48Demetri Kofinas?

  So what exactly is the argument that he's making?

• 27:51Speaker 01

  His argument is that the big internet software companies have steadily decreased the usability and functionality of their platforms in order to maximize revenue from ads and engagement. Again, so I don't use Facebook, so this is anecdotal, but what I hear from people using Facebook is much of their feed has nothing to do with what they're really interested in. So that would be an example of enshitification. And the guy's name is Cory, C-O-R-E-Y.

• 28:27Speaker 01

  Dr. Row, D O C T O R O W.

• 28:32Demetri Kofinas?

  Have you written a book that describes this process that you were just talking about? What sounds a lot like an organism comprised of competing interest groups and imperatives? Is this something that you've written about at length?

• 28:43Speaker 01

  So there's a couple of places where they can find this material. There are parts of this argument in a book called States Versus Markets, which they should wait to buy, unfortunately. This book will be coming out in fifth edition sometime in 2025. If you want to buy the fourth edition, which is a little bit less up to date, that is out there. Other places they can find this material are a whole bunch of articles I've written for American Affairs, Phenomenal World, which is phenomenalworld.org.

• 29:15Demetri Kofinas?

  Maybe I can finagle you into giving me an early copy of that book. We'll see. So I just want to clarify something and follow up with a question related to what we were speaking about before. When we think about Joseph Schumpeter's six big technological developments, the cheap energy source in this case that enabled the post-World War II growth wave, was both US-produced oil as well as oil coming out of the Middle East, correct?

• 29:41Speaker 01

  No, originally it was cheap oil coming out of West Texas. So up until the 50s, the US is the dominant producer of oil in the world. So let me go back one step again. So all of these processes of exhaustion are, I like to say, endogenous, not exogenous. That is to say, it's the success of these growth waves that brings them to an end. And it's the success because insofar as they're powered by some set of cheap resources, again, social as well as material. The success of the growth wave in converting most forms of production to the new mode,

• 30:25Speaker 01

  converting many more users to the new energy source, leads to demand exceeding supply and prices go up or social compromises break down. So, oil production is dominated by the US well into the 50s. But again, the very success of assembly line production in making cars cheaply available to the middle class of the Western world is what leads to oil demand exceeding oil supply at the end of the 1960s, beginning in the 1970s. So, the fact that it's the Mideast at the end is actually a signal that there's a problem because the original cheap resource was located in the US.

• 31:09Demetri Kofinas?

  Just a quick question here. In this case, cheap energy is both an input to the manufacturing process and also an important part of the consumer process. In other words, the people that are actually getting the cars need the oil to be able to drive their cars. Is that typical where we see that cheap energy source being important across the economic stack?

• 31:30Speaker 01

  Yes. Totally, totally typical. Because at the root, I mean, we could say at base, everything is dependent on that energy source.

• 31:38Demetri Kofinas?

  Because it was also, I mean, this is this assembly line process, this continuous flow assembly line production process, really came into being through electrification. Electrification will really enable this in the factory, correct?

• 31:51Speaker 01

  Yeah, so electrification enabled continuous flow production. And electrification is, in some sense, before Ford. You already see electrically driven production processes at the end of the 19th century. And that's what gives you continuous flow production. Classic example here being something like Campbell's Soup. Which we don't think about as a kind of major innovation, but at the end of the 19th century, to have shelf-stable food was a big deal. And Campbell's soup was produced through continuous flow processes. Continuous flow, assembly line production is a different animal.

• 32:32Speaker 01

  And the difference here is, if you think about the production of soup, you're basically dumping a liquid into a can. It's continuous flow because you have machinery to do that, but there's not a lot of parts there. When you have assembly line production, you're dealing with hundreds to thousands of parts. A typical automobile will have around 10,000 parts. Okay? And so this is why it was incredibly important to have the right materials arriving at the right time, in the right quantities, at the right place in the assembly line.

• 33:12Speaker 01

  And this is fundamentally a logistics problem, which again is a social and political problem because that means you need a transportation network. It means you need some kind of regime, some kind of regulatory regime governing relations between companies or inside companies around workplace control, work, control of the labor process. And so electrification obviously is important here, but it's not the only thing that matters.

• 33:44Demetri Kofinas?

  So I think where I might be getting confused, and I'm very sensitive to this because I don't want to get caught in the weeds or confuse listeners, I want to be as efficient as I can here.

• 33:53Speaker 01

  Yeah.

• 33:54Demetri Kofinas?

  Perhaps where I'm getting confused is that I'm thinking that the beginning of this growth wave is in the post-World War II period, but presumably it goes at least as far back as the 1910s and 1920s with Henry Ford's introduction of the moving assembly line at the Highland Park factory in Michigan, around the same time that oil production in the United States began to really take off in the early 20th century. Is that the right starting point?

• 34:16Speaker 01

  Yes, so I mean, two things here. The first is that these growth waves are not, I would say, until the most recent ones, these growth waves typically do not appear everywhere, all at once, every place. They start in one place and then they spread. So the car growth wave, the Fordist growth wave, starts in the US where we already had a tradition of mass production, where we had abundant oil supplies, where we had actually a pretty high penetration of electrical power in the states that were manufacturing centers, and where we had high incomes which would enable people to buy stuff, comma, if they

• 35:01Speaker 01

  had some expectation of continuous employment. And what we add to that in the 1920s, 1930s, are mass consumer credit. Mass consumer credit is an American invention that starts in the 20s, 30s with the car industry. And we add to that this productivity pack, this productivity agreement, where in some companies, you can already see the deal of exchanging managerial control for higher wages happening. Again, for Ford, the iconic example is the five-dollar day, which was not intentionally about creating mass purchasing power, but

• 35:43Speaker 01

  did transfer some of the enormous productivity gains to workers. So this car-based, petroleum-based growth wave starts in the US. It will spread to other places. And again, this is a political process. If you were sitting in Berlin, or Paris, or London, in 1925 or 1930, you know you must have car manufacturing to remain competitive in not only the world market, but also geostrategically. If you can't make cars, you can't make tanks. If you can't run an assembly line, you can't make aircraft. So it will spread in the 20s and 30s because states will be trying to get domestic production of these new commodities.

• 36:33Speaker 01

  And then after the World War, Marshall Plan aid is deliberately targeted to the mass production industries and Marshall Plan aid is deliberately used to expand European and Japanese dependence on oil. So the growth wave is not a spontaneous eruption everywhere. And that makes dating things a little difficult, right? We can't say arbitrarily, well, it's 1910 when Ford implements a continuous flow assembly line production process. We can't say that it's 1945 when the US imposes mass production on Western Europe. But we can say that most of the 20th century is dominated by this growth wave.

• 37:17Speaker 01

  Likewise, if you say, okay, the high tide of the Fordist era is the 1960s, you can go back to the 1960s and say, oh, look, I can already see the beginnings of the information communication technology wave. And you can see it in all kinds of things. Already in 1958 or 1959, the phrase knowledge economy was being used in congressional testimony. And of course, the 1960s are when we get the emergence of the silicon chip, the semiconductor chip.

• 37:55Speaker 01

  And the 1960s are also when we start to get research money directed at figuring out how to do genetic manipulation. Now, that won't come bare fruit until 1973, 1974, when Cohen and Boyer demonstrate recombinant DNA. But again, you can see the beginnings of this. So dating these things is a little difficult because they always overlap. And they overlap in part because fundamentally, people are not stupid.

• 38:29Speaker 01

  And you could see already, you know, both market responses and state responses to the problems that were emerging in the Fordist era. And likewise, you see the same thing today, right? Fracking, which is what leads to a huge explosion of oil and gas production in the US, originates in a Carter, that's Jimmy Carter, 1970s research effort to find more oil domestically to offset the power of OPEC.

• 39:07Speaker 01

  So people are always looking for ways to cut costs and states are always worried about their geostrategic problems. And this typically leads to the early-stage research that then will give birth to the new technologies, comma, if the right macroeconomic policy, regulatory policy, social compromises can come into place.

• 39:34Demetri Kofinas?

  Okay, so just again, as imperfect as it's going to be, just to clarify each of these tech developments in this particular growth wave, we talked about the energy, the production process we discussed, which was really an iteration of continuous flow production. Continuous flow, assembly line production was an iteration of a previous form. The new investment slash mass consumption goods, that basically reflects the consumer-driven growth model, that there was all this demand for things that could be produced through this new production process, is that what that basically describes? Anything from vacuum cleaners to canned foods to whatever? Does that capture all of that?

• 40:11Speaker 01

  Yeah, and I would add to that, that putting in place the new energy and transportation infrastructure also requires massive investments.

• 40:18Demetri Kofinas?

  So that was going to be my next question, because the fourth one is a new mode of transportation. Now, when I think about that in this version of the growth model, I think about the internal combustion engine cars, the ability to drive them as a consumer product, and also the ability to use them to transport the goods of production. When I think about the analog for the growth wave that we've lived through in the last 40 years or whatever, I think about containerization, shipping, global supply chains. So like, I don't, in other words, think of a consumer application for transportation. So do we not need to be so rigid in our understanding of it? Like, how would you answer that question?

• 40:54Speaker 01

  So I would say, don't be too rigid because in some cases, the transport mode overlaps with the consumer good, and cars are the best example, or cars, trucks, where the critical innovation is internal combustion engine powered transportation, there you see an overlap, but you don't always see an overlap. In the late 19th century, one of the biggest transportation innovations was steel-hulled steamships, and that's obviously not a consumer good. So, you know, sometimes it overlaps, sometimes it doesn't.

• 41:28Demetri Kofinas?

  And the railroad too, trains, right, also.

• 41:30Speaker 01

  Right, before that, railroads, yeah, yes.

• 41:33Demetri Kofinas?

  Which also, of course, in that case, had a consumer application.

• 41:36Speaker 01

  Well, you could ride, yes, you could move passengers, but most rail usage was freight.

• 41:41Demetri Kofinas?

  Now, what about corporate organizations or corporate forms? What was, I mean, I associate this period that we're talking about now with the sort of onerous corporate form, the top-down, heavy corporation, very hierarchical, rigid. What was the form before that? How did organizations come together? And just kind of flesh that out for me.

• 42:00Speaker 01

  Okay, so what, when you say that period, what period are we talking about?

• 42:03Demetri Kofinas?

  The period that we're talking about that, again, loosely begins, I guess, around the 1920s, but really comes into full force in the 19, in the post-war period up until the 1970s.

• 42:13Speaker 01

  Yeah, okay. So, at the end of the 19th century, you have corporations that are largely focused on one product, that are often owned by an entrepreneur founder, and that are beginning to become shareholder-owned corporations with dispersed ownership. That model, shareholder-owned corporation with the separation of ownership and management, is what becomes dominant in the early 1900s. And then by the time you get to the post-war period, that has turned into what you're talking about as a highly bureaucratic, centralized, top-down, hierarchical, and here's a word you didn't use, multi-divisional corporation.

• 42:57Speaker 01

  So this is the era in which conglomerates are beginning to form. And those corporations did a lot of value creation internally. So again,

• 43:08Speaker 01

  To take the iconic companies, General Motors, seventy percent of value added, created internally. Ford, about fifty percent. Chrysler, the weakest of the three, about forty percent, created internally. And these corporations also were relatively diversified. You young people, you young people out in the audience won't remember this, but once upon a time, General Motors used to make refrigerators, air conditioners, things like that. Because if you've mastered assembly line production for one thing, you can make other things. And similarly, you have corporations like General Electric that are making everything from plastics to locomotives.

• 43:50Demetri Kofinas?

  So was that a big part of it, the fact that there were economies of scale to be derived from all the capital investment that went into building the assembly line production process? That then the corporate form was partly a reflection of those economies of scale?

• 44:03Speaker 01

  Yes. So Alfred Chandler, the great business historian, says, "Strategy determines structure." So the profit strategy determines the organizational structure. And the profit strategy for these big companies was invest a lot of money in dedicated physical capital to produce, that basically was specialized in producing one kind of good, and use that to become profitable. And the way that that created profits and the way it drove structure looks like this. If you have a big investment in this physical capital, and then here again, this is the important part of the sentence, and you can run it at full capacity, you will be incredibly productive.

• 44:48Speaker 01

  You will have extremely high economies of scale, and you will be able to generate massive profits. Importantly, also, because you have this big investment, and because we don't run factories at three shifts typically, you can also prevent competition, you can prevent market entry by a new entrant. You have the physical plant built. If they want to enter the market, they're going to have to build new capacity. And when they're doing that, you can run your existing capacity with that third shift or with a second shift, flood the market, drive down prices, and this basically, if they're smart, drives your competitors out of the market because they know they can't compete.

• 45:34Speaker 01

  At the new low price point. So that's the profit strategy part. The way that drives structure is what we've already talked about, which is, okay, I've built an assembly line, again, let's say to build cars. But it could also be to build electronics, equipment, aircraft. I've built this assembly line. The car requires 10,000 discrete parts. My profitability is based on running it at full capacity, which means I do not want to stop that assembly line. And again, what that means is everything that's flowing into the assembly line has to be there at the right time, in the right quantities, at the right place, or you can't run that assembly line. That's what drives vertical integration.

• 46:18Speaker 01

  Because you want to be 100% certain that you'll be able to continue to have those parts there. And you can do that one of two ways, right? I mean, you could be Chrysler and you are not generating most of the parts internally. So what you'll do instead is you'll order ahead, you'll stockpile parts. And that works to keep the assembly line running, but it also costs you money. Every dollar you invest in holding inventory of parts is money that you're losing, could be investing somewhere else. So you're losing money.

• 46:50Demetri Kofinas?

  Yes. In these technological developments, some of these are, you know, you could argue whether it falls under people's traditional definition of technology, like a corporate organizational form or new modes of social and economic governance. Something that doesn't really come up, that comes up now as I'm thinking about this, is marketing. Because you have a problem here, which is that you're getting so good at producing goods under this economic model, that you're producing more than what people are willing to consume under the previous paradigm. And so you have to actually convince people that they want things that they may not otherwise want. So how does that fit in? I mean, do we see marketing schemes and organizational forms around marketing and getting people to consume or behave in particular ways change? Not necessarily consumption, in this paradigm it was. But how do we see that? In other words, trying to shape people's behavior

• 47:35Demetri Kofinas?

  in order to accommodate the imperative of the growth model that we're currently living through?

• 47:40Speaker 01

  Absolutely. So the rise of modern advertising and branding is the late 19th century when continuous flow production starts. If you're, again, investing a lot of money in making canned soup, you want customers to recognize and buy your brand. You're not going to produce tin cans with no label because you want your soup to sell so you can run that continuous flow production line constantly. So advertising emerges already, branding, advertising by the 1900s. We have then have this period of the 1950s, 60s, the madman era, when advertising gets very sophisticated. And then the next big shift is what we've

• 48:21Speaker 01

  seen happen in the last 30 years, which is a recognition by some companies that you don't even actually need to produce goods anymore. What you can do is produce brands. And so if you think about a company like Nike, in the old days Nike actually made sneakers. And then what Nike realized, and literally realized, this is what Phil Knight, the former CEO, said in an interview. He said, "I realized we didn't have to make anything anymore. What we were in the business of was making emotions." And so Nike begins subcontracting everything

• 49:02Speaker 01

  and becomes an emotion producer. And the value, again, this is about strategy and structure, the value capture, the profit strategy is that if you control the brand, if you control the emotions, and you can protect the brand with an intellectual property right, which is what a trademark is, then you don't actually need a vertically integrated structure. You can simply have other people make the goods and slap your brand on it. So, you know, you could walk into Walmart and buy a $10 pair of sneakers with no brand. And you can walk into Walmart and buy the Nikes for $100 or $200. And they're made by the same companies in Indonesia, China, Thailand, by Korean subcontractors

• 49:47Speaker 01

  and by a big Taiwanese firm. And, you know, again, what's the difference, right? The difference is the brand that makes the profitability here. So we're now in an era in which branding and advertising have enabled completely different corporate structure that's not vertically integrated, at least not legally, right? So out there in the world is a big company called Poo Chen, P O U C H E N. It's a Taiwanese company. It manufactures a lot of clothing, a lot of sneakers. It does it on a contract basis for a lot of brands. You never see Poo Chen sneakers in the stores with a Poo Chen brand. Now theoretically, from a legal point of view, Poo Chen is separate from Nike.

• 50:32Speaker 01

  Poo Chen is separate from Adidas. But functionally, de facto, these companies have a lot of control over what Poo Chen does.

• 50:41Demetri Kofinas?

  This is so interesting. So we'll have a chance to dig in that a little bit in the second hour, but I also want to make sure that we have enough time to transition into thinking about what the new paradigm will look like.

• 50:50Speaker 01

  Sure.

• 50:50Demetri Kofinas?

  But I think what you're describing here is sort of the franchise model, right? It's the tripartite structure where you have three different types of firms. The lead firms, which have all the IP. The second layer firms, which are more capital intensive. And the third layer firms, which are more labor intensive and produce undifferentiated goods and services. Last thing, just to tie off this part of the conversation before we move to the second hour. The sixth big tech development that falls within the Schumpeterian growth wave is new modes of social and economic governance. We've talked around this a bit, but just kind of just nail this down for me or summarize it for me. What were those new modes of social and economic governments that came about around the fourth growth wave we're describing here?

• 51:28Speaker 01

  Sure. In the fourth or fortest growth wave, the new form was basically nuclear families living in suburban housing.

• 51:37Speaker 01

  With some degree of guaranteed long-term, if not indeed lifetime employment, with a stay-at-home mom organizing household production and consumption since dad was busy at work and couldn't actually do consumption activities. So that's a new form of social organization. You can see that breaking down, of course, in the seventies with divorces. And as we go into the the modern era, what you end up with is lots of single people, lots of folks moving back into cities, or anyway, parts of cities, in single-person households, delay of marriage, delay of childbirth. So it's a whole different social form.

• 52:21Speaker 01

  And so these things, though, are very difficult to predict because, I mean, if we're thinking about where we're going in the future, these things are very difficult to predict because, you know, you're dealing with human beings and their emotions. And again, the mindset, their sense of what's the normal way to do things, shapes what they do. So we know from polling data that if you asked women in the 1950s and early 1960s, do you expect to be working at age 35, maybe 25 or 30% of them would say yes. If you ask women today who are in their twenties or early thirties, do you expect

• 53:04Speaker 01

  to be working at age 35, the vast majority will say yes, right? So that's the kind of different social arrangement, right? We take for granted these days that most households will be dual-earner. And I say that despite all the influencer trad-wife stuff that's going on. You don't see that in the numbers anywhere, or at least not yet. So those are the kinds of big social things.

• 53:27Demetri Kofinas?

  In terms of governance?

• 53:29Speaker 01

  In terms of governance? Macroeconomic governance or governance of the social stuff?

• 53:33Demetri Kofinas?

  Well, what's the difference?

• 53:35Speaker 01

  So macroeconomic governance is what the government is doing to balance supply and demand, but the social stuff is lifestyle stuff. Now, they do intersect also. So if the government comes along, as it did in the 1940s, 50s and says, we'll offer you an FHA subsidized mortgage in which the funding for the mortgage will come out of the federal home loan banks through some savings and loan bank, which is backed up with deposit insurance. You can see that that does shift consumption towards buying houses. And so in that sense, the macroeconomic governance does affect what people do, but...

• 54:16Demetri Kofinas?

  My question, though, and I totally understand that, but just in terms of understanding how that economic governance dovetails or is influenced by what's happening in the growth wave. So I understand sort of your example with the social changes, but like what types of changes happened on a governance side that were driven by or meant to accommodate the growth wave that was underway?

• 54:42Speaker 01

  Right. Okay, so the government, from the 1930s forward, most US government policy is oriented towards stabilizing prices of critical inputs to the economy. So Agricultural Adjustment Act stabilizes food prices and agricultural raw materials. Federal subsidies for the rollout of electrical transmission and generation help electrify households. Again, obviously, it doesn't do any good to buy a washing machine if you don't have electricity. AT&T has a regulated monopoly, rolls out telecommunications. Federal highway system is being built. And in addition to that, the federal government is subsidizing states and localities in building roads.

• 55:27Demetri Kofinas?

  That's actually a really great example, right? Because Eisenhower's, what was it? It was the National Defense Highway Act. That facilitated and enabled the proliferation of automobiles and trucks to ship goods and supplies across the United States. It wasn't just a defense policy. It also had real economic benefits.

• 55:45Speaker 01

  Yeah, but I would say it was actually done for military purposes. But yes, it has as secondary, important secondary consequences. It makes automobilization of the economy a lot easier. The non-highway parts are the critical thing. Again, you can run a highway as far as you want, but if there's no on-ramp, off-ramp connection to local road networks, you're not getting anywhere. So federal subsidies to states are significant here. I will say, right, though, I mean, again, this is like a bit the, you can lead a horse to water, but you can't make them drink. You can build highways, you can offer subsidized credit for buying houses, but the big social

• 56:25Speaker 01

  impetus is, again, reactions to the experience of the 1930s and the Second World War. You have a whole extended generation of people whose life experience was, things suck. I'm living in my parents' basement, or I'm living in my parents' home. I can't get a steady job. And then the war happens, and a lot of those things evaporate. You do get a job, you do get steady employment, but also, you know, you see people around you being killed. In all these societies, the whole generation of men from 18 to 30 something, or even 40, are being drafted.

• 57:04Speaker 01

  In the US, we draft, out of a population of 160 million people, we draft 16 million men. So that means out of a male population of 80 million, we're drafting 16 million, one in five. And then start to think about children, old people, workers at home. So a huge chunk of this generational slice is being drafted. And the war's over, they want normalcy, they want jobs, they want a quiet life. So there's an important social side here that intersects with the state policy.

• 57:38Speaker 01

  And state policy could have done different things, right? American policy built single-family detached suburban housing. But other countries built apartments. Sweden famously built net 660,000 apartments in 10 years. And that was the state doing that. And in Japan, famously, Hitachi, Toyota, et cetera, were building apartments for their workers. It's a different way of doing things. But again, the impetus, social impetus was, I want a normal life.

• 58:09Demetri Kofinas?

  So Mark, one of the things, we're going to move to the second hour. One of the things I also want to ask you that came in for me while you were talking now was the impact of geopolitical disruptions like war or breakdowns in trade like we saw in the 1930s, what effect that has on a growth cycle. And of course, we're going to have a chance to go through the information and communication technology plus biotech 1.0 growth wave. We won't be able to get into as much as this one, we won't need to. And then we'll have a chance to talk about kind of what's emerging. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Mark,

• 58:50Demetri Kofinas?

  head over to hiddenforces.io/subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Mark, stick around, we're going to move the rest of our conversation onto the premium feed.

• 59:15Speaker 01

  Sure.

• 59:17Demetri Kofinas?

  If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stilianos Nukolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at Kofinas and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.