Prepare for an economy that is set to be turned inside out

Big, I mean really big, changes are afoot. Investors and Joe Public must understand what’s going on, their survival depends upon it.

Article updated: 3 January 2020 12:00pm Author: Michael Baxter

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Doctor Jeffries was one of my economic lecturers when I studied economics way back during the early 1980s. He taught Comparative Economics, which meant studying the Soviet Union economy. We learnt how the Soviets didn’t use the price mechanism to match demand and supply, rather central planning was used instead. As a result there were massive shortages of some goods, abundance in the supply of others. Factory managers were poorly incentivised too, meaning that factories often ended up getting detail wrong, they met targets by producing goods that were not necessarily fit for purpose.

Yet, and apologies if I do him a disservice, this was rather a long time ago and my memory may be playing tricks, but I seem to recall that my lecturer dismissed talk that the Soviet economy could collapse.

The Soviet Union could not keep up with US military spending. There are lots of theories as to why, but underpinning it all was pure inefficiency. The Soviet Union could not keep us with US military spending because its economy was not so efficient.

Of course, everything changed. Communism was defeated, Francis Fukuyama famously hailed the end of history, and the ideology we call neoliberalism reigned supreme.

Nineteen years later, we had the financial crisis, capitalism appeared to totter but central bankers and finance ministers rode to the rescue, like the seventh cavalry coming over the hill. Ever since then, things have looked different.

But two forces are set to combine. The impact will be enormous, probably the greatest economic change of my lifetime, perhaps longer.

The two forces are technology and climate change.

Technology provides the means, you could even call it the carrot, and climate change provides the imperative, the stick.

Climate change means we simply must change. We have to change the way we consume.

Within the energy sector, renewables are winning. The speed with which their price is falling means the hegemony of fossil fuels is ending. Already, wind and solar is the most cost effective means of new energy production in many parts of the world. But the cost of renewables will continue to fall in parallel with the falling cost of energy storage. At the moment, the carbon footprint of lithium ion energy is quite high, but it is falling, indeed it is falling fast. To win a war, you sometimes have to concede ground, while you re-group. Lithium ion batteries as they currently stand are not ideal, but in order to develop batteries that are optimal you have to improve, and that means starting with suboptimal products.

But artificial intelligence (AI), and the Internet of things supported by 5G, change the outlook. Take energy. AI can be used to more efficiently channel energy, for example at times when it is windy or sunny, when wind turbines and solar generate more energy than we currently use. AI and automation technologies could ensure surplus energy is used to heat up storage heaters, create ice for air conditioning, desalinate sea water, charge neural networks and power 3D printing.

AI combined with the internet of things could prove to be the most efficient way of marrying supply and demand ever invented — even more efficient than the price mechanism. This means central planning may come back into vogue, or it may mean that the price mechanism in combination with AI could simply become more efficient.

However, there is a missing part of the story — waste. The economy is inefficient. Cars are parked for 95 per cent of the time. Food goes uneaten at a time when others go hungry. Clothes are worn for a handful of times before being binned — a report on the BBC this morning stated that less than one per cent of UK textiles are recycled. The same report warned that a polyester shirt has a 5.5kg carbon footprint. (According to UK parliament.)

In response we see new models, largely supported by AI and other digital technologies to make their operation more efficient. The Uber type business model is slowly evolving to create car sharing — something that will develop super-fast as electric cars and then self-driving cars become established. Clothes sharing is becoming fashionable, the market for second hand clothes is developing. And before you say ‘this is nothing new’, and refer to jumble sales, let me quickly add that digital technology is transforming these kinds of operations. Indeed, new clothes sharing services are more akin to Airbnb than jumble sales. Smart phones change everything — almost everything.

Technology is making all this possible, climate change is making it essential. We have the technology to win the battle against climate change; we can only lose the battle by clinging to the old fashioned way. But if we do lose the battle, the consequences would be horrendous. Okay, sure, these consequences may not fully unwind in my life time, but they could unwind in the lifetimes of my as yet unborn grandchildren. And I care about that, I think most people do.

On the other hand, consider the implications. The modern economy thrives on waste, on getting us to buy things we don’t really need.

Imagine the consequences for fashion. Imagine the consequences for retailers like ABF subsidiary Primark if we move away from disposable clothing.

The economy will look very different in 2030. Companies that provide the technology to make this difference possible will thrive. Companies that produce products that will be affected, but understand the changes that are afoot and rapidly learn to embrace them, will survive and in some cases boom. Companies that resist will go bust. Workers who fail to re-train will be out of work. Investors who fail to ride with the changes will lose their shirt, whether it is made of cotton or polyester.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

 

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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