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Thursday, May 25th, 2006
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Revolutionary Wealth

by Alvin Toffler

Gee Whiz

A review by Robert M. Solow

I.
Reading this book is a lot like watching the preview of a new action movie: one rapid-fire, fragmentary scene after another, loud, flashy, logically unconnected to the one that came before or the one that comes after. It is very exciting, but when it is over you have no clear idea what the movie is actually about.

Of course the book is longer than a preview, though it remains heavy on coming attractions. There are fifty chapters, averaging seven or eight pages each, and composed mainly of factoids -- masses of factoids. Most of these snippets are blue-sky technological. But not all: one also learns that "a Tokyo-based company formed by designer Rei Kawakubo and her husband, Adrian Joffe, has opened a store in Berlin that, they claim, will exist for only one year, and will be closed down after that, whether profitable or not. The idea is supposed to reflect the ever-shorter shelf life of fashions, movies, music, and celebrity." It is never mentioned again.

In fact, Revolutionary Wealth stands as a tribute to the authors' clipping service and filing system. Chapter eight, for example, the source of that quotation about the disposable store, is nine pages long and has thirty-three endnotes. The endnotes contain thirty-nine references: twenty-eight to articles in newspapers (from the Shanghai Daily to the Chattanooga Free Press) and magazines, three to books, four to websites, two to radio or television broadcasts, and two to interviews. This is not atypical.

As a sample of the method, here is how chapter twenty-four treats health care in eight pages. This is a serious issue that has been the subject of serious thought, but not here. The chapter begins with a scare: "Health care is where the most spectacular new technologies are matched by the most obsolete, disorganized, counterproductive and often deadly medical institutions. If the term deadly seems excessive, think again." Thousands of people die each year from infections contracted in hospitals and from medical errors. Even when it comes to actual illness, the old communicable diseases are now much less important than ailments, such as cancer and heart disease, that are clearly affected by behavior. They are also diseases of old age. No health care system has been designed for this situation. Something "far more drastic than mere reform" is needed.

Then comes a recital of the substantial fractions of GDP spent on health care by major advanced economies. "The number for the United States exceeded 14 percent. How far can that number grow before the bankruptcy lawyers arrive?" The reference to bankruptcy is exactly wrong and unhelpful. An individual hospital can go bankrupt; but presumably a large and growing volume of health care expenditure makes that event less likely, not more. Much of the spending in question is government-financed, and there bankruptcy is not an issue.

The Tofflers then point out, quite correctly, that these figures understate the resources actually devoted to health care, because they do not capture the large volume of care delivered informally at home, by relatives and friends. This has always been the case, but the share of home health care may have increased lately, and it has certainly become more sophisticated. Much serious information is available to households via the Internet, and new technology has allowed much more to be done in the home, a prime example being the case of diabetes.

Next comes a brief catalog of farout health care stuff that is available, or may some day be available, in your very own home for your very own use, from a "'finger goniometer' for measuring range of motion in metacarpophalangeal finger joints" to automatic urine analysis with every flush. (Every flush? Geez, Louise.) Naturally there is a take-back sentence, not the only one in the book: "As with any such forecasts, not all of these products will ever see the light of day, or prove cheap, practical and safe. But they represent only the first drops of a technology torrent to come. It will change the economics of both self-care and paid care." So we pass from empty concreteness to vague generality.

The message of the chapter appears to be that we should think about educating our children to be more knowledgeable and skillful at home health care, thus solving both the health care crisis and the educational crisis with one revolutionary stroke. I am not sure that this amounts to something "more drastic than mere reform."

The Tofflers are big on the non-market economy, the large volume of valuable productive activity that goes on in the home, or even outside the home, but is not bought and sold in any market and thus never makes it into the National Income and Product statistics. It covers a broad range, from the home health care just discussed, to cooking and cleaning, to do-it-yourself projects, to volunteer work in the community, to newer activities conducted via the Internet. They think it is very important, very large, and getting larger (though they would not dream of trying to measure it). And they seem to think that they are rescuing this concept from "an enormous, gaping black hole in standard economics, which partially explains why even top-league economists and scholars have so poor a record in forecasting."

Well, actually, standard economics has not ignored non-market work, and anyway that is not why forecasting is so poor. The importance of the non-market economy has been talked about for a long time. When national income accounting was being invented, some seventy years ago, there was active discussion about where to draw the line. Rents were imputed to owner-occupied homes, but not to the services of housewives, mainly for measurement reasons. Generations of bold teaching assistants have explained to their elementary classes why, if a prostitute marries her favorite client, the measured national product falls.

The Tofflers have come across Gary Becker's groundbreaking paper of 1965, "A Theory of the Allocation of Time." They seem to think that he was discovering non-market work. What he was actually doing was demonstrating how it could be brought into the analytical fold, alongside market activity, using the tools of "standard economics." They also think that the fact that Becker's Nobel Prize did not come until twenty-seven years later is evidence of the obtuseness of economists. But Becker's talent was recognized from the day he graduated from Princeton; there was never any chance that so bright a light would be hidden under a bushel. A little research would have turned up a relevant fact: taking 1992 and the five years before and after, there were eighteen Nobel Prize-winners in economics, of whom Becker was the fourth-youngest. This is utterly trivial, of course, but it is an indication of the carelessness of thought in this book, and the sheer ignorance on which the frequent economist-bashing is based.

It is a nice question whether the share of non-market work in the modern economy is rising or falling. As the Tofflers point out, innovations in information and communications technology have allowed a lot of valuable economic activity to be decentralized and to escape the market. This factor may be dwarfed, however, by the massive movement of women into the market economy. The diaper service and the disposable diaper have replaced home diaper-laundering; fast food, restaurant meals, and semi-cooked supermarket fare have replaced home-cooked meals; and various forms of paid child care have replaced mom staying home with the kids. The whole point of Becker's work, which launched a small industry within economics, was to suggest a way to think systematically about just those decisions and others. That sort of thing leaves the Tofflers cold.

II.
Now you know what Revolutionary Wealth is like. But what is it about? The story starts with the commonplace that modern society is in the midst of a "revolutionary wave of change in wealth creation." This is what has sometimes been called the post-industrial society, or the knowledge-based economy, or the information-technology revolution. Its origin seems to be mainly technological, along with the human tendency to prefer the consumption of relatively fewer material goods and relatively more services as income rises. But there are also broad cultural and political implications. The pace of change is accelerating dramatically, to the point that our institutions are falling behind and failing to cope. How the Tofflers can speak so confidently of acceleration -- an increase of velocity -- when they never measure anything is an interesting question. I will come back to this pedantic point in a moment.

Throughout the book, there are weighty references to "deep fundamentals," presumably meant to be the glue that holds the factoids together. The deep fundamentals are time, space, and knowledge. The problem is that nothing very "deep" seems to be happening here. It is certainly true, for instance, that computer technology has made it possible for many economically and socially significant activities to be carried on at much higher speeds than used to be available. Communication can be virtually instantaneous. This means, in a world of services, that some products can be delivered at the same high speed. Other activities continue to take more time.

The Tofflers call this development "desynchronization," and they say that it puts pressure on managements to dovetail the different activities under their control. Social institutions designed to deal with different timing relationships may have to adapt to the newer conditions, and thus added frictions arise. To take another example, occupational skill requirements may change quickly, while educational curricula are notoriously sluggish. All this is moderately interesting, but it is merely pretentious to describe it as having something to do with the "deep fundamental of time."

Similarly, the shift from goods to services (as well as improvements in transportation technology) has vastly enlarged the geographic scope of economic activity. The relocation of call centers from the United States to India is a well-publicized example. Even within the realm of tangible goods, it has become possible to eat Peruvian-grown asparagus in New York in the winter, or to assemble parts from all over the world to create a finished product in China and ship it anywhere. Does it add anything to say that we are changing our relation to the "deep fundamental of space"? It seems more informative to observe that the spatial distribution of economic activity has become broader and flatter.

"Knowledge" is a much more complex affair, if only because it is less Euclidean than time and space, less open to quantification and comparison. There is much to be found out about the circumstances in which useful (or useless) knowledge is produced and consumed. Again I see no advantage in calling it a "deep fundamental" on the same footing as time and space; but by this point you will have grasped that the phrase is there mostly for show. In the end, the Tofflers can do no better than portentous but empty remarks such as this one: "And when we add these (changes in handling data) to the crises in economic thinking and science, it becomes evident that we are engaged in the fastest and most profound restructuring of knowledge in history, with implications reaching far beyond the economy to culture, religion, politics and social life. At the same time we are making the wealth of individuals and nations alike more dependent than ever on that growing global knowledge base."

Chapter twenty-five is a pretty good one, in five pages. It makes one point, with examples: information and communications technology has allowed and encouraged many service-sector companies to shift part of the workload from paid employees to consumers. The examples are standard. ATM access replaces tellermediated bank transactions (but also allows you to get cash in the middle of the night). You can order airline tickets and books online. I need not remind you that "All of our 'customer advocates' are busy tending to other customers. Your call is important to us. Please stay on the line. ... " And this gets registered as an improvement in the industry's productivity!

I was going to say that work gets shifted from paid employees to unpaid consumers. The Tofflers realize that in principle, if this shift reduces the seller's costs, competition should lead to lower prices for customers, who are thus paid indirectly for their time and effort. They beg leave to doubt that competition has been sharp enough to enforce this indirect payment. They may well be right. The least they could have done is to scour the business literature to see if any mere academic had actually looked at the data. How much have banks spent on acquiring and maintaining ATMs? How does that compare with their saving of labor cost? (One of their endnotes, not discussed in the text, seems to hint that banks' return on investment may have fallen since ATMs were introduced.) What has happened to the implicit price of banking services (or telephoned catalog orders) since the introduction of ATMs (or catalog call centers)? Unfortunately, that is not the way the Tofflers work. They are content with a solemn and empty reference to the "deep fundamental" of time, and an ominous warning that more of this may be yet to come, with unspecified but no doubt sensational consequences.

A serious book could be written about the conjunction of fast technological (or other) change and the much slower reaction of regulatory arrangements and other social institutions. Whether it would be a story of fairly successful adaptation or of dangerous malfunction would remain to be seen. Since there seem to be no obvious general principles, case studies might be the way to go. How did central banks adapt to the internationalization of capital markets and their greater volatility, indeed in part by the advance of communications technology? How did the health care system adapt to the AIDS epidemic? Or, to take a current example, how did the institutions that are supposed to guarantee or regulate individual privacy deal with the enormous increase in the public and private capacity to eavesdrop?

Clearly there are many examples of this kind, and some have worked out better than others. The Tofflers' method is not to ask that question at all, but rather to claim very excitedly that everything is now happening faster and more drastically and that everything is up for grabs. And this brings me back to the question of measurement. Is the pace of change accelerating? If it is, by how much? Is it really unprecedented? This kind of sensationalism has its risks. I am reminded that in the late 1950s and early 1960s there was much alarmist talk about an "Automation Revolution." (The phrase "The Triple Revolution" was used, but I cannot remember what the other two aspects were. That literature was also rich in factoids-to-be.) The imminent danger was that accelerating productivity would cause human labor to become essentially obsolete. There would be no more jobs, and our society provided no substitute source of income.

Neither the protagonists of this idea nor the skeptics had any inkling that the late 1960s and early 1970s would bring just the opposite, a dramatic deceleration of productivity that would last for a quarter-century. The unexpectedness of that slowdown was probably an important cause of the inflation of the 1970s. And this history suggests a closer look at the growth of productivity during the past fifty-plus years. Productivity is only part of the story, but it is an important part and it has been carefully studied. The Tofflers' dizzy factoids go well beyond productivity to include all sorts of more or less mind-boggling lifestyle changes, some of them unquantifiable, some of them quantifiable but unquantified. Still, if we are talking about a revolution in wealth, all this turmoil must leave tracks in the evolution of productivity.

Economists have two standard concepts for measuring productivity. One is simply labor productivity: how much output -- goods and services -- the system can turn out for each hour worked. This is the ultimate source of improvements in the average standard of living. An analytically more sophisticated concept starts with the growth of labor productivity and then strips off the part of it that can be traced to identifiable and measurable sources: the two most important of these are sheer physical-capital accumulation (an hour's work with a shovel moves less earth than an hour's work with a backhoe) and the improvement of skills through education and training, sometimes called human-capital accumulation (a skilled data-entry clerk will produce more in an hour than a raw trainee). These two sources are obviously related: skill is needed to manage and to operate up-to-date capital equipment. The remaining growth of productivity, known as total factor productivity, can be attributed loosely to technological change, including organizational improvement.

So what does the record show? Between 1950 and 1973, labor productivity (in private non-farm business) grew at 2.94 percent per year. Thus in 1973 an average hour of work produced 95 percent more output than in 1950. Between 1973 and 1995, the growth rate of labor productivity fell by half, to 1.47 percent per year, so that labor productivity was only 38 percent higher at the end of the period than at the beginning. Between 1995 and 2004, the growth rate returned to 3 percent per year, almost exactly where it had been in the 1950s and 1960s.

Some of that growth in labor productivity came from "conventional" sources, so total factor productivity grew more slowly: 1.95 percent per year in 1950-1973, 0.56 percent per year in 1973-1995, and back to 1.57 percent per year in 1995-2004. The slowdown of which I spoke earlier is clearly visible. Notice that the conventionally caused growth of labor productivity was about 1 percent per year before and during the slowdown; the deceleration was entirely centered in total factor productivity. The period since 1995 looks much better, though the advance of total factor productivity appears to be a bit slower than in the first postwar quarter-century, 1950-1973. This is a complex measurement problem, so no one should take the last decimal place too seriously.

It is generally agreed that the revival of productivity growth since 1995 mainly reflects the delayed effects of improved information technology and communications technology. Perhaps unexpectedly, much of it has come from dramatic improvement in the production of computers and related equipment, rather less from their use. It is hard to find the Tofflers' Gee Whiz revolution in these pedestrian data. At least so far as production matters, we are really not outside the range of past experience. But not to worry: the world is full of Gee Whizzes. The trouble is that merely counting them is not a useful guide to the seriousness and the location of social tension and change and opportunity. The Tofflers do not seem to understand this. That is why one can say of this book what Karl Kraus said of psychoanalysis: it is the disease of which it purports to be the cure.


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