Humanity is currently facing the same problems as at the end of the second industrial revolution: falling stock market indices, soaring unemployment, skyrocketing corporate and government debt and the poor financial positions of banks. Every production phase, or every society or other human phenomenon, goes through a so-called transformation process, a transition.
This article uses such a transition to indicate where we stand with our current society.
Third Industrial Revolution
Looking at the characteristics of the phases in which social transformation processes take place, it could very well be that we are now at the end of the so-called third industrial revolution. Transitions are generally social transformation processes that cover at least one generation. Transitions have (Source: Prof. Dr. Ir. Jan Rotmans) the following properties:
- it concerns a structural change in society, or a complex sub-system thereof;
- there are interacting and mutually reinforcing technological, economic, ecological, socio-cultural and institutional developments at different scales;
- it is the result of slow changes (developments in stocks) and fast dynamics (flows).
Examples of historical transitions are the demographic transition, urbanization and the transition from coal to natural gas, which implied a transition in energy management. A transition is not predetermined, because during a change process there is always a question of adapting to, learning from and responding to new situations by responding persons, groups and authorities. A transition is therefore not a rule of law.
Four transition phases
In general, transitions describe the S-curve and four transition phases can be distinguished:
1. a pre-development phase of dynamic equilibrium in which the status quo does not visibly change;
2. a 'take-off' phase in which the change process starts because the state of the system starts to shift;
3. an acceleration phase in which visible structural changes are taking place through a cumulation of socio-cultural, economic, ecological and institutional changes that interact with each other; the acceleration phase involves collective learning processes, diffusion and embedding processes;
4. a stabilization phase in which the speed of social change slows down and a new dynamic equilibrium is reached while learning.
Three drastic economic transitions
If we look at the role of business organization and production technology in the economy of the last two centuries, three major transitions have taken place:
1. The first industrial revolution
The first industrial revolution lasted from about 1780 to about 1850. A characteristic feature was the transition from small-scale manual work to mechanized production in factories. A major driver in this transition process was the steam engine, which also revolutionized the transport sector through applications in the railways (steam train) and shipping (steamship). The first industrial revolution was concentrated in the cotton industry. Because steam engines ran on coal and were made of iron, coal mining, the iron industry and machine building also flourished.
The beginning of the end of this revolution was 1845 when Friedrich Engels, son of a German textile baron, described the conditions in which the workers of England lived and worked in "The Condition of the Working Class in England."
2. The second industrial revolution
The second industrial revolution lasted from about 1870 to about 1930. Characteristic was the further mechanization through the introduction of the conveyor belt, the replacement of iron by steel and the development of the chemical industry. In addition, coal and water were replaced by oil and electricity and the gasoline engine was developed. While the first industrial revolution was started by (sometimes accidental) inventions of amateurs, the second industrial revolution was actually started by companies that invested a lot of money in professional research ('research') into new products and production methods. In order to have sufficient capital, small companies merged into large-scale companies, led by professional managers. Shares were also issued. These developments led to the transition from the traditional family business to the limited liability companies and multinationals. The revolution ended after the 'roaring twenties' in America, with the New York stock market crash in 1929.
3. The third industrial revolution
The third industrial revolution started in about 1940 and is now coming to an end. The United States and Japan have been at the forefront of computer development. During the Second World War, the US worked feverishly on military applications of computer technology. After the war, the US space program expanded the number of applications. Japan specialized in the development of the industrial application of the computer: the robot. Meanwhile, computer and communication technology plays an irreplaceable role in all parts of the world. The acceleration phase started around 1980 with the advent of the microprocessor.
Consequences of the three industrial revolutions
The first (and the second revolution) transformed an agricultural society into an industrial society, in which mechanization (eventually) relieved man of physical labor. The craft industry could not compete with the factories that brought products of the same or even better quality to the market at a lower price. As a result, many craft businesses went bankrupt and the former workers in the industry went to work. The consequences of industrialization could be seen in the process of the rapid urbanization of previously relatively small villages and towns where the new factories were built. These turned into dirty and unhealthy industrial cities. Yet the people of the countryside were forced to flock there for work. This gave rise to a new social class: the workers, or the industrial proletariat. They lived in overcrowded slums in poor housing with hardly any sanitary facilities. Average life expectancy was low and infant mortality was high. The elite accepted the factories' filth as the inescapable price of their success. The chimneys were symbols of economic power, but also of social inequality. This social inequality is reflected after every revolution. The gap between the bottom and the top of society is getting very big.
Ultimately, there will always be counter-reactions to narrow this gap again. It can be argued that the Industrial Revolutions created the conditions for a society with little or no poverty.
The third revolution turned an industrial society into a service society. Whereas mechanization relieved man of physical labor, the computer relieved him of mental labor. This revolution caused the more and more redundancy of lower functions in industry and the emergence of completely new functions in the service sector.
Industrial revolutions and stock market indices
The Dow Jones Industrial Average was first published halfway through the second Industrial Revolution, in 1896. The Dow Jones Industrial Average (DJIA) index is the oldest stock index in the United States. This was a direct average of the prices of twelve stocks.
A select group of journalists from The Wall Street Journal decide which companies are part of the world's most influential stock market index. Unlike most other indices, the Dow is a price-weighted index. This means that stocks with a high absolute stock price have a major impact on the movement of the index.
The S&P index is a market value weighted index. The 500 largest US companies by market capitalization are included in this index, which is compiled by the rating agency Standard & Poor's.
What does a stock market index such as DJIA and S&P 50 actually say?
In many graphs, the y-axis is a fixed unit, such as kg, meter, liter or euro.
This also appears to be the case with these index graphs, because on the y-axis the unit in points is used. Nothing could be further from the truth! An index point is not a fixed unit in time and you should therefore not attach any historical significance to it.
An index is calculated on the basis of a basket of shares. For each index this is done according to a certain formula and the outcome of the formula yields a number of points. A big mistake many people make is that value is attached to these graphs. However, these graphs are very deceiving.
Basket of shares
An index is calculated on the basis of a basket of shares. For each index this is done according to a certain formula and as a result you will receive a number of points. However, that basket of stocks changes regularly with each index. The value of another basket of shares is therefore measured for the new period. It is of course strange that you project the different baskets as the same unit.
After a period of 25 years, the value of a basket of apples is compared to the value of a basket of pears. There are currently only six of the 30 original companies in the Dow Jones compared to when (1979) the acceleration phase of the last revolution began.
It gets even weirder when every basket transition also changes the formula used to calculate the index. This happens because the index, the result of the two formulas of both baskets, must yield the same result at the moment of change. After all, the index graph of the two time periods must match. For example, with the Dow Jones, all the prices of the thirty Dow stocks are added together and then divided by a number. Due to changes in the basket and due to stock splits, the divisor is constantly changed. The divisor is currently 0.132319125, but in 1985 the divisor was more than one. An index point in one period is therefore calculated in a completely different way than in another period.
Dow1985 = (x1 + x2 + …… .. + x30) / 1
Dow2009 = (x1 + x2 + …… .. + x30) / 0.132319125
There have been many stock splits in the 1990s. To keep the fraction the same, both the numerator and the denominator of the fraction have been changed. A dollar increase of the basket in 2012 thus provides de facto 7.5 more index points than in 1985. As there have been quite a few stock splits in the 1990s, this is probably why the Dow Jones is nearly exponential during this period. increased.
Currently, the Dow stands at 13207. Using the 1985 formula, the index would now be 1760.
Constantly changing composition
The strangest thing is, of course, the ever-changing composition of the basket. In general, when changing the basket, companies that are in a stabilization phase or the deterioration phase of their cycle are removed from the basket. Companies that are in the 'take-off' or acceleration phase of their cycle are added. The chance that the index will rise after the change in the basket and the formula is of course many times greater than that the index will fall. You do not need to use a probability calculation, especially if this method is applied in the acceleration phase of a transition. Since 1980, seven ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft), the engines of the last revolution have been added to the Dow Jones and five financial institutions, playing an important role in every transition.
Basically a pyramid scheme has been created. The index evolves positively as long as companies that are in the 'take-off' or accelerating phase of their cycle are added to it. At the end of a transition, however, this will decrease. This means that the baskets will be reset less and less.
Will Stock Market Indices Fall Further?
Determining stock market index values and “basket” resets as described above and displaying indexes in historical charts are useful indicators to indicate the stage of an industrial revolution.
The indexes indicate that the third industrial revolution is clearly in the saturation and decline phase. This phase is characterized because the market is saturated and competition is increasing. Only the strongest companies can compete or take over the competition (think of the acquisitions that Oracle and Microsoft have made in recent years). Under the hood, there is relatively little technical news under the sun in the IT country, although the marketing machines from America want us to believe otherwise.
Many new companies emerge in the pre-development and take-off phase of a transition. It's a divergent process. Financial institutions in particular play an important role. After all, a lot of funding is needed at this stage. The graph of the wages of the financial sector therefore shows the same s-curve as for both revolutions.
Investors get euphoric when they hear about mergers and acquisitions. In fact, mergers and acquisitions represent the converging processes at the end of a transition. From an objective point of view, every merger or acquisition is an opportunity to produce more efficiently, but also a reduction in economic activities. This becomes painfully clear when we look at the unemployment rates of various societies.
New industrial revolutions arise from new ideas, inventions and discoveries, or new knowledge or insights. The question is whether we as humanity have reached a saturation point here as well. There will be fewer and fewer companies in the 'take-off' or acceleration phase that can replace the companies in the stabilization or decline phase in the index basket.
Is history repeating itself?
Humanity is currently facing the same problems as at the end of the second industrial revolution, such as falling stock market indices, soaring unemployment, skyrocketing corporate and government debt and the poor financial positions of banks.
History has shown that five pillars are indispensable for a stable society: food, safety, health, welfare and knowledge.
Transitions are initiated by inventions and discoveries, thus new knowledge of humans. New knowledge in turn influences the four other components in a society. Few new inventions or discoveries are currently being made. So the chances of a new industrial revolution in the short term are not very high.
At the end of every transition, the pillar of well-being is endangered. We have seen this after every industrial revolution. The pillar of well-being of a society is in danger of falling again. History has shown that the collapse of the pillar of welfare always results in revolution. Due to the high unemployment after the second industrial revolution, a new transition has been initiated by many societies, namely the creation of a war economy. This economy flourished especially in the period 1940 - 1945. Societies will again have to make a choice as to which transition will be initiated. Anyone who has no knowledge of the past has no future.
Current crisis: a regularity?