We're living in two economies, and they are tearing us apart

By William H. Davidow and Michael S. Malone

Hidden behind the good economic news is a disturbing new phenomenon – one more far-reaching — and disturbing — than the latest up or down of the business cycle. It is that our economy is now increasingly bipolar, with a traditional economy at one end and a virtual one at the other.

We see this most vividly during the holiday shopping season, where Cyber-Monday Web sales increasingly outstrip Black Friday in-store sales three days before. But this is only the most celebrated manifestation of this change in the economy. The reality is far more pervasive — and it portends a massive transformation in modern society. One for which we are unprepared.

It all seems benign; even an improvement over what came before. After all, why fight your way through a crowded store, or burn gasoline driving to a store — only to find the item sold out? It is so much easier to just find the item on Amazon, press the order button and find it at your door in a day or two. Increasingly, even perishables such as groceries are being ordered the same way. 

As with much of the digital revolution, a lot of this change has crept up on us quietly. One day it isn’t there and the next it is. Somehow, almost without noticing, we have fully assimilated it into our lives — and can’t imagine (or if we are older, scarcely remember) what life was like before the Internet, smartphones, social networks, digital music, network-only television, analog automobiles, robots. . .and all of the other accepted aspects of 21st century life.

We chalk all of this up to the evolution of technology, and we thank our lucky stars that we live in the era of Moore’s Law, which delivers thrilling new products and services every few years.

We call these changes substitutional equivalences — meaning that we have substituted one technology for another that appears, on its surface, to provide the same experience — only cheaper, faster, smarter and more efficient. And we are the lucky recipients of these changes.

But these substitutional equivalences are not the same as what they have replaced. Indeed, many are fundamentally different — not least because they exist and operate in cyberspace, not in the physical world. And the virtual world is very different place: with a very different purpose, rules and impact on the human brain. Moreover, these virtual products and services increasingly exhibit their own intelligence and autonomy . . .and are getting better at both by the year.

In other words, these products and services are not merely evolutionary improvements over what came before, but revolutionary new creations. Individually, these discrete revolutions are usually so rewarding — Wow! Look at all the new apps for my phone! — that we can easily overlook their often less-than-positive consequences (social isolation, rewiring our kids’ brains, a surveillance state, etc.) 

But, put all of these discrete technologies together, and multiply their effects by billions of users, and the result is a massive cultural and civilization shift that is already happening around us. We call this a Social Phase Change: a cultural transformation that is so sweeping that it changes everything — including all the rules we live by. It is an event so profound that it has only happened twice in human history: the agricultural and industrial revolutions. We believe we have now entered the third such transformation: an Autonomous Revolution, in which we increasingly hand over our future to intelligent machines.

These Social Phase Changes are wrenching experiences, presenting enormous challenges to humanity — and often producing vast blood-letting and misery. They also offer the possibility of huge advances in human existence: longer lives, greater wealth and increased happiness. But getting to this better world will mean making our way successfully through a minefield.

We are already in that dangerous zone. And one of the first challenges we face, one that is already upon us, is an increasingly bipolar economy.

What that means is that we have today, having emerged over the last quarter-century, an economy that is characterized by a traditional economy that operates under long-established rules in the real world . . .and a second economy, an Autonomous Economy, with very different rules, that operates in cyberspace — and promises to become even larger than the traditional one. In the process, the two economies are pulling in opposite directions, and doing so, tearing the Old Order apart.

In particular, the traditional economy is biased toward inflation. By comparison, the Autonomous Economy is biased toward deflation. The traditional economy provides us with most of the basic necessities of life — food, shelter, health care, clothing, transportation, and energy. Money spent on these necessities accounts for almost 80 percent of middle-class expenditures. And the costs of all of them are rising.

Conversely, the Autonomous Economy increasingly provides the higher-level options of life: entertainment, education, employment, interpersonal relations, and community. These offerings perpetually improve and grow more valuable to the user, yet simultaneously plummet in price. That solitary transistor of 1956 has become the microprocessor of 2020 containing billions of transistors — for the same price. The $3500 desktop computer is now the $700 laptop computer with 100X the processing power. And most stunning of all, is the growing pervasiveness of freeware, from on-line games to social networks.

The presence of this growing alternative economy may be exciting, but it also disguises the fact that the traditional economy hasn’t really changed — and in that world things are getting worse. The problem is non-monetizable productivity — unlike in the real world, the productivity gains in the Autonomous Economy don’t translate to increased incomes for average folks. That’s why, even as the numbers look may look good in GDP calculations, those gains aren’t reflected in worker’s lives.

In fact, just the opposite is true. Between 2012 and 2014, the median home price rose by 17.3 percent, while weekly wages rose by only 1.3 percent. According to the U.S. Department of Agriculture, food prices rose 31 percent between 2005 and 2014, or about 8 percent more than inflation. The cost of health insurance has risen by more than 54 percent in the past five years. 

The middle class, in particular, is mired in this bipolar trough. Real median household income is below the level it was in 2000—$56,671 versus $57,372. Since 2000, the number of lower-income families has increased from 31 percent to 34 percent of the population, while the number of middle-income families has declined from 45 percent to 43 percent. The average weekly hours worked by production employees has declined from 38.8 in the 1960s to 33.7 today. Inflation-adjusted annual earnings for production employees peaked in the 1970s and is down by 14.6 percent. 

This situation is only going to get worse as automation and artificial intelligence increasingly assume traditional jobs, not just blue-collar ones, but professions. The estimates of the job losses that are to come are staggering. A study by Frey and Osborne looked at 702 occupations and concluded that 47 percent of American jobs might be automated in the future. Another study, by McKinsey, estimates that 400 to 800 million jobs around the world — and a third of current jobs in the U.S. — will be lost to automation by 2030. Already, human beings are being squeezed out of entire job categories — an estimated 2 million people in the U.S. are displaced every year by productivity improvements. 

The future? Imagine that our entire economy looks like Amazon, Google, Facebook, and Netflix, companies that are highly productive thanks to virtualization and intelligent machines. Those companies require $600,000 to $1 million increases in income to create a new job, not the $150,000 we find in the average corporate job today. GDP would have to grow at a rate of between 6.8 percent and 11.3 percent to absorb all those displaced workers. No modern developed economy has ever maintained that level of growth. While those companies may create dozens of billionaires and thousands of millionaires, they cannot save the middle class.

What is particularly disconcerting about this jobs scenario is what is missing compared to the past. Two hundred years ago, when jobs were vanishing in agriculture, they were on the rise in the manufacturing. Then, as the latter area matured, new jobs were created in the service industries.

Eighty percent of the U.S. workforce, 104 million people all-told, now work in services. But as more and more of those jobs are automated, we need a new area of economic growth to absorb those excess workers. Unfortunately, that area appears to be the burgeoning workerless segment – millions of people rendered ZEV’s — Zero Economic Value citizens, who will never find work, no matter their skills. 

Will the bread and circuses of consumer technology — wall-sized TV screens, virtual vacations, autonomous vehicles, drone deliveries — make up for radically reduced disposable income and wealth, for lives without the purposefulness of The Good Job? Will they find a meaningful life in another way?

Perhaps jobs created by the new infrastructure that needs to be built, or a new wave of jobs created by entrepreneurs, will forestall this crisis for another generation. But make no mistake: the Autonomous Revolution is coming — and all of the rules are about to change. We need to prepare, now. 

William Davidow is a Silicon Valley pioneer who ran the microprocessor division at Intel at the dawn of the chip revolution and was later senior vice president of marketing and sales, He cofounded Mohr Davidow Ventures in 1985. He is the author of three books and the coauthor of two, including "The Virtual Corporation." Michael S. Malone is the author or coauthor of nearly thirty books, including "The Virtual Corporation" with William Davidow.

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