The Industrial Revolution Is Over

One of the greatest impacts of the industrial revolution was that better communication allowed for greater specialization, and with that came better economics. There have been multiple waves of the industrial revolution, each triggered by some improvement in communications.

The first wave was all about trains — raw materials and finished goods could be quickly and cheaply moved between cities. This allowed factories to become far more scalable than individual craftsmen attempting to create the same product. This was at the region or country level.

It took a while before shipping was added to the mix. While it was not as fast, it enabled a wider range of materials to be brought into the factories. Countries no longer had to be self-sufficient, and that was a vital step forward because no country is fully self-sufficient when it comes to raw materials.

The slowness of shipping was compensated for by having fairly large inventories of materials and finished goods. Over time, the improvement of cargo traffic around the world meant this no longer had to be the case, and almost everyone moved to a just-in-time manufacturing flow.

Just as we have seen improvements in physical communications, the same is true for intellectual communications. The rise of the Internet and email dramatically changed the way in which remote groups of people could collaborate. As communications speeds have become faster and the tools available for cooperative development improved, teams have become flung across the world. Many companies stopped hiring only those people they could move to their offices, instead hiring the best engineers wherever they happened to be located.

COVID clearly pushed this even further by temporarily making offices a relic of the past. Everyone was distributed and working out of their homes. What had once seemed like an impossible working model was shown to be quite viable, even if it had some side issues that were difficult to address.

In all cases, it was assumed that communications were reliable. If trains, ships and planes regularly crashed or burned, it would not have been a trustworthy link. The same with intellectual communications. But recently, geopolitical tensions have decreased the levels of confidence and trust in all forms of communications. This will have major economic impacts to everyone.

We are seeing the rise of nationalism today, and for some this is about wanting better jobs closer to home, or restrictions in the numbers of people allowed to relocate into a country, but for industry it is way larger. If people cannot trust the supply of goods, then the only option is to make them yourself. This will significantly drive up costs.

In semiconductors, the number of leading-edge foundries had collapsed down to just a handful. That enabled the enormous costs of establishing a new fab to be spread across a large number of customers. Now, if every country wants to guarantee their own supply of chips in the event of some geopolitical action, they will have to make their own investment. That, by definition, will be used by fewer customers, and they will each have to bear their share of the burden of those costs.

The same is true at the intellectual level. What will be considered to be sensitive information in the future? We have seen the world come together to advance things like RISC-V, but will that be allowed to continue? Will governments decide that some countries should not gain access to a particular technology? Again, it means higher costs for everyone.

The industrial revolution has been about the creation of efficiencies in the system and that has now ended. Unless the world comes back together again and trust is rebuilt, it is over. We no longer can grow economies by doing more with less capital and fewer people.

What we are beginning to see today, with inflationary pressures, is just the very beginning of this shift, and it will get a lot worse. There is no controlling this at a government level. The repatriation of manufacturing and intellectual advancement either must be funded by governments, or by corporations. In both cases it will lead to higher prices. We can expect an economic boom from the new building that will be required, but there will be a big cost to pay for that down the road.

Inflationary pressures also are increasing as we realize that we haven’t really been paying the true cost for the things we consume. The damage being done to the environment has been an unpaid cost ever since the start of the industrial revolution. With growing awareness and concern, those costs will be added to the prices we pay for things. This is the true cost today, but we also have to make up for all of the cheap manufacturing of the past.

Am I being overly negative? Probably. Humankind always seems to be at its best when the situation appears dire. Just because inflation has been the bane of economies in the past doesn’t mean there is no way to thrive at a time when high inflation will become the norm.