Long waves and paradigm shifts

Long wave theory has something to say in this respect. In particular, the notion of shifts in "techno-economic paradigms"[1] offers an interpretation of the present period that can help understand the nature of the challenge and provide useful guidelines for effective social and political action.

"Long waves" in economic growth are phenomena recurring every half century, with 20 or 30 years of strong general growth followed by 20 or 30 years of unstable, uneven and slow growth with recessions and even depressions. Schumpeter attributed these long range fluctuations to successive technological revolutions. The notion of shifts in techno-economic paradigms follows this tradition. Although many radical technology systems enter the economy at different periods, those that constitute veritable technological revolutions[2] bring far more than dozens of new industries and thousands of new products. They have universal impact by providing a quantum jump in productivity and a new dynamic potential for wealth creation that affects every economic activity.

A techno-economic paradigm is the embodiment of this new potential in a new set of "best practice" principles that accompanies the diffusion of each technological revolution. The new paradigm is capable of transforming every branch of the economy and the economy of every country, renovating products and processes, relocating activities, redefining markets, redesigning firms and gradually modifying the ways of producing and the ways of living across the planet.

The world has been experiencing such a paradigm shift for over two decades. It began in the 1970’s with the microprocessor breakthrough which made information technology fantastically cheap and accessible. Then, in the mid-1980’s, a new wave of complementary change began to diffuse: An incessant flow of books and consultants began to propagate the virtues of the "Japanese" style of management and of its many alternative versions. The change from fordist mass production to computerized adaptable systems has led to amazing success stories of firms and countries and is still working its way through one industry after another, one market after another.

Yet, rather than a general increase in welfare, the early decades of deployment of a technological revolution have profoundly uneven economic and social effects. The new technologies cannot thrive in the environment of the preceding paradigm, so a gradually worsening mismatch occurs between the techno-economic sphere, where the new industries are pushing their way and rejuvenating or displacing the old, and the socio-institutional framework, which was shaped by the characteristics of the previous paradigm. The policy recipes that once worked become powerless, so new effective policies and institutions have to be created.

But institutions have a natural inertia, strengthened by past successes and vested interests. It is only when the negative social consequences of these times of "creative destruction" in the economy generate strong political pressures for change, as we begin to see in the late 1990’s, that the question of profound institutional reform becomes a truly conscious issue. In a sense then, one could say that the downswing periods of long waves, have a techno-economic origin and a socio-institutional solution.

The transition is then a long period of trial and error experimentation, of confrontation between the forces of transformation and the weight of inertia, of conflicts and negotiations, spurred by widespread, instability, uncertainty and suffering. Of course, not all experiments are successful or well guided and some can be as disastrous as the resistance to change. Yet, a new upswing will only be unleashed once appropriate social and institutional innovations have re-established a good match between the new techno-economic potential and the institutions that regulate and facilitate its full deployment on a national and international level.
           
        

Good times, bad times

The world has been here before. Although the debate among economists regarding the existence of long waves is not easily resolved, historical memory is very clear about the "good times" and the "bad times". Those who are old enough to remember will easily agree on the contrast between the uncertainties and the social hardship of the 1980’s and 1990’s and the post-war period of growth and full employment in the 1950’s and 1960’s. The same can be said about the contrast between the Victorian boom in the second half of the 19th Century and what was called the "great depression" at the end of the Century or between the "Belle Epoque" at the turn of the 20th Century and the really "great" depression of the 1930’s, after the Wall Street crash of 1929.

Each of those "bad" periods witnessed the early growth and deployment of a techno-economic paradigm. The railways and the steam engine in the 1830’s and 1840’s; the new steel technologies, electricity and modern chemistry at the end of the Century; mass production and synthetic materials in the 1920’s, 30’s and 40’s. They were, as Schumpeter called them, great waves of "creative destruction" sweeping through the economy, destroying or renovating the old and creating the new. The succeeding "golden ages" are the periods when the economies of the main countries are geared to the full flourishing of the new paradigm across the whole of the productive spectrum and when more and more countries gradually join the bandwaggon[3].
      

Risks and opportunities; winners and losers

We are now faced with the possibility of another golden age ahead. But there is of course no guarantee that the transition will occur smoothly. The risk of financial crash, as in the US in 1893 and 1929 or of a long depression as in Europe in the 1880’s and 1930’s cannot be ruled out. The development of appropriate solutions to foster harmonious economic growth is not a simple automatic process but rather the result of a web of multiple causes, including intense and purposeful social creativity, as shall be discussed later.

Neither can any country take it for granted that it will do as well -or as badly!- in the next upswing as it did in the previous. Transition periods are also the times when windows of opportunity are open for forging ahead or catching up; they also open the back door for falling behind. With the third techno-economic paradigm and the switch to science-based technologies at the end of the nineteenth Century, Germany and the United States forged ahead of Great Britain, which had been the unquestioned leader of the world economy for over a hundred years, since the First Industrial Revolution. In the present paradigm shift Japan leapt to the front ranks both by entering the new technologies and by developing some of the main managerial and organizational principles for rejuvenating the old technologies. Equally, Korea, Taiwan, Singapore and perhaps other developing countries in Asia are already catching up and entering the group of industrialized countries. It is of course not clear yet, which countries will lead or lag, advance or fall behind when -and if- a new upswing gets underway. Growth and development opportunities are a moving target and the strategies or policies that are successful in one period are not likely to succeed in the next.

Furthermore, accelerated growth and increasing equity do not necessarily go together. At each transition there is a historical crossroads when social and political forces present their programs and stage their confrontations, engage in conflicts or consensus building processes to impose by force or construct collectively the specific socio-institutional framework that will guide the mode of growth for the following decades. The outcome of these complex processes depends on the relative strength and lucidity of the social forces at play.

That is the challenge the world faces in this transition. Within each country and on a planetary scale the question is posed as to whether this enormous wealth generating potential will be geared towards greater equity benefiting all of mankind or lead to a world where the rich get ever richer and the poor poorer, where social cohesion is broken, where local wars become even more frequent and destructive, where internal unrest leads to social explosions and peace can only be imposed by violence.

The question is where to find criteria for effective social action in the most positive direction. The interpretation of long waves that we have presented here suggests that an understanding of the characteristics of the presently diffusing paradigm offers the best criteria for guiding social and institutional creativity in viable directions. By this time in the transition, as in previous cases, the diffusion of the new paradigm has advanced enough to allow a full understanding of its nature, of its logic and of its organizational options and implications.  
             

A shift in "common sense"

A technological revolution is not just a set of new technologies, not merely a set of new products and processes no matter how impressive and powerful these may appear. It is a growing constellation of interdependent technical and organizational, managerial and social innovations. It merits the name of "revolution" precisely because it is all pervasive, because it oversteps the initial cluster of new industries and provokes an upheaval across all industries and activities. As the new technologies propagate, a new "logic" begins to take shape in the minds of engineers and entrepreneurs, of managers and investors, which is applicable to other industries and activities, to other products and processes. It is this all-pervasive nature that makes technological revolutions so powerful and so disruptive.

But the process is slow and full of obstacles. Diffusion of such profound change is not easy or simple. The paradigm must make its way in a world strongly shaped by its predecessor. After decades of widespread application, the efficiency principles of a paradigm are so ingrained in the minds and skills of managers and so embedded in the business environment that they appear as universal and everlasting "common sense". The development of mass tourism in the 1960’s -with chartered planes, hotels and sightseeing buses-, which made world travel cheap and accessible to millions of people, was achieved by applying the same principles of continuous mass production of standardized products, developed by Henry Ford five decades before, for the fabrication of cheap automobiles. And those same principles had been applied successfully to an unending series of electrical appliances for the home, to successive families of synthetic materials and products made with them, to detergents and pharmaceuticals, to canned, dried and frozen foods and to the fertilizers and pesticides of the "green revolution". But the world into which Henry Ford introduced the revolutionary model-T could not believe his promise that cars would be so cheap that even the workers who made them could buy them.

Now, in the mid 1990’s, after twenty years of diffusion of the information revolution and of the flexible managerial model, consumers are beginning to get accustomed not only to the growing presence of computers and remote controls, to automatic tellers and cashiers, to faxes and Internet, but also to extreme variety and choice in products and services. People now expect to choose from a wide range of natural, synthetic, recycled or mixed materials; to have access to organic as well as "engineered" foods and to find in the super-market a special cheese made only in a remote Italian village. Large firms are learning to flatten their traditional hierarchical pyramids and turn into flat networks, to cooperate with suppliers, clients and even competitors, to train and retrain a multi-skilled workforce and to give it conditions and rewards that will stimulate the innovative attitudes that allow continuous improvement and targeting of better market segments. Small firms are forming cooperative networks to obtain economies of scale in marketing, training, research or other activities, they are discovering possibilities in export markets and venturing in alliances with complementary firms or in long-term contracts to supply large companies.
           

Learning and unlearning; resistance and pressures for change

It is a vast process of learning, of adopting and adapting the new possibilities. It is also, and perhaps above all, a painful process of unlearning, of abandoning the previously successful ways of doing things, of leaving behind much of the hard earned experience and accepting change. Apart from the young, who are born -so to speak- unto the new world, resistance is widespread and has many forms and sources. It is not easy to recognize the obsolescence of acquired routines; it is not pleasant to be a novice confronting new equipment after having been an expert at the old; it is not comfortable to take risks with unknown technologies and unfamiliar markets after having succeeded in the well trodden ones. That is why in periods of paradigm shift you can find newer firms or lagging countries catching up with the old giants, sometimes even overtaking them.

And yet, the new technologies and the new managerial models propagate. There are irresistible forces at work in the economic sphere that propel diffusion even against cultural, institutional or other obstacles. Strong competitive pressures transform conditions in one market after another, forcing one firm after another to modernize, while threatening the survival of the laggards.

But such pressures do not work upon governments or institutions. The direction of change is not so clear and there are social, political, cultural and ideological conditions -as well as vested interests- that make it even more difficult to accept the need for profound transformations. So, the more the techno-economic sphere changes, the more obsolete and powerless the old socio-institutional framework becomes. And the greater the mismatch between the two, the stronger the tensions created, the more painful the transition and the more ripping the centrifugal trends. And it is precisely the social pressures created by such differentiation and by the breaking of the social fabric that end up forcing the question of cohesion to center stage.
     

Institutional innovations for the post-war "golden age"

Last time around, to overcome the great depression of the 1930's and to rebuild the economy after the war, it was necessary to surmount the prevailing notions about the superiority of free market mechanisms and accept the establishment of massive and systematic State intervention in the economy, generally following the principles proposed by Keynes. There is a very impressive list of institutional innovations which diffused widely in order to foster and regulate the growth of markets for mass production. At the national level, it goes from the direct manipulation of demand mechanisms through fiscal, monetary and public spending policies, to the official recognition of labor unions, collective bargaining and the establishment of a complex social security net, passing through the drastic reduction of the working week and year. Some of these innovations were made in the post-war period itself, some had existed before in some countries, for a short or long time. The important fact is that, they were adopted almost everywhere, with all the variety resulting from vast differences in social, cultural, historical, political and other factors.

On the international level, these national arrangements were complemented by the economic, political and military hegemony of the United States in the West (holding the Cold War balance with the Soviet System), Bretton Woods, the United Nations with all its specialized agencies, the GATT, the Marshall Plan, the IMF, the World Bank, gradual decolonization and multiple other institutions and measures, geared to facilitating the international movement of trade and investment, as well as to maintain political stability.

What we have just listed is mainly the set of innovations of the social-democratic program followed after World War II, by the great majority of the industrialized countries of the "West". In essence it was a very effective positive-sum strategy, which created a consensus balance between government, private business, and trade unions, where salaries were kept growing apace with productivity and where taxes were used to finance government expenditures, public employment and the welfare system, which all created demand and stability for expanding business activities. Economic growth and a general improvement in the quality of life were seen as mutually propelled. Of course, the specific forms of application varied greatly, from the USA to Sweden and from Great Britain to Italy or Japan, but the general strategy was very similar.
         

The wide range of the viable

But Keynesian democracy was not the only successful "model". There were other socio-institutional systems in the world, which even before the war had achieved astonishing rates of growth with the mass production paradigm. There was fascism since the early 1930’s, mass producing tanks and weapons and later mass destructing people in the gas chambers. And much earlier, since 1917, the Soviet revolution had begun to snatch Russia from underdevelopment with a centrally planned economy, using "taylorism (the core concept in the mass production organization), electrification (the key input for the technologies of that paradigm) and the Soviet system of government".

So, in terms of socio-political organization, the space of the viable for taking advantage of the growth potential of a paradigm is very wide. In the transition to mass production, four profoundly different modes of growth were tried, each with enormous variety: Keynesian democracy, Fascism, Soviet socialism and "State Developmentalism," as we could call the various state-led modes of growth established in the Third World. Today, apart from fascism that was basically defeated early on, all these systems are either under attack or have been dismantled.

What is interesting to note here is that, for all their deep and real differences, all these systems shared certain common "morphological" features, which stem precisely from the fact that the same mass production paradigm is the "logic" guiding wealth creating activities in the production sphere. Among these shared characteristics one could mention:

1. A crucial role for a central government, actively engaged in the economy, whether by very direct control or by more indirect mechanisms;
2. The erection of the State as the main agent of redistribution of wealth, which is seen as the prevalent form of social justice;
3. A drive towards the "homogeneity" of consumption styles within the Nation-State, with an effort to minimize internal differences of nationality, religion, language, etc.;
4. Central representation of the provinces, generally by some form of direct elections;
5. "Mass" character of political parties and other associations;
6. Stable governments led by one or very few main political parties (except in some Third World Nations); and
7. A separation of political leadership from "technical" management (with measures for a degree of continuity of the second).

The interesting phenomenon is that these similarities have only become clearly visible by contrast with the diffusion of the new principles of decentralization and the increasing questions about the previously accepted role of the State. Furthermore, one can now also see a parallel between the typical "shapes" of the traditional big corporations and those of hospitals, universities, ministries and governments in general. As firms have begun to change their static pyramids into more open and dynamic globalized networks, so have other bureaucratic structures begun to question the effectiveness of their own form of organization and to experiment with the same new practices and principles that are proving efficient and effective in the world of business.
         

Organizational isomorphism

So systems with different purposes and social goals can apply apparently similar organizational principles. A techno-economic paradigm is like the syntax of a language. It sets the rules for how you can transmit ideas effectively, but it does not change the ideas themselves. And a paradigm shift is like a change of language, it is as difficult to learn and as malleable to use as any new language is. Just as similar compartmented hierarchies could serve the military for war, business for generating wealth, hospitals for healing, universities for teaching, governments for governing and so on, the decentralized adaptable network structures of the new paradigm can be put to innumerable and radically different uses.

What we are suggesting is that every technological revolution, every transition in techno-economic paradigm provides a new set of powerful organizational principles that prove to be so much more effective and so much more adapted to the nature of the emerging technological potential that they become the generalized "common sense" for structuring most activities. Thus the new paradigm leads to a sort of "organizational isomorphism".

The vehicles of propagation can be many, especially today when worldwide communications can instantaneously diffuse information from one corner of the globe to another. Nevertheless, the most effective means, in the far past as in the present, are human beings themselves. For reasons of internal coherence, people tend to transfer successful practices, techniques and habits from one sphere of social activity to another. A small example is probably the best way to convey the idea:

A production worker in a plant of the Sivensa group in Venezuela was explaining the success of his neighborhood association. He had learned problem-solving at the plant, he had discovered the effectiveness of creative team work, quality circles, project design, participation and incremental improvement. He had then decided to share this knowledge with his neighbors in order to use it for their collective improvement. In less than a year they had solved several problems ranging from a technical restriction on water supply to a playing field for the young and they were getting permission from the council to plant vegetables on an idle piece of land. The interviewer then asked whether this excess activity did not lead to problems with his family. "No, -he said- much to the contrary. My wife and children are very happy! Before, I used to come home, sit in my chair and tell them to do as I said. Now, we sit around a table, discuss everything and decide together. In fact, -he added- they are the most active helpers in the community activities."

So, as the new wealth creating potential unfolds in the economy, its "logic" propagates towards all of society modifying behaviors and establishing the new common sense criteria that guide the design and redesign of all sorts of organizations and of their ways of inter-relating. This growing coherence eventually results in maximum social synergy. Thus, understanding the nature of the paradigm can provide the most appropriate tools for becoming a fully conscious and effective actor in the process of institutional modernization.
   

The socio-political challenge: understanding the new possibilities

The present period is then one of great challenges. The times of paradigm shift are times when society risks the greatest dangers and faces the greatest opportunities for creating a better world. On the one hand, there are increasing possibilities of financial crashes, wars, conflicts and crime, arising from injustice and divisiveness, of modern forms of fascism and of the growing power of mafias which prosper in chaotic situations. On the other hand, there is an unequalled capacity for wealth creation that, if handled intelligently, could lead to a worldwide level of prosperity never imagined possible. It all depends on the specific way in which the socio-institutional framework is recoupled with the techno-economic sphere.

Obviously the question of social and institutional change is a political question. Ideologies and vested interests have great power in determining the particular outcomes out of the wide space of the viable at each transition. Successful or failed experiments can bias the direction of change. The level of political consensus, conflict or confusion strongly influences the speed and the ease or difficulty with which the new mode of growth is established.

In addition, during transitions, the usual confrontation between "left" and "right", between "solidaristic" and "individualistic" positions in the political spectrum, becomes more complicated. As the logic of the new paradigm propagates, another divide appears in each group between the old and the modern ideas, those looking backwards and those looking forward, those who propose ways of fulfilling their goals and ideals which are coherent with the new wealth creating potential and those that cling to the previous methods.

It is not that the moral or social values change; the same individualistic or solidaristic ideas or ideals can be pursued in the new context, but the organizational means are likely to be very different from those that were successful under the previous paradigm.

In this respect, a very worrisome phenomenon is occurring in this transition. The most developed political proposal and the one that is being tried and applied most widely is the "neo-liberal" set of recipes for letting the market be the universal organizer of social life. This program can certainly foster growth under conditions of globalization, though it is likely to exacerbate rather than to diminish the centrifugal trends that the world is experiencing. So, it can be located in our lower right hand box as "looking forward and individualistic". Meanwhile, the majority of the solidarity programs tend to maintain their dreams of collective prosperity very attached to the old ideas of centralized, top-down redistribution. There is very little that can clearly be located in the upper right hand box, "solidaristic as well as looking forward". This is in great contrast with the previous transition, when the bias toward the "social" component of most programs was so strong that even fascism called itself "national socialism".

There might be an explanation for this, which is related to the different nature of the paradigms in question. The very essence of the mass production paradigm was homogenization. The more you could standardize consumption patterns and the greater the mass of people involved, the more you could increase productivity and the higher the standard of living you could hope to attain for the majority. The blue uniform of Mao Tse Tung’s cultural revolution was only an extreme case of Ford’s original dictum "you can have any color, as long as it is black". So egalitarian ideas were strongly backed -probably unconsciously- by the nature of the emerging potential for wealth creation and "felt" more realistic the more this potential came to be understood.

By contrast, the presently diffusing information technology paradigm seems to thrive in diversity and differentiation. Both the adaptable nature of microelectronics technologies and the flexibility of the modern organizations allow astonishingly high levels of productivity while handling diversity. Changes in product mix, in quantity and quality, modifications to models or adaptations to customer requirements can often be made automatically. Differentiation in products and markets is seen as the route to maximum value creation (even if increasing the volume of each segment is also profitable). There are tens of thousands of little "niche" markets that are comfortably accommodated by the distribution channels. The unconscious ideal which guides product and market segmentation is that of a "personalized service". All these trends towards variety would suggest that egalitarian ideas have a much weaker footing. But this need not be an obstacle for the construction of an effective solidarity program. Indeed, the present form of differentiation by income levels is not the only one possible. An alternative and socially welcome differentiation can take place "horizontally", by multiple life-styles, fostering the flourishing of national, occupational or other characteristics and identities; where people are proudly different and socially recognized as of equal value. The most varied ways of living can provide equivalent levels of satisfaction, inside countries and across the planet, while creating favorable conditions for dynamic wealth generation through the flourishing of diversified worldwide production.

Other major characteristics of the present paradigm clearly favor the attainment of the more humanistic and socially caring goals. One is the demise of the tayloristic separation between mental and manual work. In firms as well as in society at large, the more highly skilled and educated the participants, the more advantageous the position attainable. Whereas in the past, people were asked to "leave their brains at home" and accept the routines of repetitive work as immortalized by Charlie Chaplin, the more positive versions of the modern organization foster creativity and teamwork, initiative and imagination. The vastly untapped potential of human capital is the real driving force of the new paradigm. Thus, the distribution of knowledge, the quality and depth of education and skills, the general capacity for innovation and creativity, will make the difference between firms or societies that succeed or fall behind. And, naturally, the more highly skilled a society, the more it will attract the more advanced firms[4].

Another favorable feature of the new paradigm is the trend towards decentralized networks. The essence of modern decentralization is not, as some have interpreted, dispersion, smallness and isolation. It is about empowerment, participation, autonomy and also about strategic coordination. It is actually a form of organization that allows even larger systems than before -giant global firms, for instance- to work efficiently under strategic management. In point of fact, the old pyramidal structures had a ceiling beyond which their effectiveness was lost and they either became sluggish -and often corrupt- bureaucracies or they grew so complex that they became unmanageable. One functional department knew little of what the other was doing and the problems faced at the botton were rarely understood at the top, or even in the middle. Modern decentralization emulates the "distributed intelligence" model of computer networks, where each point of the web has full capacity to act, while being able to communicate horizontally, to use a variety of powerful shared services and to send information in any direction, under the umbrella of a common system and a common "language". In human organizations these network principles mean widespread delegation of resources and decision-making power to each of the "decentralized" units, which are in close contact with "clients" and can easily respond to their needs. The "center" can then concentrate on the strategic issues, the general guidelines and the regulation and monitoring of the whole system. It is interesting to note that this structure also works well when organized bottom-up, as shown by the cooperative networks of small and medium firms in Northern Italy[5].

One extreme political version of this model is the "pure market", where the government regulates and decentralization reaches down to the individual person, giving equivalent "autonomy" to the rich and the poor, the powerful and the weak. A completely different but equally compatible political version could be based on a lattice of very strong and active local governments, each enhancing the quality of life of the people in its territory, with their full participation, and a central government which not only regulates but also finds adequate means of redressing unbalances.
                 

Politics to center stage: constructing positive-sum strategies

And so, one could continue examining the features of the new paradigm and their implications. It is this sort of exercise that provides the necessary criteria for defining the range of the viable -and of the unviable!-. Nostalgia for past recipes is deadly and counterproductive. A transition is about closing some of the old possibilities and opening new ones. Simply rejecting the "market as social organizer" will not stop those practices from spreading. Trying to redistribute a shrinking cake among a growing number of needy will not solve the problem either. Modern alternatives are needed, in the form of viable and realistic programs, with effective and attractive ideas and policies, capable at the same time of increasing the amount of wealth, of protecting the planet and of improving the quality of life of all the members of society, in every nation in the world.

The present challenge involves massive creativity and audacity. It demands stretching the imagination to think and construct the best possible future, with a full understanding of the new conditions. To gauge the size of the leap, it is useful to wonder how many people in the 1930’s, in the midst of the depression, would have believed possible that in less than three decades there would be full employment in most of North America and Europe and that the majority of industrial workers would own a car and a house full of electrical appliances. Equally difficult to believe was the future dismantling of all colonial empires when a war was about to be fought to establish new ones.

The present challenge is as great as the one that led to the "welfare state". The dangers are as big as those that originally allowed fascism to spread. The solidaristic goals and moral principles can be the same, they can even be more ambitious; the means and the methods are still to be invented. That is the task of this transition; such is the responsibility of the present generations.