Call it the post-employee economy: The digital revolution is creating billions of dollars of wealth in a second world without people
When the disappointing jobs numbers were reported last week (employers added 120,000 jobs in March, about half the number reported in the two previous months), analysts tripped over themselves looking for an explanation. Of course, jobs numbers are bound to vary, but in my view the long-term trend calls for more jobs to disappear, and the reason is clear as day: the exploding Second Economy.
The Second Economy -- a term the economist Brian Arthur uses to describe the computer-intensive portion of the economy -- is, quite simply, the virtual economy. One of its main byproducts is the replacement of low-productivity workers with computers. It's growing by leaps and bounds, brimming with optimistic entrepreneurs, and spawning a new generation of billionaires. In fact, the booming Second Economy will probably drive much of the economic growth in the coming decades.
Unfortunately, the Second Economy will not create many jobs.
Arthur's article in the McKinsey Quarterly, titled "The Second Economy," does a wonderful job of explaining it. His Second Economy is made up of large swaths of corporate America, especially the service areas that are being replaced by transactions over the network where -- in many cases -- computers talk only with other computers. Arthur uses the airline check-in process to illustrate the point:
Twenty years ago, if you went into an airport you would walk up to a counter and present paper tickets to a human being. That person would register you on a computer, notify the flight you'd arrived, and check your luggage in. All this was done by humans. Today, you walk into an airport and look for a machine. You put in a frequent-flier card or credit card, and it takes just three or four seconds to get back a boarding pass, receipt, and luggage tag. What interests me is what happens in those three or four seconds. The moment the card goes in, you are starting a huge conversation conducted entirely among machines. Once your name is recognized, computers are checking your flight status with the airlines, your past travel history, your name with the TSA (and possibly also with the National Security Agency). They are checking your seat choice, your frequent-flier status, and your access to lounges.
Nobody knows how big the Second Economy is, and there is no rigorous way of defining it. But in estimating it, I would use fairly expansive parameters for what to include. For example, I would count Amazon's total sales. In the case of Walmart, I would include all of the online sales plus the value added when computers talk to other computers to manage the supply chain, payables, and receivables and inventory. In the case of the airline industry, I would count not only the check-in process Arthur describes but things like the online reservation and ticketing process and the value added by automated systems in running airline operations.
Online retail sales topped $200 billion in 2011. Forrester Research expects them to grow at greater than 10 percent per year for the next few years. Amazon had $48 billion in sales in 2011. Google generates $40 billion in revenue. Large portions of corporations have now replaced workers with Second Economy processes, with computers busily interacting among themselves. Corporate billing system computers are now communicating with bank computers to get bills paid, and portions of the human-operated billing and crediting processes have vanished. Again, it's just computers talking with computers. Once recordings and movies are loaded into virtual space, computers in media distribution centers talk with computers in your iPod, tablet, and home entertainment center. The media manufacturing process, retail video rental stores, and theaters have been sucked into virtual space.
My New York Times and Wall Street Journal are, increasingly, Second Economy employers. No paper, no paper delivery, no paper bills, no printing presses, no more jobs for people who run printing presses, just the Times and WSJ computers talking to my iPad and billing my credit card.
New economic growth is also occurring. New businesses have been created: Google, Facebook, OpenTable, and Zynga. I, for one, buy more books because shopping at Amazon is so convenient and buying eBooks so easy. Others are watching more movies and TV reruns.
In estimating the size of the Second Economy, it's easy to count the sales of Amazon and the revenue of Google but it is difficult to know what portion of corporate activity has made the transition. For example, how deep into the Second Economy is the $5 trillion retail sales industry and the airline and banking industries? But if just one percent of the 2.5 to 3 percent labor productivity increase since 1995 is attributable to digitization, it would greatly exceed $2 trillion annually. If a $2 trillion Second Economy is growing at 10 percent per year, the same rate at which online sales are growing, then the growth in the Second Economy would account for about half the anticipated increase in GNP in 2012.
Let's do some arithmetic.
The Gross Domestic Product for the United States in 2011 was around $15 trillion. There are a little over 130 million non-farm employees. So each worker adds a little over $100,000 to the domestic output. The numbers are quite different for a Google employee. Google has a little more than 32,000 employees and its $38 billion in revenues means it generates about $1.2 million per employee. The numbers are similar for Facebook.
Walmart has some two million employees, and annual sales of around $200 billion. Given that many work part-time, I figure that the company has sales of around $100,000 per employee. With 56,000 employees in 2011, Amazon generated a little over $800,000 per employee.
Here's the challenge: In the past, every million-dollar increase in economic output generated on the order of ten jobs. In the future, in the productive Second Economy, it may generate only one or two.
When I listen to politicians and policy makers explain how they will create jobs in the future, I never hear mention of the Second Economy. If a large portion of future economic growth will occur in the rapidly expanding and highly productive Second Economy, where will the jobs come from?
As sobering as the Second Economy scenario is I believe the trend is reversible. In my next post I will sketch out an argument for how that could happen.