The Great Update: A Changing Economic Order

If your cell phone is like mine, it wants to update itself seemingly every other week. And if the notifications are to be believed, it is critically important to your well-being that it be updated immediately. Or it’s critically important to your phone’s well-being. Or something. It’s not exactly clear.

My tendency is to ignore the notifications for a number of days until it issues me a sort of ultimatum, minus Liam Neeson’s calm yet foreboding tone: “We will update you whenever we want, unless you do it right now.”  

Ugh. Right in the middle of an office meeting.

If “Big Update” was ever an interest group, I have to assume this is how they’d behave. Defeated, I permit the update.

I’m not entirely sure what changed from system 6.2.1b to 6.2.1c, but I have a hard time imagining it was terribly important.

The Operating Systems of the World

Civilizations have operating systems as well. Institutions, laws, and cultural mores change over time. Robust operating systems feature built-in mechanisms to audit and edit themselves as needed. Changes take place, usually slowly, sometimes rapidly. 

The last time we experienced a period of rapid updates was nearly 100 years ago. Today, we are going to take a look at that update—specifically, in terms of the economy.

The 1930s. The Great Depression. The nation went from a euphoric stock market run to 25% unemployment in a few short years. As you can imagine, the superlative concern for policymakers (and the dismal economists who informed them) was ensuring that unemployment could be managed down to as low a level as possible. Economic theory of the time focused on the intersection of production factors (predominantly labor and capital) yielding an economy’s maximum possible productivity.

He was younger than his contemporaries, but John Maynard Keynes was widely acknowledged as the most clairvoyant and savvy economic theorist of the era. His groundbreaking idea? Government should accrue tax revenues during times of economic growth and then increase spending, specifically in times of economic recession—the idea here being that the government would be accumulating a surplus during good times. Then, in times of economic downturn, the government would draw from this surplus to increase its spending.  

This would have a stimulative effect on the economy at the time when it would be most needed. It would also function as a natural stabilizer, meaning lower highs but higher lows. At the end of the day, that’s what consumers and businesses both want most anyway: stability.

Nowadays, that seems kind of obvious, but it was a major update for its time. For instance, consider the unprecedented proportion of the U.S. population that now lives in urban areas. In 1820, less than 10% of the United States lived in an urban area. By 1920, just over 50% did. Our livelihoods were a function of harvest seasons for 99% of human history. Today, we live for manufacturing demand.

The industrialization of the West enabled the surpluses of productivity that would lead to greater cyclical boom and bust. The basis for our economic thought is armies of laborers filling multiplexes of factory buildings. Keynes’s beliefs have been accepted in economic scholarship as the “orthodoxy,” with subscription to alternative schools of thought described as “heterodox.”

And this would be fine, except for the fact that today’s Keynesian orthodoxy does not apply to the 21st-century American economy. Indeed, while manufacturing was the primary driver of the economy 100 years ago, we’ve spent the entire postwar period de-industrializing. Today, almost three-quarters of the labor force works in the services sector, with about 15% still working in manufacturing.

So, when unemployment numbers are down around all-time lows, but consumers appear not to be benefiting from this circumstance, we have to check to see if there are any updates available for our understanding of this issue. That’ll be a topic for another day.

A Note to Our Readers

Thank you for reading this first article in The Great Update Series by contributor Dan DiFilippo. Dan feels strongly that institutional and cultural biases have obfuscated our understanding of the changing world, especially in terms of finance and economics. Read along as he delves into an array of subjects that may require a new perspective, including real estate, macroeconomics, domestic politics, geopolitics, demographics, culture, technology, entrepreneurship, and more. Comment below if you have a topic in need of a new perspective that you’d like him to cover.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.