Competition Compensation

Quick, what do these four things have in common: cameras, cars, fax machines, and factory workers? The answer is that, within the past decade or so, they’ve all been digitized. The difference between the first three and the last is that the former are still considered current and viable. The factory worker, by contrast, evokes nothing so much as the brontosaurus. The image of a guy in grimy overalls hammering rivets or wielding a pneumatic drill is almost quaint.
 
 
But just as snapshots are now ported on memory chips, just as dashboards now give real-time data about automobile performance, and just as the pixel is displacing the practice of sending ink by telephone, so is the factory worker morphing into something new. And that’s evolution. Which is not necessarily the same thing as extinction.
 
 
We are entering what The Economist has dubbed “the third industrial revolution.” The first stage—flashback to your grade school lessons about Eli Whitney’s cotton gin—entailed mechanization and the rise of the factory. Fast forward a century to the assembly line and the advent of mass production: That was stage two. (Henry Ford’s famous, if possibly apocryphal, quip about the Model T went that, “you can have any color, as long as it’s black.)
 
 
Now comes the age of industrial digitization. With that comes, in some ways, the opposite of mass production: mass customization. Or, for those pitching Software-as-a-Service, mass configuration. This is a world in which carbon fiber offers significantly higher strength-to-weight ratios than traditional aircraft materials, potentially yielding huge fuel savings. It is a world in which nanotechnology makes for vastly easier cookware cleaning. It is a world in which 3D printing might well mean that “made in your basement” becomes as common as “made in China.”
 
 
In other words, it is a world of profound disruption. Quite simply, as we see all around us, industrial digitization has destroyed—and is destroying—certain jobs. Some car manufacturers now produce twice as many vehicles per employee as they did just 10 years ago. That said, just as the extinction of the buggy whip led to Ford’s assembly line, new vistas are now opening for engineers and IT specialists and various attendant professions.
 
 
Factory workers are not obsolete. They are just fewer in number—and more likely to be sitting in front of a computer screen than standing on an assembly line. They also increasingly might be found sitting in shops that are based in America and Europe.
The geography of both supply chain and production are realigning. As labor costs decline as a percentage of production, wage arbitrage loses some appeal. Locales with a developed rule of law, a highly educated workforce, and modern transportation systems are presented with new opportunities. That does not mean the end of globalization. Far from it. But manufacturing has already begun repatriating to rich counties, and the trend is likely to continue.
 
 
Some context helps here. In the past two decades, trade climbed from 22 percent of America’s gross domestic product to 31 percent. It was Barack Obama—not some rabid libertarian or firebreather from the Club for Growth—who pushed through last year’s trade agreements with South Korea, Columbia, and Panama. (And take note: more Americans opposed than supported them.)
 
 
Globalization and digitization are generally net goods. But the net has holes. Multinationals arbitraging the labor pools of India and China have inevitably put some Americans out of work—statistically, those without college degrees most. Yes, globalization has generally reduced prices. But it has also cut some jobs, in ways that seem pretty much irreversible. Or so the late Steve Jobs famously told President Obama. (“Those jobs aren’t coming back.”)
 
 
Responding to dislocation with protectionism—erecting barriers to imports and imposing penalties on outsourcing—would cut off too many noses to spite too many faces. Digging a moat in hopes of preventing multinationals from leaving the castle just won’t do the trick. What’s more, it would be particularly injurious to emerging economies (which, by the way, offer new customers, not just new labor threats). The problem requires a smarter, sustainable, nuanced response.
 
 
Global taxation treaties might be negotiated some day. But that day seems pretty far off. Ditto global labor and environmental standards, or the knitting together of any meaningful international safety net. Somehow, we need to reallocate outsourcing cost savings to a retraining kitty. Retraining for what would differ from sector to sector, but the impulse would not be charitable. It would be an investment. Thinkers, let’s get to work.