The End of the Industrial Age: What Next?

The old economy gave its last gasp in 2008 when the “housing crisis” brought down Lehman Brothers and we found out that some businesses are “too big to fail”. At least that is what we have been brought to believe. The real story is more interesting and something we all need to understand in order to chart our personal paths into the next economy.

What happened in 2008 was the end of the Industrial Age. The Industrial Revolution that began with the steam engine in the early 18th century matured into the Industrial Age during the 19th and early 20th century, and ended with the emergence of an electronically connected global economy in the late 20th century. By that time the means of production, (that is, factories), began integrating with computerized robots, redefining the entire concept of “industry”.

Historians could easily choose the 1980’s as the beginning of the end of the Industrial Age. It was a time of stunning economic changes, when huge companies that were synonymous with the global dominance of the industrial strength of the United States suddenly when bankrupt. Tens of thousands of people who had worked faithfully for these industrial giants found themselves not only unemployed, but also without promised retirement plans. Thousands more who had already retried found themselves without their pension payments, dependent only on government old age benefits. The people who lived through that time had no inkling of the underlying causes of the financial chaos they endured or the end of an era it signaled.

Two completely different things happening at about the same time combined to drive a stake into the heart of US industry and ushered in the first glimmer of the global economy. At the time, neither of these things attracted much notice, but as the years went by their impact became clear. Individually, neither is much to take note of, but each one magnified the effect of the other, and over the years each matured into more efficient and ubiquitous forms; now more mature versions surround us, yet we fail to appreciate how dramatically they affect global business.

The first of these two occurrences was the fax machine. Fax machines are not a 20th century invention. The first business use of a fax machine was a devise that converted the dots and dashes transmitted by telegraph to letters and were used to send messages between Paris and Lyon in 1865. By the turn of the century an improved devise transmitted a wanted poster, complete with a drawing to the suspect, from Paris to London.

The problem with fax machines is that only one is useless; in order to send a message the person to whom one wants to send a message needs to have a compatible devise, along with electricity, telephone lines, and related infrastructure. It was not until the early 1980’s that enough people in the United States had fax machines to create a “critical mass” robust enough to support widespread business use. When that point was reached, however, it took very little time for fax machines to go global. Suddenly orders, receipts, and bills of sale could be transmitted instantly to whoever had a fax machine. Physical financial instruments delivered by the mail system established by Benjamin Franklin were no longer required to place an order when inventory got low or a market demand for an item emerged.

The financial industry began their move towards electronic financial transfers during this time. No longer, did physical checks need to be flown to and from central processing centers every night before credits and debits could be applied. The international banking system very quickly integrated the speed that fax machines provided into their business transactions. For a while in the early 1980’s international financial transfers were facilitated by clerks sitting at computer terminals. Popular culture featured these workers in movies like the 1986 Whoppi Goldberg film Jumpin’ Jack Flash, and Texas singer Michelle Shocked referenced her time as an international financial clerk in her song “Anchorage” on her second album “Short Sharp Shocked” released in 1988

The increased speed that orders and financial transactions could be made did not mean much without the second event. Not really an invention as much as a change in perspective it changed the world, but went largely unnoticed. In the early 1980’s goods were transported much as they had for the preceding century. Factories created products and stacked them on wooden pallets that were driven into railroad boxcars with forklifts. Once at their destination more forklifts would drive the pallets of goods form the boxcars to large delivery trucks that would transport the goods to warehouses. At the warehouses, the goods were organized and stored until ordered and delivered to retailers. Ocean transport was still a matter of cranes lowering large empty nets into holds of ships where strong men would use their muscles to place goods into the nets. Cranes would lift the filled nets out of the hold and place them on the dock where more men would stack the goods on pallets for the forklifts to drive into boxcars for transport to warehouses.

In the late 1970’s and early 1980’s Burlington Northern Railroad Company was becoming concerned about competition from more efficient means of transportation. It was losing freight business to trucks, and passenger travel was becoming dominated by cheap air carriers. In their book Wisdom of Teams, Katzenbach and Smith wrote a fascinating account of how a small group of experienced managers working for Burlington Northern inadvertently revolutionized international transportation. Their idea, a simple concept that became obvious only after a change in perspective, would not have had the impact it did except for the worldwide use of fax machines. Those two things taken together — a simple change in how rail transportation was thought of, and the advent of cheap international communication — combined to drive industry from the United States to Asia and to signal the beginning of the end of the industrial age.

For years, railroads had loaded semi trailers belonging to the trucking industry on flatcars, carried them close to their eventual destination, then unloaded them and turned them over to the trucking industry for final delivery. This was called intermodal transportation, but it had been viewed by the railroad industry with contempt because it involved cooperation with what they viewed as their direct competition, the trucking industry.

Burlington Northern saw truckers as brutish amateurs, upstarts in the freight hauling business who were unconstrained by fixed rail networks or interstate regulations, who had no tradition or reputation to recommend them. When a small team was assigned to upgrade Burlington Northern’s’ small inter-modal division little was expected. As the team studied the deficiencies of the intermodal system, it became clear to them that the company had not exploited a valuable possibility. The inter-modal system could be made more efficient in a number of ways, but a vague and unidentifiable piece was missing. It was not until the team looked at the problem from a different direction and in so doing redefined the entire situation.

For months, they had thought of themselves in the railroad business making a foray into the trucking business, but suddenly it occurred to them that they were not in the railroad business at all — they were in the transportation business. That simple change of view made all the difference.

Instead of viewing tucks as competitors they began to see trucks as a tool to be used. At first Burlington Northern contracted with tucking companies, and quickly bought their own fleet of tractors and trailers. They reorganized the network of ramps and cranes needed to move trailers from pavement to flatcars and made the entire system more efficient.

As diminishing costs and increasing business proved the value of the concept, someone came up with a new idea. Why use trailers? Why not use a container that was just as much at home sitting on a flatcar as being hauled down the highway behind a tractor? Or for that matter, stacked on a ship? Or rolled into a jet powered cargo aircraft?

And so started the era of container shipping. Now a container could be packed with products made in efficient Asian factories with cheap nonunion labor, placed aboard a ship with hundreds of other containers, off loaded on the west coast of the United States, moved by rail to a location near the final destination, and trucked the final distance to the eventual destination. Computers calculated the cheapest method of transportation every step of the way and products with the highest profit margins and shipping charges became a priority. Suddenly the cost of shipping goods fell dramatically.

So dramatically, that factories in the United States could no longer compete. Not only did Asian producers have much cheaper labor, but they also had the money for the most modern production facilities. US Steel was the benchmark steelmaker for every other producer in the world, an icon of American industry and the pride of US industrial might. However, the furnaces of US Steel were using the technology of the 1920’s, while Asian steelmakers were financing state of the art computerized steel mills. US Steel went out of business.

Thus ushered in an era in which Americans learned a new vocabulary of finance terms. “Arbitrage artists” launched “hostile takeovers” of factories because their assets were worth less than “net future value”. In other words, the property the company owned could be sold for more money than what it could ever be expected to make. The dawn of the global economy had arrived, and suddenly American factories and workers were competing with factories and workers in Asia.

“Arbitrage” is a financial term used when an imbalance exists between the values of two or more things. In the case of the US economy in the 1980’s the imbalance was between the cost of output between old American industries and newer industries in Asia using lower priced labor. Arbitrage artists were wealthy and well-connected Wall Street professionals who created complex deals in which investors offered enormous sums to shareholders of struggling companies. Shareholders were offered far more money for their shares they they could ever hope to gain by holding them. They had little choice but to sell, although companies often used bankruptcy a tactic to hold off these hostile takeovers. It did not matter if the arbitrage attempts were successful or if bankruptcy succeeded in maintaining the original owners of the company. In either case, assets — the physical property of the company — were then sold, often to foreign competitors. Entire factories were exported to Asia, Mexico and South America.

However, what sparked the ire of Americans against the arbitrage artists and the deals they made was that pension funds and other worker benefits were included as assets of the company. Bartlett and Steele, two reporters at the Philadelphia Inquirer, explained the details in America: What Went Wrong, published in 1992. They profiled hard working Americans who found themselves without pensions or health insurance because those assets had been liquefied during an arbitrage battle or bankruptcy proceeding. After working for decades in American factories that supplied the world with everything from freight cars to bubble gum, these people created the middle class, bought homes ownership, sent their kids to college and drove new cars. One the verge of retirement, however, these same people often found themselves selling all they had acquired in a lifetime of loyal labor in order to preserve their lifestyle. In the end many of them moved in with children or went on public assistance.

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