Technology is causing the recession

The latest GDP numbers are awful. The UK economy shrunk by 0.7 per cent in a quarter. One cornerstone industry – construction – is in free-fall.

Rather than embarking on futile political blame-games (Lord spare us John Humphrys’ asking yet again, “what’s the government doing about it?), we must face a stark fact: the UK economy needs a total clean-out. All the fiscal and monetary levers have been pulled, and they haven’t worked. A much, much bigger story is in play. And, as someone once said, we’re all in it together.

Next time you pay for your groceries at a self-pay checkout, you’re contributing to reduced demand in the economy: that Tesco employee who’s been replaced by a machine may not have found a new job and, thus, added to the country’s welfare bill.

Every time you buy a book online at Amazon (instead of wandering down to your nice, local, independent bookshop), the economy (right now) shrinks a little more: the bookshop owner, the staff, the printer gradually fall out of commission.

When you next visit a free online news source, rather than buying your local newspaper, a publishing business struggles further: traditional roles such as print journalists, production managers, sub-editors step closer to extinction.

When you go online to compare insurance prices rather than visit your local insurance brokers, that firm finds it just a bit harder to survive.

When a business moves its IT services to the cloud, even relatively new technology sub-sectors slip into obsolescence.

And so it goes on. In fact, it gets worse.

The devastation wreaked by digital technology on old-style business doesn’t end with the consumer/business transaction: beleaguered property companies generating increasingly poor sales-per-sq-ft from their retail business clients pass on the problem of declining returns to their freeholders. They, in turn, deliver declining results to their investors. On and on the problem moves, until it arrives at the doors of, yes, our financial institutions.

And what do they do? They “innovate” to reignite their performance. They push the limits.

It’s widely accepted that the global financial crisis started with the over-zealous selling of sub-prime mortgages. This, at first glance, seems to have little to do with the increasing pervasiveness of digital technology.

In fact, the sub-prime episode was, fundamentally, provoked by the internet. History will show that the mid-noughties boom was the last hurrah for the pre-fully digital economy. Having explored all frontiers of money-making, the world’s financial community landed on their last opportunity: poor Americans who couldn’t repay their debts. That same, desperate hunt for ever-diminishing returns can be seen in the fraught behaviour of the banks over the Libor scandal.

What those bonus-fuelled traders could feel, marching over the horizon, was the astonishing, terrifying, almost magical transparency of the internet and its deathly handmaiden – super-fast digital technology. They knew their time was up and, like Hitler’s retreating armies, they desperately scorched the last few opportunities for revenue.

The internet has, in effect, rumbled the developed (aka western) world’s whole way of doing business. Where once there was fog about the real cost of insurance, mortgages, DVDs, data storage etc etc etc, now there is light. And there’s not just light; there’s speed. That retailer, financier, salesman who once could fob you off with industry jargon and data (and, in so doing, make his margin), can now be rumbled in the time it takes to type “best price of ***” into your smartphone.

The ethics-free sub-prime salesman may not himself have foreseen the power of the new technologies, but up the food chain, such truths were increasingly well understood. It’s the views of analysts and credit-rating agencies that determine the future strength of a business or nation. And which self-respecting analyst is going to recommend buying stock when, she knows, transformational technology is just a few months down the line? Why have the ratings agencies given up on Greece, Spain, Portugal etc? Because they know they’re fundamentally inefficient and unproductive.

The same logic applies in everyday business: why would a bank manager lend good money to a business owner when he realises that, nice bloke that he is, his long-standing customer’s business model (lots of expensive outlets, people, manufacturing units etc) is terminally broken? Are we heading for a recession UK ?

The banks have copped enormous flak for their reluctance to lend to businesses but you could argue that, in some ways, they’re playing smart; waiting for a new generation of real-time, low-cost, truly digital businesses to surge through. Now those would be worth putting money into.

Everywhere you look, inefficiency is rife. Industries, businesses, departments, job functions are dying due to lack of relevance.

Take marketing. Why would any organisation continue to commit itself to decades of the fixed costs, salaries and pension provisions that come with a whopping great marketing department when 70% of consumers these days seek recommendations from other consumers before making a purchase? The days of pumping out “messages” that no-one believes are gone and, with them, is the requirement for great big departments. Traditional marketing has been disintermediated. The sooner the organisation makes that (albeit ruthless) analysis, the sooner it reduces its costs and, paradoxically, improves its interaction with customers.

Then there’s “management” – an accepted part of commercial life for the past 150 years. A chief characteristic of the internet is the way it cuts out the need for much management. Here’s a quote from the Wonga.com website about its operating model: “We are the first company in the world to fully automate the business lending process and we are able to make completely objective and responsible decisions around the clock. There’s no paperwork, meetings with bank managers or hanging on the phone – our entire service is online and real-time.” Like it or not, this is what financial services will look like in the future – and it’ll mean far fewer jobs for managers.

The public sector is the most obvious example of inefficiency unmasked by technology. It’s not the fault of hard-working public servants, but huge chunks of this work could be more efficiently delivered, with far lower fixed costs, by the widespread adoption of technology and, in turn, the collaborative models that it enables. Cast your eyes forward: will we really have vast housing departments in 20 years’ time when, already, users and properties can be instantly matched through the internet? Look at Storemates or Airbnb and then be honest: wouldn’t these models be a better, leaner, faster way of delivering housing services?

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