Industrial output is one of the driving factors of the changing world order. Along with the global share of manufacturing output change, the international order has changed over more than 300 years. For example, India’s dominance of wealth creation out of industrial output was taken over by Britain. Subsequently, Britain lost its dominance to the USA. After WWII, Japan grew up as an industrial power even after being defeated. In the 1980s, we also witnessed the rise of South Korea and Taiwan. Most importantly, we have been witnessing the unprecedented rise of China as a global factory. Let’s look into some data to substantiate the observation.
India’s share of the global economy declined from 24.4% in 1700 to 4.2% in 1950. Likewise, India’s share of global industrial output fell from 25% in 1750 to 2% in 1900. Britain’s relative share of manufacturing output rapidly grew during the same period, reaching its peak around 1880. On the other hand, USA’s global share in manufacturing kept rising between 1830 and 1900. Unlike past, we have been observing the rise of China’s global share of manufacturing outputs, growing from 8.7% in 2004 to 28.4% in 2018. The USA’s share fell from 22.3% to 16.6% during the same period. Another notable change has been the rise of Japan, South Korea, and Taiwan. On the other hand, despite having independence in 1947, India’s global share of manufacturing output stood just at 3.1% in 2019, let alone getting back the past glory.
But what is the underlying force? How can we interpret the changing roles of nations in industrial outputs? Are there roles in the dynamics of inventions and reinventions?
Topics of interest
- Questions to be answered to figure out the underlying cause of the changing world order
- Defining productivity and finding reasons for its rise and decline—affecting the changing world order
- The uprising of Britain and the Fall of India—is it due to the exploitation of colonies?
- S-Curve like rising path of Britain, followed by a decline
- India does not rise due to its failure to scale up productivity out of knowledge and ideas
- Rise of Japan after getting defeated in WWII
- Taiwan is a factor in global geopolitics due to the success of the reinvention race
- Investment in education is not good enough to open the path to increasing the productivity
- The invention is not good enough—winning the reinvention and incremental innovation race is essential
- Changing world order within the context of creative destruction and disruptive innovation
- Reinvention waves underpin the changing world order
Questions to be answered to figure out the underlying cause of the changing world order
What kind of things India was producing and how for attaining as high as 25% share of global industrial output in 1750? Is it about the colonization for which India lost its glory in the industrial economy? If yes, during Japan’s uprising from 1950 to 2000, why could not India experience a similar growth path by enjoying independence? On the other hand, how did Britain grow? From whom did it learn?
Likewise, what is the underlying force of the growth of the USA, followed by China? Did China become a success story just because it had a colossal manufacturing labor force? Did technology progression play any role to making the vast pool of Chinese farmers eligible for factory jobs? Can we figure out answers to these relevant questions without taking into consideration of the role of reinvention dynamics? Was the investment in education good enough for the rise of Japan? If yes, why cannot many other nations like India replicate it?
Defining productivity and finding reasons for its rise and decline—affecting the changing world order
In explaining the rise and fall of nations, Ray Dalio has identified productivity as the most critical force in causing the increase in wealth, power, and living standards. For sure, productivity has many connotations. In this article, let’s assume it as the per-person economic value creation and capture. To get further clarity, let’s look into how human beings create economic value with innate abilities and the ability to acquire and develop knowledge and produce ideas. Concerning productivity, the wealth of a nation depends on how much per person value addition and the total number of employed people. Hence, both low productivity and unemployment affect wealth creation.
By born, human beings have a set of innate abilities. Yes, economic value creation started with these innate abilities. For the growth of the industrial economy, it was not sufficient enough; besides, even replication of simple industrial products needed acquired knowledge and skill, which only a few artisans could deliver. But continued advancement of the production process and the products themselves have been eroding the requirement of earned abilities, leaving only the necessity of innate skills for the factory workers. As a result, a large pool of unskilled or low-skilled people from less developed countries, including China, became eligible for factory work. Yes, productivity in production through innate abilities is low. But it has turned a massive pool of unemployed or underemployed people in China and many other countries eligible for factory jobs. Hence, China and many other nations have witnessed wealth creation out of factory jobs.
The other two means such abilities of knowledge gathering and discovering, and creativity depend on the available scope. In its absence, education and research alone do not increase productivity and employment. Often, it’s determined by the global race of product and process innovation.
The uprising of Britain and the Fall of India—is it due to the exploitation of colonies?
Among the colonies, there is a common belief that the uprising of Britain is due to the exploitation of resources of the colonies. There is also a strong belief that due to such exploitation, India fell from grace. In 1700, India primarily produced spices, cotton, handmade textiles, handicrafts, and natural resources. Yes, British merchants benefited by trading those products in Europe. Is it the sole reason for rising of Britain? But why did India fall through this trading? There is no denial that perhaps the master was setting the price, depriving Indians from getting a competitive value. But that does not explain the steady decline of India’s and Britain’s steady rise in global shares of industrial outputs.
Perhaps, it can be explained by considering technology and reinventions, and their implications on productivity. During the pre-industrial age, like the rest of the world, intuition-based innovation and craftsmanship-based manufacturing were the base of the industrial economy of India. Due to the vast population, easy availability of natural resources, and favorable climatic condition, India prospered far better than other nations. But the equation started changing due to the formation of Newtonian mechanics, thermodynamics, and other areas of scientific advancement. As Britain was leading the leveraging of such development by transforming craftsmanship into mechanical engineering and scaling up steam engines with the flow of ideas out of scientific knowledge, productivity started rapidly growing.
It happened as mechanical engineering and science leading to mechanization and continued advancement of the steam engine were widening the scope of creating economic value out of knowledge and ideas. Furthermore, mechanization made the large pool of peasants eligible for higher value-added factory jobs. Hence, the total wealth of Britain started growing faster than any other nation. On the other hand, India’s craftsmanship-based industrial products started losing the market.
S-Curve like rising path of Britain, followed by a decline
As explained, the development of an academic base around Newtonian mechanics and thermodynamics led to scaling up craftsmanship, skill base for manufacturing, and steam engines. As a result, since 1760, productivity started to ramp up. It also created the opportunity to engage low-skill unemployed or low value-added craftsmanship workers in manufacturing jobs. As a result, the total wealth of Britain kept rapidly rising. However, due to the diffusion of steam engines and mechanical engineering technology base in the rest of Europe, Britain’s ability to extract value kept declining. Besides, along with the maturity of these two technology cores, the scope of increasing productivity out of knowledge and ideas also kept falling. Hence, Britain’s rise in productivity and wealth out of mechanical engineering and steam engine showed an S-curve pattern from 1760 to 1880.
Furthermore, due to the reinvention of products and production processes by changing the steam engine and mechanical engineering with the internal combustion engine and electrical engineering by other European countries and America, British industry also suffered the burn from disruptive innovation. Hence, by the late 19th century, Britain started to experience a decline in prosperity and power.
India does not rise due to its failure to scale up productivity out of knowledge and ideas
After its independence in 1947, India opted for an import substitution strategy. Instead of reinvention, India picked replication and imitation of the products India was importing. It chose to labor and natural resources to add value in replicating foreign products by importing capital machinery and product design and infringement of intellectual properties. Yes, such an approach created manufacturing jobs. But the reliance on labor-based replication did not open the path of scaling up productivity for leveraging knowledge and ideas. Hence, although India’s wealth started increasing due to manufacturing job growth for replication, India failed to scale up through knowledge and idea accumulation. Besides, India could not leverage the linear model of IT service export success into an exponential productivity growth model. As a result, India cannot find the rising path to changing world order.
Rise of Japan after getting defeated in WWII
In comparison to China and India, Japan is a small nation. Furthermore, unlike Ray Dalio’s presumption of the rise of power after winning the war, Japan started the journey from the ash of WWII. Surprisingly, it rose as the 2nd largest economy and maintained it for decades before losing it to China. Unlike India, Japan focused on reinventing existing products and winning the incremental innovation race. One of the preferred technologies for the reinvention journey for Japan was Transistor. Hence, just right after its invention in 1947, Japan embarked on leveraging it to reinvent an array of consumer electronic products, like Radio and Television. As a result, Japan succeeded in scaling up productivity out of knowledge and ideas.
Due to the rise of Japanese companies’ led reinvention waves, many American and European companies lost the business edge in consumer electronics. Notable ones are RCA, Zenith, Leica, and Kodak. It’s worth noting that the rise of Japanese companies and the fall of American and European counterparts did not happen due to less costly and hardworking Japanese, as referred by Ray Dalio. Instead, it happened due to a decision-making dilemma, often caused by technology uncertainty. Hence, with the rise of exponential productivity and wealth of Japanese companies, American and European star performers suffered from disruptive innovation effects and declined. Therefore, reinvention dynamics are at the core of the rise and fall of productivity and wealth of firms and nations.
Taiwan is a factor in global geopolitics due to the success of the reinvention race
Taiwan’s small island economy has become a pivotal factor in the geopolitics involving two powers—the USA and China. What is the underlying strength of the rise of this small agricultural economy as the battleground of these two economically most powerful nations?
It happens to be that Taiwan has succeeded in taking away the silicon processing edge from the USA’s Silicon Valley through the reinvention of the semiconductor industry. It led to the growth of the 3rd party foundry-based fabless business model by leveraging the rise of the smartphone wave. On the other hand, due to the maturity of the PC waves, Intel-led Silicon Valley could not keep pace. Furthermore, instead of adding value out of operation through capital and labor, TSMC led Taiwan to focus on adding value to silicon through knowledge and ideas. Hence, Taiwan has created a path of exponential growth in productivity, making it a highly prosperous economy.
Investment in education is not good enough to open the path to increasing the productivity
Like many economists and development thinkers, Ray Dalio has stated that investment in education is the starting point of the rise of nations. But in their deliberation, there is a lack of clarity. Despite the common belief, there is no natural correlation between acquisition and generation of knowledge, idea creation, and productivity growth. First of all, for replication out of imported capital machinery and designs of products, there is a decreasing role of knowledge and little or no role of ideas.
The challenge is to create the scope of adding locally produced knowledge and ideas to both products and processes so that the quality keeps going up and the cost keeps falling. And it happens through joining and leading reinvention and incremental innovation race. Unless a deliberate attempt is made, progress in graduates, publications, and patents will fall short of the rise of productivity and competitiveness, let alone a nation’s rise.
The invention is not good enough—winning the reinvention and incremental innovation race is essential
First of all, inventions seldom happen. Irrespective of the greatness of the ideas, inventions appear in primitive form, generating no economic value at the beginning. A long journey of incremental advancement is needed to make them suitable for creating economic value. Besides, reinvention is a must to keep finding successive growth paths to expand the invention’s wealth reservoir.
For example, the invention of the computer by Charles Babbage created hardly any economic value. Similarly, in the beginning, inventions like airplanes, automobiles, gramophones, and light bulbs produced no economic value. But over the century, they have become powerful vehicles for creating wealth. It has happened due to the race of incremental advancement and reinvention. Due to lack of it, Russia could not drive economic growth through various inventions, like Radio, Laser, and many more.
Changing world order within the context of creative destruction and disruptive innovation
All great products have been progressing through reinventions in an episodic form. As explained, products keep maturing and reach the peak of the S-curve; Consequentially, the scope of adding value out of knowledge and ideas slows down. Therefore, along with productivity, wealth creation progression also decelerates. To overcome it, there is a need to dive into recreation through reinvention. It takes place by changing the mature technology core with emerging ones. But invariably, reinvention waves appear in primitive form. But through continued improvement out of a flow of ideas, these primitive waves grow and destroy mature, profitable products.
Invariably, reinvention waves emerge in primitive form, generating loss-making revenue. Hence, incumbent firms or nations profiting from producing mature products fail to lead and switch. As a result, they suffer from disruptive innovation effects. Hence, often, they suffer from the loss and the migration of innovation epicenters of those products. Such reality is the underlying cause of the fall of influential firms. Consequentially, newly entering firms and nations rise–changing world order.
Reinvention waves underpin the changing world order
As explained, inventions are not enough to create wealth. Besides, education and research do not naturally correlate with productivity growth and wealth creation. Hence, investment in it alone does not make the rise and fall of nations. Furthermore, low cost and hardworking labor for replication are not good enough either. Instead, the underlying cause has been the rise of the reinvention waves as creative destruction, often unleashing the disruptive innovation effect. Hence, the changing world order is rooted in the rise and fall of nations’ productivity and wealth due to the reinvention waves.