Davos 2016: Forget the markets – the Fourth Industrial Revolution is here

New technologies are again about to transform how we live, as those gathered in Davos are well aware

Let’s take a respite from the gyrations of the markets and focus on something longer term. When, this weekend, the grandees in Davos were not fretting about financial chaos they were talking about something else: the Fourth Industrial Revolution. This is a main theme of the meeting, for the people who run the symposium there are good at picking up big ideas. So, we are going to hear a lot more about it in the coming months. But what is it?

Start with some history. The first Industrial Revolution, which began in Britain in the late 1700s harnessed first water power, then steam, to drive a string of connected changes that enabled living standards to increase by around 2 per cent a year. The key elements were factories, railways, steamships, and agricultural advances. For the previous 1,000 years living standards in Europe had risen, at most, by less than 0.5 per cent a year, and there were long periods of stagnation and retreat. Go back further and living standards in Europe in 1000 were lower than those at the time of the Roman Empire. The world in 1900 was utterly different from that of 1800.

In the final years of the 19th century the second revolution was under way, with factories driven by electricity rather than steam (which made possible the moving production line), mass consumer goods, the car, the plane, the phone, television and so on. Then, from the 1970s came the personal computer, the internet, the whole bundle of technologies of the communications or IT revolution, which we are living with now. This has been dubbed the Third Industrial Revolution, because it has led to a very different economy from that of, say, the 1950s or 1960s.

Some question whether we are moving into a new revolution or a sub-set of the previous one; I’m not sure we can know yet. What we do know is that some developments coming through now, or just round the corner, carry the possibility of change that will be as different as the internet world is from the pre-internet world. The key technologies will probably include some or all of these: artificial intelligence, robotics, the Internet of Things, big data, mobile telephony, and 3D printing.

A couple of examples may make this clearer. Take health care. At present we rely on doctors, hospitals, pharmaceutical companies and so on to keep us well, and treat us when we are not. It is a huge chunk of the economy, between about 8 and 16 per cent of the GDP of developed countries. In the United States it is bigger than manufacturing. Now, suppose we could manage things so that people didn’t get ill. Absurd? Well, yes, but you can see bits and pieces of the technologies that might make constant monitoring of health possible: the health app stuff from Apple is a precursor of much more sophisticated kit. You can imagine a world where you don’t need a doctor to diagnose your illness because before any symptoms appear the info would have gone to a specialist treatment centre. People would be able to take responsibility for their general health. 

The new element here is that machines talk to machines. The (expensive) human being is involved when needed, not as routine. So, not only does the cost of healthcare come down; the quality of the outcome goes up.

Now think of financial services. Take pensions. It is, with buying a home and choosing a career, one of the big three financial decisions that people make. Yet most of us give only cursory attention to it, assuming our employer or the state will sort it out, or just hoping for the best. For those who do tailor their own plans, doing so is expensive. The scope is huge for a pension plan that requires little or no input from either provider or the individual, but simply sets aside some money every month, changes the plan as markets and tax legislation alter, and adjusts to other shifts in lifestyle and expectations. Taking the human interaction out of the process would cut costs, and that alone would massively boost returns.   

Perhaps the best way to think of the possible changes is to look for the parallels with previous industrial revolutions. Mass production has delivered an increase of around 3 per cent in manufacturing productivity year after year. It has proved much harder to increase productivity in the service industries, yet services account for a much larger proportion of output now than manufacturing. So, the key to getting richer is to use technology to improve efficiency of service industries, and that is really what the latest revolution is about.

One huge challenge will be to see that these developments do not disadvantage the people whose jobs are displaced. Jobs at risk include a lot of mid-skill ones in service industries. But the prize is huge … which is why we will hear a lot more about this revolution in the years ahead.