The “Fourth Industrial Revolution” is a popular label for the changes that are taking place in our economy. However, this term is misconceived. This transformation is not another wave of the Industrial Revolution. The labels “Third” and “Fourth Industrial Revolution” miss the point that our economy has moved to a qualitatively different basis for generating wealth.
The current revolution is as far-reaching as the original Industrial Revolution. It is not the “Fourth Anything,” and it is not “Industrial.” In reality, it is counterindustrial.
Why? Because intangible assets, such as software, data, brands, trust and customer relationships, have replaced physical assets as the principal basis of value creation. This trend has been tracked and measured by economists, but we have yet to realize its profound repercussions for business and society.
Welcome to the intangible economy
Intangible assets now outweigh tangible assets (e.g., machinery and buildings) in terms of investment and accumulated capital. They are driving higher returns on capital, productivity, growth and shareholder value.
It’s not just that intangible assets are of huge significance; they are also different in nature. As Haskel and Westlake explain in “Capitalism without Capital,” whereas physical assets are consumed and wear out, intangibles are scalable — think Google, with its data and algorithms, and Starbucks, with its brand and standardized operational procedures. Since intangible assets can be scaled, maximization of returns demands that they are scaled globally. Likewise, much of the value of intangible assets comes through synergies. With platforms, for instance, customers draw in more customers and partners, and additional customers bring extra data to refine algorithms.
IT is critical, but it’s not everything
There is an intimate relationship between IT and other intangibles. Although intangible assets are scalable in theory, this potential remains unrealized without IT to provide a vehicle for scaling. Likewise, IT plays a key role through connectivity: Synergies are easier to create on the digital than the physical plane. For example, Uber’s rapid growth was possible because its operations were essentially a synergistic bundling of digital services — geopositioning, route calculation, maps, push notifications, payments and receipts — sourced from partners.
However, the rise of intangibles is not simply about IT. The chronology does not fit, nor does the logic, since intangibles such as brands, organizational development and training do not depend on IT. Finally, the economic analysis does not support this. Instead, “A surge of new ideas (technological or otherwise) is linked to output growth through a complex process of investments in technological expertise, product design, market development and organizational capability.” (Carol Corrado and Charles Hulten,“How Do You Measure a ‘Technological Revolution’?” American Economic Review Vol. 100, No. 2, 2010.)
The intangible economy runs alongside the physical economy
The intangible economy doesn’t replace the industrial economy; it runs parallel and is connected to it. Yet increasingly, the space where value is created is in the intangible domain. Yes, the iPad and iPhone are manufactured devices, but they are assembled out of commodity components from many of the same manufacturers used by Apple’s competitors. The value-add, which enables Apple to charge a premium, comes from intangible assets: Apple’s user experience and design, brand and the ecosystem of partners in its platforms.
Just as occurred during the Industrial Revolution, the Counterindustrial Revolution will have ramifications across our economy and society. For example, prior to the Industrial Revolution, merchants provided raw materials to weavers and their families, who worked from home with their own tools and were paid on a piece rate. With the advent of large machinery, however, the unit of manufacture moved from the household to the firm and the location of manufacture moved from the house to the factory. Wages and employment contracts supplanted piecework. The division of labor drove productivity. Workers organized themselves in trade unions. Capital markets blossomed to fund building of factories and railways.
With the intangible economy, we are seeing change on each dimension. The optimal scale for digital production is global. The home has re-emerged as a workplace for teleworkers. The gig economy has sprung up at the expense of wage-based employment. The “division of learning” now mostly defines power and rewards. Unionization has declined, and venture capital has taken over much of the role played by stock markets for early-stage companies. Moreover, this is inherently a greener economy since there is much less dependence on producing and transporting physical goods using carbon-derived fuels.
Recognizing the nature of this transformation and its magnitude is the first step to responding to the Counterindustrial Revolution. Organizations will develop strategies in a different way once they realize that the most important building blocks are scalable, intangible assets enriched by synergies between them. Our governments and societies will need to devise novel policies — for example, around skills, investment and infrastructure — to ensure success in the new economy, and to mitigate its inevitable side effects.
To learn more about the Counterindustrial Revolution and what makes the intangible economy different, read the full Leading Edge Forum research commentary.