Value in the Digital Transformation

By Martin Recke

21/02/2017 | “In the digital transformation, we often overlook what is actually being transformed” writes Martin Recke in his column. “And that thing is value, which affects not only humans but also industries.”

There are basically two ways that we deal with the challenge of the digital transformation. One is simply to deny it as a reality: Me, my industry, my life and my job are not affected, because all of that remains analog. The other is the complete reverse: Yes, everything is going to be digital. If we lose our jobs because of this, we will still need a basic income.

Both are nonsense: the reason being that the digital transformation digitises the value. This affects everyone and everything - people, industries, products, life, jobs. Therefore, it will preserve analog things, products and ways of life - but their relative value, compared to digital products, decreases rapidly. To understand this, a look back at similar transformations in the past is necessary.

Before the Industrial Revolution, the majority of the value added was produced in agriculture, everything else was largely craft and trade. None of this has completely disappeared - but in agriculture less than one per cent of gross value added is provided today. Nevertheless, no one should go hungry, and a densely populated country like Germany can practically feed themselves. The Industrial Revolution marginalised agriculture. The value has moved from agriculture to industry, and with it the labour force.

The value is digitised

Around fifty years ago, the same process started again. This time it’s the service sector that’s growing, while industry is shrinking and migrating to Asia. In part, this process is dramatic – and can be suitably described as de-industrialisation, which has drastic consequences for regions and employees. A strong industrial base such as Germany today yields less than 30 percent of gross value added in the industry sector – compared to almost 70 percent in the service sector, where nearly 75 percent of all employees work.

The productivity of employees in the industrial sector is only slightly higher than those in the service sector. However, services also include relatively simple tasks, which bring the overall average down. In fact, low skilled industrial jobs were cut long ago. On the other hand, there are lot of well-paid expert tasks in the service sector, with most of you reading this article belonging to that category.

The value is already migrating towards digital, while services, industry and agriculture are either digitalised or further marginalised.

The digital transformation has not only recently begun to take away share of value added from the three sectors of agriculture, industry and services. It’s hard to calculate by how much but, according to official figures, the ICT industry already provides almost five percent of the gross value added, more than the machine engineering industry. The level of digitalisation of the German economy in 2016 was already at 55 of a possible 100 points. Studies like these suggest that about 50 percent of the value generated is by digital offerings. An industry heavyweight like Audi CEO Rupert Stadler says that, in the future, his company will obtain 50 percent of its revenue from digital services.

Would statisticians therefore eventually bring themselves to define the Digital Economy as separate sector, then the digital sector would definitely already be one of the major pillars in the diagram. In other words: The value is already migrating towards digital, while services, industry and agriculture are either digitalised or further marginalised. This process inevitably means that jobs will disappear, specifically those whose value has been substituted by the digitisation. So, to continue the analogy with the Industrial Revolution, the term Digital Revolution is quite appropriate.

The unconditional basic income is not a solution

We may ask if an unconditional basic income is a solution to this problem? Probably not. And again a look at history is enlightening. The welfare state as we know it today emerged in response to the social problems of the Industrial Revolution. It helped to mitigate the distortions of this structural change. However, a redistribution of the value on a large scale cannot be accomplished by the welfare state. That would not be compatible with the idea of the social market economy. But when an unconditional basic income has to compensate for the consequences of the digital transformation, it would have to do and be exactly that - a redistribution of the value in a big way.

If this wasn’t achieved, then the unconditional basic income would not solve the problem its supposed to solve. Without redistribution on a grand scale, the largest part of the value would remain with those who generate it. The actual core of the discussion is to be found here. Redistribution on such a scale would mean burdening the digital value with higher taxes and fees, which would be understandably unpopular.

Equally, it is questionable whether the solution would be to pay significant social benefits to large parts of the population. The experiences of the past decades in this respect are not encouraging. Most people of working age prefer to be involved in the value creation, so they can feed themselves, than to be bankrolled. So if the value is digital, so too must be the jobs. More specifically, people need jobs that can’t be digitally substituted (yet). And for that it needs human ingenuity - as always. In the end, that has little to do with digital transformation or unconditional basic income. It has more to do with the fact that people always go where they see opportunities for themselves and their lives - in occupations, industries and regions where value creation is higher than elsewhere.

Originally published in German at t3n.de on February 15, 2017.

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