Welcome to 2022! A DISCUSSION OF DRIVING FORCES OF CHANGE FOR THE YEAR AHEAD

Published: Mon, 01/10/22

InnovationLabs Newsletter

January 2022

Welcome to 2022! 
A DISCUSSION OF DRIVING FORCES OF CHANGE FOR THE YEAR AHEAD


We’re wishing you a Fine New Year in 2022!

Our changing and confusing world is not getting any simpler, it’s not calming down, and the turbulence will no doubt continue throughout 2022. This presents us with great uncertainties, many questions, and troubling anxieties.

However, despite the many unknowns there are indeed interesting patterns that are becoming clear concerning the year ahead, and we will discuss some of them here. In particular, we’ll take a look at emerging patterns regarding the economy, finance, politics, climate change, and covid.



Icebergs

Making predictions about events is a futile exercise, as we all know that most predictions are wrong. But a useful way to think about the future is suggested by the metaphor of the iceberg, which no doubt you’ve already seen (although perhaps with different labels).

The smaller part above the surface constitutes events, which are nearly always unpredictable, but below the surface are driving forces and enduring structures that often shape what we see above the surface.  We can anticipate a lot about these forces and structures because they develop over time, and we can often track their emergence and anticipate their impact.



Key Driving Forces of 2022

Two major driving forces which will have significant influence on the first half of 2022 are the linked conditions of covid and inflation.

We say linked, because the outburst of inflation that many nations are now experiencing seems to be a confluence of three factors. First are supply chain disruptions caused by covid, and second are covid-induced labor shortages. The third is the massive government stimulus payments that protected the economy from the negative impacts of covid. Combined together, the three are putting upward pressure on prices.

We can surmise that if covid had not arrived, then inflation would have been quite unlikely to appear. But going on two years, covid has proven to be quite a difficult adversary, and inflation may become one as well.

Another major driving force which will have enormous impact during the second half of the year in the US will be the national midterm elections. These promise to be very nasty, pitting four major factions against each other: pro-Trump MAGA Republicans, anti-Trump Republicans, Progressive Democrats, and Moderate Democrats. Both the historical pattern and early signs do not point favorably for the Democrats, but many events will occur that could quickly change public perceptions. For example, the more intense the infighting on the Republican side, the greater benefit to Democrats, and vice versa.

Additional and significant driving forces that we will continue to cope with include the ongoing advance of technology and its transformative and often disruptive impacts on the economy, the worsening impact of climate change and the resulting urgency of dealing with it, and unresolved geopolitical tensions in many parts of the world.

While all these driving forces will become evident through countless specific events, they’re all also reflected at deeper levels, in society’s very structures.


Structural Change

A key structural shift underlies many of these driving forces, the major transition now ongoing that affects all of us. This is the transition from the Industrial Era economy to the As-Yet-Unnamed one that follows.

In two of our recent books, Foresight and The Big Shift, we explored key structural factors that are shaping the modern era, and described the transition from industrialism to what’s next in considerable detail.

To better understand this transition, it is helpful to review a bit of history.

The Industrial Era came about through the confluence of advancing science and technology that produced large-scale machinery, improved agriculture and thus increased crop yields, and also improved health care. These combined factors enabled significant population growth, from 1 billion in 1800 to 7 billion only 200 years later.

The population explosion then led to very rapid growth of the economy. Industrial scale manufacturing, exemplified by the Ford Motor Company’s massive assembly lines, ran on vast quantities of fossil fuels and employed the growing population to achieve unprecedented levels of productivity. At the same time, workers formed families and households, and bought stuff to fill them up, creating the post-war cycle of ever-increasing consumption.

As we have since learned, however, that tremendous rate of growth was not sustainable in the way that it was achieved, due to reliance on fossil fuels that brought on climate change, and also due to large-scale environmental destruction that mass consumerism caused.

Consequently, the deeper structure level of the economy is now in the midst of the transition to a different, non-fossil energy infrastructure. This is not a simple transition.

Another key shift which is also contributing to structural change is the surprising end of rapid population growth. Around the world, the rate of growth is quickly slowing, and in many countries the population is actually declining due to slowing birth rates (and in some, emigration). This is also having fundamental impact.

For example, as there is a clear linkage between population growth and increased consumption, so too the reverse is also to be expected: population shrinkage may well lead to reduced consumption. From the perspective of those concerned about environmental damage due to excessive consumption, this is welcome news; from the perspective of those who believe that only economic growth leads to economic health, this is quite worrisome.

But the idea that GDP growth is the only relevant measure of economic health is now being widely questioned, and as we progress into the new economic era it’s a pretty good bet that other measures will replace GDP as the standard.

Yet another pattern impacting on the structure of the economy is the continuing development and spread of advancing technology, including AI, machine learning, robotics, crypto, blockchain, 5G, IoT, etc., etc. As we adopt ever more technology, along with it we get ever more economic disruption.

And then there’s climate change, which now appears to present an unprecedented challenge to humanity. (Our most recent book Net Zero City examines climate change in detail.)

So given the confluence of all of the above (and again, this is a summary in a few paragraphs of hundreds of pages of text), we see that the structure of the economy is inevitably going to change, and indeed we observe that it is already is changing.

We visualize the change this way:


Over the 1000 years from 800 to 1800, the human population grew at a very slow pace. But then from 1800 to 2000 the line lurched upward, nearly vertically. The nearly horizontal line describes the Agricultural Era, the nearly vertical one the Industrial Era.

Now that the line is again arcing down toward much slower population growth, we are by definition entering a new era. (Hence the title of the second book mentioned above, The Big Shift.)

This change, however, is by no means an easy process, and it is made even more difficult because of all the other driving forces that are occurring at the same time.

There have already been winners and losers, and many uncertainties still loom large. As a result, fear is increasing. And what happens when people are afraid? Many become angry, they look for scapegoats, they yearn for solutions, and they are drawn to leaders who promise that they can fix things painlessly, or better yet, fix everything painlessly.

This is the promise of the populist authoritarian, and the world is not short on them right now. Nearly all the major world powers currently have or recently have had authoritarian leaders, for these times of change and uncertainty are their invitation onto the stage.

Calm, well-reasoned, and thoughtful leadership would be so very helpful just now, but unfortunately it has not been predominant in our politics.

Given all this upheaval, it’s not difficult to see that the US election is likely to be a nasty affair. Since we’ve lost the capacity to talk rationally about our ideals and our concerns, we have reverted to accusations, insinuations, and arguments. The other guys are not just wrong, they’re stupid, (although they are smart enough to have fomented a massive conspiracy).

We are thus immersed in the politics of outrage. And if insufficient outrage is present, partisans can whip some up with the help of Facebook and friends in the media. The Russians may also chip in. (This was the topic of our recent book The War for America.)

Underlying this disorderly and bombastic campaign cycle is a second and very important structural theme. Because in addition to the process of reshaping form and functioning of the economy, what we’re actually debating in the US, and indeed in many nations, is the underling social contract according to which our society will function in the future.


The Social Contract

The last few years show widespread disagreement about the role of government and its relationship with society, and even about our relationships with one another. These are all facets of the social contract, and while there has always been disagreement about what should be in and what should not be in the prevailing contract, the character of the argument has lately taken on a rather ominous tone. The riot on January 6, 2021 showed this clearly, as in many nations, and certainly in the US, the capacity to dialog has broken down.

A social contract has an explicit part, often written as a nation’s constitution, but other important elements are often unspoken although they’re widely understood. These tell us “the way it really is.” The written and unspoken together constitute a shared understanding that helps us see who we are and where we’re headed.

Such a contract is not fixed in time, and it’s not the same everywhere in a given society, city, or nation. Further, it evolves as society and the economy evolve, and as our views about ourselves and about right and wrong change. Thus, the prevailing social contract of 1500 or 1800 or even 1980 is not the one of today.

But given that we are experiencing massive change due to the driving forces, given the fear and anxiety that this provoking, given the quite visible shifts in our underlying economic structures, the question we are now actively debating is, What should our social contract be tomorrow?

In the US, the diverging perspectives between partisans of left and right, progressives and moderates, conservative Republicans and pro-Trump Republicans, reflect the prevalence and turbulence of the changes we’re experiencing at all levels of society, the structural changes, and the changing driving forces. Hence, this debate about the social contract will be with us for some time, and because this contract is a structural factor underlying nearly all aspects of society, we know not to expect a calm and settled time.


Strategy for 2022: Leading Indicators

Which brings us back to 2022, and the year ahead.

Although this would be an ideal time to have a productive dialog about the future we want, don’t expect much productive dialog as summer winds into fall, as the prevailing American political pattern is quite the opposite of reasoned discussion.

Yet amid all this turbulence, organizations still have to develop strategies, and then they have to execute them. Strategy is never easy, and it’s only getting more difficult since changes are occurring from the bottom of the iceberg as well as the top, thereby creating even more major uncertainties and increasing the risks. And yet when change goes all the way down to the structure level as it is doing now, developing a coherent and useful strategy is even more important for success, and it may be essential even to survival.

In past writings we have advocated scenario planning as an effective approach to devising strategy in times of turbulence, and as far as we can tell it’s probably the best approach to take now. Let us know if you’re not familiar with scenario planning and you’d like to learn more. We can send some materials and references that you may find useful.

The essence of the approach is to identify critical uncertainties and use to them model various possibilities. This discipline helps us to avoid planning for a single future based on unproven assumptions, and shifts our thinking instead to looking at possibilities, and then at the imperatives for our organization in the face of uncertainties.

We then identify the trends and driving forces that seem to matter most, and we track them carefully, looking especially for early indicators.

In the context of the above discussion, then, here are some of the leading indicators that we are paying attention to.

Global Economy:
We want to understand how fast the overall economic structure is really changing, and how quickly the new economic model is emerging. Can we pick up credible signs that things are really different?

We will not see a mature post-industrial economic model in 2022, but we should see increasing signs that will help us to gauge how fast it is arriving. New technologies, increasingly robotic workforces, and issuance of new currencies are three factors to pay attention to.

Will the birth rate continue to decline?
Will the ratio of robot workers to human workers continue to shift toward robots?

Meanwhile, the Fintech Revolution will continue, which will naturally have significant influence throughout the economy. The very nature of money is evolving, and recently we discovered that at its current rate of development, on a global basis as many as a million people per day may be shifting to fintech service providers. This is an astonishing rate of growth and change, and it explains why billions of dollars of venture capital money is flowing into fintech, and why it is thus in itself becoming a major driving force of change.

Climate Change:
How bad is the climate crisis going to be in 2022, and how quickly will public pressure cause us to mount an effective response? Do we continue to see more major storms and droughts, and increasing insurance claims and losses as a result?

Here is an interesting twist. Much of the increasing pressure to address climate change will come from a perhaps unexpected source, the finance sector. Because the flow of money follows reality, not ideology, finance tends to be focused on what’s really happening, not on symbolism. As investors, insurers, mortgage owners, and property owners are all coming to recognize the significant risks that climate change presents to the value of their portfolios, they are starting to demand meaningful action.

Indeed, the world’s largest single investor, BlackRock, has already announced that one of its top three themes for 2022 is “Net Zero,” and its leadership has been quite articulate in advocating for a zero-carbon future. Many other firms in the finance sector have shared the same views.

During the coming year it’s therefore possible that they will come together to compose a powerful influence block to insist on policy change not just in the US, but globally. If they are forceful enough, this could have unexpected impact on policies and elections worldwide.

How quickly does the momentum build, and how quickly does advocacy momentum turn into action, in the forms of legislation, policy, and investment? This will tell us a lot about how governments may respond, as pressure for action from the finance sector may have significant impact on policy.

At the level of specific firms, do Lloyd’s of London, Munich re, or AIG (for example) announce new insurance restrictions regarding coastal real estate? Is BlackRock effective in promoting de-investment from the fossil fuels sector?

Politics:
In the US, do the Democrats formulate a strong approach for the upcoming election, or do they continue to talk dull policy rather than brand identity?

How effective are Democrats in engaging the public in scenarios that present an alternative to Trump and MAGA? Also, do the MAGA and QAnon movements shed the stigma of Jan 6 and regain prominence? And Does Donald Trump play a leading role in the 2022 election, or does he become merely a role player? These will tell us a lot about how the next few years are likely to go in the US.

And the US is not the only nation with major elections in 2022. Lobbying and electioneering will be going on in many countries, notably South Korea, the Philippines, France, Colombia, Kenya, and Sweden. Each election provides insights into beliefs and attitudes about its part of the world. How does global sentiment evolve? The social contract will be major part of the spoken or unspoken agendas in many of these elections, as the battle between nostalgic impulses and forward-looking visions unfolds globally. Whose vision of the future will prevail? Do nations choose authoritarians or populists, or climate crisis advocates?

Covid:
Covid is on our minds every day, so what risks come after Omicron? Do masks, social distancing, and debates about vaccine mandates become a permanent aspect of our lives? How many covid tests will you take in 2022?

Education has been radically altered by covid, and we fear that an entire generation of students will be adversely affected. Will this be permanent?

And will covid recede enough for travel and tourism to recover? Will people go back to their offices, or will it be another year of Zoom meetings? We wish we knew, but covid has its own agenda and its own evolutionary pathway, and it’s not made its plans public. So we follow the news daily and look for insight into what’s next.


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So these are some of events, forces, and structural questions  we’re thinking about as we begin another year.

We hope this discussion has provided you with some interesting insights and perspectives, and as always, we welcome your comments, feedback and suggestions.



Thank you!



Books referenced in this newsletter:


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As always, we welcome your feedback.
And please do stay healthy!!

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Langdon Morris is Senior Partner of InnovationLabs, one of the world’s leading consulting firms working in the areas of strategy and innovation.  He is author or coauthor of more than ten books on innovation. To learn more please visit www.innovationlabs.com/