The seemingly sudden collapse of commodity prices has made news in the press.  Oil declined close to 50% in just a few weeks. The press claimed it was due to increased U.S. shale production and slowing global demand.  While these two factors are valid, I believe, they are on the margin.  What’s not on the margin:  Americans understand something very fundamental has changed in our economy. The true heart of the issue is the transition of the United States from a manufacturing economy to a knowledge/service based economy.  This economic transformation was first visualized over 30-years ago by Austrian economist Peter Drucker.  It is a paradigm shift unique in the economies of the world.

The transition started circa 1980 as we experienced peak inflation, strong labor union demands and the worst recession since the depression.  It was a recession that would last two years. To deal with the then economic reality, manufacturing began to shift to lower wage countries … particularly China.  Our largest retailer, WalMart, became a pioneer in “offshoring.” With consumer spending over 60% of the economy, this offshoring also had a tremendous social impact.  The prosperity of the middle class began a 30-year slide; a slide which caused the social malaise that exists in the country today.

As our manufacturing was shifting overseas, entrepreneurs began to create a new economic paradigm; one that was based on knowledge … especially in technology and health care.  Microsoft and Amgen in many ways provided the “genetic coding” for thousands of other knowledge-based companies that were to follow.  These knowledge businesses all were entrepreneurially-driven and about new product discovery ... the very essence of a vibrant growing economy. 

While new knowledge usually has social benefits, this time it also had an unfortunate downside.  In technology and health care one has to be trained in either discipline to work in it.  It is knowledge that most of us who are older do not have.  Also a knowledge-based economy does not require as many workers as an industrial economy.  The service sector does create jobs … but they are generally low paying.  The new economy has thus created a wealth and political divide as presented by sociologist Charles Murray in his book Coming Apart.  It’s politically presented as the 1% versus the 99%.  Nothing will change that reality but educational training … which in time will build a new middle class.

Finally, as a knowledge-based economy grows it becomes less dependent on commodities.  In fact, the recent 50% decline in the price of oil is a direct result of new fracking technology knowledge.  This past year’s commodity decline could be the tipping point in the U.S. economic evolution.  If so, since we are the world’s largest economy, it would be unfortunate for commodity based countries.  Unlike industrial economies, what we need to continue growing our NEW economy is not commodity dependent.  It’s what we have always excelled at --- new entrepreneurs, new products and great new ideas.  

Francis Patrick Boland