COVER STORY • AI — Opportunity for the Evolution of Human Beings • 1

T
he Fourth Industrial
Revolution: What it Means,
How to Respond
By Klaus Schwab
Japan SPOTLIGHT Introduction
We are currently facing a dramatic transformation of the world economy initiated by changing technology, in particular
the rapid progress in AI and robotics. Its impact is increasing exponentially and becoming systemic, as the pace of the
“creative destruction” process increases throughout the global economy. The fundamental question is how people,
companies and industries are to respond to this revolutionary change. At the beginning of 2016, the World Economic
Forum annual conference, which plays a leading role as always in providing issues for economic policy discussions,
announced its expectations and concerns about this technological revolution. Japan SPOTLIGHT believes it is worth
listening to the views of the Forum on this issue first in our cover story.

We stand on the brink of a technological revolution that will Fourth is evolving at an exponential rather than a linear pace.
fundamentally alter the way we live, work, and relate to one another. In Moreover, it is disrupting almost every industry in every country. And
its scale, scope, and complexity, the transformation will be unlike the breadth and depth of these changes herald the transformation of
anything humankind has experienced before. We do not yet know just entire systems of production, management, and governance.
how it will unfold, but one thing is clear: the response to it must be The possibilities of billions of people connected by mobile devices,
integrated and comprehensive, involving all stakeholders of the global with unprecedented processing power, storage capacity, and access to
polity, from the public and private sectors to academia and civil knowledge, are unlimited. And these possibilities will be multiplied by
society. emerging technology breakthroughs in fields such as artificial
The First Industrial Revolution used water and steam power to intelligence, robotics, the Internet of Things, autonomous vehicles, 3D
mechanize production. The Second used electric power to create mass printing, nanotechnology, biotechnology, materials science, energy
production. The Third used electronics and information technology to storage, and quantum computing.
automate production. Now a Fourth Industrial Revolution is building Already, artificial intelligence is all around us, from self-driving cars
on the Third, the digital revolution that has been occurring since the and drones to virtual assistants and software that translate or invest.
middle of the last century. It is characterized by a fusion of Impressive progress has been made in AI in recent years, driven by
technologies that is blurring the lines between the physical, digital, and exponential increases in computing power and by the availability of
biological spheres. vast amounts of data, from software used to discover new drugs to
There are three reasons why today’s transformations represent not algorithms used to predict our cultural interests. Digital fabrication
merely a prolongation of the Third Industrial Revolution but rather the technologies, meanwhile, are interacting with the biological world on a
arrival of a Fourth and distinct one: velocity, scope, and systems daily basis. Engineers, designers, and architects are combining
impact. The speed of current breakthroughs has no historical computational design, additive manufacturing, materials engineering,
precedent. When compared with previous industrial revolutions, the and synthetic biology to pioneer a symbiosis between
microorganisms, our bodies, the products we consume, and even the
TABLE
buildings we inhabit.
Navigating the next industrial
revolution Challenges & Opportunities
Revolution Year Information
Like the revolutions that preceded it, the Fourth Industrial
Steam, water, mechanical production
1 1784 equipment Revolution has the potential to raise global income levels and improve
the quality of life for populations around the world. To date, those who
Division of labour, electricity, have gained the most from it have been consumers able to afford and
2 1870 mass production
access the digital world; technology has made possible new products
and services that increase the efficiency and pleasure of our personal
3 1969 Electronics, IT, automated production
lives. Ordering a cab, booking a flight, buying a product, making a
payment, listening to music, watching a film, or playing a game — any
4 ? Cyber-physical systems of these can now be done remotely.
In the future, technological innovation will also lead to a supply-side
Source: World Economic Forum / Benedikt von Loebell miracle, with long-term gains in efficiency and productivity.

Japan SPOTLIGHT • July / August 2016 3

 COVER STORY 1

Transportation and communication costs will drop, logistics and global Industrial Revolution are having a major impact on businesses.
supply chains will become more effective, and the cost of trade will On the supply side, many industries are seeing the introduction of
diminish, all of which will open new markets and drive economic new technologies that create entirely new ways of serving existing
growth. needs and significantly disrupt existing industry value chains.
At the same time, as the economists Erik Brynjolfsson and Andrew Disruption is also flowing from agile, innovative competitors who,
McAfee have pointed out, the revolution could yield greater inequality, thanks to access to global digital platforms for research, development,
particularly in its potential to disrupt labor markets. As automation marketing, sales, and distribution, can oust well-established
substitutes for labor across the entire economy, the net displacement incumbents faster than ever by improving the quality, speed, or price
of workers by machines might exacerbate the gap between returns to at which value is delivered.
capital and returns to labor. On the other hand, it is also possible that Major shifts on the demand side are also occurring, as growing
the displacement of workers by technology will, in aggregate, result in transparency, consumer engagement, and new patterns of consumer
a net increase in safe and rewarding jobs. behavior (increasingly built upon access to mobile networks and data)
We cannot foresee at this point which scenario is likely to emerge, force companies to adapt the way they design, market, and deliver
and history suggests that the outcome is likely to be some products and services.
combination of the two. However, I am convinced of one thing — that A key trend is the development of technology-enabled platforms that
in the future, talent, more than capital, will represent the critical factor combine both demand and supply to disrupt existing industry
of production. This will give rise to a job market increasingly structures, such as those we see within the “sharing” or “on demand”
segregated into “low-skill/low-pay” and “high-skill/high-pay” economy. These technology platforms, rendered easy to use by the
segments, which in turn will lead to an increase in social tensions. smartphone, convene people, assets, and data — thus creating
In addition to being a key economic concern, inequality represents entirely new ways of consuming goods and services in the process. In
the greatest societal concern associated with the Fourth Industrial addition, they lower the barriers for businesses and individuals to
Revolution. The largest beneficiaries of innovation tend to be the create wealth, altering the personal and professional environments of
providers of intellectual and physical capital — the innovators, workers. These new platform businesses are rapidly multiplying into
shareholders, and investors — which explains the rising gap in wealth many new services, ranging from laundry to shopping, from chores to
between those dependent on capital versus labor. Technology is parking, from massages to travel.
therefore one of the main reasons why incomes have stagnated, or On the whole, there are four main effects that the Fourth Industrial
even decreased, for a majority of the population in high-income Revolution has on business — on customer expectations, on product
countries: the demand for highly skilled workers has increased while enhancement, on collaborative innovation, and on organizational
the demand for workers with less education and lower skills has forms. Whether consumers or businesses, customers are increasingly
decreased. The result is a job market with a strong demand at the high at the epicenter of the economy, which is all about improving how
and low ends, but a hollowing out of the middle. customers are served. Physical products and services, moreover, can
This helps explain why so many workers are disillusioned and now be enhanced with digital capabilities that increase their value. New
fearful that their own real incomes and those of their children will technologies make assets more durable and resilient, while data and
continue to stagnate. It also helps explain why middle classes around analytics are transforming how they are maintained. A world of
the world are increasingly experiencing a pervasive sense of customer experiences, data-based services, and asset performance
dissatisfaction and unfairness. A winner-takes-all economy that offers through analytics, meanwhile, requires new forms of collaboration,
only limited access to the middle class is a recipe for democratic particularly given the speed at which innovation and disruption are
malaise and dereliction. taking place. And the emergence of global platforms and other new
Discontent can also be fueled by the pervasiveness of digital business models, finally, means that talent, culture, and organizational
technologies and the dynamics of information sharing typified by forms will have to be rethought.
social media. More than 30% of the global population now uses social Overall, the inexorable shift from simple digitization (the Third
media platforms to connect, learn, and share information. In an ideal Industrial Revolution) to innovation based on combinations of
world, these interactions would provide an opportunity for cross- technologies (the Fourth Industrial Revolution) is forcing companies to
cultural understanding and cohesion. However, they can also create reexamine the way they do business. The bottom line, however, is the
and propagate unrealistic expectations as to what constitutes success same: business leaders and senior executives need to understand their
for an individual or a group, as well as offer opportunities for extreme changing environment, challenge the assumptions of their operating
ideas and ideologies to spread. teams, and relentlessly and continuously innovate.

The Impact on Business The Impact on Government

An underlying theme in my conversations with global CEOs and As the physical, digital, and biological worlds continue to converge,
senior business executives is that the acceleration of innovation and new technologies and platforms will increasingly enable citizens to
the velocity of disruption are hard to comprehend or anticipate and engage with governments, voice their opinions, coordinate their
that these drivers constitute a source of constant surprise, even for the efforts, and even circumvent the supervision of public authorities.
best connected and most well informed. Indeed, across all industries, Simultaneously, governments will gain new technological powers to
there is clear evidence that the technologies that underpin the Fourth increase their control over populations, based on pervasive

4 Japan SPOTLIGHT • July / August 2016

surveillance systems and the ability to control digital infrastructure. On nurture relationships. It is already changing our health and leading to a
the whole, however, governments will increasingly face pressure to “quantified” self, and sooner than we think it may lead to human
change their current approach to public engagement and augmentation. The list is endless because it is bound only by our
policymaking, as their central role of conducting policy diminishes imagination.
owing to new sources of competition and the redistribution and I am a great enthusiast and early adopter of technology, but
decentralization of power that new technologies make possible. sometimes I wonder whether the inexorable integration of technology
Ultimately, the ability of government systems and public authorities in our lives could diminish some of our quintessential human
to adapt will determine their survival. If they prove capable of capacities, such as compassion and cooperation. Our relationship with
embracing a world of disruptive change, subjecting their structures to our smartphones is a case in point. Constant connection may deprive
the levels of transparency and efficiency that will enable them to us of one of life’s most important assets: the time to pause, reflect,
maintain their competitive edge, they will endure. If they cannot evolve, and engage in meaningful conversation.
they will face increasing trouble. One of the greatest individual challenges posed by new information
This will be particularly true in the realm of regulation. Current technologies is privacy. We instinctively understand why it is so
systems of public policy and decision-making evolved alongside the essential, yet the tracking and sharing of information about us is a
Second Industrial Revolution, when decision-makers had time to study crucial part of the new connectivity. Debates about fundamental issues
a specific issue and develop the necessary response or appropriate such as the impact on our inner lives of the loss of control over our
regulatory framework. The whole process was designed to be linear data will only intensify in the years ahead. Similarly, the revolutions
and mechanistic, following a strict “top down” approach. occurring in biotechnology and AI, which are redefining what it means
But such an approach is no longer feasible. Given the Fourth to be human by pushing back the current thresholds of life span,
Industrial Revolution’s rapid pace of change and broad impacts, health, cognition, and capabilities, will compel us to redefine our moral
legislators and regulators are being challenged to an unprecedented and ethical boundaries.
degree and for the most part are proving unable to cope.
How, then, can they preserve the interest of the consumers and the Shaping the Future
public at large while continuing to support innovation and technological
development? By embracing “agile” governance, just as the private Neither technology nor the disruption that comes with it is an
sector has increasingly adopted agile responses to software exogenous force over which humans have no control. All of us are
development and business operations more generally. This means responsible for guiding its evolution, in the decisions we make on a
regulators must continuously adapt to a new, fast-changing daily basis as citizens, consumers, and investors. We should thus
environment, reinventing themselves so they can truly understand what grasp the opportunity and power we have to shape the Fourth
it is they are regulating. To do so, governments and regulatory agencies Industrial Revolution and direct it toward a future that reflects our
will need to collaborate closely with business and civil society. common objectives and values.
The Fourth Industrial Revolution will also profoundly impact the To do this, however, we must develop a comprehensive and globally
nature of national and international security, affecting both the shared view of how technology is affecting our lives and reshaping our
probability and the nature of conflict. The history of warfare and economic, social, cultural, and human environments. There has never
international security is the history of technological innovation, and been a time of greater promise, or one of greater potential peril.
today is no exception. Modern conflicts involving states are Today’s decision-makers, however, are too often trapped in traditional,
increasingly “hybrid” in nature, combining traditional battlefield linear thinking, or too absorbed by the multiple crises demanding their
techniques with elements previously associated with nonstate actors. attention, to think strategically about the forces of disruption and
The distinction between war and peace, combatant and noncombatant, innovation shaping our future.
and even violence and nonviolence (think cyberwarfare) is becoming In the end, it all comes down to people and values. We need to
uncomfortably blurry. shape a future that works for all of us by putting people first and
As this process takes place and new technologies such as empowering them. In its most pessimistic, dehumanized form, the
autonomous or biological weapons become easier to use, individuals Fourth Industrial Revolution may indeed have the potential to
and small groups will increasingly join states in being capable of “robotize” humanity and thus to deprive us of our heart and soul. But
causing mass harm. This new vulnerability will lead to new fears. But at as a complement to the best parts of human nature — creativity,
the same time, advances in technology will create the potential to empathy, stewardship — it can also lift humanity into a new collective
reduce the scale or impact of violence, through the development of new and moral consciousness based on a shared sense of destiny. It is
modes of protection, for example, or greater precision in targeting. incumbent on us all to make sure the latter prevails.

The Impact on People This article was first published in Foreign Affairs.

The Fourth Industrial Revolution, finally, will change not only what © 2015 Council on Foreign Relations, publisher of Foreign Affairs.
we do but also who we are. It will affect our identity and all the issues All rights reserved. Distributed by Tribune Content Agency
associated with it: our sense of privacy, our notions of ownership, our
consumption patterns, the time we devote to work and leisure, and
Klaus Schwab is founder and executive chairman of the World Economic Forum.
how we develop our careers, cultivate our skills, meet people, and

Japan SPOTLIGHT • July / August 2016 5