Without knowledge of the past there is no future

3. The third Industrial Revolution

The third Industrial Revolution started around 1940 and is nearing its end. The United States and Japan played a leading role in the development of computers. During the Second World War great efforts were made to apply computer technology to military purposes. After the war the American space program increased the number of applications. Japan specialised in the use of computers for industrial purposes such as robotics. The acceleration phase of the third Industrial Revolution started around 1980 with the advent of the microprocessor. Now computer and communication technology have an irreplaceable role in all parts of the world.

Effects of the three industrial revolutions

The first (and second) revolution transformed an agricultural society into an industrial society where mechanisation (finally) relieved humankind of physical labour. The craft industry could not compete with the factories that put products of the same or even better quality on the market at a lower price. The result was that many small businesses went bankrupt and their workers went to work in the factories. The effects of industrialisation were seen in the process of the rapid urbanisation of formerly small villages and towns where the new plants materialised. These turned into dirty and unhealthy industrial cities. Still people from the country were forced to go and work there.

Because of this a new social class emerged: the workers, or the industrial proletariat. They lived in overcrowded slums in poor housing with little sanitation. The average life expectancy was low, and infant mortality high. The elite accepted the filth of the factories as the inevitable price for their success. The chimneys were symbols of economic power, but also of social inequality. You see this social inequality appear after each revolution. The gap between the bottom and the top of society becomes very large. Eventually there are inevitable responses that decrease this gap. It could be argued that the industrial revolutions have created the conditions for a society with little or no poverty.

The third revolution transformed an industrial society into a service society. Where mechanisation relieved humankind of physical labor, the computer relieved him of mental labor. This revolution made lower positions in industry more and more obsolete and caused the emergence of entirely new roles in the service sector.

Industrial revolutions and stock market indices

The Dow Jones Industrial Average (DJIA) was first published in 1896, halfway through the second Industrial Revolution. The DJIA is the oldest stock index in the United States. This was a straight average of the prices of twelve shares. A select group of journalists from The Wall Street Journal decided which companies were part of the most influential index in the world market. Unlike most other indices the Dow is a price-weighted index. This means that stocks with high absolute share price have a significant impact on the movement of the index.

The S&P Index is a market capitalisation weighted index. The 500 largest US companies as measured by market capitalisation are included in this index, which is compiled by the credit rating agency Standard & Poor’s.

What does a stock exchange index really mean?

In many graphs the y-axis is a fixed unit, such as kilograms, metres, litres or dollars. In graphs showing stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from the truth! An index point is not a fixed unit in time and does not have any historical significance.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs, which are actually very deceptive.