THE RICH GET RICHER AND THE POOR GET TECH-SAVY
After World War II, at least two generations of policy makers grew on the assumption that children would, by and large, have a better future than their fathers and mothers due to peace, technological progress and international economic integration. They also thought that without major wars, research, innovation and the removal of barriers to trade and capital flows would lower the differences in income, output and especially opportunities between the ‘haves’ and the ‘have-nots’ on a worldwide basis. Economists broadly supported these views with their post-keynesian theories and their econometric modeling.
In the second half of the twentieth century, few voices challenged this scenario. More precisely, few Western European and North American scholars proposed different prospects. Latin American economists and a few Asian and African economists drew a bleak picture of the future. Such a picture, however, indicated the ‘unequal trade pattern’ and the ‘unfavorable terms of trade’ as two of the main reasons for the increase in international disparities. They too did bet that a well-regulated economic integration would have reduced the problems. Also an increase in resource transfers from the North of the world to the South would have gradually promoted growth and development. To the benefit of everybody and of the mankind as a whole.
In the nineteen fifties, a Swedish socio-economist, Gunnar Myrdal was nearly alone in shouting aloud that these positive prospects would have led to a great disappointment. Myrdal was awarded the 1974 Nobel Prize for economics but he was never greatly considered neither by the sociologists nor by the economists. The former were increasingly interested either in micro issues dealing with their own countries and societies or in history which would explain today’s political systems and issues. Thus, they did not focus on worldwide long-term issues. The latter shifted their focus to micro and macro modeling. Thus, they had little time for a scholar who used comparatively simple statistics and quite unsophisticated mathematics, and integrated these ingredients with a profound knowledge of history and a skilled use of social research to investigate the present and draw projections for the future. Furthermore, although a tenured professor of Stockholm University, Gunnar Myrdal was not an academician strictu sensu. He became a member of the Swedish Parliament as a Social Democrat at a comparatively young age and a Minister of Foreign Trade immediately after World War II. He reached international reputation not for his work on Sweden but for a monumental research on US racial problems - An American Dilemma: the Negro Problem and Modern Democracy – published in 1944 when the armed conflict was not yet over. He served for ten years as Secretary General of the United Nations Economic Commission for Europe – then the only contact between Western and Eastern European economists, during the time of the iron curtain and the cold war. His entire family was very committed to development and better income distribution. He and his wife, Alva Reiner, were awarded the 1984 Nobel Prize for Peace.
Gunnar Myrdal had been a founding member of the London Econometric Society and a good personal friend of John Maynard Keynes. Already in the nineteen fifties, he outlined a future whereby economic integration would not bring about ‘convergence’ but would increase ‘divergence‘ , especially at the international level. Indeed, he even prospected ‘disintegration’ as a possible outcome of economic integration. On the one hand, the better off and more productive countries would be in a position to better use technological progress. On the other, their domestic policy demands would be for transferring incomes, wealth and opportunities to the less fortunate parts of their own population. This would occur at the expense of the lower income areas of the world, whose citizens are not in a position to have their voices heard in the Parliaments of the advanced countries where there are high incomes, wealth and opportunities. This hypothesis was squarely against the then current main line of thought, especially against that of the American-naturalized Hungarian, Bela Balassa. As a whiz kid, Balassa had published The Theory of Economic Integration, a text which soon became the livre de chêvet for all those favoring the start and the development of what is now the European Union (EU).
With the wisdom of time past, we can now say that Gunnar Myrdal did not see the rapid growth and transformation of large areas in developing countries; in 1968 his latest major effort – Asia Drama: an Inquiry into the Poverty of Nations – did not foresee that few decades later the Far East would become a team of Asian Tigers essential to pull the world economy caravan. However, Gunnar Myrdal was right in seeing that within regional unions, such the EU, ‘divergence’ would prevail over ‘convergence’ and there would be little incentive to transfer from the ‘have’ to the ‘have not’ countries within the same economic and monetary zone. Primarily because the ‘have’ societies are struggling with their own domestic ‘convergence’ and integration problems.
Neither Myrdal nor his optimistic happy-go-lucky adversaries could predict that the fourth or fifth – it depends where one starts to count –‘wave’ of technical progress would be very different from all the previous ones. So different to make shambles of John Maynard Keynes ’Madrid Lecture’; in 1930 in the capital of Spain the British economist outlined that, in the advanced Nations, before the end of the twentieth century, it would sufficient to work three hours a day to meet our basic needs. In that often forgotten lecture, Keynes admitted that there would be ‘a new disease’: ‘technological unemployment due to our discovery of means of economizing the use of labor outrunning the pace at which we can found new use for labor’. Not even Keynes himself would envisage that in this wave, technical progress would have an impact quite different from that featuring the introduction of mechanics, electricity and other ‘waves’ of innovation. Then, new technology would increase productivity and incomes and, after an adjustment period, would generate new demands for goods and services. This is what is happening in the emerging countries, that have been stagnating for centuries and centuries. Indeed, Europe and North America had had almost no growth for a thousand years before the rise of technical innovation at the end of the eighteenth century. The new ‘wave’ of technical innovation has made substituting capital for labor through innovation very attractive; as a result, in the last thirty years owners of capital have captured even more of the developed world income while the share going to labor has been falling.
‘Capital’ must not be meant only as financial and physical capital but also as human capital; those better endowed with the natural gifts of being smart and aggressive seize the opportunities of the new ‘wave’ of technological change, whereas those with lower levels of skills and more introverted personalities are left at the margin of the labor market and of the society. The Economist Intelligence Unit (the research branch of the publisher of the weekly The Economist) carried out a study in 2013 and published a summary of results early in 2014. In North America the average wage has hardly budged over the last forty years. In Britain and Germany, where standard unemployment rates have been low for several years, wages have been flat for a decade.
Meantime, dispersions in compensations have increased. Those who have high human capital and take risks, command high remunerations mostly in management capacities, whilst the others struggle along. According to Harvard economist, and former US Secretary of Treasury, Larry Summers, in 2020 there will be only one job for every seven American in age group 25-54; in 1960 only one in twenty was not working. According to a study by Carl Benedict Frey and Michael Osborne (both of Oxford University), forty seven per cent of those with jobs, mainly ‘white collars’ in accountancy, legal work, technical writing, can be, sooner or later, ‘automated out’ of their positions. This spreads uncertainty and has adverse effects on consumption as well on the quality of savings and investment; whatever can be saved from increasingly lower salaries is kept as a ‘buffer’ for harder time not channeled to high return but risky ventures. A Creepy World, two Swiss men, Didier Sornette and Peter Cauwels, respectively of the Swiss Finance Institute and Swiss Institute of Technology, title a very recent paper of theirs.
In addition, the French economic historian, Thomas Piketty, argues that since the nineteen eighties, capital accumulation has been growing more rapidly than incomes; thus in OECD countries returns on capital are higher than those on labor and capital distribution is much less equal than in the past. In his February 2014 book Capital in the Twenty Century, Piketty concludes that in Western Europe ten per cent of the population holds sixty per cent of the capital stock and receives twenty five per cent of labor income. In his view, we are about to pioneer a hyper-unequal model of society in OECD countries where top one percent of capital owners and super managers receive a growing share of national income and an increasing concentration of wealth. This has a corollary for stagnating economies (such as Italy): with an ageing population and the lack of growth of our labor income, if average return on capital is higher than GDP growth as it has been happening in Italy for the last four decades, every year the rate of capital accumulation is higher than that of value added and, as a consequence, disparities do increase.
Would this theoretical point necessarily mean an ever impoverishing Northern America and Europe? Another February 2014 book takes a more optimistic view. Its authors are Erik Brynjolfsson and Andrew McAfee, both from the Massachusetts Institute of Technology – thus economists accustomed to work with engineers and scientists. Its title is a program, indeed a ‘manifesto’: The Second Machine Age. The book purports that this new ‘wave’ of technological innovation would bring great benefits but only to those who can grasp them - and after a period of disorientation and difficult change. In short, the exponential growth in chip processing speed, memory capacity, and other computer metrics will make possible as much progress as that made since the start of the computer business in the next few years. The main bottleneck would be the time required by the society to sort out the new combination and business models. In North America, they argue, this sorting is already starting. In Europe it is not yet in sight.
Would this improve labor income and opportunities for those who are not the best and the brightest or do not, or cannot, participate in the race between education and technology? Erik Brynjolfsson and Andrew McAfee do not give a clear answer, but in their Second Machine Age there would be a great deal of flexibility, a great deal of trials-and-errors; only a few start-ups would flourish and last, while millions would flank. Thus, the key question is what will happen to those accustomed to life-time secure occupations with a moderate pay but a quiet life? In short, what will the future be for the American and European middle class, where occupations are often transmitted from generation to generation with the pride of being in a job similar to that of parents and grand-parents.
In this society the middle class may disappear, just when in the new emerging countries the middle class is growing and becoming assertive. In the Spring 2014, a simple ‘bye, bye middle class’, however, looks like a platitude. The issue is more complex. It is well illustrated in a book by Tyler Cowen (George Mason University) titled Average is over. Powering America Beyond the Age of the Great Stagnation. The key issue is not the end of middle-skill, middle-earning occupations and the consequent labor market polarization – but the disappearance of the ‘average’ man and woman, of the ‘average’ job, and of the ‘average’ pay. In an increasingly automated world, the winners are those able to work with the technology, not to follow it as a robot, not to fight with it. If you are driving in the suburbs of a big city, you do not know your way around and blindly follow the GPS, most likely you will turn in many different directions and waste a lot of time before arriving where you want to go. Instead, if you interpreter the GPS, if you work with the tool, you may get quite easily to the address you are aiming at.
According to Tyler Cowen, we can fight Thomas Piketty’s hyper-inequality only with hyper-meritocracy. This does not imply a stratified society where you cannot easily move from downstairs to upstairs. On the contrary, those with the capacity of mastering, even with limited capital, their relationship with technology can climb the ladder much more easily than their peers in the past. ‘We would move from a society based on the pretense that everyone is given an okay standard of living to a society in which people are expected to feed for themselves much more than they do now’. ‘Worthy individuals will in fact rise from poverty on a regular basis and this may make it easier to ignore those who are really left behind’. ‘Worthy individuals’ are, in Cowen’s language, those who combine innate abilities and raw intelligence with motivation, determination and ambition.
Cowen makes another interesting point: the top ten per cent (in wealth and income) would generate a demand for personal service jobs where high skills (including a ‘friendly’ relationship with technology) are required: florists, decorators, nurses, chauffeurs, cooks, landscapers, party planners and alike. They would replace the ‘white collar’ as a new middle income class.
A new major political issue is likely to come to the forefront. In such a society where a large and skilled servant class is born to cater for the physical and mental health of the fabulous rich and to satisfy their material wants, the political leaders will try to take away the punch bowl and end the party; after all, in countries still based on the principal of ‘one-person - one vote’, hyper-inequity can hardly be accepted even if it is married to hyper-meritocracy.
Back to a full circle
Thus we are back to Myrdal – almost in a full circle. Long ago, in 1958, when he was lecturing at Yale University, he published a book titled Beyond the Welfare State where he depicted both the increasing inequalities in developed countries, the decreasing attention of high income countries for low income countries (and hence resulting in diminishing transfers from the latter to the former) and the need for a stern policy to refocus the welfare states even in countries (such as the Nordic Group) which had been the forerunners in this field. The growing disparities, the hyper-meritocracy, the possible expansion of middle income class made up not of ‘white collars’ but of technological servants to the few super-rich make this scenario very pertinent to today’s OECD societies. There is, however, a major difference. Back in 1958, Myrdal was focusing on domestic policy making. Now, because of international integration, the need is for a stern international policy making, at least within the OECD and the EU countries. Their lessons may be useful for the emerging and the transition countries where similar problems of disparities and inequalities are already visible.