Re-imagining the safety net– a review of HEDGE by Nicolas Colin
On the morning of 24 June 2016, I remember being woken up by my daughter.
I had fallen asleep on the sofa watching the results of the UK’s EU Referendum. Even though it was horrible to watch — it was clear from early on that the outcome would be Brexit — I couldn’t stop watching it. Until I eventually fell asleep. And when my daughter woke me, I felt profoundly shocked and saddened. Shocked because I didn’t know many people who planned to vote leave and I didn’t believe it would happen. And saddened because, notwithstanding its shortcomings, I consider membership of the EU so self-evidently in the economic and political interests of the UK — and an integral part of who we are as a nation — that I couldn’t believe a majority of British people saw it otherwise. I assumed people had voted either based on different concerns (immigration) or had been misled about the economic benefits of leaving. However, not only is this the sort of condescending explanation that so annoys people who voted leave, but it is also only at best partly true. The fact is that for many leave voters, this was a cry for help.
So much has been written now about the conditions that led to Brexit and other populist political events across Europe — the best of which in my view is After Europe by Ivan Krastev — that I won’t dwell on that much here. Suffice to say that the financial crisis caused a deep recession, the effects of which were greatly exacerbated by governments’ response of austerity (instead of fiscal stimulus). This, in turn, led to both great economic hardship — especially for the worse off — as well as much higher inequality (which was compounded by quantitative easing). And when voters, who in the UK have suffered the longest ever recorded period of falling real wages, have been asked their verdict on the ruling elite, they have chosen to side with populist causes. As John Lanchester says about Brexit in his recent piece on the aftermath of the financial crisis:
“The dominos fell. The initial event was economic. The meaning of it was experienced in ways best interpreted by sociology. The consequences were acted out through politics.”
But the truth is that the roots of this populist wave go further back than the financial crisis. Since the oil crisis in the 1970s, neoliberal policies in the West have seen the gains from productivity growth and international trade go to disproportionately to capital holders (shareholders) compared to workers, while the safety net provided by corporations (pensions, healthcare) and governments (unemployment benefit, public services) has been stripped back and the risks shifted to individuals. And so, even though the growth in trade is a positive-sum activity that has lifted millions of people out of poverty across the world, in the West it has benefited largely only the wealthiest — see graph below — and allowed populists to present globalization as zero-sum.
And, were that not enough, we now also face the spectre of widespread automation. An analysis from Oxford University looking at the US market suggested that 47% of employment was susceptible to automation. Many recent books, such as the The Second Machine Age have addressed this phenomenon, and many others, such as The Rise of the Robots, have also discussed how this will further amplify inequality between those with and without work, especially where the former also own capital and receive the profit windfall from automation.
The problem, however, with so much of the recent literature on growing inequality and the rise of automation is that it presents the (jobless and unequal) future as some sort of given and does not acknowledge people’s agency to determine a different kind of future. In doing so, it either completely ducks the difficult questions of how to ensure that technological advances lead to shared prosperity or, where discussed, opts for the overly simplified notion of universal basic income.
Some optimism and answers at last
This is why Nicolas Colin’s HEDGE represents such a refreshing point of departure. Like Tim O’Reilly’s “What’s the Future and Why it’s Up To Us” from last year, it is prepared to go beyond documenting the causes of rising inequality to envision how economic activity could be reorganized to create greater shared prosperity; practical blueprints that take as their starting point that technological progress can improve, not worsen, people’s outcomes.
While there is overlap between the two books, such as on why and how to reform government institutions, Colin’s book is much more focused on how to recreate the pillars of the safety net for the digital age. As he puts it, “It is about constructing a virtuous circle like once existed with the post-war boom” where rising incomes, social insurance and access to finance gave people the purchasing power to consume more, which in turn fueled business investment and government spending, leading to self-reinforcing cycle of increasing aggregate demand and GDP growth.
In common with the many other books on the digital economy, Colin is also of the view that we are undergoing a paradigm shift, to what he calls the Entrepreneurial Age. But, for Colin, the key characteristic of this new entrepreneurial age is how technological advancements are empowering consumers, increasing their bargaining power as well as making them a critical resource in the production value chain. The key is how ubiquitous computing and networks allow consumers easily to create and exchange information between themselves, converting them from a mass into a multitude. Colin writes:
“As the multitude, individuals can access a wider range of information, interact in real time, and really exert more bargaining power. Above all, the very nature of software makes it easier for corporations to enlist their consumers in creating value.”
It is this concept of the multitude which is central to the book, the prism through which to understand why the nature of economic activity is changing and why the pillars of the industrial age safety net cannot simply be rebooted, but need to be re-imagined for the entrepreneurial age. Further, even though it will be considered by some as an omission, by concentrating on the multitude, Colin avoids a discussion about the power of tech platforms and whether or not they need to be regulated. Instead, he implicitly assumes that the most successful companies are simply those that have responded best to the demands of the multitude, which clears the way for a more orderly discussion of how best to protect the interests of workers in this new age.
The paradigm shift
In a world where consumers represent a multitude rather than a mass, the Fordist methods of mass production, mass marketing and mass distribution won’t work. This is because consumers are demanding better quality services, personalized to their needs, and at lower prices. This puts more pressure on firms to innovate, accelerating the Schumpeterian forces of creative destruction and shrinking the longevity of firms, while shifting the emphasis from supply-side economies of scale to demand-side economies of scale. To quote Nicolas Colin:
“Today is not about big pyramidal organizations seeking supply-side economies of scale to mass-produce standardized goods and services for mass consumption. It is about agile, innovative firms obsessed with using technology-driven network effects to produce an exceptional experience at a large scale.”
This shift has important implications. Firstly, the pressure to innovate is leading firms to automate, displacing workers as well as making it easier for less skilled workers to do their jobs. Second, the pace of change means individuals are forced to change jobs with more frequency, either because existing skills become obsolete faster or because there is more churn in the companies that employ them. Third, the power base is changing within corporations towards consumers. Whereas over the last 40 years, wage growth has given way to profit growth, now wage growth is giving way to consumer surplus.
A Greater Safety Net: 2.0
In all, then, these changes point to a future for workers that is more uncertain, with more regular job switching, more geographic mobility, more volatile income and more pressure to make ends meet. This both underlines the urgency of recreating the safety net, but also the need to adapt it to workers’ new circumstances and the new technological paradigm.
In Clayton Christensen’s Law of Conservation of Attractive Profits, he talks about how as one thing commoditizes, something else becomes valuable. A similar phenomenon is likely to occur in the labour market, according to Colin. As automation creeps up into white collar jobs, so we are likely to place more value on those jobs that can’t be automated. These could be jobs that involve true craftsmanship. But, in particular, these will be jobs in proximity services, like social care and hospitality (many of which are invisible today), which are likely to proliferate as more people move to urban areas and the population ages. Moreover, the relentless innovation of the digital economy will give rise to many opportunities to create new businesses. And so, the digital economy is unlikely in the view of Colin to a jobless one and, in fact, as his term “Entrepreneurial Age” suggests, it is likely to be one in which many more people start their own companies and have the freedom and autonomy of working for themselves. The challenge will be to ensure that the impediments to job creation are removed, that work pays enough for workers to participate in the value creation, and that they are protected against the higher levels of uncertainty that arise from this new economic paradigm. As Colin sees it, this will involve a re-imagining of the three pillars of the safety net — social insurance, finance and collective bargaining — as well as reforms to, inter alia, housing and occupational licensing. It will also likely see government take a smaller role than in the Safety 1.0.
Occupational licensing for amateurs
Nicolas Colin starts his book with a personal anecdote about when he was summoned to court for alleged defamation against a leading figure in the French taxi industry. He uses this story to illustrate how so many industries are desperate to slow the pace of innovation and protect the status quo, using occupation licensing to preserve scarcity and protect the income of incumbent workers. As Colin says, “The taxi industry is a case in point; it constantly raises prices due to more expensive medallions; at the same time it leaves entire neighborhoods unserved.” The danger, as Colin points out, is that rising prices and restricting supply pit these industries against the all-powerful multitude; a situation which the success of Uber and Lyft shows is unsustainable once new competitors come along. But Colin also rightly observes the challenge when technology “augments” workers, as is the case where GPS allows a driver to know their way around any city, in that it creates “a reserve army of labor” on hand to displace existing professionals, depressing wages. So Colin puts forward a solution, what he calls “occupational licensing for amateurs” where supply of professionals is capped to protect quality and incomes, but where supply can be boosted at peak times or to cater to underserved demographics with the help of amateurs, who among other things will gain the experience to one day become professionals themselves.
“In my view, technology is showing us ways in which it will be possible to put a ceiling on the number of workers while satisfying consumer demand even in the most extreme circumstances. The stake is to prevent rent-seeking and ensure that demand is always served at the highest quality and the largest scale. The goals should be to impose occupational licensing to professionals in exchange for certain benefits…while simultaneously using amateurs as a backup.”
Nicolas Colin’s approach to the problem of housing is also novel. As cities become a more and more important driver of economic growth, as the place where entrepreneurs want to base themselves to capture spillover effects and as the location where an explosion in proximity services will occur, it is essential that workers can afford to live there. However, most proposed solutions, argues Colin, fail to “account for the magnitude of the current paradigm shift”. And while Colin does advocate some oft-discussed solutions, such as a land tax, he argues that we need to look at the problem through a different lens: that of the competing needs of hunters and settlers.
“Hunters [are] people who spend a relatively short amount of time in a particular area because they’re hunting for money (as workers), for knowledge (as students), or experiences (as tourists). On the other hand are the settlers, those who need to have a fixed place of residence for the longer term, one that is attached to steady job, their kids’ school, or simply their taste for a particular neighborhood that eventually decide to call home.”
When the issue if framed like this, argues Colin, it becomes clear that the solution lies in becoming more accommodating towards hunters. Unlike in the industrial age, where jobs and lives were much more settled, hunting is the new way of life. As such, governments should adapt zoning restrictions to allow for greater confluence of hunters and settlers, real estate operators should build a mixed portfolio of properties for hunters and settlers (which Colin suggests is in their own self-interest in diversifying their revenue base) and a new breed of start-ups should be formed to better serve this community.
Consumer finance for Entrepreneurs
The changes that are needed for finance also become clear when one considers the needs of a nomadic group of hunters. Finance, one of the three pillars of the Safety Net 1.0, grew up to serve consumers with steady incomes and settled lives, helping them to buy durable assets and buy their own homes.
What is needed now, where individuals face more volatile incomes, more regular career changes and are likely to be more geographically mobile, is set of products and services that address this — helping smooth incomes, fund periods of retraining and remove the friction of moving. And this calls for a new set of tools — Colin invokes the example of Henry Goldman who invented the DCF to be able to fund companies without tangible assets — for banks to be able to lend in these new circumstances. In particular, argues Colin, “banks need to learn to exploit data so as to turn everything, including failure, into value-creating information.” And while Colin says we should “bring the government along”, it seems clear that he sees a smaller role for government, believing for example that — given that hunting will become commonplace and there will be a much larger pool of risk –private companies could offer services previously provided by governments, such as unemployment insurance.
Exploiting network effects in insurance
In social insurance, too, Colin envisages a bigger role for the private sector. In the case of healthcare, for example, the role the state plays today, as single payer and sometimes single provider, is a legacy of the industrial age where economies of scale were paramount. As a single payer, governments could exercise purchasing economies of scale, helping lower the cost of provision for everyone. In the provision of healthcare, governments operate like pyramidal industrial age companies — which Colin believes they still do across most functions, making deep reform necessary (but hard) — leveraging economies of scale to produce cheap, but one-size-fits-all, services which are increasingly at odds with the rising demands of the multitude. So, instead, Colin believes the role of the state should be limited to creating the mandate which would lead to universal health coverage and legislating against adverse selection through pricing or failure to cover. For the rest, the private sector makes for better provision, creating platforms that exploit network effects to generate better services and lower costs than the government could.
“With more intensive monitoring of user-generated data, technology also provides insurers with the tools to implement better prevention at a much larger scale. It makes it possible to collect more data, which in turn makes it easier to target prevention measures. Data can be used at both the individual level (to know us better and influence our lifestyle in a virtuous way) and at the aggregate level (to assess statistical results and improve the capacity to predict both individual losses and the insurer’s underwriting margin).”
A new kind of union
If finance and social insurance can be so reimagined, this leaves collective bargaining as the final, but arguably most important, plank of the safety net to be reformed. As Colin puts it, “I am convinced unions played the most critical part in building the middle class in the [industrial] age…Now we have to reinvent unions so that workers gain leverage in the current age of ubiquitous computing and networks.” For that to happen, Colin believes that unions should change the focus on their activities. Up until now, unions have been focused on “voice”, helping to make workers’ voices heard through activities like strikes and demonstrations. But now, in the new world of hunting — of more frequent career changes — unions should put more emphasis on “exit”, helping members to vote with their feet where pay and conditions are inadequate by supporting them through the process of reskilling and finding new work, as well as helping them to find housing and providing mutual insurance against critical risks such as illness. As Colin writes:
“I think it’s time we imagine unions that support workers as they switch jobs, unions that would provide their members with all of the resources necessary to find inspiration (“What should I do?”), train (“How can I acquire new skills?”), find a new employer (“When do I start?”), relocate (“I need an affordable house close to my new workplace”)”
Such unions, rather than being tied to industries as is often the case, could pool together larger numbers of workers — Colin sees it as a “cooperative model” — and, in that way, would stand a good chance of standing up and extracting concessions from the most powerful stakeholder in the Entrepreneurial Age — the multitude. And to support this idea, Colin points to some of the recent victories on the minimum wage front, which were achieved thorough an alliance between workers and consumers.
Toward a virtuous circle
There are so many reasons to feel pessimistic about the way the world is moving. The inequality gap in the Western World is growing, meaning that, for most, real incomes haven’t increased for decades and, for many, life is a day-to-day real struggle (in Britain, 1.5m people rely on foodbanks every week). And people’s anger and sense of injustice is pushing them into the arms of populists, who will only make matters worse.
But none of what is happening is inevitable. Globalization has been generating growth and wealth — indeed, it has lifted millions out of poverty in the developing world — but, in the absence of a robust safety net, the spoils of growth have not been shared in the Western World.
What we face are political and societal choices. We can try to recreate the past, but this won’t work in our new age of networks and the connected multitude. We can do nothing, in which case life will get worse for most. We can opt for a simple fix like universal basic income, which will be inadequate to deal with the complex set of challenges at hand. Or, we can embrace the paradigm shift to create new jobs, more vibrant communities and a new set of institutions to ensure growth translates into shared prosperity.
It is in its optimistic desire to do the last that Nicolas Colin’s book breaks new ground. He believes the future can be better than the past and he sets out a compelling and concrete vision for how we can bring about that better future.
Now it’s up to us: government to lay the foundations, VCs to fund it, entrepreneurs to build it. As Colin quips, sitting around discussing immortality and the singularity won’t help. We need action. And not only is time running out, but the stakes couldn’t be higher.