(Digi) Capital in the 21st Century: Part I
In which we set the stage
This is the first in a series of posts on the interaction of automation on the one hand, and pervasive inequality on the other. In this installment I’ll introduce a cast of characters, a few obvious truths, and some curious things about economics.
Ahem.
Capitalism leads to vast divides in income and wealth.
…
Make this observation in the midst of a college bull session, family gathering, or your local chapter of Occupy Wall Street and you might be met with crickets, bland disinterest, or the ever-endearing ‘No S#%T, Sherlock.” The idea that we live in a vastly unequal society, and furthermore that our inequality is driven by the forces of free-market capitalism enjoys broad currency. “Everyone knows that!” your uncle might mutter from across the table.
So it might surprise you to learn that economists, as a profession, largely DON’T know that. Until recently practitioners of the Dismal Science paid scant attention to inequality at all. To the extent that they did, both data and theory seemed agreed upon a blissfully optimistic picture. Inequality, both in incomes and in wealth, tends to fall steadily as the economy grows.
Against this background Professor Thomas Piketty’s book, Capital in the 21st Century, caused quite a stir among his fellow social scientists. The book is long, running to over 600 pages, and as densely packed with 19th century literary allusions as it is with graphs. Despite this, the thesis is simple. The golden age of relative egalitarianism that followed the Second World War was a welcome but unsustainable respite from the onward march of inequality.
The inevitable criticism of this view, when it came, was curiously uniform. It was also curiously vacuous. Reviewers from Bill Gates to Larry Summers quibbled about Piketty’s stabs at theory. They carped about the law of diminishing returns. They did everything, it seemed, but dare to engage with his data. In academic economics, when the real world departs from theory, so much the worse for the real world.
While econ and business heavyweights were busy burying their heads in the sand, however, a second obvious fact was idling at the fringes of orthodoxy.
Since the early 1970s, automation has taken a huge and growing bite out of labor’s share of the economy.
Again, a sadly unsophisticated reader might be forgiven for rolling her eyes. The truth, however, is that this is one more place where economists have fought hard to ignore reality. Theory, they insist, is quite clear on the matter. Innovation in technology leads to increased productivity, meaning that each hour an employee works generates more revenue. The resulting increase in the value of labor drives up wages and everyone is happy. Robert Solow (Nobel Laureate, ‘87) proved it way back when!
As with inequality, however, the data has gotten increasingly embarrassing for partisans of the orthodox view. Since the early-1970’s productivity numbers have risen prodigiously as new technologies flooded the market.Word Processing, Speadsheets, Robots, the Internet. Each of these innovations and plenty more have driven productivity to hitherto undreamed of heights, yet the average worker hardly has more buying power today than they did fifty years ago.
Whoa…
So what happened? Professional economists aren’t stupid. They can spend up to a decade parsing through reams of data and absurdly technical mathematics before they ever get to practice their craft. And if we’re being honest with ourselves, they tell a pretty good story. Rising productivity should by definition have made labor more valuable, which in turn should have driven up wages nearly in lock step with rising revenue per hour worked. But it didn’t.
Capitalism: A Murder Mystery
If you’re reading this, there’s a good chance that no president or senator has ever asked for your advice on the economy. So who are they asking? The experts of course! The experts, though, can be surprisingly obtuse.
And that, really, is the take home message of this first leg in our journey together. Once upon a time, inequality plummeted as the economy boomed in the postwar years. American workers got richer and richer off of a beautiful relationship between their own honest productivity and wages. That time is over. It’s dead. Something killed it, and the people getting calls to advise the commander-in-chief on the fallout are fuzzy on whether the dastardly deed even happened.
In our next installment, we’ll look for the culprit. We’ll review the evidence, question the witnesses… Most importantly, we’ll ask ourselves; are more victims yet to come? Is the sorry state of the American Dream an unfortunate blip on the historical radar, or is it the new normal? And if so, is there anything to be done?
