Political economy

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Capital and Ideology

Thomas Picketty has produced another enormous tome. Like Capital in the 21st Century, it is an excellent analysis of the growing problem of inequality and comes at a really interesting time. Whereas his first work looked at the economic drivers of inequality and produced the formula r>g where r stands for the annual rate of return on capital and g stands for the growth rate of the economy. In essence claiming that the wealth of owners of capital’s income will increase at a faster rate than the growth in the overall economy. This facilitates a remorseless concentration of wealth in the hands of fewer and fewer people. In essence that book looked at the mechanics of this process. 

Capital and Ideology is a companion volume which essentially looks at how the inequality produced by this mechanism is justified. It does so by setting the process of justification of inequality regimes in there long term historical setting. He explores the transformation from, what he sees as a sort of pre-modern template for all inequality regimes, ternary or trifunctional societies, to the inequality regimes of modern unified states. 

Trifunctional sytems are those which divide society into three variously described social orders. Essentially, a clerical, a noble and a mass grouping. The clerical is the religious and or intellectual order, the noble is essentially the warrior class, and the final group is the third estate, the property-poor remainder of the population. Picketty applies this trifunctional analysis to an enormous canvass. Ranging across a number of European civilisations but also, India, China, Iran and others. He sees this system of distinctions as the oldest and most common type of inequality regime.

His analysis is aimed at showing how the trifunctional historical roots of different societies shape the changed circumstances of inequality and continue to echo in the forms of justification used today. Throughout there is an impressive wealth of historical data and analysis. 

Picketty also looks at how the “age of exploration” and imperial dominance impacted the shape of the global economy, the emergence of the modern centralised state and a new template to support the new inequality regime. A template structured around the deification of property ownership. Under trifunctional regimes there was an overlapping of property rights and regalian powers at the local level. In other words the local baron owned the land, defended it, taxed it, maintained order and dispensed local justice. The emergent modern age was organised around “a strict separation of property rights, ostensibly open to all, and regalian powers, a monopoly of the centralised state.” 

This model persisted through to the beginning of the 20th Century when three challenges arose causing a crisis for the ownership model founded on private property. The three challenges were around, growing inequality within European ownership societies; inequality amongst countries as colonial competition and increasingly powerful independence movements contended; and finally a nationalist and identitarian challenge which reinforced competition amongst European powers with the consequences of economic collapse and two world wars.

All of this led to a different view of property and willingness to redistribute it as an outcome of conscious public policy. A massive reduction in levels of inequality resulted with the advent of social democratic movements across the world, building upon demands from the 19th Century for wider franchise and greater state support for the unemployed and the old. Accelerating the creation of social states with substantial public services and economic and industrial engagement by governments. The New Deal in the US, the National Health service are just two, albeit shining, examples of how the needs of the majority of the population started to be met.

In truth the first two parts of the book are building up to this point and the last three are an analysis of how the period of classist, social democratic politics after the end of World War 2 consciously addressed the issue of inequality and created a trente glorieuses where the living standards of millions in the west were increased beyond any historical precedent. It then analyses the period from 1980 when a new model of Hypercapitalism evolved through the twin processes of globalisation and communications technology innovations, and the new justificatory regime which supported this model. One dressed in notions of equality of opportunity, set in a context where the levels of wealth concentration are returning to levels last seen in the gilded age of the robber barons.

This is a political economy history book but focussed very much on the here and now and critically the ideas and ideologies which have created and sustain the world we live in. By setting these in a historical framework Picketty aims to show how what exists at the moment as the economic reality is contingent and can be contested, but more importantly can be changed. The book does not just analyse the world but aims to change it. Picketty sets out what can be done via progressive taxation of all sources of income and wealth to reduce unsustainable levels of inequality. He addresses the issues of tax avoidance and secrecy regimes; the problem of European unity; the beggar my neighbour race to the bottom of corporate taxation; inequality in educational opportunity and much more. The book does not lack ambition.

By bringing into the public consciousness the experiences of the past, where, for example, property rights were so sacrosanct when slavery was abolished it was the slave owners who were compensated, it provides depth  and shade to many contentious issues of the hear and now.

This book is very much a marathon but one where you are running through the pages of history brought to life in limid prose and substantial detail. Acres of statistical evidence are marshalled and reveal trends in the longue duree which impact now on the issues shaping national and international political debate. They are deftly handled by a writer at the top of his game. Dissecting ideologies and debates of the past and illustrating how they continue to be evoked in political debate. Like a marathon the work is daunting at the start but on completion there is a real sense of elation. I have every confidence there will be those who profoundly disagree with it and I am certain some of the arguments are contestable, however, as a catalyst for change it is unrivalled.

It would be fascinating to hear what Picketty has to say about the political economic implications of Covid-19 as I suspect they may provide a catalyst for much more profound change than anything we have seen to date.

It is said that those who fail to study history are condemned to repeat it. Picketty is doing his best to help us overcome this failure. Help him. 

“Capital and Ideology” Thomas Picketty. Belknap Harvard Press 2020.

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The Dismal Science

The discipline of economics is in crisis. This according to no less a person than Andy Haldane, Chief Economist at the bank of England. The blatant inadequacies of the subject, exposed by the 2008 credit crunch, brought to a head a growing chorus of criticism. Not only did the vast bulk of economists fail to see the crisis coming, they also struggled to analyse it once it broke.

For good reason the debates since then have been far more than academic. The imperialist ambitions of the discipline and the advice provided by economists have come to profoundly shape ever wider areas of public policy having profound implications for the lives of millions of people. Over the years the neoclassical model has been proposed to have direct relevance to more and more areas of life. The insights of the market and competition have been seen as directly applicable to topics previously thought of as the province of other subjects. Health, education, welfare, policing, no area of life appears immune to the benefits derived from the application of market principles.

Even within the framework of neoclassical economics there is much to argue about given the limitations highlighted by the 2008 crash. The role of finance is one of the areas where the theoretical analysis was weak. However, a more radical attack accuses the neoclassical model itself of obscuring as much as it reveals. What is more, doing this to the benefit of the few at the expense of many. It is suggested the intellectual structure of the subject defines what are legitimate questions for debate and systematically exclude distributional consequences of economic actions as irrelevant, to the advantage of those who currently benefit from those distributional consequences.

Some believe the standard model is basically sound but needs development, others see the model as sound but having been captured to support particular interests, and some see the problems having their roots in the very scientific essentialism of the model itself. This more radical attack rejects what they see as a misguided attempt to make economics a science modelled on physics. A subject purged of moral content, founded on unrealistically simplified assumptions.

It was not always thus. When Adam Smith was writing the “An Inquiry into the Nature and Causes of the Wealth of Nations” his subject was “political economy” a subject with philosophical and moral considerations built in. Smith certainly saw how the operation of the market could translate personal interest into collective welfare. However, he was as concerned in the 18th Century as many are today about how the hidden hand of the market could become handcuffed to the special interests of oligarchs. At the time he was writing his concern was straight forward collusion. As he put it  “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.”

Such collusion is still a concern, however the evolution of economics as a subject has created new, more insidious and sophisticated  challenges. Challenges which arise out of how the neoclassical model defines its subject. It is argued those “of the same trade” no longer need to crudely rig the operation of the market, rather the neoclassical definition of the market itself is rigged in favour of their interests.

At the heart of this view is the notion that economics has been elevated to something akin to a science who’s findings are outside the court of political discourse. They are just about the way the world is and challenging them is akin to objecting to the laws of gravity.

This model reifies the market as an independent force which tends towards an optimum outcome if left alone. Political interference with the market, on this view, is almost certain to lead to a worse state of affairs as the natural operation of the market tends to the best of all possible outcomes.

So, if the market creates enormous inequalities of wealth which undermine social solidarity; if it leads to financial speculation which threatens to destroy the whole of the banking system; or even if it promotes the use of fossil fuels transforming the climate and threatening the viability of the planet, regulation should be avoided at all cost. The reason being that such regulation will lead to a worse state of affairs. Quite what is worse than the end of human civilisation is unclear.

This transformation of economics from a broad ranging social and moral area of study into a mathematical science did not happen overnight. It has taken some 150 years to transform Political Economy into Economics. A process involving an understandable if misguided attempt to drive normative judgements out of the subject in the belief this will improve its objectivity and therefore usefulness. 

As moral questions were driven out mathematical ones took their place. WS Jevons, one of the founders of what was to become neoclassical economics put it, “… if it is to be a science at all, it must be a mathematical science.” The aim being to transform economics  into a subject which reveals truths about what is the case as opposed to wishful thinking about what ought to be the case. Hard nosed, if sometimes unpalatable, common sense, over, morally attractive, but ultimately self defeating utopian proposals for improvement.

In order to achieve mathematical purity, economics, like physics, needed to simplify its’ assumptions to discover underlying, generalisable laws. Thus human beings are transformed into rational utility maximisers. They are assumed to have perfect and instantaneous knowledge of all prices within a market. And that market has a natural tendency towards Pareto optimal equilibrium. In other words supply and demand are balanced such that no one can be made better off without making someone else worse off. However, such a pared down model has come under challenge.

Firstly there have been attacks on the abstract model of rationality adopted. Fascinating work by people like Daniel Kahneman into the way human beings make decisions in the absence of perfect knowledge has produced a more accurate model of actually existing human rationality. The non-rational heuristic tools we all use to make, often significant, decisions feels very persuasive.

This new thinking has become incorporated into behavioural economics by people like Robert Shiller who has analysed the “irrational exuberance” of investors when an economic bubble starts to inflate. He asks what is an essentially basic question, “…what ultimately causes all those fluctuations in the price of speculative assets like corporate stocks, commodities, or real estate?” In other words if all these rational agents are operating in a perfect market why does it gyrate around so much?

A moments reflection on how your perspective and attitude is transformed the instant you get behind the wheel of a car and become a “driver” instead of a “pedestrian” should make you doubt any theory which relies on the rationality of human beings. Pure rational choice theory ultimately leads to a definition of rationality being any preference I happen to reveal. By this token of course Donald Trump is rational. Clearly the theory is in trouble.

Others have challenged the weakness of the neoclassical model’s view of the the role of finance in the economy and the tendency toward equilibrium. To some extent finance and the banks were seen as neutral facilitators of economic activity but not players. This was not the position of Hyman Mynsky writing in the 1970’s and 80’s, now regarded as something of a far sighted prophet of the 2008 credit crunch, with his radical critique of financial capitalism.

Rather than seeing markets as naturally tending to Pareto equilibrium with disruptions to this coming from shocks outside of the economic system Minsky saw crashes and booms as inherent features of the system itself. He developed the “Financial Instability Hypothesis” which saw investors behaviours following a cycle with only a shallow anchorage in rationality. After a crash investors are very cautious and adopt a hedging approach to investment decisions. They will only invest where the anticipated return will cover both interest and principal payments. As “confidence” returns to the economy investors take a more speculative position where near-term returns only cover interest charges and not principal. Finally, confidence moves toward hubris and investment decisions become more akin to Ponzi schemes where neither the interest or the capital pays back initially. Such positions require an increase in income flows or reduction of interest rates to avoid collapse.

Another line of critique is that the neoclassical model, irrespective of its theoretical strengths or weaknesses, has been captured by special interests. A critique developed by James Kwak in his work “Economism”. This looks at the basic models learned by students across the world in “Econ 101” and examines how they are transformed from tentative  descriptions with constrained application to immutable laws which shape the economic universe and thereby the social and political realm. 

In essence he suggests the models supplied by Econ 101 are like the models of the atom which show it as similar to the solar system with “planet” electrons revolving around a “sun” nucleus. Such a model is a helpful heuristic device but of course the reality is far more complicated. Public debate about economic policy options however is shaped by the unsophisticated “solar system” models of Econ 101. But why should this be the case?

Kwak points to the role of various foundations in the US such as the Foundation for Economic Education, the American Enterprise Institute and others. All of these bodies endowed by wealthy American businessmen who are very clear about the negative impacts of taxes and regulation on economic growth, and the importance of a flexible labour market unconstrained by the innovation-inhibiting impact of trade unions.

Further evidence for the way in which economics has been captured and weaponised by wealthy individuals in the United States is provided by Jayne Meyer in her excellent book “Dark Money“. This looks at how multi-billionaires have used their economic strength to promote a particular interpretation of economics which supports their radical libertarian political outlook. The neoclassical model is transmuted into a neoliberal model of economics which is created by and yet provides the intellectual foundations for a neoliberal politics. A politics which majors on the scientific pretensions of the neoclassical model and uses it to rule out of court certain questions about the consequence of specific economic policies.

William Davies has chartered the process talking about it as the “disenchantment of politics by economics.” In his work “The Limits of Neoliberalism” he considers how neoclassical economics is supported by and in turn reinforces a neoliberal political agenda. Indeed he defines Neoliberalism as “the elevation of market-based principles and techniques of evaluation to the level of state endorsed norms.” This picture of the way market models have been applied to more and more areas of life is certainly familiar in the UK. 

The 2008 crash was a major shock to the world financial system. It was also a major shock to the subject of economics and the profession of economists. The Queen wanted to know why no one had seen it coming and Economics students around the world started to question the value of complex mathematical models which gave incomplete answers to questions they were not interested in.

Demands for a more relevant economics syllabus resulted in initiatives, such as the on-line, open-access platform coreecon addressing what were seen as critically relevant issues such as innovation, inequality, environmental sustainability and much more. If anything this process is gaining momentum. It may mean that politics is put back into economics allowing distributional consequences to be considered as valid criteria for assessing economic models. The subject may become less scientific but more useful.

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Will robots “Exterminate!” jobs?

In December 2016 Mark Carney gave the Roscoe Lecture in Liverpool and spoke about the challenge of automation. He made the point that, “…every technological revolution mercilessly destroys jobs and livelihoods – and therefore identities – well before the new ones emerge.” His talk reflects growing concern around the world about the impact of robotics, machine learning and artificial intelligence. Some take an optimistic position arguing we can and should race “with” rather than “against” the robots, others are more concerned about the social and economic consequences. The following books reach differing conclusions,  but pretty much all agree on the accelerating pace of change and the ubiquitous impact they are set to have on the labour market.

In 2014, Erik Brynjolfsson and Andrew McAfee published “The Second Machine Age” It followed an earlier and much shorter work entitled “Race Against the Machines”. I start with this, much quoted, work as it provides a good overview of the brynspeed and scale of change. They start out with an interesting analogy to illustrate the accelerating pace of change in information technology based on the operation of Moore’s Law. That “law” was first enunciated by Gordon Moore in 1965. Over the years the shorthand version has become that roughly every two years the complexity of integrated circuits double and their cost halve. The critical consequence of this is the power and costs of computing double and halve respectively also.

This law has proven reasonably accurate over the past 50 years which means of course the power of computers has doubled 25 times since it was first described. Brynjolfsson and McAffee then use an analogy to give some indication of what may happen in the future if the law continues. They use the, possibly apocryphal, story of the reward provided to the man who invented chess. When asked by the emperor what he wanted he said he would like rice, and the amount of rice to be the exponential sum of rice if you started with one grain on the first square of a chessboard and then two grains on the next square and then doubled again on each remaining square of the chess board.

His request was granted until the amount started to become apparent. After 32 squares it amounted to 4 billion grains of rice which is about one large fields worth. So the first half of the chess board delivered a significant but manageable reward. The problem was when they moved into the second half of the board. Geometric progression really starts to accelerate and by the time you get to the 64th square you are at 18 quintilian grains of rice, more than has ever been grown on the planet. In passing, the emperor had the inventor’s head chopped off. No one likes a smart Alec.

The point that Brynjolfsson and McAfee are making is that computer technology is now approaching the second half of the chessboard and the increases in power which have been impressive to date, will pale into insignificance as we go forward. Computer power will increase at such a rate that it is difficult to predict what the limits of its capacity going forward will be or its consequences.

When you read Brynjolfsson and McAfee you cannot but be infected by their optimism. They are clearly impressed by the speed and depth of challenge technological change is creating. Despite the optimistic tone of their writing they do see the issues which this rapid change generates. In an article for the January 2016 World Economic Forum they recognised that “Globalisation and technological change may increase the wealth and efficiency of nations and the world at large but they will not work to everybody’s advantage…” They go on to make clear “ordinary workers” will bear the “brunt of the changes”.

Further they see the negative outcomes are likely to be increasing inequality of wealth and incomes leading to inequality of opportunity meaning that not all talent will be accessed, undermining the “social contract”which underpins social order. They also state, perhaps prophetically given what happened in the remainder of 2016, “Political power, meanwhile, often follows economic power, in this case undermining democracy.”

They argue, because of all this, there is a need for greater social investment to allow the provision of good quality basic services including education. They also make the case for public sector investment to boost the economy in the short term however they also talk about simultaneously putting in place a fiscal consolidation plan. There is a bit of cake and eat it here.

Coming from a rather different position is Martin Ford whose book “The Rise of the Robots” was the FT’s surprise business book of the year 2015. Ford makes the point that Information Technology is a radical “general purpose technology” by which he means it is similar to fordelectricity or steam. These advances had implications in every area of life. Electricity effected production, transport, communications, culture and opened the way to the creation of completely new industries. IT is a similarly powerful and ubiquitous innovation, what is more the pace of its evolution is accelerating across the second half of the chessboard.

Ford focuses on the economic impact of IT on employment. He describes how the declining costs of technology and the rising costs of labour are undermining the competitive advantage of developing economies workers. Foxconn, for example, who make Apple devices in China announced in 2012 plans to introduce up to a million robots into its factories there.

Another interesting example Ford presents relates to the textile industry. This was decimated in the US in the 1990’s as jobs went to low wage economies like China, India and Mexico. But between 2009 and 2012 US textile exports increased by 37% on the back of automation technology that could now compete with the lowest wage economies on the planet. Of course this does not mean the jobs that were lost have been recovered. It means the jobs were first exported to the developing economies and have now been replaced altogether by technology. Mr Trump might find it more difficult than he thinks when he tries to bring the jobs back home.

Of course many of the jobs that have been lost to technology to date have been precisely the manual jobs which provided reasonably well paid work for the lower skilled working class. With the development of machine learning and artificial intelligence however a wider and wider range of jobs are becoming vulnerable. The success of Deep Blue in beating Garry Kasparov in 1996 was seen as a major milestone in the development of computer capacity.

Whilst this feat was impressive it was largely a result of what might be called brute computation. There are an immense number of potential chess games however they are all derived from a set of basic moves which can be easily programmed. Advantage is obtained by computing the potential future moves given any particular configuration of the pieces. As computers become able to compute ever larger numbers they can see further ahead in the game which gives them the advantage.  In crude terms their sheer number crunching ability eventually gives them an unbeatable advantage. The success at the chess board is in large part a result of quantitative advances in IT.

Some argue we are now moving in to a period where qualitative changes are being made. It may be that the scale of quantitative change leads at some point to a qualitative change but different approaches are being made to the development of algorithms such that machine learning becomes self sustaining. It is the difference between programming a computer with chess moves on the one hand and enabling the computer to learn how to play chess itself. When this is combined with natural language communication some very impressive results ensue.

One of the most impressive of these is mentioned in many of the books. It is Watson, another IBM supercomputer, which managed to beat two champions of the American TV show Jeopardy in 2011. Jeopardy is an altogether different game from chess. It does not have an easily programmed set of rules. It is based on cryptic, natural language questions which may involve humour, slang, high culture, popular culture, deliberate red herrings etc. There is no straightforward set of basic moves you start from or algorithmic rules to move forward with. The Jeopardy victory was great publicity but the remarkable capacity of the machine was not developed to win a TV show.

Immediately after the show Watson was launched as a diagnostic tool in the health industry. By 2013 it was helping diagnose health issues and design patient treatment plans at major medical facilities in the US. IBM see Watson as having a wide range of applications based on natural language information requests. It is now starting to be used by companies to review business strategies. And for the avoidance of doubt I do not mean making sure their budget numbers add up. I mean taking a view about what products should be launched when, and where R&D expenditure should be made. Of corse Watson is not the only game in town.

Eureka is a programme which was set to work out the mathematical equations which explain the  motion of two pendulums, one dangling from the other. A fiendishly difficult problem, according to those that know about these issues, and incomprehensible to those of us that did woodwork. According to Ford the programme, “…only took a few hours to come up with a number of physical laws describing the movement of the pendulum – including Newton’s Second Law – and it was able to do this without being given any prior information or programming about physics or the laws of motion.”

The implications of this level of machine learning for the professions has been analysed by R Suskind and D Suskind in their rather academic, but non the less interesting book “The Future of the Professions”. In broad terms they see robotics and automation as mainly impacting on manual and administrative jobs. However software is now set to have the same transformative impact on professional jobs.

susskindIn true academic form they begin by carefully defining what a profession is and the model of the relationship between professionals and society. The definition talks about a body of specialist knowledge; admission through the gaining of credentials; a regulatory framework and a set of common values.They then identify the problems that the current model is experiencing. Economic issues of affordability, technological challenge in the manufacture and distribution of knowledge and a growing suspicion that professional knowledge is used to blind people with pseudo-science at the behest of those with economic power etc.

One of the most interesting parts of their work is the review of what is already happening. They systematically review, Health; Education; Law; Journalism; Management Consulting; Tax and Audit; Architecture and …Divinity! What is already happening is shocking but Susskind and Susskind make the same chessboard point. Technological innovation is on an exponential path and it will have the kind of transformative impact on the professions that digitalisation has had on the music industry.

Ford’s work reinforces the same points that automated sports coverage and news articles are starting to appear regularly, if not always identified as such. Precedent searches for law practices, journal reviews for doctors, automated diagnostic programmes are all examples of where technology is starting to make inroads. Whilst currently the focus is mainly on the effective analysis and review of vast quantities of data. It is replacing the need for some of the more routine middle class functions in the legal and health professions. It is a moot point whether a computer will take Silk but each year the possibility of this happening is becoming greater. Even if this never happens, a huge number of middle class jobs are at risk over the coming years, put that together with the more mundane jobs that are going and the economy looks set to need fewer and fewer people.

It is usually at this stage in the reviews of IT and AI progress that people start mentioning Luddites and the need for us to learn from history. The point is made that 300 years ago circa 90% of the population worked in agriculture. Now it is something less than 1% in the UK. As productivity in agriculture increased other opportunities opened up for the workforce that was thus “freed up”. Another, oft quoted, example is the development of the internal combustion engine. When this replaced horses millions of jobs were lost in breading, maintaining, and  cleaning up after them. However, millions of new jobs were created in the production, distribution and maintenance of cars. Given all this we should not worry too much about the IT revolution automating existing jobs, this will “free up’ labour to move into new jobs that will surely emerge.

Ford is not so sure about this, and neither am I. As computing power becomes ever more powerful and also ever cheaper robots will become ever more flexible and may well be able to take on whatever new jobs are created. There is a qualitative difference between previous technological revolutions and the current IT based one. Previous revolutions, brought about by general purpose technologies such as steam, electricity and the internal combustion engine, have been about introducing a source of brute power which humans use to magnify their efforts. Initially IT did something similar magnifying our physical capacity so that, for example, highly automated Amazon warehouses could replace a huge amount of manual labour. However IT also magnifies our intellectual power, indeed in terms of the storage, retrieval and manipulation of data machines have far exceeded man for decades. Whether at some point machines cross the Rubican of consciousness is in some ways irrelevant. There are millions of sedentary jobs which currently middle class workers do which are at risk. The internet of things linked to a machine which has the capacity to have a natural language “conversation”, whether they understand that in some conscious sense or not, means enormous amounts of intellectual work will disappear as far as humans are concerned.

Ford certainly feels we are moving into a new economic paradigm where substantial numbers of people will be redundant in the very strong sense that there labour and intellect is not needed, not just by a company or an industry but by the economy as a whole. This concern is shared by another interesting writer on the subject, Ryan Avent in his book “The Wealth of Humans”.

Avent disagrees with the view that the digital revolution is radically different from what has gone before. He argues the economic process is very much in line with what happened in the industrial revolution. At that time society had to make a trade-off between “…new and improved goods, services and experiences at lower costs in exchange for social and economic disruption.” (my emphasis) Avent looks at the continuities of economic processes between the industrial and the digital revolution. Specifically he looks at the concept of scarcity and how that determines cost. He sees, like Ford and others, that labour is becoming more and more abundant. In this context labour “finds itself settling for a shrinking share of income – and is increasingly irrelevant in the taking of important economic decisions.”

Given that labours bargaining power in the economy is limited and it no longer has the power of trade unions to artificially boost its scarcity to increase its bargaining power, it has to turn to aventpolitics to protect its position. If the existing political elites do not seem to be responding then it is increasingly likely labour will turn to “…radical political movements that offer the possibility of political expression and economic power.”

Avent charts the way the economy has evolved over the past few decades, and how, what he terms, social capital has increased in value. He defines social capital as “contextually dependent know-how, which is valuable when shared by a critical mass of people.” He makes the point that 80% of the value of Standard and Poor’s 500 companies is now “dark matter” or “the culture, incentives and tacit knowledge that makes a modern company tick.” In other words an enormous proportion of value is created socially. At a national level social capital is within institutions like, the rule of law. However, the rule of law isn’t a thing, it is an emergent property arising out of the willingness of a citizenry to accept certain processes that substantiate the rule of law in practice. As Avent sees it, the benefits of the collectively created social capital of the digital economy are going increasingly to the owners of financial capital. Further he thinks that “… this mismatch is a source of significant economic trouble.”

I started this article with an analogy about the geometric progression of computer power. We are now entering the second half of the chessboard and thus the pace of change in relation to AI, machine learning and robotics is likely to be even more spectacular than in the past. There is another issue that is picked up in some of the books above and illustrated by a story, again possibly apocryphal, about a visit by a trade union official to a modern Ford Motor plant. The official is being taken around by Henry Ford Junior. Mr Ford is extolling the virtues of the robots which produce the cars without the need for food breaks, trips to the toilet or holidays, 24/7 and 365 days of the year. The never complain or argue for higher pay. At the end of this paean for the robot the trade union official turned to Mr Ford and asked. “And how many cars do they buy?”.

During the enclosure movement it was said that sheep ate men. Some think now that software is eating men. I hope new jobs do come and they are like the physically and socially sustaining jobs that emerged in the post-war trente glorieuses. Jobs that enabled people to have a reasonable standard of living and a sense of their own worth as part of society. I have my doubts however and think Avent is probably right when he comments on how the the global economy has evolved in recent years  and concludes”…the hardest part in finding utopia is not the figuring out of how to produce more. We’ve managed that. The hard part is the redistribution.”

 

The Second Machine Age, E Brynjolfsson & A McAfee. Norton Press 2014.                                   The Rise of the Robots, M Ford. Oneworld Publications 2015.                                                             The Future of the Professions, R Susskind and D Susskind. Oxford University Press 2015.      The Wealth of Humans, R Avent. Allen Lane 2016

 

 

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The Rise and Fall of American Growth

This is a work whose central thesis is relatively straightforward but of immense significance not just for the United States but also for the rest of the world. In essence Mr Gordon argues that the growth rate of the American economy, which for so long has driven much of the world economy and transformed the lives of its citizens has its best days behind it. This is not because of a loss of entrepreneurial flair or lack of self-confidence. Rather, more substantive structural issues relating to an unprecedented and unrepeatable period of innovation mean that the levels of economic growth achieved over a period from 1870 to 1970 are unlikely to be recovered in the foreseeable future i.e. the next 25 years, or perhaps ever.

The book analyses economic growth in the States over three historical periods, first 1870 to 1940, then 1940 to 1970 and finally 1970 to 2014. For someone who has sat through more strategic planning meetings than I care to remember which have been peppered with phrases such as “the pace of change is unprecedented”, “learn to love change”, “change is here to stay”, it is absolutely fascinating to have pointed out how truly revolutionary was the first of the periods Mr Gordon addresses.

Part one of the book covering the period 1870 t0 1940 considers what people ate, how they dressed, how they got around, what their heath was like, how illness was managed, what their homes were like, how they communicated, and what working conditions existed. Each area is addressed in exhaustive and, one feels, loving detail. The book is a treasure trove of practical illustrations about how America has evolved over the past 150 years.

If we take the homes Americans lived in in 1870, they were lit by candle or paraffin lamp, which was inefficient, dangerous, required significant maintenance, and smelly. Water was provided by wells or other external sources. It had to be brought in and taken out of the home by hand, predominantly women’s. Human waste was deposited outside of the home in pits. Heating and cooking was mainly by open fire and centered on the main room of the home the kitchen/dining/living and occasionally bathing area.

To say life in such a home was “mean brutish and short” may be an exaggeration however compared with the home of the 1940’s not much of one. In a powerful use of language Mr Gordon describes the homes of the 1940’s as having become “connected”. I know that if our home lost its connection to the internet my youngest son would think the world was about to collapse and to be fair I would not be far behind him. However, it would be interesting to see how important the internet connection would be if it had to be traded off against connection to clean, running water, an effective sewage system or electricity.

One of the great things Mr Gordon’s book does is make visible the incredibly transformative function of advances which are now so ubiquitous in developed economies they are “invisible”.

One example from the book is the calculation of what a typical North Carolina housewife had to do to provide the home with water in 1886. She had to carry water 8 to 10 times a day meaning that over the course of a year she toted more than 36 tons of water over 148 miles. Washing, boiling and rinsing a single load of washing would require 50 gallons of water to be brought in and out of the home by hand. Running water and effective sewage were, of course, not just about convenience. Their impact on public health and urban development was immense.

In area after area a similar picture emerges. In 1870 transport was powered by horses or steam trains the internal combustion engine transformed this so that by the end of the period cars, trucks, electric transit systems and, even more spectacularly, airplanes were the norm. The germ theory of medicine and antibiotics extended average life expectancy significantly by reducing the high levels of infant mortality commonplace in 1870. Clarence Birdseye perfected the process of freezing food thus transforming the diets of the population. Electronic communications moved on from the telegraph to the phone to the radio, to the silent movie and by 1939 the release of The Wizard of Oz and Gone with the Wind.

The changes that occurred were overwhelmingly the product of the general purpose innovations of the second industrial revolution specifically the application of electricity to lighting and other uses, and the invention of the internal combustion engine. These reached into every aspect of peoples’ lives revolutionising how they lived.

Many of them were quantum shifts which were subsequently refined and developed but cannot be repeated. The provision of the first motorcar is such a paradigm shift. In the space of a few decades it meant the horse, which had effectively been the only mode of personal transport for millennia, was made redundant. This had enormous implications for areas as diverse as urban design, allowing suburbs to be “invented”, and public health with the removal of literally tons of animal waste from the streets of cities.

The productivity increases of the agricultural revolution and the growing application of steam power to production of the first industrial revolution were supercharged with the inventions of the second industrial revolution leading to the rapid and massive process of urbanisation. In every area productivity was increasing at a spectacular pace and the whole of the environment within which people lived was being transformed.

The Depression and the Second World War threatened all this and there was a fear that after the hot house of planned military production the post war period would lead to a collapse in productivity rates and a return to the stagnation of the 1930’s. What happened could not have been further from the truth. The period from 1940 to 1970 saw the rapid expansion of consumer capitalism as wartime production facilities were turned to peacetime white goods creation.

The era from after the war to the early 1970’s some have labelled as the Great Compression because of its redistribution of wealth transforming blue collar workers into what became, up until recently, the middle class bedrock of American politics. Trade unionism flourished, redistributive taxation with higher rates of 70% and 90% enabled the federal government to investment in infrastructure projects to do things like bring electrification to the South, establish social programmes such as Medicaid and Medicare and mount a war on poverty.

Whilst innovation continued it was largely about the more effective exploitation of the technologies that had been created in the earlier period from 1870 to 1940. Nothing was discovered that had the all purpose transformative power of electricity or the internal combustion engine.

Finally, we move to the era from 1970 to 2014. The story in this era is far less positive. The newly created middle class, who had experienced nothing but growth with living standards effectively doubling every 30 years, began to find their incomes stagnating or declining in real terms. Inequality began to grow and the pace of economic growth began to slow down.

This process was punctuated with the third industrial revolution around information and communications technology (ICT). This had a significant but relatively brief impact on productivity growth in the decade from the mid-1990’s to the mid-2000’s. There is a famous quote by Robert Solow, the Nobel prize winning economist that “You can see the computer age everywhere but in the productivity statistics.” This encapsulates what has become known as the “productivity paradox”, the fact that spectacular improvements in computer technology have had little impact on the overall level of productivity growth in the economy.

In essence Mr Gordon believes the period 1870 to 1940 saw a scale of transformation that is very unlikely to be repeated in the medium term and possibly never again. What it enabled was a period of economic growth unprecedented in human history. The speed of that growth was spectacular but has been in decline for over 30 years. If we take the annualised growth rate of output per hour in the period from 1870 to 1920 it was 1.79% per annum. In the period from 1920 to 1970 it was a very impressive 2.82%, but in the period from 1970 to 2014 it fell back to an average 1.62% per annum and of course this included the decade of growth between 1995 to 2005 associated with the ICT revolution. If this is stripped out the average growth rate in this period is 1.38%.

However Mr Gordon identifies four critical “headwinds” that might undermine even this rate and may mean “the future growth of real median disposable income will be barely positive and far below the rate enjoyed by Americans dating back to the nineteenth century.”

The headwinds he identifies are a) growing inequality which means that increasing amounts of whatever growth does occur is captured by a tiny fraction of the population; b) a faltering education system where the poor enter the system late and at a massive disadvantage leading to their early exit with all the negative career and income implications of this; c) a demographic shift with baby boomers retiring over the next twenty years reducing the supply of labour and increasing the dependency ratio; d) government debt to GDP ratio will inevitably increase as a result of these demographic changes and lead to the need for action in terms of cuts or tax increases to reduce the fiscal imbalance.

Taking account of the potential economic consequences of these headwinds Mr Gordon estimates that real GDP per person may grow at around 0.8% per annum over the next 25 years. This is a third of the rate achieved in the period 1920-1970, and barely half the rate achieved in the period 1970-2014. If the success of Mr Trump is in any way connected with the stagnation of the blue collar / middle class standard of living over the past thirty years what might a future of lower growth and more extreme inequality hold for politics in the States?

Mr Gordon ends his work with a number of policy prescriptions to mitigate the worst of the slowdown in economic growth. These include, a much more progressive tax system, a higher minimum wage, increased earned income tax credits, drug legalisation, improved pre-school education, a move away from the current property tax based system for the funding of education, increased but targeted immigration.

I suspect Mr Trump has not read this book, for if he had I am sure we would have heard the howls of condemnation from across the Atlantic. It is impossible to get across the quantity or quality of information contained within it nor the humane tone with which it is suffused. It is an important book that deserves to be debated widely amongst policy makers on both sides of the Atlantic. If even only partially correct its implications are profound for the economic, social and political future of the United States.

Further, one suspects the thesis has traction in the UK and Europe. This may mean any assumptions about future growth solving the UK’s current fiscal problems may be completely misplaced.

“The Rise and Fall of American Growth: The US standard of living since the civil war.” Robert J Gordon. Princeton University Press. 2016.