Hedge

by Nicolas Colin

  On the consumption side, technology provides a better life and more opportunities, with startups and entrepreneurs harnessing the power of technology to make the world a better place. On the production side, the rise of technology has reinforced the sense of perpetual crisis given the startups that are primarily seen as threats for incumbents, the instability that goes with increasing returns to scale, and the ‘Greater Wal-Mart Effect’. Here, technology disrupts the world and displaces its inhabitants rather than making things better. Clearly the impact of technology is not the same if you’re part of Richard Florida’s “creative class” or if you have a mid-level assembly or desk job in an aging organization.

  As we’re going deeper into the Entrepreneurial Age, technology has become a constant challenge and a matter of life and death for traditional employers. Most of them are unable to take the risks required to make the most of computing and networks. To remain competitive without innovating, they have to cut costs continuously, thus increasing the pressure on what is now the weakest link in their supply chain—the workforce[260].

  This echoes Clayton Christensen’s argument[261] as to how corporate finance has made it harder for old corporations to comply with the fast pace of innovation[262]. Disruptive innovation, the one you need to implement to remain competitive over the long term, employs a lot of capital and creates many jobs. But corporate executives usually favor efficiency innovation, whose main consequences are the freeing of invested capital (hence the record-high corporate dividends[263] in the recent period) and massive job destruction. The fact that those executives prefer rent-seeking over risk-taking explains a significant part of the widening economic inequality gap and increased economic insecurity[264]. Yet workers in traditional industries will often point to tech startups as the main culprits for their problems, rather than the feeble and incompetent management of incumbents in traditional industries.

  It’s not that technology is absent from older organizations. Most of them have long since deployed information systems and equipped their workers with computing devices. Rather the problem is that using technology to achieve higher efficiency does not solve strategic problems as much as it makes work more alienating and inspires resentment in workers. Tech companies willing to ally with the multitude have made a priority out of making life simpler and more seamless for their users. But there is also an entire generation of older tech companies (what Peter Thiel calls the “Rust Belt of the tech industry”[265]) that have made it their mission to serve legacy organizations with ill-designed apps and closed systems. It certainly doesn’t serve the cause of technology well.

  The rapidly approaching spectre of automation is adding to the fear. The twentieth century created lots of jobs, whether in manufacturing or services, that consisted in executing routine tasks within an integrated supply chain under the principles of scientific management. Now technology makes it easy to replace humans with machines that execute those same routine tasks. And it’s no wonder this hurts: for decades, those routine jobs were extremely attractive. People didn’t need to be highly educated to perform them and they nonetheless came with good wages and the economic security underpinned by the Great Safety Net. In other words, those jobs gave rise to the middle class and the very idea of working families (father at a factory, mother either at home or at an office or retail store nearby). And now they are precisely the jobs that are being replaced by technology—or, potentially even worse, simply made redundant, inspiring workers to see their daily labor as what David Graeber calls a “bullshit job”[266].

  In many ways, the transition to the Entrepreneurial Age is amplifying and accelerating a preexisting trend. Robots have been present in factories for decades, gradually replacing workers at various levels of the income ladder. Predominantly routine jobs have been affected the most. They’re the easiest to replace with technology and they’re also the easiest to relocate overseas, as technology (and free trade agreements) made it incredibly easy to build factories in cheap-labor countries and ship manufactured goods over much longer distances. This has been a concern for decades, but clearly the exponential power of technology has made the fear of it more vivid—and personal—than ever.

  Things are becoming somewhat more urgent because less educated workers are far from being the only ones affected by technology-driven displacement. The acceleration brought about by the current techno-economic transition is leading to the replacement process affecting more than just manual routine tasks, and educated professionals are now being replaced with software. The common point for intellectual professions currently being eaten by software[267] is the mastery of vast amounts of knowledge. Thanks to advancing artificial intelligence, this knowledge can be mastered by autonomous software, leaving to humans only the personal service / caring side of the job: think about IBM’s Watson (healthcare)[268], Watson-based Ross (legal)[269] or high-frequency trading (finance).

  A less understood way in which technology contributes to destroying jobs is that it makes it possible to replace workers with a multitude of users whose contributions are coordinated by networks. Through these networks, many tasks previously executed by paid workers are passed over to the multitude itself. This happens either individually (I can type on a computer myself, a task rendered so simple thanks to software that no secretarial jobs are needed anymore) or at the aggregate level (entire professions are gradually overthrown by contributing users: travel guide writers vs. TripAdvisor, encyclopedia writers vs. Wikipedia, journalists vs. Medium). Professionals are replaced with user communities working for free[270]  on relatively small individual tasks.

  On top of that, we have difficulties in translating the higher productivity and quality brought about by the Entrepreneurial Age into better working conditions for those who retain a job. As technology makes progress, most jobs can now be held by less skilled workers[271]. As observed by Tim O’Reilly, technology can augment people and enable them to do things that were previously impossible[272]. But it also makes it possible to do the same things with less skilled workers. Like Uber, technology can even do both: employing less skilled workers (Uber drivers don’t know the city map by heart like old fashioned taxi drivers) while delivering higher quality than the incumbents[273] to ever more demanding customers.

  This “downward augmentation” is a promising perspective when it comes to creating jobs for less educated people in an economy driven by technology[274]—and a radically new way of looking at software and robots in the context of Schumpeterian job destruction. But it’s also bad news for most workers, as Marx’s “reserve army of labor” is now larger than ever. In the Entrepreneurial Age, corporations have an infinite pool of low-skilled job-seekers that they can tap into to replace those who have the nerve to organize and demand better working conditions. And this can only make the ‘Greater Wal-Mart Effect’ even worse.

  All in all, technology isn’t changing the world in a day. Instead, creative destruction is triggering gradual yet massive transitional unemployment due to a radical shift on the job market. On the supply side, the new economy is taking over without yet creating enough jobs to compensate for the amount of destruction. On the demand side, it is proving difficult to attract middle class workers into the new, more tech-driven segments of the job market. If the Dark Ages seem to be lasting so long, it’s because such a techno-economic transition takes time and inflicts quite a lot of pain on the workforce that finds itself caught between two eras.

  What’s more, with the instability that is characteristic of the Entrepreneurial Age, demand is less steady than ever. The exponential pressure exerted on workers by consumers allied with large tech companies (the ‘Greater Wal-Mart Effect’) brings wages lower and lower, which in turn causes consumers to seek out more savings. It’s a vicious cycle in which individuals are both perpetrators and victims. Even the financial system doesn’t work anymore since it was designed for a society of salaried workers employed by big, resilient corporations. Once jobs are more precarious and corporati
ons are more prone to failure, the financial system is proving incapable of fulfilling the financing needs of either households or businesses of the Entrepreneurial Age.

  This is the challenge we need to tackle today: revisiting every function that was once performed by the Great Safety Net back when it worked so well. We need to imagine institutions to once again serve the three goals that we should all be obsessed with: making consumer demand steadier, increasing household income, and providing access to affordable credit.

  It’s not about restoring things as they were in the 1950s and 1960s. It’s not about implementing the principles of neoliberalism that led us to the 2008 financial crisis. Rather we have to imagine a radically new mix of social insurance programs, financial innovation, and worker empowerment mechanisms to better manage risks and increase prosperity and economic security for all. This is what the Great Safety Net 2.0 is all about—a way out of the Dark Ages and a virtuous macro mechanism to fulfill the promise of the Entrepreneurial Age.

  ◆◆◆

  Key takeaways

  ● Consumers gaining power as the multitude is not good news for everyone. Like once happened with the infamous “Wal-Mart Effect”, it inflicts an ever-growing pressure on workers.

  ● As the Entrepreneurial Age is driven by increasing returns to scale, it displays instability at levels far beyond what was observed at the dawn of the age of the automobile and mass production.

  ● It’s time we imagine a Greater Safety Net, or ‘Great Safety Net 2.0’, to hedge both households and businesses against these new adverse features of the Entrepreneurial Age.

  Part 3

  The Collapse of

  the Cathedrals

  Chapter 7

  The Safety Net

  in an Open World

  “Sometimes simple and bold ideas help us see more clearly a complex reality that requires nuanced approaches. I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.”

  —Dani Rodrik[275]

  Software is opening the world

  One of the most striking articles I read in 2016 was written by Rex Storgatz for the Wired edition of Backchannel[276]. The piece is about a paradox observed in the small, isolated town of Napoleon in North Dakota. As remarked by the author, nothing has changed in the appearance of the place where he once spent his childhood and teenage years: the population is the same, the number of jobs is the same, the same stores are up and running. Yet as he digs deeper and talks with teenagers who live there, he discovers that their lives have almost nothing in common with what he experienced twenty years before. For him, living in Napoleon equaled being cut off from the world. But today, there’s something new that considerably broadens the perspective of Napoleon’s residents. As remarked by Storgatz, the town “would be trapped in the amber of time, in a big glass case, if not for one thing: Access to information.”

  Until the 1960s, the main force at work in modern societies were local communities. In the absence of mass media and with the national government still a loose organization gathering people from different areas and various backgrounds, action on the ground was key to delivering economic security and prosperity. Those local systems were more than simply living in the same area. Their primary function was to provide people with a sense of community. At the local scale, people gathered and bonded working in the fields and in the factories, walking around the local marketplace where they went for groceries and communing at church where they congregated on Sundays.

  Those tight-knit communities played an even more crucial role because the Great Safety Net didn’t exist back then. To find a job and cope during difficult times, individuals needed to belong to that community, which led them to participate in the political process. In the case of the infamous political machines in the US, people literally sold their vote (and that of their community) in exchange for favors and material support. Patronage was the lever candidates had to operate in order to bond with individual voters and their community. Geographic proximity formed the basis for mitigating risks at the local level[277].

  At a larger scale, entire territorial systems were controlled by powerful intermediaries. Their mission, on behalf of their constituents, was to bargain with power players at the national level. In exchange for delivering votes for their party, these local leaders obtained public money to facilitate patronage of their constituents. And like in the case of segregation in the Deep South of the US, they also ensured that there would be no intrusion from the national level in their own local businesses, sustaining fragmentation and regional differences in the process.

  The way to aggregate the various local systems at the national level was to form loose electoral coalitions that pulled together different constituencies around tailor-made coalition-building policies. In the US, one such coalition existed with the first populist movement in the late nineteenth century: it was driven especially by the farmers’ response to the overwhelming power of the railroads and it led to their forming an alliance with the urban working class, long before industrial trade unions were even a thing.

  The New Deal, which led to building the American version of the Great Safety Net, was another opportunistic coalition[278]. In November 1947, the ‘Clifford Memo’, a document laying out the strategy to be followed by President Truman the following year, reminded its readers that “the Democratic Party is an unhappy alliance of Southern conservatives, Western progressives and Big City labor… The success or failure of the Democratic leadership can be precisely measured by its ability to lead enough members of these three misfit groups to the polls on the first Tuesday after the first Monday of November, 1948”[279].

  The mass media shift from the 1950s onward definitively weakened those local political systems. Even in 1947, the aforementioned ‘Clifford Memo’ already detailed how “the old ‘party organization’ control [was] gone forever. Better education, the rise of the mass pressure group, the economic depression of the 30s, the growth of government functions — all these have contributed to the downfall of the organization…They have been supplanted in large measure by the pressure groups”[280]. As soon as the Great Safety Net of the Fordist age was in place and delivering results, the sense of community became national rather than local.

  Today, the unprecedented connectivity experienced in places such as Napoleon is something that we should factor in as we try to better understand the nature of community in the Entrepreneurial Age. Ubiquitous computing and networks enable many things that didn’t exist in the past: you can now learn anything from YouTube, Facebook, and Medium; you can exchange information with people anywhere in the world with the help of Twitter, WhatsApp, and Google Translate; you can form new networks of remote, yet like-minded individuals who will pool their knowledge and power to achieve new goals and form new organizations.

  Thus the redistribution of power from the inside to the outside of organizations and the rise of the multitude are changing the game. Openness in the Entrepreneurial Age is quite different from globalization in the Dark Ages of financialization. The global world of the 1980s, 1990s and 2000s was dominated by giant, bureaucratic corporations. As it constrained nation states, the level at which people tended to congregate in those times, globalization was a direct threat for people’s sense of community.

  But today things are different. The open world of the Entrepreneurial Age is dominated by networks of individuals equipped with ever more powerful computing devices. Not only do people travel more, they’re also more connected with one another across the borders that still divide the physical world. It doesn’t mean that local communities or nation states are now obsolete. But from the point of view of individuals, they don’t matter as much as they used to. In this new world, people don’t need to live close to one another to feel a sense of community.

  In
deed connections within the multitude are more and more difficult for nation states to capture. A growing part of the population is mobile at the global level, with young (and less young) people now used to working in different countries and adapting to local customs. Gone are the days when Western people working abroad were so-called ‘expatriates’, still relying on their home state and institutions when it came to employment, banking, social insurance, and various other ties. Today, more individuals, however privileged, are effectively behaving like emigrants. They leave things behind and convert to the way of life and institutional framework of their place of residence. Alongside the travelling professional class that still consumes stereotypical products and experiences from one large city to another[281], there’s another fringe of the creative class that dives deeper into foreign countries, weakening their attachments to the one they were born in.

  In some aspects, the digital economy is still trapped within borders: Netflix still streams different movies and series depending on where you watch it; Uber has to comply with heterogeneous regulations from the US to the UK to Germany to Italy; European citizens have the “right to be forgotten” whereas in the US the First Amendment makes it most difficult to suppress online speech; most US tech companies have failed to gain a foothold on the Chinese market, which is mostly owned by Chinese ventures.