Hedge

by Nicolas Colin

  In essence, our modern tax system was invented in reaction to the development of a now-exhausted techno-economic paradigm. Now that we’re entering a new paradigm, that of the Entrepreneurial Age, there’s no reason not to imagine a new tax system that accounts for the dominant way of life and earning income—that of hunters rather than settlers. It is true for businesses, with the rise of tech companies calling for radical change in the fields of both corporate tax and value added tax. It is no less true for individuals, whose taxes need to be also upgraded to account for the current shift of household income. As we pass from a world of stable salaries to a world marked by instability at every level, income taxation should contribute to stabilizing personal income over time and hedging hunting individuals against the ups and downs of careers in the Entrepreneurial Age.

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  Key takeaways

  ● The shift to the Entrepreneurial Age calls for a new breed of consumer finance, one that is focused on facilitating career shifts rather than buying physical assets like houses and cars on credit.

  ● We need to harness technology to provide better insurance against critical risks. With adequate regulations, the market has the potential to deliver outcomes similar to those of social insurance.

  ● The tax system, too, must be upgraded to account for the ups and downs of the Entrepreneurial Age. We need to align personal income taxation with principles that govern corporate taxation.

  Chapter 12

  A Hedge for the Networked Individual

  “Providing protection against… risks is a way of ensuring that the dynamism of our economy is politically sustainable and morally defensible. It is also a way of ensuring that Americans feel secure enough to take the risks necessary for them and their families to get ahead. Corporations enjoy limited liability, after all, precisely to encourage risk-taking. But while today we still have limited liability for American corporations, increasingly we have full liability for American families.”

  —Jacob Hacker[479]

  The corporate world in retreat

  One of the major changes of our time is how the corporate world has moved from the center to the periphery of the economy. We’re leaving a world in which the large corporation was the epicenter of our lives. We’re entering one in which more and more shots will be called by an even stronger party: the multitude.

  Why were corporations so central until recently? Venkatesh Rao, of Ribbon Farm, has an interesting take:

  “In the 1780s, only a small fraction of humanity was employed by corporations, but corporations were shaping the destinies of empires. In the centuries that followed the crash of 1772, the power of the corporation was curtailed significantly, but in terms of sheer reach, they continued to grow, until by around 1980, a significant fraction of humanity was effectively being governed by corporations”[480].

  Indeed the reach of the corporate world increased greatly during most of the age of the automobile and mass production. In the techno-economic paradigm of the day, the corporation proved a superior mechanism when it came to delivering certain outcomes. In many cases, it was simply more efficient and more effective than either the state and the market. It was so effective, in fact, that the state used the corporation as a proxy for implementing the Great Safety Net 1.0: social insurance was mostly provided through employers; most of labor law was effectively bargained for at the company level; consumer finance relied on corporations providing steady, salaried jobs.

  An entire discipline, corporate strategy, was developed to help corporations consolidate their position in the economy. Most people assume that the corporation’s edge is derived from simply being bigger, as the bigger the size, the more value it can create and capture. But we tend to overlook the fact that scaling up demands difficult trade-offs. In practice, a corporation can grow in size only if it offloads some weight by outsourcing certain assets, functions, and risks to other businesses. This is what corporate strategy is all about: helping corporations expand their reach and scale up without becoming overweight.

  Today we’re way past the time when large corporations were vertically integrated. The Standard Oil Co. was one large corporation that was present all along its industry’s value chain, from upstream (extracting crude oil from the Lima-Indiana fields in Ohio) all the way to downstream (selling gas to consumers)[481]. Rockefeller’s empire was a precedent suggesting that a corporation could successfully address large consumer markets while operating each line of business in the industry.

  Following the Standard Oil example, Henry Ford designed the Ford Motor Company to be just as integrated, with the assembly lines at the core and the company selling directly to consumers through department stores, mail order, and sales representatives. But then General Motors, Ford’s nemesis, broke with that model. As discovered by its CEO Alfred P. Sloan, it only needed to control a few strong links in the value chain to impose conditions on third parties operating the other links. Owning certain strategic assets, the ‘one ring to rule them all’, was more than enough for GM to dominate the car industry.

  Corporate strategy grew more sophisticated during the following decades, helping corporations such as GM make the many trade-offs that would allow them to scale even more. Following Bruce Henderson’s “Experience Curve”[482] and “Growth/Share Matrix”[483], corporations started to divest non-core businesses. Then came the time of Michael Porter’s “strategic positioning”[484], with which large firms realized that focusing on one line of business made it very difficult to achieve a competitive advantage.

  As a compromise, it became common practice for large firms to pick two or three links in their value chain while leaving the rest to others. Car manufacturers had the assembly lines and the brands that they marketed to the public; the rest (manufacturing parts, selling cars) could be abandoned to weaker links submitted to their willpower. Large publishing houses had the editing and the distribution, but they obviously let authors write manuscripts and preferred that books be sold to the general public through independent bookstores. Insurance companies had the balance sheet to underwrite most risks, but they let insurance agents and brokers do the hard work of selling policies to businesses and consumers. Likewise, McDonald’s had the trademark and, famously, the real estate[485], while most other assets, functions, and risks were carried out by its franchisees.

  The idea that corporations are now in retreat may sound odd in a world so obviously dominated by large tech companies. And it's true that the story of the corporate world is still all about scaling up—at least in terms of market capitalization and number of customers served. But something has changed since we left the age of the automobile and mass production and entered the Entrepreneurial Age. With ubiquitous computing and networks, the strategic trade-off of the day is that corporations offload more assets, functions, and risks not to other businesses, but to us—the users.

  This is a radical shift from the corporation’s point of view. First of all, consumers are simply more powerful thanks to technology. They are not scattered, non-coordinating agents anymore. They’re equipped with increasing computing power and connected with one another, forming the multitude—a networked organization whose exponential power eventually exceeds that of most corporations, however large and tech-savvy.

  A recent example of that unprecedented pressure from the bottom up is how the #DeleteUber hashtag initiated the takedown of Uber’s Travis Kalanick in 2017[486]. Another is how a revolt of Netflix’s customers in 2011 led the company to renounce splitting its DVD-by-mail and streaming businesses into two separate entities[487]. Even traditional, brick-and-mortar companies are feeling the heat of consumers being empowered by technology, such as when Gap chose to cancel its ill-fated brand redesign in 2010[488], or when Delta had to rescind its partnership with the National Rifle Association following the Marjory Stoneman Douglas High School shooting in Parkland, Florida in 2018[489].

  But the shift is about more than mere consumer empowerment. Again, in an economy in whic
h production and consumption are increasingly blurred, we users are more than consumers. As we provide data, capital, and labor that is reintroduced into the supply chain, we’re also an essential resource that large firms rely on. As a result, we now have a grip over corporations because we control two points of their value chain: as customers at the bottom, and as suppliers somewhere at the top. With those two points of support, individuals within the multitude can begin to apply Michael Porter’s strategic positioning and secure a sustainable competitive advantage. And this further changes the balance of power between corporations and individuals, with the former retreating to the periphery while the latter take center stage in value creation.

  We can draw many conclusions regarding prosperity and economic security from this. In the age of the automobile and mass production, the corporate world was so central to the economy that the main risks of the day could be mitigated by simply providing stability to corporations. Firms had to change and rebound at the pace of market competition. But the Great Safety Net 1.0 was there to help them absorb the shock and thus preserve households from the adverse effects of market instability. By making corporations more stable and resilient, the Great Safety Net 1.0 provided most individuals with opportunities to resist the ups and downs of the economic cycle.

  Today’s Entrepreneurial Age creates a new range of problems. There’s the overall pressure on workers’ income—the ‘Greater Wal-Mart Effect’. With the rise of multitude-driven increasing returns, instability is of such magnitude that it has become impossible to count on corporations to absorb shocks for individuals. We need to imagine new ways of empowering individuals in a world that exposes them to more risks but also where technology provides them with unprecedented capacities.

  The center of gravity of our entire economy has irreversibly moved. It is no longer the corporation and the rigid, stable relationships it entertained with individuals as shareholders, workers, and consumers. It is instead the individual as an entity, connecting with others (mostly individuals) on borderless networked markets. It is worth re-reading the prescient and lasting words of the Cluetrain Manifesto: “Networked markets are beginning to self-organize faster than the companies that have traditionally served them. Thanks to the web, markets are becoming better informed, smarter, and more demanding of qualities missing from most business organizations”[490].

  Many twentieth-century institutions were set up with the underlying thinking that individuals were a faceless mass, incapable of self-organizing. But in the Entrepreneurial Age individuals are active, not passive. They’re organized, not blended away into the mass. They’re constantly on the move, not stuck in one place. In the Entrepreneurial Age, it becomes more and more difficult to fit individuals into rigid categories. The Great Safety Net 2.0 has to comply with this unprecedented difficulty in fitting any one individual into a particular box.

  This explains the idea of promoting a Greater Safety Net for networked individuals rather than for corporations—a hedge designed to cover us against all critical risks and empower us in our many interactions with other economic agents, all without the intermediation of the proxies (large corporations, the state) on which the Great Safety Net 1.0 had to rely in the age of the automobile and mass production. In a world where corporations are now prospering at the margin rather than the center of the economy, the corporate world alone has neither the power nor the influence to initiate designing and implementing the Great Safety Net 2.0.

  If the connected individual is now at the center, with everything constantly moving around them due to the features of the Entrepreneurial Age, then this calls for grounding economic security in the new paradigm: not institutions designed to manage the balance of power between individuals and corporations, but institutions designed to hedge individuals in the many connections they constantly make and break with organizations and other individuals in their various capacities.

  This calls for radical imagination when it comes to harnessing the power of the multitude in the interests of the many instead of the few. Technology-driven capacities are now available for individuals in various guises: as voters, as users of public services, as self-employed workers, and even as employees. The multitude explains the adverse consequences of the Entrepreneurial Age, the widespread instability, the ‘Greater Wal-Mart Effect’. Can it also be a dynamic positive force, like trade unions in the past, using the power of technology in the interest of economic security and prosperity?

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  The new frontier in collective bargaining

  One issue with technology is what I have previously called “downward augmentation”: the fact that technology compensates for a lack of skills when executing many tasks. The more technology there is, the less educated you need to be to provide high quality services in a more productive way. For less educated workers, this is good news indeed. It means that the barriers will be lower when they try to access the job market. And once they have a job, they’ll be able to deliver a greater output and will (in theory) be rewarded with an accordingly higher wage.

  But there’s a catch. With more people being able to occupy many jobs, technology also contributes to Karl Marx’s “reserve army of labor” becoming wider than ever. Thanks to technology, employers tend to have an infinite pool of job-seekers into which they can tap to replace those who have the nerve to organize and demand better working conditions. How can workers restore their bargaining power in the presence of both increased consumer power and this infinite reserve army of labor?

  As is often the case, there are many lessons to be drawn from the past. The rise of assembly lines at the end of the nineteenth century was similarly seen as a major threat for the well-being of workers. Since working on these assembly lines required less skills than traditional craftsmanship, factory bosses could maintain pressure on wages and force their employees into accepting degraded conditions. Union leaders answered by breaking with the corporatist approach of the old craft unions and organizing industrial workers no matter their skills or the sector in which they worked[491].

  To create a sense of shared destiny between their heterogenous members, innovative union leaders had to inspire their troops with radical messages and, in some cases, revolutionary views. But above all, they designed a new value proposal: joining a union was no longer about entering a closed corporation of skilled craftsmen; rather it was about taking a path towards inclusion in society. Thus much like the infamous political machines[492], industrial unions in the US were a preferred destination for minorities and immigrants since they provided their members with services covering critical risks and taught them the soft skills necessary to find their place in an otherwise antagonistic society.

  My view is that such a cooperative model (call it a union, a guild, or a federation) is bound to rise in the future as the most effective way to empower workers in the Entrepreneurial Age. But a paradigm shift is needed in terms of what the goals are and what kind of methods and tools should be used by those trade unions of the Entrepreneurial Age.

  Indeed the great Albert Hirschman told us about what it takes to move the needle: voice and exit[493]. Voice is obviously about making your voice heard: participating in a town hall meeting, demonstrating on the streets, or demanding to see the shop's manager. Exit is about taking refuge in the other option: you vote for the other candidate, or go to that other shop across the street where prices are cheaper, inventory is larger, and employees are nicer.

  Historically, trade unions have been concerned mostly with supporting workers so that their voice is heard by employers. This was consistent with what jobs were all about in the settling model of a continuous career spanning decades. Because workers had the same employer for years, voice was their preferred option, with quitting their job the solution of last resort.

  But now jobs have radically changed to the hunting model. We switch jobs more often. Some, notably many high-skilled workers and millennials, are even enjoying it. And as pointed out in 2014 by Adam Davidson,
in our current “Failure Age”[494], businesses close down at a higher frequency anyway, so you can’t plan on spending your entire career with one single employer anymore.

  As a result, exit has become less frightening than it used to be. Quitting your current job is about precipitating the inevitable and switching jobs is the new normal[495]. This changes the relative opportunity of the two Hirschman levers: exit is not the last resort anymore. And with more of us becoming hunters in the Entrepreneurial Age, it has even become the more desirable.

  So how come unions keep on supporting workers on the voice front only—bargaining with employers, going on strike, demonstrating, doing everything they can to save their members’ jobs? I think it’s time we imagine unions that support workers as they switch jobs, unions that would provide their members with all 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”).

  I can hear your doubts: that's not what unions do, they should stick to what they know. And yet it won’t be the first time that unions reinvent themselves. Again, in the US, they once went from defending skilled (mostly white) craftsmen to defending the interests of all industrial workers whatever their skills, sectors, and origins. The industrial union paradigm was so different that a new entity had to be founded (the Congress of Industrial Organizations, which only later merged with the old craftsmen’s American Federation of Labor).