If present trends continue, the fortunate creators of blockbuster ideas will earn even more. The corollary, as I have emphasized, is that they will also gain unparalleled political power. But most people will not share in the monetary gains, and their political power will disappear. They will see the dazzling array of products and services spawned by the new technologies but will be unable to buy them because the technologies will supplant their work and drive down their pay.
When I made my predictions almost twenty-five years ago I expected that modern technologies would continue to increase the demand for highly educated workers while reducing demand for the less educated. So I assumed that the remedy for job losses and for declining wages lay in helping more people get more and better education, especially access to higher education. I was only partly correct. Those with college degrees continued to do far better than people without them. In 2013, Americans with four-year college degrees earned 98 percent more per hour on average than people without college degrees. That was a bigger advantage than the 89 percent premium that college graduates earned relative to nongraduates five years before, and the 64 percent advantage they held in the early 1980s.
Yet I was wrong in believing that college degrees would deliver steadily higher wages and a larger share of the economic pie. In fact, the demand for well-educated workers in the United States seems to have peaked around 2000 and then fallen, even as the supply of well-educated workers has continued to grow. As I have noted, since 2000 the vast majority of college graduates have experienced little or no income gains at all. Even those in the top 90th percentile of college graduates increased their cumulative income by only 4.4 percent between 2000 and 2013. Over the same years, the entry-level wages of college graduates actually dropped (a decline of 8.1 percent for women graduates and 6.7 percent for men). To state it another way, while a college education has become a prerequisite for joining the middle class, it is no longer a sure means of gaining ground once admitted to it. The middle class’s share of the total economic pie continues to shrink, while the share going to the top continues to grow.
Reversing the upward pre-distributions baked into the rules of the market, getting big money out of politics, reinventing the corporation, and improving the quality of and access to education will all be helpful. Countervailing power should aim for no less. But these changes will not themselves alter the direction in which technological advances are taking us. And yet, as I have shown, no economy, and no society, can sustain itself with a system of production whose revenues and profits overwhelmingly flow to a very few. What, then, is the answer?
Some call for higher taxes on the incomes and the wealth of the few big winners, with the revenues then redistributed to everyone else. It should be possible for countervailing power to raise the top marginal income-tax rate. After all, during the three decades after World War II, when the power of large corporations and Wall Street was effectively countervailed, the top marginal rate never fell below 70 percent (and the effective rate, including all deductions and tax credits, never below 50 percent). But if current trends continue, direct redistribution on the scale necessary to achieve broadly shared prosperity forty or fifty years from now will require more than this. When almost everything can be done by knowledge-replacing technologies owned by a small number of people, not even Thomas Piketty’s proposed global tax on wealth will suffice. What will be needed? And how could the market be reorganized to accomplish it?
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1 Official productivity data do not yet show the growth in output the new technologies appear to be generating. This could be because the official data don’t measure it very well (open-source software, for example, doesn’t show up as part of output because it’s freely available) and because it often takes years for technological breakthroughs to pervade the overall economy, given how deeply embedded are older technologies.
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The Citizen’s Bequest
Instead of directly taxing the current income or wealth of a few and transferring it to the many, a more sensible approach is to more widely share future wealth. The difference is not merely semantic. As we have seen, current wealth is the outcome of a system of market rules. Presumably the founders of WhatsApp went to the trouble of creating their blockbuster product because they hoped they would win the jackpot with it, as they did. But the size of that prize, and the system of incentives of which it is a part, depend in turn on rules about intellectual property, such as the duration of patents and copyrights; rules about market power, such as when standard platforms violate antitrust laws; rules about contracts, such as when a corporation becomes so powerful that its agreements with consumers and employees become coercive, or when conflicts of interest and insider information result in fraud; rules about who can declare bankruptcy and have their debts reorganized; and rules about enforcing all of these, including the protection of private property and wealth.
If the rules were different—if, for example, the Patent Office defined “new and useful” so strictly that it denied WhatsApp’s patent application as being insufficiently novel or useful relative to other messaging services; or Congress decided patents will last only three years instead of twenty; or antitrust laws prohibited any company that controlled a large network or major platform (such as Facebook) from acquiring another company on the way to gaining control of another network (such as WhatsApp); or enforcement of patents was so lax that anyone could freely appropriate WhatsApp’s messaging service—WhatsApp would not be worth $19 billion. It would be worth far less, or nothing, which would leave its founders with relatively small rewards or no remuneration at all for their efforts. Is this a good outcome?
The question has to do with the underlying market rules for pre-distributing income and wealth, including providing adequate incentives to innovators such as WhatsApp’s founders. As I have pointed out, current market rules are generating increasing returns to the owners of capital assets and decreasing returns to the vast majority who work for a living. With sufficient countervailing power, society has the option of creating rules that will not heap such huge rewards on so few but will still give innovators enough incentive to keep their inventions coming.
What’s the appropriate balance between stimulating new inventions and investments that could possibly improve the quality of life for millions of people and not concentrating too much wealth in the hands of a few, thereby impoverishing almost everyone else? There’s no correct answer. But with adequate countervailing power we could have more confidence in the ability of our political-economic system to decide. We could better trust that the resulting distribution of income and wealth represents a trade-off society is willing to make.
That doesn’t end the matter, because that trade-off would change for wealth handed down to future generations who played no role in the original invention and investment. Even if the market is designed to richly reward WhatsApp’s two founders, it need not lavish similar rewards on their descendants in order to give the founders ample incentive. Even if they care about their kids, they are likely to care far less about their great-grandchildren and about subsequent generations whom they will never know and whose genes will be further diluted with the genes of many forebears other than the founders’. This means that the market rules affecting wealth and income in the long term could generate smaller and smaller returns to each succeeding generation of heirs to inventors without reducing the original inventors’ motivation. From society’s point of view, that would allow the trade-off to tilt ever more in the direction of reducing concentrated wealth and spreading economic gains.
The appropriate analogy is to intellectual property, which poses a similar balance between giving creators adequate incentives and putting their creations into the public’s hands—into the “public domain” as it is called—as soon as those incentives are no longer necessary. Extended to the entire process of technological advancement and to all the market rules underlying it, this suggests a principle for deciding on the rules govern
ing future wealth. Just as with intellectual property, at some point that wealth would revert to the public domain.
The absence of countervailing power has moved us in the opposite direction, however. To repeat: By 2014 six of the ten wealthiest Americans were heirs to prominent fortunes. The six Walmart heirs together had more wealth than the bottom 42 percent of Americans combined (up from 30.5 percent in 2007). According to political economist Peter Barnes, interest, dividends, capital gains, and inheritances account for one out of every three dollars of income received by Americans—and almost all of that goes to the richest 1 percent. Meanwhile, the estate tax no longer kicks in until a couple’s estate is worth more than $10.68 million, and the laws give ample opportunity for a halfway clever estate attorney to lock away far more in trust funds. In addition, assets that increase in value over the course of a lifetime—homes, stocks and bonds, jewelry, paintings, antiques, land—can go to heirs without the heirs paying capital gains taxes on such increases. The heirs can draw income from the assets through the course of their own lives and then pass them on to their own heirs, without anyone ever paying capital gains taxes.
Put this together with the technological trend I have outlined, which is putting more and more value in fewer and fewer hands while reducing the real wages of most, and the expected transfer by wealthy Americans to their heirs over the next half century of some $36 trillion, and you see why we are lurching toward a capitalism so top-heavy it cannot be sustained.
Countervailing power would not only reverse this but would use the proceeds from the changes in market rules I have suggested to guarantee all citizens a share in the future growth of the economy.
One straightforward way to do this would be to provide all Americans, beginning the month they turn eighteen and continuing each month thereafter, a basic minimum income that enables them to be economically independent and self-sufficient.
This is not as radical as it may sound. In 1979, the conservative economist F. A. Hayek endorsed just such a system:
The assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be a wholly legitimate protection against a risk common to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born.1
Many who call themselves libertarian are also attracted to a basic minimum income because it eliminates the need for welfare or another form of government transfer to the poor that tells them how to spend the funds or otherwise demeans or stigmatizes them. It would likewise reduce people’s dependence on private employers, thereby freeing them to express their views without fear of retaliation.
Some might object that such a system would contravene society’s work ethic, robbing citizens of the structure and meaning work provides. The answer is that a basic minimum payment would be only enough to ensure recipients and their families a minimally decent standard of living. Anyone wishing to supplement their basic minimum could of course choose to work, even though most jobs will pay modestly, for reasons already mentioned.
The basic minimum would allow people to pursue whatever arts or avocations provide them with meaning, thereby also enabling society to enjoy the fruits of such artistry or voluntary effort. It seems doubtful that the vast majority would choose idleness over physical and mental activity. Instead, we’re likely to see a reversion to a time when many jobs were considered “callings,” expressing a deeply personal commitment rather than simply a means of acquiring money. I have met a number of teachers, social workers, doctors, nurses, and—yes—even politicians who still view their work this way. I have not yet found an investment banker who does, but perhaps there are a few.
Similarly, potential artists will be freed to pursue their work. It was once possible for T. S. Eliot to survey land when he wasn’t writing poetry, or Walt Whitman to earn money as a copyist in an army paymaster’s office, or the young Albert Einstein to develop his theory of relativity while an examiner in a patent office. But in recent decades, for most people, paid work has become more intrusive, occupying more waking hours and even intruding on sleep. How many budding poets or artists or scientific theorists cannot pursue their craft because they are effectively on call almost all hours in order to have enough to live on? A basic minimum income would give them that opportunity.
We would thereby create a future in which robots do most of the work and our people reap the benefits. This would be that kind of society John Maynard Keynes foresaw in 1928, when he claimed that in a century technological advances would create an age of abundance in which no one would need to worry about making money, leaving us with the challenge of how best to use the resulting freedom and leisure. Keynes left out the crucial mechanism for distributing the gains from technological advances in such a way that nearly everyone would have the means of benefitting from them. A basic minimum, financed through reduced property rights for the future heirs of owners of breakthrough technologies, would realize Keynes’s vision.
But the true visionary here, as elsewhere, was Thomas Paine, author of Common Sense, published in 1776, who authored another essay as prescient and important as the former but that is less remembered. Entitled Agrarian Justice and published in 1797, Paine’s essay proposed that every American man and woman be paid fifteen pounds when he or she turned twenty-one, a sum that would serve as a basic minimum income. Revenues for this would come from a tax on the inheritance of land. This, Paine reasoned, would foster economic independence, so crucial to the budding democracy. In setting out the argument for his proposal he noted that private property was a human contrivance. When people were hunters and gatherers, the earth was “common property.” But with the coming of agriculture, property took the form of the right to exclude others. Such landholdings were useful and inevitable, Paine thought, because of the difficulty of distinguishing improvements to the land from ownership of the land itself. But it was necessary and proper to give every citizen a stake, a “just indemnity” for what was taken.
The analogy is not perfect. The robots of the future, along with other breakthrough technologies, will not exactly take away “common property” for which citizens deserve to be indemnified. But they will take away good jobs that are already dwindling in number and replace opportunities already growing scarce. They will, in short, supplant the middle class that has been the centerpiece of our economy and society and that is already shrinking. New market rules that cause wealth eventually to revert to the public domain rather than compound for future generations that had nothing to do with creating it, and be used instead to finance a minimum guaranteed income for all citizens, is one way to avoid this fate.
An alternative would be to provide every citizen a tiny share of all intellectual property awarded by the patent office and protected by the government. As the worth of the nation’s stock of intellectual capital grew, all citizens would reap the dividends. Another alternative would be to give every child at birth a basic minimum endowment of stocks and bonds—a “share” in the future economy, which, as the economy grew and the value of the endowment compounded, would become a nest egg capable of producing a minimum basic income.
However it is accomplished, the rules must be adapted toward creating a more inclusive economy. Absent some means for sharing the increasingly large rewards that will otherwise go to a few people and their heirs fortunate enough to possess ownership rights to these robots and related technologies, the middle class will disappear, and capitalism as we know it will not survive.
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1 A similar proposal, which would provide every Swiss citizen a stipend of $2,800 per month, was submitted to Swiss voters in October 2013. To date, the proposal has not been enacted.
24
New Rules
As I hope I’ve made clear, there is much cause for optimism. We are on the cusp of a wave of inventions and innovations that can vastly i
mprove our lives. Although these inventions and innovations will also replace countless jobs and thereby drive down the wages of the vast majority—a process that has already started in the United States and other advanced nations—we have the capacity to reorganize capitalism so the gains are shared widely.
The larger cause for optimism is that we need not be victims of impersonal “market forces” over which we have no control. The market is a human creation. It is based on rules that human beings devise. The central question is who shapes those rules and for what purpose. Over the last three decades, the rules have been shaped by large corporations, Wall Street, and very wealthy individuals in order to channel a large portion of the nation’s total income and wealth to themselves. If they continue to have unbridled influence over the rules, and they gain control of the assets at the core of the new wave of innovations, they will end up with almost all the wealth, all the income, and all the political power. That result is no more in their interest than in the interests of the rest of the population, because under such conditions an economy and a society cannot endure.
The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about the size of government; it is about whom government is for. The central choice is not between the “free market” and government; it is between a market organized for broadly based prosperity and one designed to deliver almost all the gains to a few at the top. The pertinent issue is not how much is to be taxed away from the wealthy and redistributed to those who are not; it is how to design the rules of the market so that the economy generates what most people would consider a fair distribution on its own, without necessitating large redistributions after the fact.
Saving Capitalism Page 22