Many of us are familiar with a story that pits capitalism versus socialism. The Cold War was about that battle. This article is about a totally different story. It paved the way for Donald Trump to win an election in the US, and it encouraged populists and nationalists in Europe. The new story is interesting and it is summarized here. It describes the institutions that worked well in the early stages of capitalism and it argues that those institutions will need to change as we move into a later stage of capitalism which is being altered significantly by technology and a lower rate of growth.
The early stage of capitalism benefited from several coincidences. For example, the industrial revolution provided tools which increased the marginal product of labor. That enabled workers to receive wages that increased their marginal ability to consume at a socially appropriate level. Governments were able to tax a large amount of private goods and services that enabled them to pay for a smaller amount of public services. Young people could acquire a level of education and training that produced reliable skills and knowledge which could be repeated with small variance throughout their lifetime. That led to careers and professions which are familiar to us today but that process is not tied to a fundamental law. It is undergoing important changes.
The industrial revolution moved workers from low value added repetitive activities to higher value added repetitive activities. These activities are cyclical. Technologies are being created today which replace cyclical repetitive activities but they are not being replaced by high value repetitive activities as they were during the industrial revolution. The main opportunity to produce high value added activities today is from one-off activities that are not being done by computers. For example, hedge fund managers make lots of money by finding unique opportunities for profitable investments. One could also argue that talented athletes, and other individuals with unique skills that can be sold for high value in the market, benefit from one-off activities. They are not subject to the intrusion of technology into the market for cyclical repetitive activities. Our social problem is to find a way to provide a socially appropriate level of consumption for people who provide one-off skills that are immune from technological development, but are not sold in the market for high prices.
The other major change in our economy is that it differs from the economy that we experienced in earlier generations. We had a high growth economy that was primarily affected by the business cycle. Today we have a lower growth economy that is making changes in our institutions that we are just beginning to experience. For example, in a law firm that is rapidly growing, a partner may have five associates working to support his wage. The associates have an incentive to work long hours to become a partner. That changes when the growth slows down. A partner in a low growth firm may only need a single associate to produce the revenue was anticipated in fast growing firm. That has an impact on the demand for lawyers and on the incentive for associates to move up the ladder.
If we assume a lower growth economy, and the replacement of repetitive cyclical activities by computers, some changes will be required to maintain our society. Wealthy capitalists, particularly in the technology industry, are aware of the need for change. Some believe that we need a universal wage system to survive the impact that is underway. That understanding needs to spread beyond the technology industry. That will not be easy because the super rich have little contact with those who are being most affected by the changes. For example, airplane travel used to be a luxury. Wealthy individuals could travel first class, or perhaps in business class, but they shared their trips with ordinary people. The super rich today travel in private planes. They may not even use the same airports that are used by the airlines which serve ordinary people.
The concluding argument is that we need a hybrid form of capitalism that increases opportunities to develop the economy by those with one-off skills, but provides individuals with lower paying one-off skills to consume at a socially appropriate level. The super rich may have to decide between the evolution of capitalism or social revolt that damages our institutions. Trump may have given us our first taste of that challenge in the US. He won an election by promising economic changes that he will not make. He and many in his administration do not fly on commercial airlines.
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