October 23rd, 2014
in Op Ed
by Charles Hugh Smith, Of Two Minds
Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.
A recent issue of Foreign Affairs sported a catchy cover teaser: Our New Robot Overlords. This brings to mind various sci-fi scenarios, but the actual article title is academic to the point of obscurity: Labor, Capital and Ideas in the Power Law Economy.
Rather than rehash the usual failed Keynesian Cargo Cult economics, the authors describe three powerful ideas that resonate very strongly with my own work:
- Digital technologies (networked software, automation and robotics) are radically reducing the need for human labor and the leverage of traditional capital (land, fixed assets and cash) globally.
- Premiums flow to whatever inputs are scarce. Labor and traditional capital are no longer scarce; what's scarce is innovative, practical ideas. Ideas (for new models, products, services, processes, etc.) are a third form of capital that will accrue most of the rewards.
- This distribution of premiums/rewards follows a power law, i.e. the Pareto Distribution where the "vital few" with the 3rd type of capital (good ideas) reap most of the rewards.
This is of course a generalized simplification, and there are plenty of parts of the economy that still depend on labor and conventional capital. But the point here is that thanks to globalization and overcapacity, most inputs are no longer scarce, and so the premium (high wages and/or profit margins) that the owners of labor and capital can charge is trending down in every tradable sector.
This mirrors the analysis of socio-economist Immanuel Wallerstein, which I have covered in some depth:
- Is This the Terminal Phase of Global Capitalism 1.0? (February 8, 2013)
- How the Middle Class Lifestyle Became Unaffordable (May 7, 2014)
- Is There Capitalism After Cronyism? (August 30, 2014)
One systemic source of rising inequality is crony-capitalism/crony socialism: the vast array of insider deals, collusion, winners being picked by the central state, too big to fail banks bailed out with taxpayer money, etc. People are increasingly aware the Status Quo is rigged, and the playing field is tilted to favor the few inside the crony-capitalist castle (what I call the New Nobility in a Neofeudal economy).
The authors of this essay are pointing out that the leverage of digital technologies rewards the most talented to an extreme degree. In an economy where the premium on labor and ordinary capital is falling (i.e. the yield on ordinary capital is near-zero, and wages are declining in real terms), those who can leverage ideas digitally can reap the premium reserved for what's scarce.
"This means that the real winners of the future will not be the providers of cheap labor or the owners of ordinary capital, both of whom will be increasingly squeezed by automation. Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.
The distribution of income for this creative class typically takes the form of a power law, with a small number of winners capturing most of the rewards and a long tail consisting of the rest of the participants. So in the future, ideas will be the real scarce inputs in the world -- scarcer than both labor and capital -- and the few who provide good ideas will reap huge rewards."
Should the digital revolution continue to be as powerful in the future as it has been in recent years, the structure of the modern economy and the role of work itself may need to be rethought."
For individuals, this means being able to solve problems and create value in ways that can't be automated: this is the core message of my book Get a Job, Build a Real Career and Defy a Bewildering Economy. The way to leverage one's ideas is to network, network, network and acquire multiple skills that can be applied in innovative, practical ways to a wide spectrum of problems.
As a society, we will have to deal with the reality that the nature of work is fundamentally changing, and wages are no longer an adequate means of distributing the surplus of an economy.
In my view, the answer is to broaden the scope of work beyond the state (i.e. working for the government) or private sector companies which must make a profit or perish, to what I call the community economy. More on that in my next book, which is on this very topic.
This essay was drawn from Musings Report 27. The weekly Musings Reports are sent exclusively to subscribers ($5/month) and major contributors ($50+ per year).