Inequality isn't inevitable. Here's what we can do differently

Protesters, organized by Good Jobs LA and Occupy Los Angeles, demonstrate in the downtown financial district of Los Angeles, California November 17, 2011. Anti Wall Street greed protests as part of the National Day of Action for the 99% are taking place in various cities throughout the nation, including New York, Chicago, Washington, DC, Seattle, Minneapolis, Milwaukee, Houston and Miami. REUTERS/David McNew (UNITED STATES - Tags: CIVIL UNREST BUSINESS POLITICS) - GM1E7BI0B0001

The financial crisis resulted in rising inequality within advanced economies. Image: REUTERS/David McNew

Andrea Zorzetto
Founder and director, Poliferie
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One morning in 1914, Henry Ford made an announcement that shocked the US, if not the whole world. A Cleveland newspaper reported that it “shot like a blinding rocket through the dark clouds of the present industrial depression”. With the aim of tackling staff turnover and improving productivity, he more than doubled the wages of most of his workers, to $5 a day. The move led not only to a marked increase in output per worker and company loyalty, it also allowed Ford’s employees to afford his cars.

By doing this, the American businessman helped establish what would become the twentieth century’s defining social formula, that workers equal consumers. Thus, Henry Ford not only gave birth to the automobile industry – “the industry of industries” – but also to the mass-consumption economy of the post-war decades, the golden era of the middle class.

A fractured world

Those times are long gone. After the financial crisis, the Great Recession and the political upheavals of 2017, we are all familiar with the stories of rising inequality within advanced economies.

The crucial statistics here are the marked decline in the share of total income that goes to wages, compared with returns on capital. In simpler terms, the wealth created by our powerful economic system increasingly goes to those who already have a lot of it.

Image: Bruegel

If workers have lost out, it could be argued that consumers have made handsome gains. Prices of a great variety of goods and services have come down, from ever-cheaper computers and clothes, to low-cost flights and groceries. The symbolic companies of our age, above all Google, Amazon, Facebook and Apple, offer either a great customer experience or free services, if not both.

However, we are forgetting Ford’s fundamental lesson here: the majority of consumers, those that power economic growth, are also workers. Losing the connection between the two is creating a profound imbalance, not only in our economy but also in our society and our politics. The golden equation of the past century is broken, replaced by ever-widening inequalities.

At first glance, this development seems unstoppable. On the one hand, the consumer is king, and a consumer is always happy to pay less for the same good or service. With fierce competition on a global scale, it seems natural that firms try then to keep down prices to maintain or increase their market share. And to keep prices low, the only option seems to be to keep wages down, or lay off employees outright and replace them with machines. Yet, this is not how the economy worked in the golden decades of Fordism. How did we get here?

A very bad choice

Of course, there is a great variety of contributing factors. Trade liberalisation and the automation of jobs, in many ways positive developments, are often seen as the two main drivers of inequality.

Yet what we often forget is that globalisation and technology are not inevitable, neutral trends. They have been shaped by the policy mindset in the global centres of powers, such as Washington, London and Brussels. As the world order has been largely shaped by democratic governments in the 30 years, between the decline of the USSR and the rise of China, the world today is the result of a very clear choice that we, as a society, have made.

What choice? The group of billionaires and Nobel prize winners who decry the financialization of our economy and the imbalances of turbo-capitalism is large and growing. In his recent book “WTF?”, tech guru and futurist Tim O’Reilly describes the global economy as driven by a simple algorithm: shareholder value above everything else, no matter what the human cost.

Indeed, do we really have no choice but to tax labour more heavily than capital; or to crack down on unions whilst letting the uber-rich stash their cash away in Panama; or to let bankers responsible for the 2008 crash walk out with millions whilst taxpayers foot the bill? Even in France, the most socialist advanced economy in the world, the 1% pays relatively less tax than the poorest half of the population. In the US, corporate profits are at an all-time high, as is student debt.

Political disruption

None of this is inevitable. The problem is, we cannot simply wind the clock back. The technological fundamentals of our economy are undergoing a structural transformation. As Ford’s success ushered in a new era based on mass production and consumption, today the Fourth Industrial Revolution is giving birth to a brave new world.

Digitalisation will soon impact any sector, from energy and transportation, to healthcare and banking. Those looking back on the seventies with nostalgia simply prove the point, made by the scholar Carlota Perez, that institutions and society always lag behind shifts in the “techno-economic paradigm”. To make the middle class great again, we should look at the future, not build walls against time.

In other words, the winning formula of the twentieth century, that consumers equal workers, is gone forever. What could replace it? The most popular idea around is universal basic income (UBI), basically taxing the rich and robots to guarantee everyone a basic stipend.

I am not convinced. O’Reilly is right in saying that it would be just a patch over a broken system. I believe that UBI would simply entrench inequality for good, allowing people to continue consuming but forgetting about their chances to make it to the top through talent and hard work. Rather than the solution, UBI would be the bell tolling the official death of the American Dream.

What would the New Deal of the digital age look like then? Getting the details right will take a lot of thinking and experimentation, but the new social formula should be that consumers equal owners. Distributed production and growth needs to replace full employment as the new base for a thriving middle class.

We should receive micro-payments, enabled by technologies such as the blockchain, for the data we give away for free access to digital platforms. Households could own solar panels and 3D printers, instead of having to buy energy and basic goods. And the growing ranks of freelancers of the gig economy could receive shares as compensation, working for different companies in a flexible way but having a steady flow of income to fall back on.

This formula upholds the fundamental freedom of private property, but avoids unsustainable concentrations of wealth. Neither communism nor plutocracy, rather it’s about saving capitalism from itself.

To borrow a great analogy, inequality is like cholesterol, meaning there are two types of it: one good and one bad. The good one is about getting the incentives right: the gifted and the hard-working must be rewarded handsomely for their creations, innovations and discoveries that benefit all of society. The bad one is what we are seeing more and more of today: disproportionate gains going to an elite that gradually becomes powerful enough to become a new oligarchy. As in Fordism, we can once again have the former but not the latter, thanks to a social formula that suits the digital age.

Just imagine, one morning in 2019, the CEO of Uber makes an astonishing announcement. News instantaneously spreads around social media that there is still some hope in an ever more fractured world. Pressured by political backlash and unsustainable levels of driver turnover, Uber decides to give micro-shares to all of its drivers. It also offers them financial aid to buy an electric, self-driving vehicle and rent it to the company.

This vision is not impossible, if we get the right kind of political disruption.

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