Let’s begin with the begging question: Why would technological improvements explain growing economic inequalities in America and elsewhere?
The
logic is fairly simple. Technology has a positive impact on the economy as a
whole, because it increases productivity, making the production of goods
cheaper or more cost effective—workers become more productive and the resources
needed to produce goods and services decreases. From this perspective, the
issue of income inequality seems foreign and the way it is introduced into the
conversation is as follows:
1) By
asking about the type of skills needed to be able to use and benefit from
technologies—which amounts to asking about the ways in which the presumed gains
in productivity come about.
2) By
comparing investments in technology with other forms of investment.
How
can productivity gains come about if most workers lack the skills to use the
available technologies at their disposal?
After
raising this question, apologetics of economic inequality hurry to give the
following answer: income inequality is the result of having a labor force that
is split, between those who possess the right skills and can to take advantage
of the technologies available in the 21st century economies and
those who lack such skills and find themselves competing for a decreasing
number of jobs that don’t require any such skills. In short, this is the story
that tells us there is Silicon Valley, on the one hand, with its high-tech
innovations and a growing number of millionaires and billionaires. On the other
hand, you have the grey old manufacturing sector, which is inefficient and
wasteful and that would be symbolized by cities like Detroit in the US or
Birmingham or Liverpool in the UK.
Income
inequality would, therefore, be a temporary event, whose solution is to
motivate people to choose the right professions (ICT related subjects), for,
once they do, they will be able to earn the high salaries that those skilled
workers at Google have. Is this a feasible story? What does the evidence tell us?
Thomas
Piketty addresses this argument in his Capital in the Twenty-First Century. The
evidence, he tells us does not seem to support this theory.
“Over the long run, education and
technology are the decisive determinants of wage levels” (Piketty, 2013, pp. 306, 307).
In the
short run, however, differences in labour income (in wages) obey directly to
three main factors:
1. Executives have acquired direct
influence on their own remuneration and at times even set their own salaries, through
direct control over boards of directors—this is a claim supported by Piketty,
but also Nobel price winners’ Joseph Stiglitz and Paul Krugman.
2. Pay for luck: positive changes
in a firm’s external conditions (economic growth, prices of raw materials,
exchange rates, competitors’ performance) are rewarded as if generated
internally—by the leadership and strategic mind-set of upper echelon employees
(Piketty, 2013, p. 335).
3. Decreases of top marginal
income tax rates in English speaking countries since the 1980s, was followed by
an explosion of very high incomes, which accelerated the growth rate of
economic inequality during the last 30 years (Piketty, 2013, p. 335).
4. The main source of income of
the richest 1% is not their wage, that is, income inequality is NOT primarily
explained by disparities in wages (Piketty, 2013, p. 280).
Next
to these factors, I said too that in comparing investments in technology with
other forms of investment, such as investment in real estate property, the
former are presumed to accrue higher rewards, because they entail equally high
risks. This means, for instance, that someone like Steve Jobs, who made what
was back in the early eighties a very risky investment in an incredible
innovation (the personal computer) received an equally high reward, when his
innovation proved its merit and became very profitable. In comparison, if you
or I, who are fearful of risk, prefer, in turn, a safer investment (a savings
account for example), it is only logical that we cannot expect high rewards.
Under this light, innovations are taken as the philosopher stone of wealth
creation, and to a certain extent long run economic growth does depend on
innovation (Piketty, 2013, p. 306).
Yet,
is it feasible to put the blame of economic inequality on smart investments (high
risk, high reward) against lame investments (low risk, low reward)?
Piketty’s
answer is that the historical evidence does not suggest this to be the case,
even remotely, for a single, yet quite important reason: the rate of return of
portfolios increases not as their investment on innovations increases, but
rather as the amount of capital invested increases—on average the largest
endowments are able to obtain real returns of close to 10 percent a year, while
smaller endowments must make do with 5 percent returns (Piketty, 2013, p. 449).
Technology
has, no doubt, been fundamental to the economies of the 19th, 20th
and 21st centuries and has, to be sure, been disruptive of the ways
we used to do things in the past—and it will probably play the same role in the
future. The issue of economic inequality, however, cannot be blamed on
technological advancement.
Written by Daniel Vargas Gómez
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