The Weekly Sift

Inequality is different this time, because the rich are usurping a different kind of capital.

For a long time, most thinkers in the West accepted poverty as natural. As Jesus said: “The poor you will always have with you.” But by 1754, Jean-Jacques Rousseau was writing an entire discourse on the origin of inequality and blaming it largely on the practice of recognizing land as private property.

The first man who, having enclosed a piece of ground, bethought himself of saying This is mine, and found people simple enough to believe him, was the real founder of civil society. From how many crimes, wars and murders, from how many horrors and misfortunes might not any one have saved mankind, by pulling up the stakes, or filling up the ditch, and crying to his fellows, “Beware of listening to this impostor; you are undone if you once forget that the fruits of the earth belong to us all, and the earth itself to nobody.”

Thomas Paine, who in many ways was the most radical of the American revolutionaries, observed the contrasting example of the Native American tribes — where he found no parallel to European wealth or poverty — and came away with a more nuanced model of the connection between inequality and landed property, which he published in 1797 as Agrarian Justice. He started in much the same place as Rousseau:

The earth in its natural, uncultivated state, was, 
and ever would have continued to be 
THE COMMON PROPERTY OF THE HUMAN RACE. In that state every man 
would have been born to property. He would have been a joint life-proprietor with the rest 
in the property of the soil, 
and in all its natural productions, 
vegetable and animal.

But Paine also recognized that the development of modern agriculture — which he saw as necessary to feed people in the numbers and diversity of activities essential to advanced civilization — required investing a lot of up-front effort: clearing forests of trees and rocks, draining marshlands, and then annually plowing and planting. Who would do all that, if in the end the harvest would belong equally to everybody? He saw private ownership of land as a solution to this problem, but believed it had been implemented badly. What a homesteader deserved to own was his or her improvement on the productivity of the land, not the land itself. If the land a family cleared became more valuable than the forest or marshland they started with, then the homesteaders should own that difference in value, but not the land itself. [1]

Society as a whole, he concluded, deserved a rent on the land in its original state, and he proposed using that income — or an inheritance tax on land, which would not be as clean a solution theoretically, but would be easier to assess and collect — to capitalize the poor.

When a young couple begin the world, 
the difference is exceedingly great 
whether they begin with nothing 
or with fifteen pounds apiece. With this aid they could buy a cow, 
and implements to cultivate a few acres of land; 
and instead of becoming burdens upon society … would be put in the way 
of becoming useful and profitable citizens.

Paine argued this not as charity or even social engineering, but as justice: The practice of privatizing land had usurped the collective inheritance of those born without land, so something had to be done to restore the usurped value.

In one of my favorite talks (I published versions of it here and here), I extended Paine’s idea in multiple directions, including to intellectual property. Just as Paine would buy a young couple a cow and some tools, I proposed helping people launch themselves into a 21st century information economy. Like Paine, I see this as justice, because otherwise the whole benefit of technological advancement accrues only to companies like Apple or Google, reaching the rest of us only through such companies. A fortune like Bill Gates’ arises partly through innovation, effort, and good business judgment, but also by usurping a big chunk of the common inheritance.

Avent. And that brings us to Ryan Avent’s new book, The Wealth of Humans: work, power, and status in the twenty-first century. There are at least two ways to read this book. It fits into the robot-apolcalypse, where-are-the-jobs-of-the-future theme that I have recently discussed here (and less recently here and here). Avent’s title has a double meaning: On the one hand it’s about the wealth humans will produce through the continued advance of technology. But that advance will also result in society having a “wealth” of humans — more than are needed to do the jobs available.

Most books in this genre are by technologists or futurists, and consequently assemble evidence to support a single vision or central prediction. Avent is an economic journalist. (He writes for The Economist.) So he has produced a more balanced analysis, cataloging the forces, trends, and possibilities. It’s well worth reading from that point of view.

But I found Avent’s book more interesting in what it says about inequality and social justice in the current era. What’s different about the 21st century is that technology and globalism have converged to make prosperity depend on a type of capital we’re not used to thinking about: social capital. [2] And from a moral point of view, it’s not at all obvious who should own social capital. Maybe we all should.

What is social capital? Before the Industrial Revolution, capital consisted mainly of land (and slaves, where that was allowed). By the late 19th century, though, the big fortunes revolved around industrial capital: the expensive machines that sat in big factories. The difference between a rich country and a poor one was mainly that people in rich countries could afford to invest in such machinery, which then made them richer. On a national level, industrial capital showed up as government-subsidized railroads and canals and port facilities. (The Erie Canal alone created one of the great 19th-century boom towns: Buffalo.) A country that could afford to make such improvements became more productive and more prosperous.

In the 20th century, the countries that rose to wealth — first Japan and then later Singapore, Taiwan, and South Korea — did so partly through investment in machinery, but also through education. An educated populace could provide the advanced services that made an industrial economy thrive. And so we started talking about human capital, the investments that people and their governments make in acquiring skills, and intellectual capital, the patents, copyrights, and trade secrets that powered a 20th-century giant like IBM.

That may seem like a pretty complete list of the kinds of capital. But now look at today’s most valuable companies: Apple and Google, either of which might become the world’s first trillion-dollar corporation in a year or two. Each owns a small amount of land, no slaves, and virtually no industrial capital; Apple contracts out nearly all of its manufacturing, and a lot of Google’s products are entirely intangible. Both employ brilliant, well-educated people, but not hundreds of billions of dollars worth of them. They have valuable patents, copyrights, trademarks, etc., but again, intellectual property alone doesn’t account for either company’s market value. There’s something in how all those factors fit together that makes Apple and Google what they are.

That’s social capital. Avent describes it like this:

Social capital is individual knowledge that only has value in particular social contexts. An appreciation for property rights, for example, is valueless unless it is held within a community of like-minded people. Likewise, an understanding of the culture of a productive firm is only useful within that firm, where that culture governs behavior. That dependence on a critical mass of minds to function is what distinguishes social capital from human capital.

Social capital has always existed and been a factor of production, but something about the current era, some combination of globalism and technology, has brought it to the fore. Today, a firm strong in social capital — a shared way of approaching problems and taking action that is uniquely suited to a particular market at this moment in history — can acquire all the other factors of production cheaply, making social capital the primary source of its wealth. [3]

Who should own social capital? Right now it’s clear who does own a company’s social capital: the stockholders. But should they? Avent talks about Bill Gates’ $70 billion net worth — created mostly not by his own efforts but by the social organism called Microsoft — and then generalizes:

People, essentially, do not create their own fortunes. They inherit them, come to them through the occupation of some state-protected niche, or, if they are very brilliant and very lucky, through infusing a particular group of men and women with the germ of an idea, which, in time and with just the right environment, allows that group to evolve into an organism suited to the creation of economic value, a very large chunk of which the founder can then capture for himself.

Stockholders — the people who put up the money to acquire the other factors of production — currently get the vast majority of the benefit from a company’s social capital, but it’s not clear why they should. We usually imagine other forms of capital as belonging to whomever would have them if the enterprise broke up: The stockholders would sell off the land and industrial and intellectual capital, while the employees would walk away with the human capital of their experience and education. But the company’s social capital would just vanish, the way that a living organism vanishes if it gets rendered into its constituent chemicals. So, rightfully, who owns it?

Another chunk of social capital resides in nations, which are also social organisms. The very real economic value of the rule of law, voluntary compliance with beneficial but unenforceable norms, shared notions of fairness, trust that others will fulfill their commitments, and general public-spiritedness — in other words, all the cultural stuff that makes a worker or firm or idea more valuable in America or Germany than in Burundi or Yemen — who does it belong to? Who should share in its benefits?

Bargaining power. Avent does not try to sell the conservative fairy tale that the market will allocate benefits appropriately. Under the market, what each party gets out of any collective endeavor depends on its relative bargaining power, not on what it may deserve in some more abstract sense.

Avent proposes this thought experiment: What if automation got to the point where only one human worker was required to produce everything? Naively, you might expect this individual to be tremendously important and very well paid, but that’s probably not what would happen. Everyone in the world who wanted a job would want his job, and even if he had considerable skills, probably in the whole world millions of people would share those skills. So his bargaining power would be essentially zero, and even though in some sense he produced everything, he might end up working for nothing.

Globalization and automation, plus political developments like the decline of unions, have lowered the bargaining power of unskilled workers in rich countries, so they get less money, even though in most cases their productivity has increased. As communication gets cheaper and systems get more intelligent, more and more jobs can be automated or outsourced to countries with lower wages, so the bargaining power of the people in those jobs shrinks. That explains this graph, which I keep coming back to because I think it’s the single most important thing to understand about the American economy today: Hourly wages tracked productivity fairly closely until the 1970s, but have fallen farther and farther behind ever since.

Companies could have afforded to pay more — by now, the productivity is there to support a wage nearly 2 1/2 times higher — but workers haven’t had the bargaining power to demand that money, so they haven’t gotten it. [4]

A similar thing happened early in the Industrial Revolution: Virtually none of the benefits that came from industrial capital were shared with the workers, until they gained bargaining power through political action and unionization. The result is the safety net we have today.

Just as workers’ ability to reap significant benefits from the deployment of industrial capital was in doubt for decades, so we should worry that social capital will not, without significant alterations to the current economic system, generate better economic circumstances for most people.

Who’s in? Who’s out? When you do start sharing social capital, whether within a firm or within a country, you run into the question of who belongs. This is a big part of the contracting-out revolution. The janitors and cafeteria workers at Henry Ford’s plants worked for Henry Ford. But a modern technology corporation is likely to contract for those services. By shrinking down to a core competency, it can reward its workers while keeping a tight rein on who “its workers” are. No need to give stock options or healthcare benefits to receptionists and parking lot attendants if they don’t seem essential to maintaining the company’s social capital.

Things shake out similarly at the national level: The more ordinary Americans succeed in getting a share of the social capital of the United States, the greater the temptation to restrict who can get into the US and qualify for benefits — or to throw out people that many of the rest of us think shouldn’t be here.

Avent would like to see us take the broadest possible view of who’s in:

The question we ask ourselves, knowingly or not, is: With whom do we wish to share society? The easy answer, the habitual answer, is: with those who are like us.

But this answer is bound to lead to trouble, because it is arbitrary, and because it is lazy, and because it is imprecise, in ways that invite social division. There is always some trait or characteristic available which can be used to define someone seemingly like us as not like us.

There is a better answer available: that to be “like us” is to be human. That to be human is to earn the right to share in the wealth generated by the productive social institutions that have evolved and the knowledge that has been generated, to which someone born in a slum in Dhaka is every bit the rightful heir as someone born to great wealth in Palo Alto or Belgravia.

Can it happen? Much of the Avent’s book is depressing, but by the time the Epilogue rolls around he seems almost irrationally optimistic. For 200 pages, he has painted as realistic a picture as he could of the challenges we face, whether economic, technological, social, or political. But as to whether things will ultimately work out, he appears to come around to the idea that they have to, so they will. So he ends with this:

We are entering into a great historical unknown. In all probability, humanity will emerge on the other side, some decades hence, in a world in which people are vastly richer and happier than they are now. With some probability, small but positive, we will not make it at all, or we will arrive on the other side poorer and more miserable. That assessment is not optimism or pessimism. It is just the way things are.

Face to face with the unknown, it is hard to know what to feel or what to do. It is tempting to be afraid. But, faced with this great, powerful, transformative force, we shouldn’t be frightened. We should be generous. We should be as generous as we can be.

[1] The arbitrariness of this becomes clear when you consider mineral rights. If my grandfather homesteaded a plot of land, which in my generation turned out to be in the middle of a oil field, what would that wealth have to do with me that I would deserve to own it?

[2] If the term social capital rings a bell for you, you’re probably remembering Robert Putnam’s Bowling Alone, which appeared as a magazine article in 1995 and was expanded to a book in 2000. But Putnam used the term more metaphorically, expressing a sociological idea in economic terms, rather than as a literal factor of production.

[3] Henry Ford’s company probably also had a lot of social capital, but it was hard to notice behind all those buildings and machines.

[4] Individual employers will tell you that they’d go bankrupt if they had to raise wages 2 1/2 times, and in some sense that’s true: They compete with companies that also pay low wages, and would lose that competition if they paid high wages. But that is simply evidence that workers’ bargaining power is low across entire industries, rather than just in this company or that one.