The Rentier Economy: A Primer (Part 2)

My plan for this week’s post was to present further data about the extent of the rentier economy and then provide a digest of articles for further reading.

Turns out that wasn’t so easy. The data is there, but it’s mostly buried in categories like corporate capitalization, profits, and market concentration. Extracting it into blog post sized nuggets wasn’t going to be that easy.

Further, the data was generally only footnoted in a maelstrom of worldwide commentary. Economists and journalists treated it as a given, barely worthy of note, and were much more interested in revealing, analyzing, and debating what it means. The resulting discourse spans the globe — north to south, east to west, and all around the middle — and there is widespread agreement on the basics:

  • Economic thinking has traditionally focused on income from profits generated from the sale of goods and services produced by human labor. In this model, as profits rise, so do wages.
  • Beginning in the 1980’s, globalization began moving production to cheap labor offshore.
  • Since the turn of the millennium, artificial intelligence and robotics have eliminated jobs in the developed world at a pace slowed only by the comparative costs of technology vs. human labor.
  • As a result, lower per unit costs of production have generated soaring profits while wages have stagnated in the developed world. I.e., the link between higher profits and higher wages no longer holds.

Let’s pause for a moment, because that point is huge. Erik Brynjolfsson, director of the MIT Center for Digital Business, and Andrew McAfee, principal research scientist at MIT, wrote about it in their widely cited book The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (2014). The following is from a chapter-by-chapter digest  written by an all-star cast of economists:

Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress.

On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States. For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the “great decoupling.” And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.

Okay, point made. Let’s move on to the rest of the rentier story:

  • These trends have been going on the past four decades, but increased in velocity since the 2007-2009 Recession. The result has been a shift to a new kind of job market characterized by part-time, on-demand, contractual freelance positions that pay less and don’t offer fringe benefits. Those who still hold conventional jobs with salaries and benefits are a dying breed, and probably don’t even realize it.
  • As non-wage earner production has soared, so have profits, resulting in a surplus of corporate cash. Low labor costs and technology have created a boom in corporate investment in patents and other rentable IT assets.
  • Rent-seeking behavior has been increasingly supported by government policy — such as the “regressive regulation” and other “legalized monopoly” dynamics we’ve been looking at in the past few weeks.
  • The combination of long-term wage stagnation and spiraling rentier profits has driven economic inequality to levels rivaled only by pre-revolutionary France, the Gilded Age of the Robber Barons, and the Roaring 20’s.
  • Further, because the rentier economy depends on government policy, it is particularly susceptible to plutocracies, oligarchies, “crony-capitalism,” and other forms of corruption, leading to public mistrust in big business, government, and the social/economic elite.
  • These developments have put globalization on the defensive, resulting in reactionary politics such as populism, nationalism, authoritarianism, and trade protectionism.

As you see, my attempt to put some numbers to the terms “rent” and “rentier” led me straight into some neighborhoods I’ve been trying to stay out of in this series. Finding myself there reminded me of my first encounter with the rentier economy nine years ago, when of course I had no idea that’s what I’d run into. I was at a conference of entrepreneurs, writers, consultants, life coaches, and other optimistic types. We started by introducing ourselves from the microphone at the front of the room. Success story followed success story, then one guy blew up the room by telling how back in the earliest days of the internet, he and Starbucks’ Howard Schultz spent $250K buying up domain names for the biggest corporations and brand names. Last year, he said, he made $76 Million from selling or renting them back.

He was a rentier, and I was in the wrong room. When it was my turn at the mic, I opened my mouth and nothing came out. Welcome to the real world, my idealistic friend.

As it turns out, following the rentier pathway eventually leads us all the way through the opinionated commentary and current headlines to a much bigger worldwide issue. We’ll go there next time.

Race Against the Machine

For the past several years, two MIT big thinkers[1] have been the go-to authorities in the scramble to explain how robotics, artificial intelligence, and big data are revolutionizing the economy and the working world. Their two books were published four and six years ago — so yesterday in the world of technology — but they were remarkably prescient when written, and have not diminished in relevance. They are:

Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy (2012)

The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (2014)

Click here for a chapter-by-chapter digest of The Second Machine Age, written by an all star cast of economic commentators. Among other things, they acknowledge the authors’ view that neoliberal capitalism has not fared well in its dealings with the technological juggernaut, but in the absence of a better alternative, we might as well continue to ride the horse in the direction it’s going.

While admitting that History (not human choice) is “littered with unintended… side effects of well-intentioned social and economic policies”, the authors cite Tim O’Reilly[2] in pushing forward with technology’s momentum rather than clinging to the past or present. They suggest that we should let the technologies do their work and just find ways to deal with it. They are “skeptical of efforts to come up with fundamental alternatives to capitalism.”

David Rotman, editor of the MIT Technology Review cites The Second Machine Age extensively in an excellent, longer article, “How Technology is Destroying Jobs.” Although the article is packed with contrary analysis and opinion, the following excepts emphasize what many might consider the shadowy  side of the street (compared to the sunny side we looked at in the past couple posts). I added the headings below to emphasize that many of the general economic themes we’ve been talking about also apply to the specific dynamics of the job market.

It used to be that economic growth — including wealth creation — also created more jobs. It doesn’t work that way any more. Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress. On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States.

For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the “great decoupling.” And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.

A rising economic tide no longer floats all boats. The result is a skewed allocation of the rewards of growth away from jobs — i.e., economic inequality. The contention that automation and digital technologies are partly responsible for today’s lack of jobs has obviously touched a raw nerve for many worried about their own employment. But this is only one consequence of what ­Brynjolfsson and McAfee see as a broader trend. The rapid acceleration of technological progress, they say, has greatly widened the gap between economic winners and losers—the income inequalities that many economists have worried about for decades..

“[S]teadily rising productivity raised all boats for much of the 20th century,” [Brynjolfsson] says. “Many people, especially economists, jumped to the conclusion that was just the way the world worked. I used to say that if we took care of productivity, everything else would take care of itself; it was the single most important economic statistic. But that’s no longer true.” He adds, “It’s one of the dirty secrets of economics: technology progress does grow the economy and create wealth, but there is no economic law that says everyone will benefit.” In other words, in the race against the machine, some are likely to win while many others lose.

That robots, automation, and software can replace people might seem obvious to anyone who’s worked in automotive manufacturing or as a travel agent. But Brynjolfsson and McAfee’s claim is more troubling and controversial. They believe that rapid technological change has been destroying jobs faster than it is creating them, contributing to the stagnation of median income and the growth of inequality in the United States.

Meanwhile, technology is taking over the jobs that are left– blue collar, white collar, and even the professions. [I]mpressive advances in computer technology—from improved industrial robotics to automated translation services—are largely behind the sluggish employment growth of the last 10 to 15 years. Even more ominous for workers, the MIT academics foresee dismal prospects for many types of jobs as these powerful new technologies are increasingly adopted not only in manufacturing, clerical, and retail work but in professions such as law, financial services, education, and medicine.

Technologies like the Web, artificial intelligence, big data, and improved analytics—all made possible by the ever increasing availability of cheap computing power and storage capacity—are automating many routine tasks. Countless traditional white-collar jobs, such as many in the post office and in customer service, have disappeared.

New technologies are “encroaching into human skills in a way that is completely unprecedented,” McAfee says, and many middle-class jobs are right in the bull’s-eye; even relatively high-skill work in education, medicine, and law is affected.

We’ll visit the shadowy side of the street again next time.

[1] Erik Brynjolfsson is director of the MIT Center for Digital Business, and Andrew McAfee is a principal research scientist at MIT who studies how digital technologies are changing business, the economy, and society.

[2] According to his official bio on his website, Tim O’Reilly “is the founder and CEO of  O’Reilly Media, Inc. His original business plan was simply ‘interesting work for interesting people,’ and that’s worked out pretty well. O’Reilly Media delivers online learning, publishes books, runs conferences, urges companies to create more value than they capture, and tries to change the world by spreading and amplifying the knowledge of innovators.”