Archive for November, 2013
The post-2008 economic recovery has been a recovery of the capitalists. Growth in employment and real wages has been sluggish whereas profits have rebounded well past pre-recession highs. However, the decline of the share of labour in GDP is not a localised post-crisis phenomenon. It is a global phenomenon that started at least three decades ago. The Great Moderation has been a period of stable prosperity for the capitalists and a period of stagnation for labour.
The declining share of labour in national income is not a problem by itself. The underlying problem is the stagnation of real income experienced by the masses. One way to tackle this problem is to redistribute income away from high wage-earners and large capitalists towards the low and medium wage-earners. But this approach is a losing battle against the march of technological progress and the inevitable substitution of labour by capital. Instead we should empower the low and medium wage earners of today to become the capitalists of tomorrow whilst protecting them with a safety net that protects them as individuals rather than protecting the firms and unions that they are members of.
There are two reasons why a ‘capitalism for the masses’ is a viable proposition today. Entrepreneurs need less capital to start a viable business today than they did in the twentieth century and whatever capital they do need is much more freely available today than it has been in the past.
Entrepreneurs need less capital
Economies of scale and scope are collapsing across the economy. This has been the case for many years in the world of software. But it is also increasingly true for hardware. The advantages of the small player can overcome the cost disadvantage of operating at a lower scale. The agile small player can experiment and iterate in a manner that the large incumbent player cannot. As Luke Johnson observes in the case of the craft beer industry, the customisation and unique character of the smaller producer is well worth the small premium for many customers.
Throughout the ‘Control Revolution’, larger firms enjoyed a significant cost advantage over smaller players and oligopolies were the norm In most manufacturing sectors. Chris Anderson narrates the story of his grandfather who was an inventor during the heyday of large conglomerates in the 20th century:
he was an inventor, but he could not become an entrepreneur because those additional steps of mass production, distribution, marketing, et cetera, were essentially inaccessible in those days. All you could do was patent, license and hope for the best. You had to lose control of your invention. You had to hand it off to somebody else.
On the other hand, an inventor today has a multitude of options to prototype and produce small quantities of his product. The logistics of selling and delivering the product to customers are also easily outsourced. As Luke Johnson identifies, the dynamics of capitalism “appear to be coming full circle and reverting to a structure that prevailed at the start of industrial capitalism” in the early part of the nineteenth century.
Capital is freely available
In our increasingly ageing and wealthy society, there is no shortage of capital available to fund new businesses. Household savings alone is sufficient to fund the required business investment1.
We imagine that risky businesses can only be funded by the alchemy of modern maturity-transforming banking system. But as I showed in my last essay, the explosion of peer-to-peer financing in the United Kingdom today shows us that speculative equity ventures and business loans can and are being funded by the man on the street.
Although significant progress has been made recently, many of the hurdles to achieving a genuinely decentralised financial system are regulatory. By trying to protect small investors from the consequences of investing in a failed venture, we end up denying financing to small businesses. It is insane that we allow small investors to “gift” as much money as they want on Kickstarter but we limit them from investing in the same venture as a part-owner with the legal protections against fraud afforded by being an owner.
Deregulate and Expand The Safety Net
Throughout the industrial era, most people did not have the option of becoming a capitalist. If you worked in a manufacturing plant, your best option was to join another firm. This is still the case today. But in many industries, the only thing stopping laid off employees from striking out on their own are regulatory economies of scale and protections (such as bailouts, patent protections and licensing requirements) that large incumbent firms enjoy. In order to enable every person to become a capitalist, we need to reduce the regulatory burden on all aspiring capitalists as well as removing the protections enjoyed by incumbent large firms.
At the same time that we eliminate these localised firm-focused safety nets, we need to implement a a broad-based safety net for individuals that will help mitigate the greater uncertainty of such an economic system. Every individual should be assured of access to an income that affords him the basic necessities of life, access to catastrophic healthcare protection and access to basic financial services such as the ability to hold a bank account and make payments.
However, no one is entitled to protection from the inherent instability of a competitive capitalist economy. Firms and workers should not be protected by bailouts. Individual investors should not be protected from the risks of investing their money in failed ventures. Everyone deserves a safety net but no one deserves a hammock.
The expanded safety net and increased deregulation go hand in hand. Increasing instability without a safety net will make the system more fragile. And a broad-based safety net by itself will simply dovetail with localised safety nets to reinforce an already sclerotic and stagnant economic system. By combining the two, we can achieve the best of both worlds – a robust economic system that can achieve disruptive economic progress whilst protecting individuals from the worst consequences of economic failure.
Note: For a more detailed explanation of my approach to economic policy and its rationale, see my earlier essay ‘Radical Centrism: Uniting the Radical Left and the Radical Right‘