Disrupting economics

How we will work in the future? And how much? These questions do not only address the work of the future; more importantly, they imply an underlying fundamental question: What is the future of work? Conventional wisdom would reply that we’ll all work differently than today, and a probably little less; but overall everybody will have a paid job to make their living, and full employment remains to be one of the principal objectives of economics policy.

Well, I have severe doubt that this mantra of full employment offers a sustainable path into the future, and here’s why. In its recent OECD 2017 Employment Outlook, the Organization of Economics Co-operation and Development analysed the impact of technological change and globalisation over the last two decades, focusing in particular on the structural changes in the labour market. The study finds a significant polarisation of the labour market in all the countries evaluated: the share of middle-skill, middle-pay jobs decreased, while the shares of low-skill, low-pay jobs and of high-skill, high-pay jobs grew. While in the past the majority of jobs was in the middle of the skill/pay spectrum, this majority is now at the two opposite poles. What used to look more like a classical bell curve is almost inverted into a U-shape.

What’s the problem?

The problem simply is that our traditional narrative fails us. As a brief reminder, we usually tell a success story along the following lines: new technologies that enhance productivity in specific sectors destroy the less-qualified low-paying jobs, but they will also create higher-qualified and better-paid jobs elsewhere. In the extreme view, the hardships for the individuals whose jobs are displaced are temporary, and technological progress provides the opportunity for everybody to gain a better-paid job and to climb the social ladder as a result.

The quintessential example for this storyline is the mechanisation of agriculture in the United States that initially left many unskilled farm hands unemployed. But the same mechanisation offered lots of better-paid jobs in industrial production. In this case, technological progress created the conditions that reduced the work force needed in the first sector (agriculture) and increased the required workforce in the second sector (industry). At the macro-economic level, we just observed a shift of employment from the first to the second sector, while GDP per capita expanded, so everybody got a better share of the wealth created.

While that development is a historic fact, the narrative we derived is only valid in that specific historic context. The narrative does not apply today, as we do not fulfil two essential assumptions underlying that narrative: one at the start, the other at the end of the storyline.

In the historic past, the majority of jobs was at the low-end of the skill/pay spectrum; so things couldn’t get worse, things could only improve. And the trick worked in the historic example, because the higher skill-level required for the new jobs in the factories was attainable for almost everybody: all that it took to get a (reasonably paid) job in the factory was a few days of training-on-the-job.

Until the 1990s, the majority of jobs was found in the middle of the skill/pay spectrum. And from this new starting point, there were in fact two possible endpoints: things can either get worse (moving towards the low-end of the spectrum) or improve (moving towards the high-end). And while the move towards the low-end in many cases is not sufficient to make a living, the move towards the high-end is not readily open to everybody any more. It requires considerably higher skills, often university degrees, which are not easily attainable for everybody loosing a mid-skill job. And even for those who can attain those higher skills, they often take years rather than days to acquire.

Developing a new narrative

With the old narrative overtaken by events, we are left with a vacuum: how do we tell the story of economics and the role of labour and technology in the future? Here I believe that we must take a look the interactions between technology and labour. Ryan Avent provides good insights in The Wealth of Humans. Sketching the main characteristics of the evolving digital economy, he points out that

… the technological capacity to eliminate costly labour will continue to improve.

And this observation is not only relevant for the future digital economy, it has bearing for past economic changes as well. Avent actually offers a general description of a target for disruptive innovation, for novel technologies that will transform the labour market: wherever and whenever labour is costly, then and there is a strong incentive to develop and implement novel technologies that are either less costly, or more productive, and ideally both.

• That was the case in the past, when the vast majority of jobs (and the labour cost) was at the low-end of the skill/pay spectrum: as soon as technology was mature enough to replace human physical skills, machines took over a large share of the backbreaking labour.
• That is the case today, as algorithms develop ever more potent cognitive skills and increasingly take over jobs in the middle of the skill/pay spectrum, especially routine jobs that are easily automated.
• And that will be the case again in the future, once Artificial Intelligence reaches a competence level on par with human cognition: at that point, the high-end of the skill/pay spectrum will be the prime target for disruption.

The narrative for the evolution of the economy so far is therefore not the traditional success story of climbing the social ladder. Instead, the technology-labour-interaction is a relentless pursuit. And it is inescapable, unless we rethink it, unless we actually reframe it. The pivotal point for such reframing is the role of labour. The question to ask is: “Why do people work?” And the standard answer of course is: “People work to earn a living.” An alternative answer, inspired by Brian Arthur’s enlightening paper on The Second Economy, offers an important differentiation: “People work to participate in the generation of wealth, and to get a share of that wealth.” In other words, people contribute their skills and competences to add value, and in return for their contribution, they are paid. Those two roles of labour are joined by the hip, and in today’s economy, they are enshrined in work contracts.

But could we think about separating those two roles? Could we separate the generation of wealth from its distribution? At a first superficial glance that question goes against many convictions, and some might even consider it utterly heretic. Still, if we take a second look, we find that the generation of wealth is in part already separated from its distribution: technology replaces jobs when technology is cheaper or more productive than human labour. In these cases, technology is productive in the economic sense; technology generates value, even without a human contribution. Although this is not the case for the entire economy yet, both Avent and Arthur help explain how in the future ever-increasing parts of the economy will be divorced from the contributions of human skills.

If that conjecture is correct, we have a challenging obstacle ahead. As less and less work contracts will be required to secure the contribution of human skills to the generation of wealth, fewer and fewer people will have a share in the distribution of wealth. In other words, work contracts are losing their pivotal functionalities: they lose their first function due to technological progress, and they cannot maintain their second function alone. Therefore, we must find alternative ways to distribute wealth across society. And that goes hand in hand with an important observation: this shift in the way the economy works is not driven by political desires or socialist romanticism, it’s driven by technological progress.

Is universal basic income a solution?

The idea of a universal basic income is under discussion for some time already (you’ll find background information at Basic Income Earth Network). This could serve as an alternative approach to distributing wealth, even though it is met with many hesitations and considerable reluctance. For example, as recently as 2016, voters in Switzerland turned down plans for a nation-wide universal basic income. Well, that ambitious plan might have been just too ambitious. Still, there is a growing number of studies that test the idea in real life. Examples of various scales and durations include:

• Finland: for 2,000 people, over 2 years ;
• The Netherlands: for 250 people, over 2 years ;
• Kenya: for 6,000 people, over 12 years (the biggest study to date) ;
• Germany: for more than 50 people so far, over 1 year.

In Finland and the Netherlands, the programmes are run by local governments or municipalities, whereas in Kenya and Germany they are funded by private non-profit organisations. These ongoing studies will help us move beyond academic discussion about universal basic income and gradually gain practical experience with it. And through this experience, they will help generate the all-important trust:

• Trust in the recipients – It is a major concern raised against the universal basic income that its recipients would only consume the hand-down and become entirely dependent on the transfer. However, initial findings from the programmes in Kenya and Finland reveal that many recipients demonstrate a genuine investment spirit and use the extra income to pursue business opportunities or to fund the education of their children.
• Trust in the mechanism itself – Furthermore, programmes run by public administrations will allow for a direct comparison of the administrative cost and effort between the traditional social transfer payments and the universal basic income. And while the jury is still out, I am confident that programmes like those in Finland or the Netherlands will show that the cost for traditional transfer payments is considerably higher due to the individual eligibility checks, calculation of entitlements, and frequent changes in regulations.

Overall, I am convinced that well-designed programmes to test the universal basic income under real-life conditions are the decisive step to generate trust in the universal basic income and to demonstrate that it is a viable way to distribute wealth across a society.

Disruptive effects on society – What is value?

Separating the generation of wealth from the distribution of wealth seems achievable, because technology takes over ever-larger shares of wealth-generation. In response, we need to that we implement concepts such as the universal basic income to distribute the wealth across society. That by itself is difficult enough, but the challenges don’t end there: this separation would not only disrupt macro-economics as we currently know it; this separation would necessarily disrupt society as well. But wait: not in the sense of “tearing society apart”. Rather, it would disrupt our current idea of what it means to be a valuable member of society.

Today, with the pivotal functions of work contracts still largely intact, we use a pretty straight-line argument: a valuable member of society is a productive member, and the work contract serves as the evidence to that productivity. In this predominant view “you’ve got to earn your living“; you are either employed = productive = valuable member, or you are unemployed = unproductive = free rider. The disruption of economics and the demise of the work contract outlined above force us to thoroughly rethink this whole concept.

So what is value? For society? And what is a useful contribution an individual can make? These questions have monetary and economic dimensions of course, but they have much broader social, ethical and religious aspects. We are forced to break the narrow mould that equates “added value” with “more economic value”, we must define the idea of value, and of a valuable member of society, independent of a specific labour contract. A new inclusive definition of value must embrace any kind of useful occupation, whether paid or unpaid, whether in the production of goods, in social and health care, in education, in science, in creative arts, in sports, or any other field that contributes to the well-being and progress of your community, be that at local, regional, national, or international level. This definition would free us from the narrow yoke of “paid labour is the only value”, and liberate our creativity and empathy to find and pursue our personal vocations for the greater good of society. I am optimistic that the ongoing studies on the universal basic income will give us a very rich set of diverse examples for that the new sense of added value.

 

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P.S. – Some loose ends – I am well aware that the ideas outlined above do not present a conclusion on a new narrative about the future role of labour and technology in the economy. I see the role of technology increase, while the role of labour shrinks. That reduced role of labour creates two challenges for our narrative. Firstly, we must add society into the equation, so that we can talk about the economy in its wider societal context. And secondly, we must define where we want to invest human labour, skills, and experience. In the old narrative, we could only invest in economic transactions. But in the evolving new narrative, we have the choice to invest ourselves either narrowly in monetary prosperity or broadly in societal progress. Time will tell as the discussion on added value unfolds.