We’ve talked so much about how no one, other than economists, want to discuss what is really driving a significant portion of income inequality – technological advancement – but I came across another perfect illustration of how radical the shift to a knowledge economy away from an industrial one has been for the labor force.
[mainbodyad]Think about the human effort required to lay stones and make paths or side streets. Up until fairly recently, it took a lot of people, skilled in their line of work, who were well-paid, to achieve such infrastructure growth. It was a way for a hardworking, non-college educated person to support a family and enjoy a nice standard of living. In fact, the median expected salary for a person in this career is $46,671 as of this month; by itself, almost enough to reach the median household income in the country, which ordinarily requires two working adults.
But there are things on the horizon that are making it difficult for that kind of work to keep pace with inflation as the efficiency gains accelerate. It’s not here yet, at least in a meaningful way, but you can hear the rumblings if you put your ear to the ground. Consider inventions such as Tiger Stone, which has become standard in some parts of the world. The bricks are fed in by hand and the road lays much of itself. There are far fewer workers required, and most of the benefits are going to flow to the customer (the municipality or institution) in the form of lower costs. On a net basis, the civilization benefits tremendously, but the labor force in this particular area is further pressured.
Productivity gains have driven corporate profits to all-time highs. Productivity gains have allowed those with high cognitive ability to capture a disproportionate percentage of the incremental economic expansion since the 1980’s. Combined with a cheap global labor force, I’m beginning to come to the realization that it is going to take a major restructuring of our existing societal compact to save the middle class in the United States, or we are going to become a nation of those who struggle (albeit in first world comfort of air conditioning and iPads) and those who drive around in their new Audis, sipping $8 coffees, wearing $400 cashmere sweaters, and collecting dividend checks to augment their family’s six-figure or higher income. Advanced education needs to become practically free, as it is in most of the nations competing with us, or we are going to suffer major competitive disadvantages in the coming decades. Germany, Finland, The Netherlands, Sweden, France, Denmark, Norway, and Canada have largely eclipsed us on this (Source PDF – Global Higher Education Rankings 2010: Affordability and Accessibility in Comparative Perspective).
[mainbodyad]What gets me about it is that so much of the affordability problem is because Congress didn’t just make college free or low cost by designing institutions around per student funding levels. Instead, it subsidized debt. Whenever you make more debt available, the price of the commodity rises. This is basic 101 stuff. More money, chasing limited goods, leads to higher nominal prices. If, by way of illustration, overnight, there were no student loans or car loans, it would be a painful adjustment but within a 5-10 year period, both items would be substantially more affordable as measured by the number of hours it takes to pay for either good or service.
I have no doubt it will work out in the end, though, because this is nothing new. The symptoms may have changed, but the phenomenon is as old as civilization itself. Society went through it when we transitioned away from whale fat as energy and textiles as a primary industry. It happened again on the shift from family farms to in-city factories. What will the world look like when cognitive ability becomes the primary driving force of capital formation? When productivity is valued far more than effort (which, to be fair, is a better standard – I’d rather have a lazy person with 10x the output than a hard working person with 1x the output)?
It’s an interesting question. I think the answer will happen in my generation’s lifetime as we’ve crossed the Rubicon.
I do have one prediction, though: Before the end of my generation’s life expectancy, education will radically change, and teaching will become a profession more akin to engineering or the legal field, relying on individual performance rather than treating everyone as an identical, interchangeable commodity. I think the teachers’ unions will be utterly shattered before it’s all over as a result of the paradigm shift. It won’t happen overnight, likely, but it will happen. I can see no avenue through which their 19th century model will survive in the knowledge economy. Much of this has to do with the fact great teachers will become much more scalable, capable of teaching far more students with little additional effort, leading to a winner-takes-all system.
Again, there is nothing new here, but the lesson is, when you see productivity improvements, you should be asking yourself the question, “Who gains?”. It’s either the owners, the customer, or the employees. In very few cases will those productivity gains go to the employees because that’s simply not how the incentive system is setup given what humans choose to do when given freedom of choice. In many industries, they won’t even go to the owners – a famous economic example is when air conditioning was installed in department stores. Soon, every department store had to spend the money just to compete, but prices of goods didn’t go up, it all came off the profit line. (In an industry such a software, the opposite is true – almost all savings go to the developer; witness the huge margins enjoyed by digital delivery mechanisms compared to the past where software needed to be sold in boxed format through traditional retailers, who took a cut.)
Rather, most of the gains go directly to the end consumer, which is one of the reasons capitalism, despite its apparent flaws, consistently delivers higher aggregate standards of living than any other economic model. As an employee, investor, and citizen, the implications of this are important so you don’t find yourself in an unpleasant situation, unrealistically optimistic about the prospects of success.