Thomas Piketty on increasing wealth concentration

 

Piketty, Thomas (2014). Capital in the Twenty-First Century. Translated by Arthur Goldhammer. Harvard University Press. Cambridge, Massachusetts.

 

The hollowing out of the middle-income jobs, discussed in Chapter 5 of my book (p.146) results in income polarization, a growing divide between the well-to-do (especially the superrich) and the rest of society.  Thomas Piketty, the French economist, in his widely discussed book Capital in the Twenty-First Century maintains that the concentration of wealth is prompted by slower population growth and slowing economic growth, which shrink the proportion of national income going to labour. Piketty bases his analysis on a series of long range data showing how the wealth accumulation by a small stratum of society fluctuated over the past two centuries.  In the dominant countries of Western Europe, wealth concentration peaked at the beginning of the 20th century.  In France, it temporarily ebbed after the revolution of 1789, but in the coming decades was showing a similar trend towards concentration as in Britain, the country with vast colonies around the world that also included Canada. On the eve of WWI, the top centile (one percent) of British society owned nearly 70 percent of the country’s wealth while the poorest half owned next to nothing (generally little more than 5 percent of total wealth). (Piketty p. 252 ff).  The British also owned nearly 20 percent of Canada’s national wealth.

 

The shocks of the Great Depression of the 1930s and the two World Wars resulted in a sharp decline of the wealth of the highest income strata in Britain and France.

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At the beginning of the 20th century the US and Canada showed a lower concentration of wealth than in European countries.  This was due to an abundance of land and intensive immigration that continued during the first decades after WWII with the rapid industrial growth that benefitted wider sections of society. After WWII, France, Germany, as well as Japan, were rebuilding their economies and catching up with the US and Britain, which in turn triggered a wave of conservative policy measures intended to strengthen the free market economy, as became most pronounced during the R. Reagan and M. Thatcher era. From the 1970s the concentration of wealth picked up anew and continues accelerating in the second decade of the 21st century. 

 

Piketty observes the extreme concentration of wealth throughout all the developed countries, regardless of the economic models and policies adopted there. Even the Scandinavian countries, which are known for their progressive taxation measures, show similar wealth concentration in the highest income strata of their societies. This overarching trend Piketty attributes to macroeconomic forces omnipresent in the developed economies. The technological changes augment income in capital intensive industries causing shrinking income from labour. The globalization of the economies intensifies competition for capital and its decreasing taxation. In addition, aging of the population in those countries causes falling growth rates, slowing population growth as well as growth of the economy.

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The falling growth rates are accompanied by increasing returns on capital, especially among the top earners. The top managers of the largest multinational corporations are able to negotiate extremely high compensation. However, their incomes cannot compete with those of large owners of the capital, who are profiting from investment options not available to average savers. Owners of the largest capital fortunes, especially those inherited, are setting themselves apart from the rest of society.

 

In times of slowing growth, the richest sector of society is able to save more and invest increasing amounts of income, thus further accelerating the concentration of wealth. This trend, according to Piketty, is most likely to continue until the 2030s and possibly well beyond (p. 251-2). At the same time automation of increasing sections of the economy is causing attrition of middle income jobs that were the mainstay of income of large sections of society in the postwar economies, until the dawn of this century.. …This was particularly striking in the period 1990–2010, when average income stagnated, or at least rose much more slowly than in the past (p. 227). While industrial workers are losing jobs without being able to secure comparative income, the richest sector of society continues amassing ever larger fortunes.

 

As Piketty states: In the 1970s, the upper centile’s share of national income was quite similar across countries. It ranged from 6 to 8 percent in the four English-speaking countries considered, and the United States did not stand out as exceptional: indeed, Canada was slightly higher, at 9 percent, … in the early 2010s, the situation is totally different. The upper centile’s share is nearly 20 percent in the United States, compared with 14–15 percent in Britain and Canada and barely 9–10 percent in Australia (Figure 9.2 p. 225).

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McKinsey’s perspectives of automation 
 

From: https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/four-fundamentals-of-workplace-automation  
Chui, Michael, Manyika, James, and Miremadi, Mehdi. November 2015. Four fundamentals of workplace automation. McKinsey Quarterly. 
Chui, Michael, Manyika, James, and Miremadi, Mehdi. July 2016. Where machines could replace humans—and where they can’t (yet). McKinsey Quarterly.Jobs lost, jobs-gained: Workforce transitions in a time of automation. Manyika, James, et al. McKinsey Global Institute. December 2017. 

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Recent research by the McKinsey Global Consulting team analyzed in greater detail the employment prospects in times of accelerated automation that is expected in the coming decades. In their introduction to Jobs lost, jobs-gained: Workforce transitions in a time of automation (Manyika, James, et al. McKinsey Global Institute. December 2017)  they state: Automation will bring big shifts to the world of work, as Artificial Intelligence and robotics change or replace some jobs, while others are created. Millions of people worldwide may need to switch occupations and upgrade skills. McKinsey estimates that up to 800 million workers worldwide could be displaced by automation by 2030.

 

The authors note that the overall impact of automation on the job market is expected to rival the one experienced during the Industrial Revolution starting in the late 18th century, the difference being that the intelligent digital technologies will be introduced much faster, in a matter of decades rather than centuries, forcing a much faster need for adaptation. 

 

Initially automation will not replace jobs wholesale, rather it will be changing the nature of work, whereby people will be working alongside robots and using automated technologies in office work. While automation will eliminate very few occupations entirely in the next decade, it will affect almost all jobs.  (Ibidem p. 8) The authors suggest that under their possible scenarios “by 2030, 75 million to 375 million workers (3 to 14 percent of the global workforce) will need to switch occupational categories. All workers will need to adapt, as their occupations evolve alongside increasingly capable machines.”

 

The transformations of the market will show significant variation across countries, and within the industries of any given country. The authors construct scenarios reflecting changes in a few basic variables: the pace of technological innovations, the type of affected industry, the tempo of adoption of new technological processes in a given industry, and the overall economic growth determining the demand for products and services. They point out that automation is shaped not only by technical feasibility, but also by the cost of developing and deploying automation solutions, the cost of labour, the effort required to reorganize the productive processes, as well as overall acceptance of automation by the customers (who may prefer being served by real people rather than robots). The interplay of these factors, as well as policies addressing the ensuing job losses, will produce different outcomes in particular sectors of the economy.

 

As mentioned earlier in Chapter Five of my book, replacement of humans by robots and digital technologies will proceed by gradually automating tasks or activities involved in a given job. Some of those activities, even in jobs requiring the highest qualifications such as doctors or lawyers, are of a repetitive and predictable nature, and amenable to automation by already available technologies.
 

Less predictable activities may require innovative solutions and will not be immediately automated. The outcome of the gradual automation of a given job will mean people working alongside robots or using advanced digital technologies augmenting their capacities. Due to minimization of human error they will be able to provide improved quality of products and services. These workers will be more efficient and fewer of them will be required to complete the job.

 

The McKinsey team weighed the chances of a number of tasks being automated in a given type of job by indicating the amount of time thus saved in the process. By analyzing about 800 types of jobs in the advanced economies, they concluded that in countries like the US and Canada, about 23% of working time would be eliminated by automation by 2030. In certain types of jobs up to 90% of the time would be automated, while in others, less predictable ones, that percentage would not exceed 15%.

 

Which jobs are automatable first

Initially, work in predictable situations, both physical work and office work, will be automated. Gradually also physical work in unpredictable situations will be replaced by machines.

Contrary to popular notions, the most automatable activities are in accommodations and food service as well as in retail - 73%   (Chui, Michael, Manyika, James, and Miremadi, Mehdi. July 2016. Where machines could replace humans—and where they can’t (yet). McKinsey Quarterly). Manufacturing jobs rank second among the most vulnerable ones with an average automatization of 59% (ibidem). Accounting and jobs in financial services are also highly automatable.

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By weighing variations between jobs in a given sector, the authors of the 2017 report (Jobs lost, jobs-gained. Manyika, James, et al.) arrive at averages for given sectors: accommodation and food services are amenable to 75% of automation; technology, media and telecom – 51%; retail and transportation – 42%; professional services – 40%;  finance and insurance – 37%; health care and social assistance – 36%. The authors conclude their report stating that, … “about 60 percent of occupations could have 30 percent or more of their constituent activities automated”.  (Chui, Michael, Manyika, James, and Miremadi, Mehdi. November 2015. Four fundamentals of workplace automation. McKinsey Quarterly.)

 

Although automation of numerous activities does not equal job elimination and will be accompanied by the creation of new positions, the profound changes of the nature of future work will make adaptation difficult for large sections of the labour force and thus result in increasing unemployment.

Manyika  et al maintain that in the United States, and other advanced economies, demand for high-wage occupations may grow the most while middle-wage occupations decline.  With emerging new technologies, there will be jobs created that may even numerically compensate for jobs lost, yet they will require higher qualifications, and therefore often will not be suitable for workers replaced by automation. The growing sectors will be healthcare and education.

Overall, the few jobs in demand will be often of the professional, managerial, and executive sort, while the ones readily available will be of a low paying, precarious character, as in care occupations (table p.9). Workers will be compelled to compete with increasingly capable machines so that their wages will be facing downward pressure. The adjustment on the
labour market will be preceded by frictional unemployment and increasing income polarization. 

If anything, workers replaced by automation will need a lot of assistance to be able to make the transition. A new set of policies will be needed to counteract the immediate negative effects of automation and enable the public at large to profit from it in the long run. 

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Robert B. Reich, Chancellor’s Professor of Public Policy, University of California at Berkeley in conversation with Nellie Bowles, Technology Correspondent, The New York Times,  postulates a discussion on policies focussed on “midcareer job training, enhancing labor market dynamism and enabling worker redeployment” as well as guaranteeing universal basic income.  Financial support will be needed for the underemployed, and the ones who are not able to find employment (No Worker Left Behind. The New York Times Conferences, February 20, 2018).  

No Worker Left Behind. Robert B. Reich, Chancellor’s Professor of Public Policy, University of California at Berkeley in conversation with Nellie Bowles, Technology Correspondent, The New York Times, The New York Times Conferences, February 20, 2018).  

https://www.youtube.com/watch?v=7viv0pj8TQc   

 

Nazareth, Linda.  Work Is Not a Place: Reimagining Our Lives and Our Organizations in the Post-Jobs Economy. The Globe and Mail Metro. 23 Feb 2018. Nazareth is the senior fellow for Economics and Population Change at the Macdonald-Laurier Institute. In her newest book Work is Not a Place: Our Lives and Our Organizations in the Post-Jobs Economy (Relentless Press 2018) the author states that with the changing economy people will be losing stable, long-term jobs in a place of work and destined for transient jobs, frequently done away from a central location.  

 

The postcarbon economy - Limiting pollution by renewables, electric cars

 

The environmental problems of big cities, as well as of the economy as whole, are largely caused by the use of fossil fuels, and oil in particular.  Clean electricity is a condition of limiting carbon emissions and thus limiting climate warming. In the wake of the 2015 Paris Agreement, conservative estimates of the measures needed to keep global warming below 2°C called for leaving at least one third of existing global oil, one half of global gas and 80% of global coal reserves in the ground. 

 

Along with the growing concerns, positive developments in recent years have also been noted.

There is a general agreement that clean electricity imports and exports will be cornerstones of a 21st-century postcarbon economy.  Evidence is growing that the transition is possible, as envisaged in Germany, which is at the forefront of the application of renewable energy sources. On January 1st, 2018, a milestone was reached, whereby for the first time in history the entire country was supplied by electricity from windfarms. Due to favorable conditions, for a brief time electricity from wind turbines was satisfying the total demand for energy. In addition, several small localities in Germany have developed sufficient capacities of renewables from various sources to fully satisfy demand on a constant basis.  

 

An important development towards a carbon free economy is progress in constructing electric vehicles (EV). Their efficiency is increasing while the cost is rapidly falling. The improving batteries of EVs offer the additional benefit of storing electricity that otherwise would have to be supplied on demand by the power grids, releasing it at times when the windfarms and solar panels could not be fully utilized. 

 

Based on recent technological developments, the European Union has set itself a goal to decarbonise all energy by 2050. Transition will be slowed due to the need of ensuring collaboration between countries to overcome intermittent supply of energy from renewables and transferring oversupply over large distances which in turn implies investing in new infrastructure.  Also phasing out suppliers of carbon-based energy with their large investments in the oil industry will meet with resistance. 
 

In reviewing a recently published book by Varun Sivaram, an MIT researcher The Economist states that the cost of electricity generated by silicon photovoltaic cells (PV) has become competitive with that from fossil fuels and cheaper than nuclear power. (Sivaram, Varun. (2018) Taming the Sun: Innovations to Harness Solar Energy and Power the Planet.  MIT Press. Cambridge, MA.)  But Sivaram cautions that the decline in the cost of solar panels has been caused by mass production in China, not by a breakthrough in technology such as computer chipmaking has experienced. Contrary to optimistic forecasts, progress may stall, and the technology might reach a plateau, as nuclear energy did in the 1990s. In addition, intermittent oversupply of solar energy causes the dropping of its price and does not allow it to maintain a steady market for electricity, in a manner similar to the intermittent oversupply of electricity from wind turbines.Still, switching to renewables will not be as rapid as sometimes hoped. 

 

In short, as of 2018, renewable energy, despite technological progress, is still facing significant roadblocks.

 

At the same time Canada is continuing work in developing new ways of using nuclear energy. Canadian Nuclear Laboratories Ltd., the newly conceived research center in Chalk River, is intended to develop small modular nuclear reactors that might supply electricity in remote Arctic areas.