The Central Economic Challenge We Face

Land, labor, and capital: those are the three fundamental sources that feed every economy. But they are not equally valuable. For most of human history, the population always expanded to meet the carrying capacity of the land, meaning that there was always a surfeit of labor. At the same time, capital wasn’t of much significance until the Industrial Revolution. This left land as the dominant factor in economic productivity, and therefore the most valuable component. Therefore, landowners enjoyed most of the wealth produced by the economy.

Capital’s value arose from its ability to fund large-scale merchant ventures. Since long-distance trade enjoyed considerable economies of scale, funding such trade was economically valuable, and the bankers who provided such capital, as well as the merchants who carried out the trade, garnered a portion of wealth for themselves — although not as much as the landowners.

An interesting twist came in the aftermath of the Black Death in 1348. It wiped out a third of the European population. Suddenly there wasn’t enough labor to utilize the land, and labor became the most valuable component of the economy. Workers were suddenly in the catbird seat, and were able to wrest a larger portion of wealth from landowners. When the landowners balked at responding to workers’ demands, they revolted, as happened in the Peasants’ Revolt in England in 1381, and gained further concessions. But as the population recovered, labor lost its dominating position in the economy, and landowners slowly recovered the lion’s share of the wealth.

The Industrial Revolution provided a new twist: capital, in the form of steam engines and manufacturing machines, rapidly gained importance as a factor in economic productivity. This triggered a profound shift in the economies of the West: land ownership was no longer the primary source of wealth. Hence, over the next century, landowners steadily lost their dominant share of economic output to the capitalists who deployed capital to make stupendous profits.

A second process was also underway: as the populations of the West grew in size, the ability of governments to control their populations with affordable armies declined. In the good old days, the nobility could keep the peasants under control with a small number of soldiers, but expanding populations required expanding armies to control, and the nobility just couldn’t afford such large armies. As a consequence, aristocracy gave way to democracy in a long series of small steps punctuated by occasional outbreaks of violence, such as the French Revolution.

The people used their growing political power to form labor unions and force through a series of laws that improved their lot and granted them a bigger share of the economic pie. Even as the landowners’ portion of the pie shrank, labor enjoyed an enlarged portion of the pie.

The next big kick in the pants came from the world wars of the first half of the twentieth century. These wars required a big supply of cannon fodder from the working population, so national leaders had to concede even more power to labor to maintain their loyalty to the state. The Depression was especially dangerous; few Americans realize just how close we skittered along the edge of a political collapse. The radical measures taken by FDR saved the government by transferring much more power and wealth to labor. The wealthy acquiesced to this transfer because they could see the danger of a twentieth century “French Revolution” in the United States.

World War II imposed a huge strain upon the American population, both in terms of blood and treasure. Everybody made huge sacrifices to win the war. That in turn created a powerful sense of what the Muslim historian Ibn Khaldun had called asabiyah: the sense of social and political solidarity that energizes a civilization. Asabiyah washes all the sand out of the gears of an economy, making the economic engine run faster and more powerfully. The American economy blasted off in the 50s and 60s as Americans put their shoulders to the wheel together.

But as the harsh memories of World War II faded, the sense of solidarity that it had fostered faded as well. By 1980, the American political system began reversing the worker-favoring changes that had begun with the New Deal. In 1950, the average boss earned 20 times what his workers earned; nowadays, the average boss earns 200 times as much. In 1950, the Gini Index, a measure of economic inequality, was about 0.36; today it is 0.48. To give you an idea of the significance of these numbers, here are some Gini Index values for various countries today, as per the CIA:

Denmark: 0.248

Germany: 0.270

Australia: 0.303

Portugal: 0.342

Japan: 0.379

Rwanda: 0.468

USA: 0.470

Zimbabwe: 0.501

As you can see, the USA has more in common with kleptocracies like Rwanda and Zimbabwe than with democracies like Denmark and Germany.

There are a number of forces at work pushing American inequality higher and higher. These forces do NOT include globalization, which has had little effect on the Gini Index values for European countries. One force is the growing political power of the wealthy. As money has played an ever-larger role in American politics, the wealthy have become more important to electoral success than the middle class; therefore, American politicians cater more closely to the needs of the wealthy than those of the middle class.

But there’s another force at work, more profound and more dangerous: the increasing role of capital in economic output. Computers and other capital equipment are making an ever-greater contribution to total economic output. This reduces the economic value of both land and labor. Capital reigns supreme.

It’s not only that more and more of the pie goes to the owners of capital (the wealthy). Capital will destroy millions of jobs. Currently, 3.5 million Americans drive trucks for a living. Self-driving trucks will put all of them into the unemployment line within a decade or two. The same thing goes for taxi drivers, a much smaller group. Checkout clerks in retail outlets are similarly threatened by rapidly improving technology. All through the economy, millions of workers will be losing their jobs to automation in the next twenty years. Capital is driving labor right out of business.

If this situation is not addressed with dramatic changes in our economic system, many millions of Americans will descend into poverty. The asabiyah that is the glue holding our society together will evaporate. With just a little luck, we can avoid an outright revolution. But why should anybody feel any loyalty to a government that doesn’t provide a decent life for the great majority of the population? Why should they obey its laws? The transition will throw more and more sand into the gears of the economy, and net productivity will decline.

Here’s a quotation from Will Durant, an eloquent historian from the mid-twentieth century:

“Since practical ability differs from person to person, the majority of such abilities in nearly all societies, is gathered in a minority of men. The concentration of wealth is a natural result of this concentration of ability, and regularly recurs in history… In progressive societies the concentration may reach a point where the strength in number of the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or revolution redistributing poverty.”

The American political system must undergo a profound change in which the huge amounts of wealth generated by capital are widely redistributed among the citizenry. The wealthiest 10% of the households hold nearly 75% of all the wealth in the country. That distribution is socially unsustainable. The only path to social stability requires the wealthy to fund everybody else. Let the 90% perform social services such as teaching, caring for the young or the very old. There are a zillion ways to reorganize society to cope with an economy in which labor has little economic value. The path we are walking is not one of them.

Master of Science, Physics, 1975. Computer Game Designer. Interactive Storytelling.