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A Note on Technology, Labour Arbitrage, and the Legitimation Crisis

Commenter Blackadder, in the thread following my earlier post on Bill Gates, analogizes technology and labour arbitrage, arguing that both can be regarded as placing downward pressure on wages, but that both actually increase efficiency and outweigh such pressures. In the first instance, though the available figures are all over the map, it would seem that, at best, real wages have risen only marginally since 1970. Some analyses show a gradual decline from the early Seventies, with perhaps a brief upward blip in the late Nineties, followed by a decline throughout the Bush era. Whatever the case may be, the meager result, at best, for so much destructive creation, is disappointing and suggestive of futility.

Second, regardless of these seemingly contestable figures, present conditions are ultimately unsustainable. The inexorable logic of globalization, of the economic path the establishment has chosen for us, cannot be thwarted. And, in this connection, it is worth observing the asymmetries of technological development and labour arbitrage, as well as the ways in which they converge under the conditions of globalization. The dynamics of technological change and labour arbitrage are sufficiently different, and the effort to associate or even equate them under the rubrics of efficiency only illustrates the reductionism of most economic analysis.

Labour arbitrage, for one thing, results in a direct competition for employment, among persons of roughly comparable skill sets, across national boundaries, boundaries which also divide nations of markedly differing levels of economic development, cultural norms concerning a 'good life', and so forth. For the prospective employee from the hitherto more advanced nation, there really isn't much to be done, once the decision has been made to hire the lower-wage competitor. He can reconcile himself to a lower standard of living, to downward mobility, or he can undertake some combination of retraining or skills augmentation. The former, however, is not always feasible, for a variety of reasons, and not even the latter offers grounds for confidence; new skill-sets or innovations, once they have been diffused throughout the market, are readily transferable, meaning that the process will begin afresh. Routinization, whether of technique or knowledge, is endlessly duplicable, and only affords the basis of further rounds of arbitrage. The fundamental dynamic of this process is downward wage pressure, simply, since the initial condition involves comparable skill-sets, with the decisive difference being the wage each of their bearers is willing to accept.

For another thing, technological development varies in its implications. The development of the automobile may have rendered the buggy-maker obsolete, but anyone capable of performing the tasks involved in the manufacture of a buggy could certainly operate the machines and tools involved in the manufacture of automobiles; all that transition did, on the macro-level, was render a similar skill set much more productive. Additionally, the Japanese economic model accommodates both a high degree of technological innovation and a high degree of stability. Generally speaking, technological advancement may often render certain positions obsolete, but the resultant shifts in employment are usually horizontal; people involved in one form of manufacturing move to another. When certain forms of employment disappear altogether, it is typically because those formerly engaged in them have been moved on to positions in more advanced manufacturing sectors.

However, if a nation has, for whatever reasons, and as a result of whatever causes, altered the balance of employment types, shifting from manufacturing towards the provision of services, the impact of technological development shifts. We are no longer dealing with skill sets that are broadly transferable, given training, but have introduced, or, better, accentuated another variable. In an economy with a substantial manufacturing base, a large percentage of the population benefits from the value-adding function of that technology; they can draw decent wages because of the productivity that technology makes possible. Certainly, this displaces people from time to time; but this - and this is crucial - factor does not obtain in isolation. In a nation committed to retaining that productive capacity precisely for reason of its value-adding capacity, and its provision of broad-based employment, such displacement only 'liberates' workers to produce something else. In a deindustrialized nation, however, one which emphasizes the provision of high-value-added services as the solution to economic displacement and competition, and tends to outsource manufacturing, the critical factor becomes the (largely inherited) ability to provide high-value-added services out of the wealth of a cognitive endowment, conditioned by education. In other words, the basic dynamic of technology may concern the skill-sets of the workers, but the omnipresent backdrop of this dynamic remains the balance of industries, economic sectors, and the diversity of employments a nation purposes to maintain.

To sum up, since this may well be unclear: labour arbitrage, as between domestic and foreign programmers, concerns downward economic pressures simply, and the question of skills and training/education is that of a merely temporary compensatory mechanism; technological change concerns skill-sets, but this consideration only becomes operative within a broader economic framework which determines a balance of economic sectors. That is, its relevance is largely conditioned by other macroeconomic questions, such as... outsourcing and import competition. The effects of technological progress will vary, depending upon whether a nation, broadly speaking, practices import substitution, or employment substitution.

Why does any of this matter? Why is it of some importance to draw these distinctions? The answer is the growth of economic inequality in America. Jim Manzi, one of National Review's finest writers, in an essay in the February 25 issue of the magazine entitled A More Equal Capitalism writes:

Absolute economic equality, a.k.a. communism, is a poor goal, but if inequality becomes sufficiently extreme it undermines the social support required for a democratic and capitalist society to flourish. (One might also add that rising inequality enables the wealthier classes to effectively capture the political institutions of the nation, transforming them into instruments of privilege and entrenchment; something of the sort has already resulted in our immigration impasse, with three-quarters of the American people opposing a policy the establishment and its backers are determined to maintain, regardless - Maximos.)

In a pungent passage, Manzi continues:

To take only the most obvious example, how much do you think high-income Americans would make in the absence of our armed forces? All of the material delights that we enjoy ultimately require men to stand watch all night looking through Starlight scopes mounted on assault rifles, and die if necessary, to protect the commercial, law-bound society that provides those delights. Would you do that for a millionaire hedge-fund manager who happens to live within a country he considers some lines on a map, and who considers you a sucker for doing it? (Or, would you consider doing it for one of Will Wilkinson's deracinated cosmopolitans? I certainly wouldn't, and I'd teach my sons not to do it as well - Maximos.)

Summing up our present set of circumstances, Manzi concludes:

So here we have our current economic situation: We are rich and economically successful, but increasingly unequal. If we give up the market-based reforms that allow us to prosper, we will lose by eventually allowing international competitors to defeat us; but if we let inequality grow unchecked, we will lose by eventually hollowing out the middle class and threatening social cohesion. This, not some happy-talk about the end of history, is what "globalization" means for the U.S.

In a sense, Manzi is grappling, implicitly, with Dani Rodrik's Globalization Impossibility Theorem, attempting to square the circle, so to speak, in order to reconcile these apparently incompatible objectives. In other words, Manzi perceives the perils of Fallow's 'Iron Law of Globalization' (my term, Fallows quoted in link at the top of the piece) for American republicanism, and intends to find a way out of the cage. Before wrapping this package, it would be worthwhile to cite Manzi's analysis of the origins of the new inequality:

This inequality is partially driven by several major transitions that began to occur in the economy and society in the 1970s. First U.S. domestic production of oil peaked in 1971, oil imports doubled between 1970 and 1975, and OPEC was able simultaneously to drive large price increases. This oil shock was directly regressive, but also tended disproportionately to hammer those industries that were the source of high-wage union jobs. Second, in 1970 "non-distributive services" (i.e., finance, professional services, health care, and so on) became for the first time a larger part of the economy than goods-producing industries. (It is also worth observing that the aforementioned transition in the oil markets played into financialization and the growth of services, insofar as the oil-producing nations were suddenly in possession of large quantities of American dollars, which we recycled into the large investment banks. - Maximos) The shift to services, especially as leveraged by the increasing technology dependence of the economy, tended to enhance the prospects of the cognitive elite at the expense of traditional industrial workers. (Emphasis mine.) Third, the combination of changes in cultural mores and social programs began to disassemble the traditional family. The social capital transmitted by intact families became a more and more relevant source of competitive advantage to those individuals raised in functioning homes as this family structure became less universal. Fourth, the foreign-born percentage of the U.S. population, which had reached its historical minimum in 1970, began to rise rapidly as massive immigration resumed after a multi-decade hiatus. This increased inequality by introducing a large low-income group to the population, and also by intensifying wage competition at the lower-skill end of the income scale.

The Reagan economic revolution achieved success by forcing an extremely painful restructuring on industry after industry. One critical consequence of this restructuring was a new compensation paradigm - one that relies on markets rather than corporate diktats, regulation, or historical norms to set pay; accepts a much higher degree of income disparity based on market denominated performance; and expects that most people will exploit the resulting market for talent by moving from company to company many times during a career. (Obviously, this factor exacerbates the second cause Manzi gives, with the resultant marketization of compensation favouring the cognitive elite. It also, in some of its particulars, such as the practice of fusing management and ownership, via stock-option compensation, engenders a short-term focus on stock market valuation, but that is an issue for another time - Maximos.) These factors interacted with and exacerbated trends toward inequality in the U.S. Growing inequality was a price we paid for the economic growth we needed.

Manzi's proposed remedies for the new inequality begin with capital gains tax rate reduction and the application of the child tax credit to the payroll tax; but the real substance lies with policies that both decrese inequality and increase performance. As I've already quoted lengthy sections of Manzi's essay, I'll summarize from here on out. First among those substantial policies is educational reform, which entails, on Manzi's reading, the introduction of competitive imperatives , the loosening of regulations on schools, and the establishment of comprehensive national grade-level examinations, with test results to be made public, all of which could be leveraged by means of the federal budget. Second among those policies is immigration reform, apparently on a recruitment, as opposed to law-enforcement, model: seeking a half-million or so of the world's finest talents who want to become American citizens.

Well. Laying aside the influence of cultural degradation and the subversion of the family upon the new inequality, which, at this stage - despite the desirability of, say, increasing the value of the tax deductions available to middle and low-income couples, the elimination of whatever marriage tax penalties may exist, the reversal of the generational trend towards easier divorce, and legions of other potential pro-family policies, none of which we are likely to see implemented - can only be mitigated by private initiative, and by government ceasing to subsidize certain undesirable behaviours (this was the original neoconservative forte, and still ought to be), we are left with a handful of structural factors, all of which favour the cognitive elite at the expense of the ordinary and average. First, there is deindustrialization. Second, there is the combination of financialization, the trend toward services, and the marketization of executive compensation. Finally, there is immigration. All of these factors are interrelated. And neither education reform nor immigration reform of the sort Manzi perceives as desirable will prove availing.

The retention of a manufacturing base need not entail economic reliance upon energy-intensive industries, though not all such industries would be rendered obsolete. Japan, after all, combines both traditional heavier industries with less-resource-intensive industries as high-tech manufacturing. This contributing factor behind the new inequality has been, in part, a consequence of a preference for arbitrage in this sector, as opposed to its modernization or transition to other types of production.

As regards the new economy of services, high finance, and god-king CEOs, highly remunerative compensation ultimately correlates with cognitive ability - this was the primary thesis of The Bell Curve, for those who remember - and this fact, operating in tandem with deindustrialization and globalization, both increases the rewards accruing to the cognitive elite and decreases returns to the average, who increasingly find themselves in competition with the average masses of nations at much lower levels of economic development. Education can do nothing to alter this reality, inasmuch as cognitive ability is only marginally malleable under environmental influences, if at all. An emphasis upon educational reform in this connection could actually have perverse effects, such as the devaluation of credentials, leading to market demands for ever more credentialization as a condition of employment, and the erection of additional financial barriers to economic advancement, as the demand for higher education drives up the cost, relentlessly. Both effects are already detectable, and have been for some time. An immigration policy which sought to attract a foreign cognitive elite, even if coupled with a cessation of low-skill immigration, would primarily intensify the competition among the top tier-minus-1 or 2 among the cognitive elite, depressing middle and upper-middle-class professional compensation, while increasing still further returns to the upper reaches of the income scales. Why else would Bill Gates be demanding such immigration reform?

In the end, the circle cannot be squared, and the dilemmas of globalization still hold. Structural factors dictate the exacerbation of the new inequality, with all that this entails, and this because those structural factors have essentially marketized heritable qualities not amenable to amelioration; simultaneously, those structural factors have developed concurrently with an increasing pursuit of efficiency through arbitrage and labour substitution. Labour arbitrage, whether this involves importing lower-cost labour or outsourcing to lower-cost destinations, increases 'efficiency' by exerting downward pressure on wages. Technological development, considered in itself, increases efficiency by increasing the ratio of inputs to outputs in a given productive enterprise; only contingently does this also place downward pressure on wages, or decrease employment, depending upon other structural, politico-economic factors, such as a nation's balance of employments and economic sectors. In the American context, given the decisions that have been taken on this latter question, where arbitrage and labour substitution are the reigning paradigms, both labour arbitrage and technological development exacerbate the new inequality: the first absolutely, and the second because the American ideal is to have the advanced design and engineering work performed by a cognitive elite, an increasing percentage of which is brought in from abroad, with the manufacturing of the end product undertaken overseas (Think about your iPod.) - both facets of which play into the preference for arbitrage. Even at this, many nominally American corporations increasingly outsource R&D, completing the closed economic circle: the cognitive elites managing the finances, and everyone else. Both forms of the pursuit of greater efficiencies, consummate expressions of the utilitarian ethos, given the balance of economic sectors incentivized by American law, exacerbate inequality, thereby contributing to the leveling down of which Fallows writes, and the threat to the stability of our representative institutions to which Rodrik indirectly alludes, and Manzi openly acknowledges. Recent libertarian skeptics of democracy are, in this respect, remarkably prescient, for there will eventually occur either a popular backlash against globalization - which is what Bryan Caplan, et.al. bemoan - or a more open constriction of the political discourse itself, hints of which we already observe in the perverse and obstinate refusal of the establishment to accede to popular pressures over the immigration question. We will have some residual national sovereignty, along with global economic integration, while democracy withers on the vine.

This is globalization's variant of the legitimation crisis, and it cannot be evaded indefinitely. Either the representative quality of our politics will be diminished, or the lords of the globalizing economy will suffer the loss of some economic power. The latter terrifies the political and economic establishments, as well as the majority of the commentariat; the former should terrify everyone else, since it is nothing less than the loss of a political heritage, coupled with a grey-goo theory of global prosperity, a vast leveling out, its thin crust of gilding all the more luminous in contrast to the colourless mass beneath.

Comments (1)

At least one thing should be absolutely clear to a distracted Joe Sixpack. Elites have learned very well how to prititize profits and socialize costs.
Enter Bear Sterns bailout.

Pure travesty, eben if complicated somewhat by losses incurred by Bear's employees-owners.

But Bear is somewhat unusual in large employee ownership.
The next giant to be bailed-out is not likely to be like Bear.
It will be a clean example: when times are good, they win, when times are bad, we (taxpayers) loose.

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