Tuesday, 25 June 2013

Defending the Halfway Line

Back in the 1970s, due to the popularity of a certain musical, it was common for football crowds to chant at long-haired players thus: "Charlie George, superstar, walks like a woman and he wears a bra". (These were the days when The Liver Birds was regarded as cutting edge gender politics.) This random memory popped up while reading a new paper by Greg Mankiw, an economic adviser to George W. Bush and Mitt Romney, entitled Defending the One Percent. This suggests that rising inequality is simply the product of "just deserts" - that the one percent are getting richer due to the impact of technology and the increasing returns to skill that this gives rise to. The paper is a standard conservative polemic against tax-based redistribution, which has been extensively rubbished by others for it dubious claims and rhetorical method (lots of begging the question). I'm less interested in the philosophical defence of privilege, which is unremarkable, or the dubious speculation on the heritability of talent, which doesn't rise above saloon-bar reasoning, and more in the relationship of technology and skill as an explanation of the one percent's good fortune.

Mankiw starts with the orthodox position that skill-biased technological change increases the rewards for skilled labour relative to the unskilled, leading to increased income inequality. Implicit in this model is the assumption that it raises the value of education, leading to more people becoming skilled and thus inequality declining (as occurred during les trente glorieuses). Recent rises in inequality thus reflect a surge of new technologies driving up the returns to skill, with education lagging behind. According to Mankiw, if this position is right "that the broad changes in inequality have [been] driven by the interaction between technology and education, rather than changes in rent-seeking through the political process, then it would seem an unlikely coincidence that the parallel changes at the top have been driven by something entirely different". In other words, this reward for skill must apply to the top one percent as much as it does to the top 10 or 20 percent, so if they're now richer, it must be because their skills have become even more valuable relative to those of the median worker.

Of course, there is no reason to believe that skill-biased change and rent-seeking are mutually exclusive, though you can see the point of maintaining that belief if your basic premise centres on "just deserts" (you see what I mean about begging the question). To take a real-world example, consider professional football. Though you can fairly argue that modern players are more skilled than those of a generation ago, it's clear that the main reason for the disproportionate growth in their incomes since the 1990s is technology in the form of TV and the Internet. This has generated larger revenues for the game, with the lion's share going to players. A case can be made that this is "just deserts", but that would not explain the huge income that now accrues to FIFA and other administrators who control tournaments (and incidentally provide opportunities for large-scale corruption, as in Brazil today). That is pure rent. An example of these two tendencies co-existing is Lionel Messi, a sublimely skilled talent and alleged tax dodger (tax evasion is rent extracted from the public purse).

Football is a useful study for a wider phenomenon first outlined in The Economics of Superstars by Sherwin Rosen in 1981, namely the impact of technology on scale economies. The point is not just that TV or recording media expand the market, but that they also produce a concentration of output on the best talent, hence overkill like the Confederations Cup and close-season club tours, not to mention Neymar's burgeoning commercial rights income. 45 years before Rosen, Walter Benjamin noted how as the work of art in the age of mechanical reproduction loses its "aura", this is compensated for "with an artificial build-up of the 'personality' outside the studio", where that personality is "the phony spell of a commodity". The artist, the superstar, becomes a commodity and object of veneration, like a medieval saint. Old Walt did not live to see the emergence of pop culture and fan merchandise, let alone Elvis impersonators or Glastonbury, but I'm sure he'd have been unsurprised by it.

Rosen presciently asked "What changes in the future will be wrought by cable, video cassettes, and home computers?" What he could not predict was the network effects of Internet-based services - i.e. the more people who use services such as Google, Facebook or Twitter, the more valuable it becomes to each user. A consequence of this is the tendency towards monopoly: one search engine, one social platform, one broadcast medium. But the financial benefits of concentration accrue to the service provider, not to the content providers, i.e. the users. This explains the need for the creators of these services to be simultaneously humanised and sanctified as benefactors of mankind, playing up their lovable nerdiness and rebellious spirit while playing down or excusing their actual strengths as ruthless business people (the trailer for the upcoming Steve Jobs biopic is a good example of these multiple tropes crammed together). Thus the superstar aura of the modern artist is easily transferred to the creators of commodities and commercial services, and reaches a sort of apotheosis in the living brand of Richard Branson (clearly a lifelong aura addict).

Since the 1990s and the emergence of the "new economy", it has become common to apply the adjective "superstar" to jobs outside of entertainment and sport, so much so that it now appears to be casually assigned to the entire top one percent. "Superstar tax accountant" or "superstar lawyer" are terms that can now be used without irony. But to what extent is this a reflection of the impact of technology or skill in harnessing it? Mankiw quotes Brynjolfsson and McAfee (Race Against the Machine, 2011): "Aided by digital technologies, entrepreneurs, CEOs, entertainment stars, and financial executives have been able to leverage their talents across global markets and capture reward that would have been unimaginable in earlier times".

What is obscured by use of the word "aided" is that these people have precisely zero skills when it comes to the digital technologies themselves (beyond operating a BlackBerry or iPhone), and even make a fetish of techno-incompetence (the modern equivalent of spotless, white gloves indicating unfamiliarity with manual labour). Skill-biased technological change, if it means anything, should mean that increased rewards accrue to those who acquire the skills to exploit the new technology. But while it is true that many techies have profited handsomely, the skill of an entrepreneur or a CEO rarely has anything to do with mastery of the technology as opposed to mastery of people and process, which fundamentally means deploying skills that are as old as civilisation, such as selling, analysis, motivation and organisation, not to mention coercion, evasion and swindling. Steve Jobs was not much cop as a technologist himself, but he was a top-drawer manipulator of other technologists.

A characteristic of the IT revolution is the scale of the market that it creates both through physical extent and commodity deflation (it is estimated that the number of mobile devices will exceed the global population by the end of this year). Steam locomotives and steam ships shrank the world, but did not penetrate every nook and cranny, hence the emblematic use of the riverboat in Fitzcarraldo. The internal combustion engine spread further but remains constrained by the availability of roads. The physical extent of datacoms has already far outstripped these earlier technologies, so new markets in Amazonia and the Congo can expect Twitter before Tarmac. This amplified network effect has created a much larger and steeper pyramid of wealth, hence the increase in inequality and the power of the one percent who have risen upon it.

Papers like Mankiw's are just attempts to rationalise this tendency as predominantly the product of individual talent and hard work, rather than the result of changes in the material base, dumb luck or incumbent privilege. Pointing at technology as the driver is unintentionally revealing. The one percent are benefiting not because they are better at harnessing new technology but because technological change is shifting wealth from production (capital + labour) to rent. If this were a matter of skill, we would expect technology to drive healthy wage growth at least down to median earners, i.e. the halfway line in the income distribution, but all the evidence is that median wages are stagnating while incomes at the very top continue to race away. Current skill-biased technological change appears lopsided in its impact on incomes. An explanation based on "changes in rent-seeking through the political process" looks more credible.

Lionel Messi may have been out of order in attempting to defraud the Spanish exchequer, but I don't begrudge him earning top wages for his performance on the pitch, even if the scale of his rewards (compared to those of Charlie George) has been hugely amplified by technology. I do however begrudge Sepp Blatter, the "superstar" of football administration, filling his own and his cronies' bank accounts by licensing the game. Greg Mankiw seems unable to appreciate that the one percent contains far more Blatters than Messis.

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