Wed, Jan 29, 2014 - Page 9 News List

Inequality being compounded by new technology

By Adair Turner

Pope Francis warned in November last year that “ideologies which defend the absolute autonomy of the marketplace” are driving rapid growth in inequality. Is he right?

In one sense, Francis was clearly wrong — in many cases, inequality between countries is decreasing. The average Chinese household, for example, is now catching up with the average US household (though still with a long way to go).

However, such examples do not negate the importance of rising inequality within countries. Both China and the US are dramatically unequal societies — and are becoming more so.

In the US, the statistics are striking at both ends of the income distribution. The bottom quarter of US households have received almost no increase in real (inflation-adjusted) income for the past 25 years. They are no longer sharing the fruits of their country’s growth. The top 1 percent, however, have seen their real incomes almost triple during this period, with their share of national income reaching 20 percent, a figure not seen since the 1920s.

In many emerging countries, rapid economic growth has raised living standards to at least some degree for almost everyone, but the share of the rich and ultra-rich is increasing dramatically. Once these countries approach the average income levels of developed economies, and their growth slows to typical rich-country rates, their future may look like the US today.

Globalization explains some of the bottom-quarter income stagnation in the US and other developed economies. Competition from lower-paid Chinese workers has driven down US wages, but technological change may be a more fundamental factor — and one with consequences for all countries.

Technological change is the essence of economic growth. We get richer because we figure out how to maintain or increase output with fewer employees, and because innovation creates new products and services. Successful new technologies always cause job losses in some sectors, which are offset by new jobs elsewhere. For example, tractors destroyed millions of agricultural jobs, but tractor, truck and car manufacturers created millions of new ones.

However, new technologies come in subtly different forms, with inherently different economic consequences. Today’s new technologies may have far more troubling distributional effects than those of the electromechanical age.

Information and communications technology is not costless magic, but it is closer to it than were the innovations of the electromechanical age. The cost of computing hardware collapses over time in line with Moore’s law of relentlessly increasing processing power and once software has been developed, the marginal cost of copying it is effectively zero.

The consumer benefits of this technology are large relative to its price — the cost of each year’s latest personal computer, tablet or smartphone is trivial compared with the cost of a new car in 1950, but the number of jobs created is trivial, too.

In 1979, General Motors employed 850,000 workers. Today, Microsoft employs only 100,000 people worldwide, Google employs 50,000 and Facebook employs just 5,000.

However, increased unemployment is not inevitable. There is no limit to the number of service jobs that we can create in retail, restaurants and catering, hotels and an enormous variety of personal services.

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