Don’t Blame the Internet for Rising Inequality

by John Quiggin

Defenders of market liberalism have appealed to technological explanations for growing inequality in the developed world. But the real cause is political.

First published: 31 March, 2014 | Category: Corporate power, Economy, Inequality

The last fifteen years haven't been kind to market liberalism, at least as a factual hypothesis about the world. In 1999, it seemed that the future promised ever-rising stock markets, the end of the business cycle and prosperity for all. Beginning with the bursting of the dotcom bubble in 2001, these hopes have been dashed. It's now clear that for the vast majority of people in the US, and the majority of people in the developed world, the era of market liberalism has been one of slow income growth, more precarious employment,[1] and more limited opportunity for those born outside the charmed circle with parents wealthy enough to give them a head start.

The obvious explanation for these outcomes is that growing inequality and stagnant living conditions reflect, and reinforce, the political power of the beneficiaries of this process, commonly referred to as 'the 1 per cent.'  (Although even within the 1 per cent, the big gains have accrued to the '1 per cent of the 1 per cent,' and so on up to the handful of billionaires who control much of US politics).

The growing wealth and power of the 1 per cent has been driven by the expansion of the financial sector. The rise of finance has coincided with the collapse of those institutions which, in the ‘Great Compression’ of the income distribution during the 1950s and 1960s, saw workers in the US and other developed countries capture a large share of growth. Domestically, these institutions included strong trade unions, an education system that promoted social mobility and macroeconomic policies that prioritised full employment. In global terms, at least in the First World, these institutions were backed up by the Bretton Woods system of fixed exchange rates, a system which included tight restrictions on international flows of capital, particularly short term flows of speculative capital.

This system broke down in the 1970s (the causes of this breakdown, which remain controversial, are discussed in my book Zombie Economics).[2] The result was the rise, or rather resurgence, of a finance-dominated form of capitalism and its associated ideology of market liberalism.

Global capital flows now massively exceed the volume of trade and long-term investment. By some measures, the volume of outstanding financial assets is now approaching a quadrillion (i.e. a billion billion) dollars, mostly in assets and liabilities that are supposed to offset each other, such as interest rate swaps. The majority of corporate profits, and of top 1 per cent incomes, are derived from the management of these financial flows.

The link between the financialisation of capitalism and the rise of the 1 per cent is direct and, now that the evidence is in (thanks largely to the work of French economist Thomas Piketty and the public advocacy of leading economists like Paul Krugman and Joseph Stiglitz), seemingly undeniable. But the fact that the evidence appears undeniable does not mean that it will not be denied: any proposition, no matter how absurd, will have plenty of defenders if it is useful to the dominant class and its ideology.

For a while, defenders of market liberalism were able to argue that the growth of inequality was overstated, and that, in any case, static measures of inequality were less important than dynamic measures reflecting economic mobility. These arguments have largely been abandoned in the face of accumulating evidence that inequality is becoming increasingly severe and entrenched (See, however, the Marxist economist Andrew Kliman, who uses similar arguments to suggest that the working class has gained ground since the 1970s, and the response from Canadian political economist Sam Gindin, with which I agree).

One counter to this observation has been to claim that increased inequality within the developed world is the necessary price of improved living standards in previously poor countries, above all China and India. I've addressed this point in Zombie Economics, but, for the moment, it is sufficient to observe that the 'Great Compression' of the 1950s and 1960s, mentioned above, coincided with rapid catch-up in Europe and Japan.

The other argument from defenders of market liberalism has been to focus on technological rather than political explanations for widening inequality. There are two, seemingly contradictory, versions of this argument.

One, put forward by Erik Brynjolfsson and Andrew McAfee in The Race Against the Machine, claims that the spectacular progress of information and communications technology has tipped the scales of factor markets against labour and in favour of capital. The core argument is that artificial intelligence technology is doing to white collar jobs in the twenty-first century what automation and robotics did to blue collar jobs in the twentieth.[3]

The other, advanced by Tyler Cowen in The Great Stagnation, maintains that technological stagnation outside infotech implies permanently lower growth. Cowen dates the beginning of this period of stagnation to the 1970s.[4]

Despite having almost the opposite view of technological progress to that espoused by Brynjolfsson and McAfee, Cowen, in his latest book, Average is Over, agrees with their view that the growth of inequality is the result of skill-intensive information technology.[5]

Cowen's argument fails to convincingly explain why the global crisis stopped economic growth, not only in the US, but in countries far inside the technological frontier like Greece; while it had hardly any impact in, for example, Australia, which avoided the initial financial crises and used Keynesian fiscal stimulus to offset shocks flowing from the global economy.

A further reason for scepticism about technological stagnation is that this explanation has been advanced in recessions and depressions ever since the beginning of the capitalist business cycle in the nineteenth century.  Such claims represent the flipside of the equally common claim, made during every period of sustained expansion, that the economy has entered a New Era of untrammelled growth. The most recent episode of this kind was the 'irrational exuberance' of the 1990s, fuelled by optimistic claims about the potential economic implications of the Internet, which was opened to commercial use by the US Congress in 1992, and by capitalist triumphalism exemplified by Fukuyama's The End of History.[6] The collapse of the ‘dotcom’ bubble was softened by the housing bubble that developed shortly afterwards (again, not at all a new phenomenon), but the result was only to worsen the inevitable crash in 2008. The similarity of these events to previous bubbles and busts is good reason to doubt that they represent, or that they have inaugurated, a new phase in the evolution of capitalism.[7]

The Race Against the Machine argument does help to explain increasing wage dispersion between educated professionals (roughly, those in the top 20 per cent of the income distribution) and other workers. For professionals, computers and telecommunications technology are labour-augmenting, allowing knowledge workers to do more with less clerical and administrative support. By contrast, for routine and semi-skilled workers, technology tends to displace labour. This divergence has been reflected in a steady increase in the ‘college premium’ and in the sharp decline in real wages and employment rates for males without college education (median earnings for men in this group fell by 41 per cent from 1970 to 2010). 

But, as Paul Krugman and others have pointed out, while professionals and knowledge workers have done better than others, the growth in their incomes has been steady rather than spectacular, and if anything slower than in the 1950s and 1960s. Moreover, their economic insecurity has increased in important respects. While declining social mobility has meant that the children of parents in the top quintile of the income distribution have a better chance of remaining there than in the past, the cost of the necessary college education has soared. More importantly, the growing gap between the top 20 per cent and the rest of the population makes the consequences of downward mobility much more severe.

In short, while technology explains the decline of the middle and working classes relative to the professional and managerial class, even this latter group has barely maintained its share of national income since the 1980s. The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators.  This group has nearly quadrupled its real income over the past 30 years, far outpacing the professional and managerial class as a whole.

This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialities.

Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can't explain the vast majority of the growth in inequality over the past three decades.

A final version of the technological argument, most prominent during the globalisation euphoria of the 1990s, attributes the rise of the financial sector itself to technological advances in communications, which allow the ownership of assets worth billions of dollars to be shifted around the world in the blink of an eye. There is a grain of truth in this claim. Information technology has enabled much more complex transactions than in the past, and thereby contributed to the increase in gross flows. And automated High Frequency Trading reduces the time involved in a transaction from seconds to microseconds.

Nevertheless, a focus on technology conceals more than it reveals. Capital flows were limited for most of the twentieth century not by capacity but by political crisis and design. Capital was just as mobile in the late nineteenth century, following the connection of international markets by telegraph. Keynes's elegiac description of pre-1914 conditions is worth recalling for those who see global capital mobility as a recent development. 

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. 

Keynes' description, written in the 1920s, was full of irony, reflecting the fact that the seeming permanence of this structure belied its vulnerability, not only to geopolitical events like war but to the inherent instability of financial markets. 

In the longer historical view, there is nothing unique about the current crisis. The truly exceptional period in the history of capitalism was, rather, the Bretton Woods era, when developed economies enjoyed decades of strong economic growth, full employment and a degree of income equality never approximated before or since. This era is long past, and the specific conditions that created it cannot be reproduced. Nevertheless, there is no reason to think that the losses of the past few decades are irreversible. The broad outlines of a political programme to accomplish this are obvious enough to be shared by everyone from centre-left Democrats like Elizabeth Warren to the inchoate radicalism of Occupy Wall Street. 

The primary thrust of any strategy under current circumstances must be an attack on the wealth and power of the financial sector and the 1 per cent (for practical purposes, these may be treated as one and the same). That means more progressive taxation, an increase in total levels of taxation and expenditure and a substantial tightening of regulation of the financial sector, with the aim of making that sector much smaller and less rewarding than it is at present. Such a strategy would represent a transformation of capitalism similar to that which occurred after 1945 and, in reverse, in the 1970s. This would be a great achievement in itself. More speculatively, it might, given the public good nature of much of the Internet, lay the basis for a further transformation in which the power of private capital ceased to dominate the global economy.


John Quiggin is an Australian Laureate Fellow in economics at the University of Queensland, and an adjunct professor of agricultural and resource economics at the University of Maryland College Park.

[1] Jacob S. Hacker, The Great Risk Shift: The Assault on American Jobs, Families, Health Care and Retirement—And How You Can Fight Back (Oxford UP, 2006).

[2] John Quiggin, Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton UP, 2010).

[3] Erik Brynjolfsson and Andrew McAfee, The Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy (Digital Frontier Press, 2012).

[4] Tyler Cowen, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better (Dutton Adult, 2011).

[5] Tyler Cowen, Average is Over: Powering America Beyond the Age of the Great Stagnation (Dutton, 2013).

[6] Francis Fukuyama, The End of History and the Last Man (Free Press, 1992).

[7] See Robert J. Shiller, Irrational Exuberance (Princeton UP, 2005).

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