Postcapitalism (part 2)

May 4, 2016

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Paul Mason’s perspective on the current plight of capitalism develops from his understanding of the crises that have occurred periodically in the history of capitalism. The current crisis resembles past crises in many respects, but differs from them in ways that are crucial to his central argument. The current crisis has taken shape more slowly and been resisted more successfully for a time, but will ultimately result in a more profound transformation.

Long cycles of capitalism

The historical part of the book focuses on the “long cycles” of capitalism first described by Nikolai Kondratieff. He discovered a roughly fifty-year cycle of economic activity, divided about evenly between an upswing and a downswing. He described the upswing as a period of technological innovation and high investment, followed by a period of slower growth or contraction, usually ending with a depression. Mason uses these dates for the first four long cycles:

  1. 1790 to 1848
  2. 1848 to mid-1890s
  3. 1890s to 1945
  4. Late 1940s to 2008

Each cycle has its key industries where innovation and growth are centered, such as the steam-powered factory in cycle 1, railroads and machine-made machinery in cycle 2, mass production and electrical engineering in cycle 3, and mass consumer goods like automobiles in cycle 4.

In the late 1990s, a fifth cycle began, “driven by network technology, mobile communications, a truly global marketplace and information goods.” But instead of transforming production, it has stalled out, while the previous cycle has hung on longer than normally expected. Mason’s theory of cycles tries to explain why.

A theory of cycles

In very brief form, Mason’s theory says this: During the upswing of a long cycle, capital that has built up in the financial system flows into new technologies and markets, “fueling a golden age of above-average growth with few recessions.” Because the economic pie is expanding so rapidly, achieving social peace by giving everyone a piece of it is easier. Workers who are displaced by labor-saving improvements can usually find employment in expanding industries.

At some point, the upswing peaks out. “When the golden age stalls, it is often because euphoria has produced sectoral over-investment, or inflation, or a hubristic war led by the dominant powers.” There are limits to how much capital can be invested productively in the same technologies and industries. As for “hubristic wars” I assume he means that nations foolishly squander their wealth trying to grab too large a share of the world’s markets and raw materials. I will add that although military spending can stimulate the economy in times of recession, wars have had devastating effects on many healthy economies, with the impact of World War I on Europe the prime example. “War is good for the economy” is not a very safe bet.

When  dominant industries stop expanding and profits stop rising, employers become more resistant to wage demands, and they may also try to reorganize production to replace skilled workers with lower-skilled workers and machines. Worker resistance increases as displaced workers have fewer alternatives. If profits continue to fall, “capital retreats from the productive sector and into the finance system, so that crises assume a more overtly financial form.” I take that to mean that capital that is not invested productively can only finance debt and inflate the value of stocks and other assets beyond their earnings value. Financial panics and depressions occur when the debtors default and the asset bubbles burst.

Mason thinks that traditional descriptions of long cycles focus too exclusively on waves of technological innovation (not to say those are not important), and not enough on falling profits, class conflict, and the intervention of the state. In the first three historic cycles, businesses tried but ultimately failed to maintain profits by squeezing the workers. When economic conditions and social unrest got out of hand, the state acted to facilitate the transition to the next cycle.

In each long cycle, the attack on wages and working conditions at the start of the downswing is one of the clearest features of the pattern. It sparks the class warfare of the 1830s, the unionization drives of the 1880s and 90s, the social strife of the 1920s. The outcome is critical: if the working class resists the attack, the system is forced into a more fundamental mutation, allowing a new paradigm to emerge….The history of long cycles shows that only when capital fails to drive down wages and when new business models are swamped by poor conditions is the state forced to act: to formalize new systems, reward new technologies, provide capital and protection for innovators.

The issue of falling profits deserves additional attention, but I’ll save that for when I discuss Mason’s theory of value in the next post.

The prolonged fourth cycle

Something different happened during the downswing of the fourth cycle, beginning in the 1970s. As in previous cycles, the growth in productivity slowed. The initial responses were inflationary rather than deflationary. Businesses kept giving in to the wage demands of highly organized workers, and government social spending also increased, although both wages and benefits were eroded by rising consumer prices. As wages went up faster than productivity, profits were squeezed. Business then launched a very successful attack on workers and government, blaming both of them for inflation. Globalization enabled corporations to eliminate high-wage, unionized manufacturing jobs in the developed countries, while finding new sources of revenue in the developing countries.

All this meant that profits could be maintained without transitioning beyond fourth-cycle capitalism. There was a twenty-five-year surge of productivity in the developing world, between 1981 and 2006. But in the developed countries, productivity growth continued to fall, and yet profits remained high because of stagnating wages. Inequality rose to Gilded Age levels, but until recently popular resistance has not been strong enough to force serious systemic change.

So we have been living in a strange time, suspended between an old system that no longer works for enough people and a new one that can’t quite get going. “Alongside higher profits, the overall rate of investment after the 1970s is low.” There is something odd about an economy in which capitalists make so much money while investing so little in the economic progress of their own countries. But another major transition cannot be put off forever.

A fifth cycle?

Twenty-five years ago, I taught a course on Social Change using Daniel Chirot’s Social Change in the Modern Era as a text. Chirot used long-cycle theory as a framework, and he said this about the fifth cycle he saw emerging at the time:

We can expect that the present fifth industrial cycle will gain ground, transform economies and societies, make life ever more materially comfortable, and then come to some sort of end in a half-century or so. Then, a new crisis will come, and a sixth as yet quite unknowable, industrial cycle will begin.

I gave a lecture which began, according to my notes, “Chirot may be right, but I want to raise the possibility that we are coming to the end of an era, not just a transition between cycles.” I based that suggestion on several far-sighted books of the 1980s, such as Christopher Chase-Dunn’s Global Formation: Structures of the World Economy, and James Robertson’s Future Work: Jobs, Self-Employment and Leisure after the Industrial Age.

Mason’s position is basically the same. The new cycle that has begun without yet coming to fruition represents a more fundamental threat to capitalism. That would explain why resistance is so strong, and why capitalists would prefer to export existing forms of production to other countries rather than improve upon them at home.

Continued

 

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The Price of Inequality (part 2)

December 12, 2012

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The previous post summarized Joseph Stiglitz’s discussion of the market inefficiencies that allow more inequality than is necessary to reward productive activity. In any free market, some will be more successful than others; the problem is that the winners can win in ways that erect barriers to the success of others, or impose costs on the rest of society, or take advantage of privileged access to information. The excessive inequality that results then undermines social mobility, aggregate demand, investment in public goods, and economic growth in general. Contrary to the view that less government is always better economics, Stiglitz sees an essential role for government in keeping markets fair and efficient, countering tendencies toward excessive inequality, and encouraging economic growth for the benefit of all.

In general, the policies that Stiglitz recommends flow naturally from his understanding of market inefficiencies and limitations. Where markets allow companies to capture private benefits while evading responsibility for social costs (such as environmental damage), government can restore the balance with taxes and regulation, and make sure that producers pay a fair price for access to public resources (such as oil on federal lands). Where markets tend to give unearned benefits to those with inside information (such as bankers who know that some of the securities they market have been designed to fail), government can insist on regulated exchanges with greater transparency. Where markets underinvest in public goods, government can specialize in the creation of public goods. Where markets leave a large segment of society too poor to afford the products that they offer, government can use progressive taxation and spending to stimulate aggregate demand. Where markets erect barriers to upward mobility, government can provide better access to education and health care, as well as “active labor market policies” to help workers transition to occupations in which their labor is needed. It can also impose estate taxes to keep the children of the rich from enjoying large unearned advantages over other children.

All of these things are easier said than done, for the simple reason that the same inequalities that distort the economy also distort the political process, undermining government’s ability to address the inequalities. Stiglitz calls this an “adverse dynamic” or “vicious circle,” a self-amplifying feedback loop perpetuating and strengthening social inequality.

As the wealthy get wealthier, they have more to lose from attempts to restrict rent seeking and redistribute income in order to create a fairer economy, and they have more resources with which to resist such attempts. It might seem
strange that as inequality has increased we have been doing less to diminish its impact, but it’s what one might have expected. It’s certainly what one sees around the world: the more egalitarian societies work harder to preserve their social cohesion; in the more unequal societies, government policies and other institutions tend to foster the persistence of inequality. This pattern has been well documented.

Economic elites use a variety of tactics to tilt the political playing field in their favor. They employ lobbyists to make their case, and gain access to politicians with large campaign contributions (minimally regulated thanks to recent Supreme Court decisions). They “use their political influence to get people appointed to the regulatory agencies who are sympathetic to their perspectives,” so-called “regulatory capture.” In the global economy, capital can flow toward countries with the most permissive tax and regulatory policies, and international bankers have enormous power over countries that rely on foreign capital. “If the country doesn’t do what the financial markets like, they threaten to downgrade the ratings, to pull out their money, to raise interest rates; the threats are usually effective.”

In a nominally democratic country like the United States, ordinary people can theoretically outvote the wealthy. Much of Stiglitz’s political discussion concerns the question of why they don’t do so more often, that is, why people frequently vote against their own economic self-interest. Here he draws heavily on behavioral economics, which tries to understand “how people actually behave–rather than how they would behave if, for instance, they had access to perfect information and made efficient use of it in their attempts to reach their goals, which they themselves understood well.” Economic elites benefit from the fact that “many, if not most, Americans possess a limited understanding of the nature of the inequality in our society: They believe that there is less inequality than there is, they underestimate its adverse economic effects, they underestimate the ability of government to do anything about it, and they overestimate the costs of taking action.” In addition, the wealthy use their economic power to market their ideas, cleverly framing policies that benefit the few to make them appear beneficial to all. Weapons programs that profit defense contractors are always described as good for the economy, while the same amount to protect the environment is just “wasteful government spending.”

The media play a crucial role here, either performing a public mission of informing the citizenry, or just presenting whatever programing brings in the most advertising revenue, including political advertising revenue. In the US, not surprisingly, the media underperform their public mission, leaving citizens at the mercy of the advertisers with the deepest pockets. Stiglitz sees this as another example of rent-seeking: The media get an unearned private benefit from free access to a public resource, then use it in a way that produces private profit at the expense of democratic discourse. “The public owns the airwaves that the TV stations use. Rather than giving these away to the TV stations without restriction–a blatant form of corporate welfare–we should sell access to them; and we could sell it with the condition that a certain amount of airtime be made available for campaign advertising.” If the public is too often misinformed, manipulated, and alienated from a political process that doesn’t represent them very well, that works to the advantage of the economically powerful: “If voters have to be induced to vote because they are disillusioned, it becomes expensive to turn out the vote; the more disillusioned they are, the more it costs. But the more money that is required, the more power that the moneyed interests wield.”

The result of this distorted democracy is that legislation to serve the public interest is extremely difficult to pass. The government is prohibited from bargaining with pharmaceutical companies over the price of prescription drugs, costing the taxpayers an estimated $50 billion a year. Banks have succeeded in blocking most regulations intended to protect student borrowers from fraudulent educational programs, as well as most state laws intended to curb predatory lending. Patent law protects the interests of large corporations and their lawyers, but allows them to “trespass on the intellectual property rights of smaller ones almost with impunity.” Corporate executives who perpetrate fraud are rarely penalized personally for doing so. The recent housing crisis revealed that the foreclosure laws make it easy for banks to foreclose without actually proving that homeowners owe the amounts claimed. And on and on.

The biggest battle over public perceptions is fought over the role of government in the economy, over the Reagan question of whether government is the solution to economic difficulties or government is the problem. Since the Reagan years, conservatives have had great success convincing politicians, the media, and much of the general public that conservative fiscal and monetary policies are good for the economy, even if they favor the wealthy and aggravate inequality. In fiscal policy, the conservative approach is to tax and spend less; this is supposed to help the economy by freeing up capital for private investment. (Conservatives often support increases in military spending, however, which in combination with tax cuts produce large deficits.) Stiglitz acknowledges that constraints on taxes and spending might make sense under some conditions: “Of course, when the economy is at full employment, more government spending won’t increase GDP. It has to crowd out other spending….But these experiences are irrelevant…when unemployment is high (and it’s likely to be high for years to come) and when the Fed has committed itself to not increasing interest rates in response.” Under these conditions, government can borrow cheaply and spend with great economic effect, increasing the size of the pie for all.

The government could borrow today to invest in its future— for example, ensuring quality education for poor and middle-class Americans and developing technologies that increase the demand for America’s skilled labor force, and
simultaneously protect the environment. These high-return investments would improve the country’s balance sheet (which looks simultaneously at assets and liabilities) and yield a return more than adequate to repay the very low interest at which the country can borrow. All good businesses borrow to finance expansion. And if they have high-return investments, and face low costs of capital— as the United States does today— they borrow liberally.

Stiglitz maintains that government spending can help the economy even if it is balanced by higher taxes to avoid increasing the deficit:

There is another strategy that can stimulate the economy, even if there is an insistence that the deficit now not increase; it is based on a long-standing principle called the balanced-budget multiplier. If the government simultaneously increases taxes and increases expenditure— so that the current deficit remains unchanged— the economy is stimulated. Of course, the taxes by themselves dampen the economy, but the expenditures stimulate it. The analysis shows unambiguously that the stimulative effect is considerably greater than the contractionary effect. If the tax and expenditure increases are chosen carefully, the increase in GDP can be two to three times the increase in spending.

That means that by insisting on low taxes for the wealthy and low spending on public goods, the economically powerful and their political allies are putting private gain before the public good. They are not only promoting social inequality, but they are impeding rather than facilitating economic growth.

Stiglitz is also a long-time critic of conventional monetary policy, as practiced by the Federal Reserve, the European Central Bank and the International Monetary Fund. He believes that the so-called “independent” central banks have been captured by the financial sector, so that they serve private rather than public interests. Their main focus has been on fighting inflation, a policy that has the greatest benefit for wealthy lenders (since they have the most to lose if loans are repaid in devalued currency). Central banks tend to raise interest rates too quickly during an economic expansion, cooling the economy and maintaining unemployment at an unnecessarily high level. On the other hand, in the Great Recession governments have relied on expansionary monetary policy, pumping more capital into the system by lending banks money at near-zero rates. This is less effective than an expansionary fiscal policy, since the problem is not so much a lack of capital as a lack of spending. But it’s a sweet deal for banks, who get money so cheaply that they can make a good profit even from very low-risk investments like treasury bonds, and are not required to invest it in productive enterprises or housing loans. Cheap capital also encourages companies to finance labor-saving equipment instead of employing more workers, contributing to a jobless recovery.

Stiglitz describes a system so tilted in favor of the rich as to leave the reader pessimistic about finding any way out of the vicious circle of economic and political inequality. In the end, he suggests two general routes to reform. One is that “the 99 percent could come to realize that they have been duped by the 1 percent: that what is in the interest of the 1 percent is not in their interests.” The other is that the 1% themselves come to see beyond their own narrow and short-term self-interest. Although the wealthy have become more and more insulated from the problems experienced by ordinary people, that insulation is not absolute. If the United States were to become as unequal as a Latin American oligarchy, there would be plenty of costs to go around as a result of underutilized human talent and social unrest. Even Brazil, one of the world’s most unequal societies, has been taking steps to alleviate inequality recently. No doubt Stiglitz hopes that books like his can sound the alarm and help change opinions at all levels of American society.

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The Price of Inequality

December 7, 2012

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Joseph E. Stiglitz. The Price of Inequality: How Today’s Divided Society Endangers Our Future (Norton, 2012)

As the economic fortunes of the rich and the not-so-rich have diverged in the last quarter century, opinions about wealth and inequality have also become sharply divided. The disagreement is partly over matters of fact, such as how many Americans are truly poor. But it is also a moral disagreement, an argument over who is deserving and who is not, a dispute over the moral frame in which the facts about inequality are interpreted and understood. The traditional conservative view associating economic success with moral worth is very much alive. Mitt Romney and Paul Ryan presented their own versions of it during the presidential campaign, Romney with his “47%” comments and Ryan with his “makers and takers” argument based on the philosophy of Ayn Rand. The more successful are the enterprising Americans who make things and create jobs, and surely deserve the economic rewards they receive, no matter how large. Taxing those rewards to support the less successful punishes success and rewards failure. The less successful are the freeloaders or takers who pay no income taxes but expect gifts from the government, gifts that the Democratic Party is happy to provide in return for votes. Progressives have their own moral narrative, in which the heroes and villains are reversed. The rich and powerful can reap large rewards even when they do irresponsible things, like market toxic securities or damage the environment, while working families who “play by the rules” can’t get ahead because the game is rigged against them. In this narrative the greedy rich are the real takers, and the Republican Party is the enabler that gives out gifts of subsidies, tax breaks and lax regulation in return for large campaign contributions.

Any discussion of inequality is likely to include arguments between its conservative defenders and its more liberal critics, and economists often fall into one camp or the other. If that’s all the discussion includes, it can easily degenerate into an exercise in moral vilification. Economists and other social scientists must try to go beyond the moral outrage to address researchable questions. They can ask what actual relationship exists between economic inequality and other economic variables, such as the productivity, efficiency and growth of an economy. Those who study such matters may be more receptive to one answer or another because of their moral commitments, but at least they have to put their evidence out there for others to examine and contest, so the discussion remains somewhat connected to reality.

In this book, Joseph Stiglitz makes his case that the growing economic inequality has weakened the US economy. I don’t doubt that his personal values have helped lead him to this conclusion, but he does have some strong arguments and evidence to back it up. In recent US history, the economy has grown more in periods of relative equality than in periods of relative inequality. Recent studies by the International Monetary Fund have also found a positive association between greater equality and sustained economic growth.

The first chapter describes the extent of the inequality in income and wealth. For example, the richest fifth earn more after-tax income than the other 80% of the population. Even before the financial crisis, 65% of the increase in national income was going to the richest 1%, and in the recovery year of 2010, 93% of it did. “The simple story of America is this: the rich are getting richer, the richest of the rich are getting still richer, the poor are becoming poorer and more numerous, and the middle class is being hollowed out. The incomes of the middle class are stagnating or falling, and the difference between them and the truly rich is increasing.”

Stiglitz emphasizes that this can’t be a result of global economic forces alone, since many other countries are more egalitarian: “Even before the burst in inequality that marked the first decade of this century, the United States already had more inequality and less income mobility than practically every country in Europe, as well as Australia and Canada.” Although many argue that inequality of outcomes is not a problem as long as a country has equality of opportunity, the evidence suggests that extreme inequality reduces opportunity as well. Stiglitz fears that the US will become like Latin America, the region with the greatest economic disparities, often accompanied by high levels of civil conflict, crime, and economic instability.

Throughout the book, Stiglitz contrasts the actual functioning of the economy with an idealized model based on neoclassical economics. Markets are supposed to be efficient mechanisms for aligning supply and demand. They should insure that economic activity channels available resources into the production of valued goods and services. Marginal productivity theory has said that “those with higher productivities earned higher incomes that reflected their greater contribution to society. Competitive markets, working through the laws of supply and demand, determine the value of each individual’s contributions. If someone has a scarce and valuable skill, the market will reward him amply, because of his greater contribution to output.” Stiglitz accepts the implication that some inequalities of reward are normal and inevitable. However, also implicit in the theory is the idea that markets can also mitigate inequality. Skills or products that are in high demand but short supply should command a higher price, but that price should come down as more economic actors acquire those skills or produce those products. The flow of labor toward productive activity in a freely competitive market should generate economic gains for all. Rather than being a sign of an efficient economy, extreme and persistent inequality may be a sign of rigidities and inefficiencies.

Stiglitz gives several reasons why real markets are less efficient–and less egalitarian–than the idealized model suggests. Markets aren’t fully competitive, since successful actors can use their power to erect barriers to competition. Prices may not reflect the true social value of a product, since they don’t factor in “externalities” (social costs and benefits affecting others, such as the cost of cleaning up the pollution caused by the production process). The information needed to evaluate the worth of a product or a worker may be unavailable or unevenly distributed. Such inefficiencies create many opportunities for economic actors to engage in “rent-seeking” behavior. In this economic context, the term “rent” refers to an unearned benefit one obtains without actually adding anything of real economic value. A company that holds a monopoly can raise prices without adding anything of value to the product. Multinational corporations operating in poor countries try to gain access to natural resources at bargain prices and avoid paying the environmental cost of extracting them. Corporate executives use their position to influence–and inflate–their own compensation. Marketers take advantage of a consumer’s lack of information by exaggerating the benefits of a product or concealing its defects. The trouble with idealizing the verdicts of “the market,” as if the invisible hand of the market were the hand of God, is that markets are subject to so many human limitations and deliberate manipulations. The fact that the rich can do so well, even when the economy is contracting or barely growing, leads Stiglitz to conclude that many of their fortunes are obtained by rent-seeking, not just by creating value for society as a whole.

At the lower end of the economic scale, Stiglitz acknowledges that structural economic changes have hurt many workers. The decline of manufacturing and the increased skill requirements of many jobs have decreased demand for unskilled workers, while globalization has increased the supply of such workers available to capital. In theory, displaced or low-wage labor should flow toward more productive uses, so that income or job losses are temporary. But the private market hasn’t done very well creating such new opportunities. The business leaders who are supposed to be the “job creators” seem more eager to downsize, cut wages and destroy unions than to invest in activities that would employ more workers. Part of the problem is that so many of the things America needs to do involve the creation of “public goods,” which private companies don’t find it profitable to produce. Some public goods aren’t marketable commodities at all, such as clean air (since you can’t charge people for breathing), while others can be commodified only when sold to those who can afford them, such as private education or private health insurance. But many things are good for society whether individuals can afford them or not, such as public education, public health insurance, law enforcement, infrastructure, and basic research. The private market tends to underinvest in such things, and the rich may resist public investments because that often means taxing the rich to benefit the needy. The poor are hurt both by inadequate job creation and by difficulties improving their human capital due to inadequate education and health care. Their struggles to make ends meet, including sending both fathers and mothers into the labor force to compensate for low wages, also interfere with providing stable homes and preparing their children for success. Extreme income inequality thus undermines economic opportunity and social mobility.

Economic inequality also impedes economic growth by limiting the aggregate demand for goods and services. Some of society’s wealth needs to be controlled by people who can afford to save and invest it, to provide capital for economic expansion. But in recent years, the economy has suffered from underutilized capital because of insufficient product demand. The economy would be in better balance if the rich had less to save, and the rest of society had more to spend. “It is perhaps no accident that this crisis, like the Great Depression, was preceded by large increases in inequality: when money is concentrated at the top of society, the average American’s spending is limited, or at least that would be the case in the absence of some artificial prop, which, in the years before the crisis, came in the form of a housing bubble fueled by Fed policies.” Families compensated for low wages by going heavily into debt, especially to acquire housing and educations. Predatory lenders made excessive profits by “taking advantage of the least educated and financially unsophisticated in our society by selling them costly mortgages and hiding details of the fees in fine print incomprehensible to most people.” They quickly sold the shaky loans to others so they wouldn’t be hurt by any defaults, and investment banks bundled them into overrated securities to be sold to unsuspecting investors. The bursting of the housing bubble almost brought down the entire financial system. Another form of predation was by for-profit schools that collected student loan money and provided little real education in return. The banks could charge interest in excess of the actual risks they took (since the government backed many of the loans and federal law made students liable for them even if they went bankrupt). The extraordinary growth of the financial sector was due partly to rent-seeking, an unearned transfer of wealth from the bottom to the top, rather than to fairly rewarded service to customers. [For other examples, see John Bogle’s critique of the mutual fund industry in The Battle for the Soul of Capitalism and William Black’s account of the savings & loan scandal in The Best Way to Rob a Bank Is to Own One.]

This side of Stiglitz’s analysis concerns the market inefficiencies that allow more inequality than is necessary to reward productive activity. The excessive inequality then undermines social mobility, aggregate demand, investment in public goods, and economic growth in general. One very interesting research finding is that low wages at the bottom hurt productivity more than exorbitant wages at the top help it. Low-level workers can be demoralized and alienated by their wages and working conditions, while higher-level workers may receive intrinsic benefits that make additional financial incentives like bonuses or merit pay unnecessary. Traditional economic theory assumes that each worker is a calculating individual motivated only by extrinsic rewards, and that inequalities of reward serve to optimize productivity, but more recent research and theory challenges those assumptions. Similarly, economists have argued that the market should work against discrimination, since it is in the employer’s interest to employ and promote the most talented workers, especially those whose wage expectations are depressed by discrimination by other employers. That may make sense if discrimination is merely an individual failure of rationality, but not if it’s an institutionalized tradition that is enforced by an entire dominant group and that actually damages the human capital development of the subordinate group. In the United States, entrenched inequalities have an ugly racial and gender aspect to them that makes them especially hard to rationalize.

The other side of Stiglitz’s analysis concerns the role of the government in either alleviating or aggravating the inefficiencies and inequalities of economic markets. He believes that recent government failures in this respect are another big reason for the country’s problems. “What is striking about the United States is that while the level of inequality generated by the market–a market shaped and distorted by politics and rent seeking–is higher than in other advanced industrial countries, it does less to temper this inequality through tax and expenditure programs.” That’s the topic for the next post.

Continued

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The Rise of the Creative Class (part 2)

November 28, 2012

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Richard Florida’s theory of the creative class is also a theory of urban development. He insists that “place matters”; it has, in fact, “replaced the industrial corporation as the key economic and social organizing unit of our time.” This view is in sharp contrast to the familiar argument that place matters less because of electronic communications, that “you can innovate without having to emigrate,” as Thomas Friedman has put it. Florida argues that globalization has two sides: on the one hand, the “geographic dispersion of routine economic functions such as straightforward manufacturing or service work,” and on the other hand, the “tendency for higher-level economic activities such as innovation, design, finance, and media to cluster in a relatively small number of locations.” So globalization produces both customer service centers in India and centers of hi-tech innovation in Silicon Valley and Research Triangle.

Florida sees a new “geography of class” in which a metropolitan area’s economic success depends on the class of workers it attracts. A large Creative Class is associated with economic development, a large Working Class with economic stagnation, and a large Service Class with low-wage job creation. He has developed a Creativity Index based on the “3Ts” of technology, talent and tolerance. Indicators of technology include hi-tech industry concentration, patents per capita, and average annual patent growth; talent is the proportion of workers in the Creative Class; and tolerance is measured by the share of foreign-born residents, a Gay and Lesbian Index, and an Integration Index (how well racial and ethnic groups are mixed within census tracts). The top ten metropolitan areas on the Creativity Index in 2010 were Boulder CO, San Francisco-Oakland-Fremont CA, Boston-Cambridge-Quincy MA/NH, Seattle-Tacoma-Bellevue WA, San Diago-Carlsbad-San Marcos CA, Ann Arbor MI, Corvallis OR, Durham NC, Washington-Arlington-Alexandria DC/VA/MD/WV, and Trenton-Ewing NJ.

This Creativity Index is strongly correlated with economic growth. Some critics have suggested that using a predictor like average educational level is a simpler way of accounting for an area’s success. But Florida claims that the Creativity Index has explanatory power beyond education, and that the tolerance measures in particular are good predictors of economic vitality. That’s because anyone–gay or straight, native or foreign-born, black or white–can have a good idea, and places that welcome diversity have a creative edge.

The relationship between economy and creativity is a two-way street. The economies of certain places attract the Creative Class by creating more jobs for them. But increasingly, the creative lifestyles of certain places attract creative people, whose talent generates economic innovation and growth. In other words, people don’t just live where their job is; they seek out an area that offers an attractive lifestyle and look for work there. Gallup’s “Soul of the Community Study” found that the main qualities that attach people to a place are not basic services or jobs, but “social offerings, such as entertainment venues and places to meet, openness (how welcoming a place is) and the area’s aesthetics (its physical beauty and green spaces).” Cities that can provide those things will be the ones that thrive.

How does a city enhance its appeal to the Creative Class, build a more creative community, and participate in future economic growth? Florida, who defines himself as politically independent, fiscally conservative and socially liberal, doesn’t recommend either a laissez-faire market approach to development or a top-down centrally planned approach. He wants to see walkable, pedestrian-scale communities encouraging spontaneous interaction, not more skyscrapers and stadiums. He sees a role for government, but one that is more facilitative than controlling:

How do you build a creative community? Certainly not all at once and from the top down—most of what defines and shapes creative communities emerges gradually over time. But that does not mean that strategy and public policy do not matter….Smart strategies that recognize and enhance bottom-up, community-based efforts that are already working can help accelerate the development of creative communities.

Florida has also developed a global version of the Creativity Index in order to make international comparisons. Sweden ranks first on this measure, followed by the United States, Finland, Denmark and Australia. In general, countries that score high on the Creativity Index are also high in national income, proportion of workers in the Creative Class, and social equality. The United States is somewhat exceptional, however, in having an unusually high level of social inequality and a rank of only 27th in Creative Class share. This strongly suggests that this country maintains more of a class barrier to entry into the Creative Class, a barrier that Florida regards as a “great stumbling block” to future prosperity.

The rise of the Creative Class is associated with a new geographic sorting process that in the US at least has aggravated rather than alleviated old social divisions. It is no longer just a matter of successful white people in the suburbs and less-successful minorities in the inner city. In five of our largest metropolitan areas (New York, Washington, Boston, Chicago, and San Francisco), over two-thirds of urban core residents have college degrees. What is happening is that members of the Creative Class are clustering in certain cities, while members of other social classes can no longer afford to live there. Meanwhile, suburban poverty is growing rapidly. This is changing our politics as well as our geography. Increasingly, the declining working class is more conservative, while the growing Creative Class is more liberal. (One wonders what Marx would make of that!)

From Florida’s perspective, the key to a country’s global competitiveness is the development of the creative potential of all its citizens. In the United States, this requires a new social compact:

This Creative Compact would be dedicated to the creatification of everyone. It would expand participation in the Creative Economy to industrial and service workers, leverage new private and public investment in human infrastructure, innovation, education, and our cities, while reaffirming and maintaining America’s long-held commitment to diversity. It would restructure education, moving away from rote learning and overly bureaucratic schools and creativity-squelching standards. It would set in place a new social safety net that invests in people and provides mobile benefits that follow workers from job to job. It would recast urban policy as a cornerstone of economic policy and ensure that America remains a beacon for the best, brightest, most energetic and ambitious people in the world.

Florida doesn’t get into very specific policies here, but he does suggest six principles to guide us:

    • Invest in developing the full human potential and creative capabilities of every single human being [for example, upgrade the quality and skills of service jobs]
    • Make openness and diversity and inclusion a central part of the economic agenda
    • Build an education system that spurs, not squelches, creativity
    • Build a social safety net for the creative economy [for example, make health and retirement benefits more portable rather than tied to a particular employer]
    • Strengthen cities; promote density, clustering, and concentration [as opposed to suburban sprawl]
    • From dumb growth to true prosperity

If these principles seem too much at odds with present conditions to be realistic, it’s worth remembering that many European countries have gone farther in some of these directions than we have.

A high-road path to prosperity–an innovative and competitive economic system that causes far less severe socioeconomic divides than we are experiencing today in the United States–is not only possible, it is already in place in some of the world’s most advanced and competitive nations.

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The Rise of the Creative Class

November 26, 2012

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Richard Florida. The Rise of the Creative Class, Revisited (New York: Basic Books, 2012)

This is the tenth anniversary edition of Florida’s book, and it is a major updating of the original. His take on contemporary social change was quite controversial when it first appeared, but he believes that developments of the past ten years have made his central argument even stronger. Florida believes that we live in an increasingly creative global economy, led by a rising “Creative Class.” I should probably say that I start out with a little bias toward this kind of thinking. My favorite philosopher, Charles Hartshorne, builds his version of Whiteheadian process philosophy on the idea of “creative synthesis,” (see his book of that name), seeing creativity as the “the ultimate abstract principle of existence.”

Florida asserts that “every human being is creative,” and he believes that human progress depends on fulfilling the creative potential of more and more people. But as things stand now, creative work is found primarily in certain occupations, and it is their workers who constitute the rising Creative Class:

The distinguishing characteristic of the Creative Class is that its members engage in work whose function is to “create meaningful new forms.” I define the Creative Class by the occupations that people have, and I divide it into two components. What I call the Super-Creative Core of the Creative Class includes scientists and engineers, university professors, poets and novelists, artists, entertainers, actors, designers, and architects, as well as the thought leadership of modern society: nonfiction writers, editors, cultural figures, think-tank researchers, analysts, and other opinion makers….Beyond this core group, the Creative Class also includes “creative professionals” who work in a wide range of knowledge-intensive industries, such as high-tech, financial services, the legal and health care professions, and business management. These people engage in creative problem solving, drawing on complex bodies of knowledge to solve specific problems.

The Creative Class embraces about one-third of today’s labor force. The Working Class, including such occupations as production, construction, mining, installation and repair, and transportation, has declined from about two-fifths to a little more than one-fifth of workers. In Florida’s scheme, the largest group (45%) is the Service Class, including such occupations as health care support, food service, cleaning, low-end sales and office support. Although not as large as the growing Service Class, the Creative Class is “dominant in terms of wealth and income, with its members earning nearly twice as much on average as members of the other two classes and as a whole accounting for more than half of all wages and salaries.” It is also the “norm-setting” class of our time: “Individuality, self-expression, and openness to difference are favored over the homogeneity, conformity, and ‘fitting in’ that defined the previous age of large-scale industry and organization.”

The Creative Class is significant beyond its numbers because the emerging global economy is powered primarily by creativity. This is similar to saying that it is an “information economy” or “knowledge economy,” but Florida prefers the first way of looking at it because he sees knowledge and information as “merely the tools and the materials of creativity.” He also advises against reducing the Creative Class to the most formally educated population, since only about six in ten workers in creative occupations have college degrees.

Florida is no elitist, since he deplores the class divisions and work organization that have limited the creative contribution of so many workers. He believes that lower-level jobs can be upgraded; in fact, he says that “factory workers today are coming to be valued more for their ideas about quality and continuous improvement than for their ability to perform routine manual tasks.” He doesn’t, however, address the potential contradiction between defining certain occupations as the creative ones, while at the same time looking for creativity in work of all kinds. Is an innovative production worker in the Creative Class or not?

A central feature of work today is the tension between the emerging emphasis on creativity and the traditional constraints of large, bureaucratic organizations. For example, traditional organizations expect workers to obey orders and be motivated by extrinsic rewards. In the Fordist model of industrial organization, workers set aside any expectations of worker control in exchange for better pay and benefits. Creative workers, on the other hand, look for challenges and personal responsibility in their work and are motivated by intrinsic rewards. (Having just read Diane Ravitch’s book about school reform, I can’t help noticing that the treatment of teachers in “No Child Left Behind,” with its emphasis on standardized instruction and test-based merit pay, is a great example of how not to manage creative people.) Many young people would prefer a low-paying creative job to one that pays better but is rigid and boring.

Florida tries to arrive at a balanced view of the new individuality and flexibility in work arrangements. Some observers see a “free-agent paradise” where individuals are free to create work to suit themselves, but working without the support and job benefits of a traditional organization can be a hard road. Others have described a worker hell where employers can make brief but intensive use of workers and then toss them aside at the end of a project. Creative work can have some downsides, such as long hours, short deadlines, less job security, and more personal responsibility for skill acquisition, career development and retirement planning. But it also encourages a more horizontal form of organization, in which each person is more of a contributing peer instead of a wage slave.

Members of the Creative Class not only work differently; they live differently. One thing their work and their lifestyles have in common is a way of experiencing time. They often feel pressed for time, a situation that John Robinson and Geoffrey Godbey call “time famine,” but they try to use their time as fully as possible. That can mean experiencing life more intensely, but it can also mean trying to do too many things at once. Their lifestyles are characterized by a “passionate quest for experience,” which gives the creative person something to draw on when a familiar way of doing something no longer suffices. As consumers, creative people often reject what is too standardized or packaged or commodified, often being drawn instead to the “organic and indigenous street-level culture” to be found in multiuse urban neighborhoods. If all of life feeds one’s creativity, then the boundary between work and leisure can become very blurry. And so can the distinction between the traditional work ethic and a more countercultural, bohemian ethic:

The Protestant work ethic supposes that meaning is to be found in hard work. We are put here to serve others and we serve them by making ourselves productive and useful. It is our duty to work….

The bohemian ethic is more hedonistic. It says that value is to be found in pleasure and happiness—not necessarily in gross indulgence or gluttonous excess, but in experiencing and appreciating what life has to offer. The bohemian ethic has its own form of discipline, which is largely aesthetic….

Bohemian values met the Protestant work ethic head-on, and the two more than survived the collision. They morphed into a new work ethic—the creative ethos—steeped in the cultivation of creativity….

Cultural icons in past eras tended to fall into two general types. The first was the romantic, rebellious outsider…rebels, with or without causes, but questing against the grain….The other type was the straight-arrow good guy…builders and problem solvers: exemplars and upholders of the Protestant ethic, welcome in any living room or boardroom. And then, in a unique and unprecedented role, came the geek. Neither outsider nor insider, bohemian nor bourgeois, the geek is simply a technologically creative person.

Continued

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