Democracy and Prosperity (part 4)

July 22, 2019

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Previous posts on Iversen and Soskice’s Democracy and Prosperity have discussed the symbiotic relationship between democracy and capitalism, democratic support for capitalism during the revolution in information and communications technology, and variations among advanced capitalist democracies (ACDs) in their original path to democracy, electoral systems, economic inequality and educational opportunity.

This final post will discuss three challenges facing ACDs today: global financial instability, populism, and artificial intelligence/robotics. The focus will be on the United States as a country with a relatively weak and politically fragmented labor movement; a two-party, majority-rule electoral system; and a recent trend toward high inequality and low social mobility.

Global financial instability

The financial crisis of 2008 occurred around the time that “governments were implementing the broad set of reforms that we have argued created the foundation for the knowledge economy.” That raises the question, “If the reforms were intended to produce prosperity, how did the crisis happen?”

Iversen and Soskice focus on the fact that different democracies responded to the opportunities presented by technological change by promoting different segments of their economies. While Germany and Japan promoted their “high value-added export sectors,” the U.S. and U.K. promoted their “high-risk financial sectors.” In the U.S., loose financial regulations allowed highly leveraged financial institutions (HLFIs) to accumulate high-risk assets such as bundles of shaky mortgages. Americans became global debtors, consuming more than they produced, while exporting countries became global creditors. This could work because creditor nations were willing to accept payment for their goods in dollars and then lend those dollars back to us, often providing “short-term loans to the HLFIs to cover the acquisition of a large proportion of the risky assets–that is, securitized loans–that financed the consumption.” Government fiscal policy sustained the imbalance by running deficits–also partly financed by foreigners–spending more dollars than it took out in taxes. Government too thus enabled Americans to consume more than they produced.

The market value of risky financial assets collapsed once debtors became overextended and started to default, triggering the global financial crisis. Although the global economy has recovered–more or less–from the Great Recession that followed, the fundamental imbalance remains, portending additional instability in the future.

How could the U.S. economy be put on a more solid footing? If all that the government would do is balance the budget by cutting spending, the result might only be lower incomes and economic contraction, without a real increase in national production. Sustainable economic growth may require both more private investment in productivity-enhancing innovations and public investment in education and training. However, such changes may lack the support of capitalists who are already making money accumulating financial assets they think are sound, or those workers who already have good educations and incomes.

Populism

The authors define populism as:

…a set of preferences and beliefs that rejects established parties and elites, that sees established politicians as gaming the system to their own advantage, and that at the same time sees the poor as undeserving of government support. Above all it opposes immigrants, who are always counted among the undeserving…,and it rejects the cosmopolitan outlook associated with the rising cities in favor of the traditional family, conforming sexual orientations, and nationalism.

The authors see the re-emergence of populism as the most important shift in politics of the last forty years. They see growing economic inequality, falling social mobility, and the aftermath of a major economic crisis as especially conducive conditions. They find populist values especially widespread in democracies relatively low on educational opportunity, such as the United States, South Korea, Japan and Italy.

The adherents of populism are usually members of the “old middle classes,…those who have experienced stagnating wages because of skill-biased technological change, outsourcing, or import competition.” Although populism is not simply a backlash against cultural changes like racial integration, feminism, or gay rights, it does have a cultural dimension that is related to economic change. The urban “agglomerations of knowledge” that are at the center of the new economy encourage a “tolerance of diversity and cosmopolitan values.” The industrial work ethic that encouraged simple conformity and submission to authority has given way to a more flexible lifestyle, one that is open to new ideas wherever they come from. But workers who lack the education and income to live in the cities remain in–or move to–smaller towns containing old middle-class enclaves. There they practice “a nativist version of the old social contract, which is based on notions of working hard…, obeying the rules, observing traditional family values, and attachment to the nation.” They may become encapsulated, and feel both economically and culturally devalued outside of those enclaves.

In electoral systems with proportional representation, populists can achieve influence by forming a minority party, just as socialists often do. In a majoritarian system like the U.S., populists need the support of a major party, and they have currently found it in the Republican Party. Iversen and Soskice see populists as a minority even there, and they do not explain why so many Republicans would find common ground with Donald Trump. I think it’s because Republican economic policies are increasingly blamed for growing inequality–their previous presidential candidate ran on trickle-down economics and lost–and they have increasingly appealed to white nativists and Christian conservatives in the hope of saving their Reagan-Bush era majority.

The authors do not regard populism as a serious threat to the technologically advanced economy or the democratic state, for several reasons:

  1. Populist economic resentments are directed less at the advanced economy itself than at poor people and immigrants, who I would say get unfairly blamed for middle-class status anxiety;
  2. Too many people are benefiting from economic and cultural change to give the populists a sustained majority;
  3. “Populism can be readily undermined by public policies designed to open educational opportunities for more people.”

I suspect that mainstream political parties will need to address the legitimate opportunity concerns that are fueling populism, but also repudiate many of its reactionary and undemocratic sentiments. If a major party can remain popular while doing neither of those things, as the Republicans are attempting, then democracy is in more trouble than this book acknowledges.

Artificial intelligence and robotics

The revolution in information and communications technology is only in its early stages. Further transformations of work and economic organization are to be expected, especially in the areas of artificial intelligence and automated mechanical systems.

Many of those who try to anticipate further change are technological optimists but social pessimists. Writers such as Martin Ford (The Rise of the Robotshave a very expansive view of what AI can do, but are very worried about the prospects for human displacement and unemployment. On the other hand, Robert Gordon (The Rise and Fall of American Growth) sees information and communication technologies as only modest contributions to the history of economic change, not transformative enough to make huge difference to human work or productivity.

Iversen and Soskice take an intermediate position. They do think that new technologies can substantially change how work is done, but they stress their potential to complement human labor rather than substitute for it. As they pose the issue, “[I]f AI and robots can replicate the cospecificity of skill clusters by essentially generating de novo the knowledge that otherwise emerges from human inter-action and exchange of ideas, then educated workers and technology would no longer be necessary complements to technology.” What computers do best is implementing algorithms, that is, slavishly following a routine that humans have already come up with. But “a key function of decentralized production networks is to develop new solutions to complex problems in uncertain environments. The objective of innovation is to develop new algorithms, as opposed to merely optimizing old ones.”

Only when and if computers can be taught to think as creatively as humans can we speak of massive substitution rather than complementarity. The authors don’t even rule out a merger of humans and machines into a new species through bioengineering, but such dreams seem a long way off.

In the meantime, workers will increasingly need the education and skills to work with the machines. There will be winners and losers, but ultimately the results will depend on democratic politics, not just technology.

This points to an optimistic conjecture: even as new technology replaces more jobs, the advanced sectors are location-specific and can support policies that ensure broad sharing of the benefits of a more productive economy based on broad, although never all-encompassing, electoral coalitions.

What those coalitions can demand is public investments in human capital to make citizens productive contributors to the knowledge economy. The authors see that as the key to sustaining the mutually beneficial relationship between capitalism and democracy. “What ultimately makes democratic capitalism resilient in the face of technological change and the rise of the populist challenge is the continued expansion of education combined with opportunity in the advanced sectors.”

Even if the number of workers displaced by technology becomes very large, democratic politics could demand a new form of welfare state, not to pay people not to work, but to support them in meaningful forms of work that are not rewarded by the market. Maybe they could stay home and care for their children, and yet share the benefits of a high-productivity, automated society, because society agreed that they deserved to.


Democracy and Prosperity

July 17, 2019

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Torben Iversen and David Soskice. Democracy and Prosperity: Reinventing Capitalism through a Turbulent Century. Princeton: Princeton University Press, 2019

The authors are professors of political economy, Torben Iversen at Harvard and David Soskice at the London School of Economics. Their focus is the relationship between capitalism and democratic government in the most advanced capitalist democracies (ACDs).

The authors complain that too much of the recent literature describes that relationship too pessimistically, emphasizing the potential of capitalism to undermine democracy by generating too much inequality. In particular, they summarize Piketty’s Capital in the Twenty-First Century as arguing that “the power of capital to accumulate wealth is governed by fundamental economic laws which democratically elected governments can no longer effectively counter. If they try, capital just moves somewhere else.” This may be a little unfair to Piketty, since he does look to democratic government to curb wealth accumulation: “Although the risk is real, I do not see any genuine alternative: If we are to regain control of capitalism, we must bet everything on democracy–and in Europe, democracy on a European scale.” Nevertheless, Piketty does not seem entirely confident that democracy is up to the task, whereas Iversen and Soskice believe that it is.

A symbiotic relationship

Looking back at the last hundred years, the authors argue that “the advanced capitalist democracies, for all their instability and social problems not least at present, have been remarkably resilient and effective over this whole period.” The key to this resilience is the symbiotic relationship between democracy and capitalism. The democratic nation-state pushes advanced capitalism forward, and advanced capitalism reinforces democracy.

The first reason for this symbiotic relationship is that the state has to be strong enough to perform several crucial roles in the economy, if capitalism is to remain vibrant and innovative. The state must require businesses to engage in fair competition, as opposed to tolerating self-serving monopolies. It must require labor to moderate its demands and cooperate with management initiatives. It must invest in such public goods as education, research and infrastructure. It must negotiate changes in the rules to respond to shocks to the system, such as technological change.

A second reason for a symbiotic relationship is that the democratic electorate expects political leaders to manage advanced capitalism effectively. They have a stake in its success, and they expect results that they can see in their own lives. This is especially true of the citizens that the authors call “decisive voters.” These include the employees of advanced capitalist companies, who are usually well-skilled. In addition, they include many voters with aspirations for themselves or their children for upward mobility.

[T]he aspirational vote has a particular relevance in relation to advanced capitalism. By contrast to status-ordered societies, growth in the demand for skilled and educated labor is core to the idea of advanced capitalism as a result of technological change….Hence, while aspirational individuals, parents, and families have always existed to some extent, it is particularly associated with advanced capitalism.

Rather than simply being divided into the opposing interests of capital and labor, advanced democracies have a large middle class of actual or potential beneficiaries of capitalism. They support the system to the extent that they perceive themselves to be benefiting from it. But their incomes are lower than those of the principal owners and managers, and they depend more on public programs and services like public education and Social Security. “Accounting for more than one third of GDP on average, wide-ranging tax-financed middle-class programs ensure that those with high and rising incomes share some of their wealth with the rest of society.” The large middle class is a moderating influence. It doesn’t want the government to radically redistribute wealth from the rich to the poor, but it doesn’t want it to let the rich hog the wealth either.

A third reason for the symbiotic relationship is that capital remains “geographically embedded” within nation-states. A common initial reaction to global electronic communications was that geography might not matter much anymore. Work could be done anywhere, perhaps far from established urban centers. Instead, “knowledge-based advanced companies, often multinational enterprises (MNEs) or subsidiaries…are increasingly immobile because they are tied to skill clusters in successful cities, with their value-added embedded in largely immobile, highly educated workforces.” Skilled workers have many good reasons to locate close to others with similar or complementary skills, especially when skills are acquired through face-to-face interaction rather than from some manual. And companies that depend on multi-skilled workforces cannot easily move their entire operation elsewhere, although they can more easily outsource particular low-skill tasks. The dependence of capital on geographically embedded skilled labor gives national and even local governments some power to regulate capital, as well as some incentive to invest in human capital development for the good of the nation or other geographic territory.

For these reasons, democratic governments promote advanced capitalism, but also try to manage it in the interests of a large class of voters. Capitalism thrives, but democracy also works to the extent that voters get a good return on their political investments.

Challenges to the symbiotic relationship

The symbiotic relationship is not a static equilibrium. Capitalism is inherently dynamic, and democracy has to be flexible in order to manage it in the public interest.

Technological change is an important driver of economic change, but not in a simple deterministic way. The authors see a new technology as a political opportunity, something that can be managed for the good of the many, although not usually the all. How political responses to the revolution in information and communications technology (ICT) have shaped the knowledge economy is a central concern of the book.

Another challenge for democratic societies is the recent increase in economic inequality and the decline in economic mobility, which is especially pronounced in the United States. “We see the division between the new knowledge economy and…low-productivity labor markets as a new socioeconomic cleavage that has crystallized along educational lines and a deepening segregation between successful cities and left-behind communities in small towns and rural areas.” The rich have been getting richer and the poor have been left behind, but the impact on the middle class is more complicated. A modest reduction in their share of national income has been accompanied by an absolute increase in income, especially in the more educated middle class. The ultimate impact on democracy is yet to be determined.

A third challenge is political populism, an anti-establishment reaction from those who feel threatened by economic and cultural change. Whether it is a powerful enough reaction to do serious damage to either advanced capitalism or democracy is another issue to be considered. The authors doubt that it is.

Maintaining the equilibrium

Iversen and Soskice acknowledge the tension between democracy and capitalism. “One is based on a principle of equality (‘one person, one vote’), while the other is based on a principle of market power (“one dollar, one vote”). In practice, what democratic electorates support is neither an absolute economic equality inimical to capitalism nor a monopoly of market power inimical to democracy.

“Democracy has a built-in mechanism to limit anti-systemic sentiments.” Voters with a stake in capitalism support the freedom of capitalists to invest in profitable enterprises and keep a lot of their profits, but voters also have a stake in the extension of opportunity so they can earn a good share of the economic benefits.

The historical experience has been that joining the ranks of the advanced capitalist democracies is not easy. Many countries have gotten stuck in a system with powerful capitalist enterprises but weak governments, in which politicians are paid off to protect firms against market competition. On the other hand, where advanced capitalist democracy has become established, it has so far proved to be highly resilient. A long-run perspective on ACDs supports an optimistic view, one that is not too dismayed by recent increases in inequality and reactionary populism.

The next post will discuss the emergence of the knowledge economy and the role of government in that transition.

Continued