For the top 10 percent of UK earners, wages increased by roughly 400 percent between 1978 and 2008. For the bottom 10 percent the increase was less than 30 percent. In the USA, income polarization has been more startling. Why is this happening? One reason is globalization. The other is technology.
Could we revert to a feudal society where a tiny slice of the population owns almost everything and lives in isolated and secure splendor, while the vast heaving mass of humanity exists in a constant state of hand-to-mouth uncertainty and desperation? In the UK, a survey found that FTSE 100 CEO pay increased by 32 percent during 2010. Compare this to the 27 percent rise low-income earners received in the 30 years from 1978 to 2008, even though overall UK GDP doubled over the same time period. The rewards enjoyed by the top of society are often immensely different than those at the bottom and the danger is that we are creating another “let them eat cake” society.
“The more the division of labor and the application of machinery extend, the more does competition extend among the workers, the more do their wages shrink together.”
Karl Marx, sociologist, economist, philosopher and revolutionary
The global effect Income polarization, and to some extent stagnating real wages, can be explained by globalization and connective technologies. If you have a skill that’s in demand, the market is now global and many of the physical barriers that would have prevented you from competing globally have fallen away. For example, if you’re a talented soccer player living in Latvia you’re now free to move elsewhere in Europe—and possibly farther—which 10 percent of the Latvian population have now done since joining the EU. Furthermore, as a talented sportsperson, your salary is now dictated by global, rather than local, market forces.
Similarly, if you manufacture a product that people want, you’re nowadays less constrained by geographical factors, which can mean bigger financial wins, but the converse is also true. If you have a skill that can be easily outsourced or automated—or you have an outdated skill or no skill at all—you are now more vulnerable.
Taken to the extreme, this situation could eventually mean that self-perpetuating elites are created in certain fields. Entry to such an elite would be almost impossible unless you had the money to afford a certain kind of education (which you wouldn’t have unless you were already part of the elite). Perhaps technology will go this way?
Larry Summers, a Harvard economist, says that the economic boom that ended in 2008 was different from previous economic booms in one fundamental way. According to Summers, US employees usually receive around 75 percent of corporate income, but since 2001 this has fallen to 25 percent. What this means is a huge disparity between the fortunes of labor and capital over recent years. Corporations have prospered, thanks largely to cost-saving technology and outsourced labor, but prosperity for ordinary households has been an illusion based on cheap borrowing.
Add to this weakened trade unions and declining social mobility and it’s possible that many of the features of modern society that people in developed economies have taken for granted for a generation or two may start to go backward in the future, especially in Western nations where indebtedness is impacting on the provision of basic public services such as education, health, policing and transport. At the very least, income—and with it opportunity—is likely to polarize, along with the distribution of human dignity and humiliation.
“The greatest wealth is to live content with little.”
Plato, Ancient Greek philosopher
Competing with everyone Stagnating real incomes largely stem from a global power shift and outsourcing from West to East plus the effects of automation. And if you think this is problematic now, just wait a few more years. In the West people are used to the East setting prices for relatively inexpensive consumer goods, but what will it be like if the region sets the global price for labor too? A likely response to all this, especially in the USA and Europe, is economic protectionism. But bucking global trends is unlikely to work over the longer term. One solution would perhaps be to educate people to accept the low-paid jobs that remain locally. A better solution would be to give people better skills, especially in new industries or in industries that do not automate or travel well.
What is the most likely outcome? A dystopian European future might be that excessive environmental regulation, workers rights’ and social policies add costs to already globally uncompetitive industries, and taxation will soar to balance the books. A middling scenario might be that workers acknowledge that they will have to work for longer, with poorer job security, just to make ends meet. In both scenarios, social mobility would presumably decrease, while social unrest and anger would rise.
A best-case scenario (for the West) might be that the East finds it harder than expected to reproduce Western-style innovation and entrepreneurship and demographics cause areas of the East to run out of low-cost labor. Labor costs would then rise to similar levels globally, while the West retains an advantage in value-adding industries. In the middle of this muddle one thing does seem clear. Free-market capitalism works only when rewards are shared, at least in proportion to effort.
the condensed idea
The rich will get richer
| timeline | |
|---|---|
| 2011 | Occupy Wall Street protests about income distribution and fairness |
| 2013 | Stagnating incomes in West and North compared to East and South |
| 2014 | Hackers target payrolls of investment banks |
| 2017 | Muggings in Notting Hill known as “income tax” |
| 2022 | Maximum of 100:1 salary ratio widely adopted in Fortune 500 companies |
| 2039 | 1 billion US dollar millionaires globally |
| 2080 | World’s first trillionaire |