Monthly Archives: June 2016

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Brexit, Trump, and Capital in the Twenty-First Century

With the recent Brexit vote, and with Trump the presumptive Republican nominee, there have been a number of comments and op-eds comparing the two and talking about the apparently inarticulate rage being expressed by the “unemployed working class” through this political process. The underlying assumption seems to be that sure, maybe these people have the right to be angry at the way they are being failed by the current economic/political system, but isolationism and nationalism are not the answer. It’s not like it actually kind of worked to pull the German economy out of the Great Depression.

But still, let’s take a closer look at why so many people are feeling disenfranchised; maybe by understanding the problem we could, for instance, come up with a damned workable solution. I dream small. This project, of course, takes us right into the arms of Thomas Piketty’s landmark economic work Capital in the Twenty-First Century.

The book’s central thesis is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability.

I disagree with this thesis, at least in part. It did, however, make me think about the problem in a different way. So let’s take a look at capital again, but from a more micro-economic perspective, and with a more Bourdieu-ian twist.

Personal Capital in the Twenty-First Century

Personal Capital, as I will use it here (not a standard definition, I know), is all the inputs to the function defining an individual’s earnings expectations in the short and medium term. This includes mostly obvious things like labour, education, and money-in-the-bank. Also note that there is a “break-even” level for this capital (kind of a natural poverty line) at which point the individual becomes financially self-sustaining within the economy. Individuals above this line are in a positive feedback loop; they earn more than they need, and since money is a form of personal capital, that increases their expected earnings even more.

The first part of my thesis, such as it is, is that people in this state tend to be happy. Even if you’re not rich in any absolute or relative sense, if you’re above that break-even line growth occurs, and your life gradually improves. I argue that the current political unrest is due to the fact that more and more people are dropping below this line. The question becomes: why?

The Relative Value of Labour

Consider the different forms of personal capital as goods in a meta-market, trading against each other. From this perspective, what has changed over the last couple of generations since the second world war? The answer is pretty obvious: the value of unskilled labour has dropped precipitously. Technological automation and a glut of supply from third-world countries have conspired to drive the value of unskilled labour into the basement. Additionally, the value of a college degree has also dropped, though not as sharply and hardly at all in some fields.

This makes it pretty obvious why so many people today are dropping below the break-even line of personal capital; it’s not that they have less capital, but that the capital they have (labour potential and education) is simply less valuable.

The Boomer-Millennial Divide

It has become almost tautological on the internet that baby boomers will whine and complain about how kids today would be doing just fine if they were willing to put in an honest day’s work, and how it’s their own damned fault. Millennials of course put the blame on the boomers; they are working hard and would be doing just fine if the boomers hadn’t ruined politics/the environment/the economy/the world. This conflict is actually a fairly natural one.

In the age of the boomers, labour was quite valuable. A confluence of factors drove the value of labour up to the point where individuals could sit comfortably at or above the break-even point, just on the value of their natural labour. Boomers really could make a healthy, happy, constantly-improving life for themselves just by working hard. They see millennials not succeeding and assume that they can’t be working as hard.

Of course in today’s market, that assumption is no longer true. Labour is so much less valuable that without some extra booster shot of personal capital (maybe a trust fund, or an expensive education in certain fields like hard science), the value of an individual’s natural labour is not enough to let them break even. They kill themselves to make ends meet, but with no hope of their situation ever really improving (they don’t have the positive feedback loop of capital growth working for them) it is no wonder they become disenfranchised. Those presently losing their jobs to foreign labour are in the same boat.

Finding Solutions

It seems then, that the solution to this recent unrest would be to bring as many people as possible back above this break-even point, giving them something to work for and hope for the future. But what do potential solutions actually look like for increasing the level of Personal Capital? Well, to me the obvious ones fall into three categories:

  • Drive up the value of the capital that people already have (primarily labour).
  • Provide people with additional capital such as education.
  • Reduce the break-even point so that existing levels of personal capital are sufficient.

With all this as perspective, the isolationist/nationalist solution isn’t actually all that insane. By putting stringent limits on immigration and trade, that greatly reduces the supply of labour, thus driving up the value of labour once more. Labour is the one piece of capital that everybody already has, rich or poor. It’s not really clear to me if this would be sufficient on its own to return us to the boomers’ golden age, but it will certainly move the needle in the right direction. The “hidden” cost, of course, is all the other terrible side-effects which tend to come with isolationist/nationalist policies. Let’s try and avoid a third world war, shall we?

So what other solutions are there that are less likely to destroy the world? Providing people with a basic income is a pretty straight-forward way to provide people with additional capital. No long-term large-scale system has yet been implemented, but the pilots look promising. Reducing the cost of higher education is also an obvious way to distribute additional (educational) capital.

Unfortunately, it’s not obvious to me how to pay for many of these socialist solutions. Since tackling the second point (providing more capital) is expensive and politically infeasible, and tackling the first point (driving up the value of labour) tends to actually hurt the economy globally in the long run, what about the third point? How do we reduce the break-even point of personal capital?

I don’t know.

Inequality, Brexit, and Trump

Bringing this discussion back to the original topics, I want to make a couple of points.

My primary point of disagreement with Piketty and many modern Bernie-Sanders-esque leftists is that it is not unequal distribution of wealth that is driving the present social unrest. It is quite possible for vast inequality to exist in a system where the majority of people are still above the break-even point of personal capital. I predict that such a scenario would be peaceful, and that people would be generally happy.

It is also quite popular among these same modern leftists to look at the people voting for Brexit and Trump and assume they must be insane to be voting for policies which are not in their own best interests. I disagree again. The policies being presented here are legitimate solutions to the problem these voters face. You may disagree with the trade-offs they are willing to make, but until you’ve walked a mile in their shoes, judge not.

Finally, what do I propose we do about it? What political and economic stance does this essay actually lead me to endorse? Again, I don’t know. There is no clear-cut winning answer that I have yet found.

I’m going  to keep looking.