Discussion Paper

No. 2017-43 | July 10, 2017
Technological change, inequality and the collapse of the liberal order
(Submitted as Global Solutions Paper)

Abstract

We are witnessing the start of a deep and prolonged political convulsion. This convulsion is caused by the impact of technological change on how wealth is generated and distributed in our societies. Since the 1970s advanced economies have seen a strong productivity increase and stagnant labor income. We believe this should be described as a major breach of our social contract. It is leading to the stagnation of income of the Middle Class, growing inequality and, ultimately, a radicalization of our politics. Unless the cause of this is properly diagnosed and the underlying drivers addressed head on we are bound to see a worsening of the convulsion. Here the paper analyzes technological change, its key cause and propose a series of bold experiments that countries should undertake in order to develop a new social contract with its citizens. The risk of doing nothing involves a long period of uncertainty and convulsion as well as the likelihood that little is achieved in tackling the underlying problems.

JEL Classification:

J24, J31, D72

Assessment

  • Downloads: 279

Links

Cite As

Carlos Lastra-Anadón and Manuel Muñiz (2017). Technological change, inequality and the collapse of the liberal order. Economics Discussion Papers, No 2017-43, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-43


Comments and Questions


Anonymous - Comments on the discussion paper "Technological change, inequality and the collapse of the liberal order"
July 21, 2017 - 15:09

I read this paper with interest, given the relevance of the topic. Nevertheless, the treatment of the topic seems superficial (at some points it reads more like the manifesto of a political program than like a piece of research) and based on a number of popular conceptions that are either ...[more]

... unsupported by the evidence or just factually inaccurate. For example:
1. The paper states “since the 1970s advanced economies have seen a strong productivity increase and stagnant labor income”, but in fact productivity growth in nearly every advanced country has consistently slowed down precisely since the early 1970s (this is easy to check for example with the Penn World or the EU-KLEMS databases). Technology progress may be spectacular on the surface but, as Robert Solow quipped already in 1987, “You can see the computer age everywhere but in the productivity statistics“; in fact, the issue of slow productivity growth is at the core of the “secular stagnation“ hypothesis that Lawrence Summers (2014) put forward and that Paul Krugman, Barry Eichengreen, Olivier Blanchard and others have subsequently analyzed.

2. The paper recommends investment in education, but provides no evidence that such an investment would actually help to address the issue. In fact, to some extent it contradicts itself, because it highlights that the premium to university degrees has been flat since about 2000 (page 3) and that the middle professional ranks that would logically need the extra education are being hollowed due to new technologies (page 4), so it is not clear why one would invest in creating additional supply when there is no evidence of supply shortage (and the statement on page 6 that the investment ought to be in “the right kind of education” is simply hollow when it is not clear either what such “right” education is or whether it would fare any better than today’s standard)

3. The paper also recommends raising taxes on capital to finance government income redistribution programs but, while this is a perfectly respectable political position, and it would no doubt benefit the recipients of the resulting subsidies, it is not clear at all whether or how such policy would address the problem of creeping inequality more than temporarily. Indeed, if low-skill workers in advanced countries are losing out because investment and jobs are moving to geographies where labor is cheaper and taxation more favorable, how exactly would imposing even higher taxes on capital improve their competitiveness? In fact, one could easily imagine the opposite scenario: more redistributive policies in advanced countries improve inequality temporarily but at the expense of their global competitiveness, which leads to capital leaving for more favorable locations, which leads to even fewer jobs being created at lower and middle levels (as well as, arguably, to lower productivity growth as existing capacity is abandoned), which leads to further pressure for the government to redistribute, which further accelerates the flight of capital… It is indeed difficult to understand why the authors, who seem to have read enough about global economic dynamics, can propose such a potentially suicidal policy without even explaining how they would propose to avoid this vicious cycle
In short, the topic is interesting and relevant, but I would have very much liked to see a more rigorous, less ideological approach in a paper that, ultimately, ought to provide a more objective, scientifically-grounded point of view.


Anonymous - Referee Report
August 02, 2017 - 11:51

see attached file