2019 Volume 22 Issue 1

Modernizing Capitalism: Saving the American Dream

Modernizing Capitalism: Saving the American Dream

GUEST PERSPECTIVE - © Edward D. Hess 2019

We’re on the leading edge of a tsunami of coming technological and scientific advances in the areas of artificial intelligence (AI); the Internet of Things; virtual reality; advanced robotics; nanotechnology; deep learning; and biomedical, genetic, and cyborg engineering. Along with quantum computing power and global connectivity, these advances will fundamentally change how most of us live and work.

The Digital Age has the potential to be as disruptive and transformative for us as the Industrial Revolution was for our ancestors. If not proactively and preemptively managed, that disruption will threaten our capitalist system and democracy and destroy what’s left of the American Dream.

The Technology Tsunami

Over the next two decades, technological advances have a high probability of displacing as many as 80 million U.S. workers (according to 2015 remarks by the Bank of England’s chief economist) or 47 percent of the U.S. workforce (based on a well-known 2013 study by Carl Benedikt Frey and Michael A. Osborne at Oxford University). According to a study by McKinsey & Company, by adapting technologies already demonstrated as of 2015, about 45 percent of current U.S. job tasks could be automated now—that includes 20 percent of a CEO’s work activities.[1] Not even the most highly skilled or paid jobs are safe.

Coming automation will impact job tasks in every occupation and sector, including service and professional jobs. The totality of disruption likely will far exceed—by a magnitude approaching ten times—the loss of manufacturing jobs to globalization and technology in the last two decades. Globally, job losses due to automation will be massive as well. For example, the OECD average percentage job loss is predicated at 57 percent; in India, it’s 69 percent; and in China, it’s 77 percent.[2] These predicted impacts will give rise to major global social challenges and further fuel political populism.

Some argue that these dire predictions are unfounded. The World Bank made just that case in its 2019 World Development Report.[3] These “techno-optimists” suggest that advancing technology will generate more jobs than it displaces. After all, that’s what happened during the Industrial Revolution. The World Economic Forum recently suggested advancing technology will generate a net of 58 million jobs by 2020.[4]

I’m very skeptical of the techno-optimistic view for two reasons. First, the prediction that history will repeat itself downplays the widespread human havoc created by the Industrial Revolution, which in England lasted 60-80 years before society adjusted. Can our diverse and divided society withstand decades of turmoil? That’s a risk with a huge downside.

Second, some techno-optimists assume that technology will produce tens of millions of new jobs with tasks that technology won’t be able to further displace. That’s highly questionable based on consensus predictions about the arc of AI innovation. It’s also cold comfort considering that any new jobs created for humans by technology will inherently require new, highly advanced skills that displaced workers won’t have and may be unable to attain.

In the Digital Age, no longer will human scale be necessary for business value creation in most fields. Without question, technology will transform how most businesses operate. In the near future, most organizations likely will be staffed by some combination of smart robots, smart machines, and humans, and the jobs and skill requirements of each will be in flux continually. In addition, the kind of long-term employment at stable organizations that characterized previous generations likely will be rare.

To be employable and stay ahead in the frantic race with perpetually advancing technology, most people will need to continually upgrade their skills. Those upgraded skills will require the highest levels of human cognition and emotional intelligence—skills that our country’s education system generally does not teach to a majority of the population. Public education just wasn’t designed to equip all students with Digital Age job skills nor to retrain current workers who need new skill sets. It was built to supply workers en masse for factory jobs. Failure to address this education challenge will lead to increased tension between economic “winners” and a larger population of economic “losers.”

The future of work is a future of temporary, part-time, and freelance jobs for many—and that’s assuming people can continue to upgrade their skills to keep up with those jobs. For many, it could be a future of no work. Without jobs, how will they meet their needs for food, shelter, health, and human dignity? During the Great Depression, unemployment reached 25-29 percent. We’re talking about levels that may double that. How we deal with that challenge will determine in large part what the United States of America will become. We as a citizenry will create that future story either proactively or by default.

It’s not out of the question that over the next 50 years we’ll see Homo sapiens evolve into a technologically enhanced species—Techno-Homo sapiens—as technology enables human bodies to be equipped with nanotechnology, genetic engineering, and brain enhancements to improve mental processing. Will these upgrades be limited to the elite? What will people do with these enhancements?

In the coming decades, we’ll be able to fight wars with smart robots, cyber technology, and artificially intelligent weapon systems. Food production will become increasingly engineered and automated. We may yearn for a past that’s gone forever, and ironically, the cultural values from our earliest history may provide us with a key to adapting. The Mayflower Compact, the ways in which Native Americans governed themselves in tribes and nations, and even our ancient hunter-gatherer communities shared a common trait: a focus on the Common Good. Recently, however, we’ve allowed, and in many cases systematically encouraged, a highly individualistic culture of social Darwinism to dominate our society to our increasing detriment. For the good of us all, we may need to actively and systematically resurrect a culture of “we” to weather the technology tsunami.

Social Disruptions

The Digital Age will dramatically disrupt our political, educational, governing, and social systems and challenge our consumption-based economy. Its impact will be further fueled by social and economic issues we’re currently facing, many of them caused by the reversal and dilution over the last 40 years of the social, governmental, and business policies that enabled the Great Prosperity after World War II.

Already income inequality is at its highest level since the late 1800s, exceeding that of the Gilded Age.[5] Middle-class families essentially have not participated in income growth over the last 30 years; the bottom 50 percent of income earners have lost income share since 1980.[6] Almost all the income growth has been captured by the very wealthy. In recent decades, many worker’s retirement and healthcare benefits and termination rights have been materially decreased or eliminated. And companies have moved to hiring more independent contractors and part-time workers. Workers today in many cases do not have the security and the downside protection that workers had during the Great Prosperity Era. Many of our fellow citizens live pay check to pay check and many have little financial reserves to weather a downturn.

In addition, the overall likelihood of intergenerational income mobility has declined from 90 percent (for those born in the 1940s) to only 50 percent (for those born in the 1980s). The probability that a child born to parents in the bottom one-fifth of income distribution making it to the top one-fifth is only 7.5 percent in the United States as compared to 13.5 percent in Canada, 11.7 percent in Denmark, and 9 percent in the United Kingdom.[7]

Our healthcare system already fails to insure good healthcare for all our citizens. Historically most employment has come with health insurance, but over time employer-provided health insurance has become more limited and more and more Americans have become independent contractors and freelancers. With predicted increases in jobless numbers, many Americans in the Digital Age will have no or very limited health insurance. What happens then? Could it mean a society in which a minority of techno-enhanced elite live to 150 years or older while the masses die out at much earlier ages?

Our political system has become more divisive and dysfunctional due to “blame” politics that reinforce individualism and “survival of the fittest” ideologies rather than the Common Good. In the last 50 years, our governance system has been overtaken by elite interest groups who believe overwhelmingly in social Darwinism, limited government, and maximum individual freedom to make as much money as possible with minimal government interference even if that means lots of people lack opportunities to live the American Dream.

Through campaign finance and lobbying our governance system has been monetized and thus representative democracy has been diluted. Today the top 1 percent of income earners—the “1 percent”—and large corporations heavily influence governmental policies through political contributions and lobbying activities, and in many cases, this has accentuated the demise of the Common Good. It’s a system in which wealthy individuals and big businesses fund Political Action Committees, politically-motivated think tanks, and made-to-order academic research to favor the interests of the few not the many.

Our current system of public taxation can’t adequately fund social programs to increase opportunity and bring the Common Good back into play. Tax rules, breaks, and loopholes favor investment income and Wall Street, leaving government squeezed for the resources to mitigate the downsides of excessive laissez-faire individualism. This is not coincidental.

The Digital Age will further inflame these systemic problems, forcing us to directly decide whether we’ll reinvigorate a concern for the Common Good or allow ourselves to devolve into an aristocratic feudal system concerned only with the good of the “1 percent.”

We’ve made this choice before. The Progressive movement and the political leadership and laws passed under President Teddy Roosevelt’s administration ended the Gilded Age of the robber barons, and President Franklin Roosevelt’s social programs and increased spending during World War II reversed the Great Depression and ushered in policies that fueled the Great Prosperity—the era from about 1947 to the mid-1970s when economic growth was the most equitably shared among income levels in U.S. history, the middle class was created, and American Dream opportunities were widely available.

In reality, this issue goes back to when our country’s founders struggled to design a constitution that reconciled the Common Good with individual freedom, and we’ve encountered the clash of those competing philosophies over and over again: in the saga with our Native American ancestors and in confronting slavery, child labor abuses, and the discrimination of minorities.

The social dilemma we face is one that’s in fact over 2000 years old. As historians Will and Ariel Durant state in their book The Lessons of History, “The concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution.”[8]

The high likelihood that technology advances will automate tens of millions of more jobs will only exacerbate social inequalities and necessitate a response, either violent or peaceable. To uphold the values of shared prosperity and upward social mobility, we must reform the entire system.

Before we can do that, however, we must revisit a critical cultural issue: the role of business and government in society.

Capitalism Must be Modernized

Since World War II, the United States has experienced two very different forms of capitalism.

During the Great Prosperity, the business community viewed its purpose as broader than just making money for shareholders, because it included a social responsibility to workers and communities. During this time, workers’ wages generally increased alongside productivity, and the ratio of CEO compensation to worker pay ranged between 20 and 30 to 1.

Since 1980, however, we’ve developed a system based on “short-termism,” a survival-of-the-fittest mentality, and greed. Many businesses have chosen to operate with the sole purpose of creating shareholder value—society and workers be damned. This philosophy was advocated by the likes of Milton Friedman and others and has been promoted by Wall Street’s non-scientific focus on quarterly earnings. That short-term focus, along with the advent of executive stock options, has caused record levels of disparity between executive compensation and worker pay, which has stagnated over the last 40 years accompanied by dramatic decreases in retirement and other benefits. By the end of the 1990s, the ratio of CEO to worker pay was 376 to 1 and has fluctuated between 185 and 345 to 1 ever since, far exceeding growth in S&P 500 stock prices.[9] Today’s real average wage for U.S. citizens has the same purchasing power it did 40 years ago.[10]

These results have been man-made and intentional. They’ve happened because a few economists, philosophers, wealthy benefactors, and Wall Street leaders decided that the era of Great (shared) Prosperity could lead to socialist tendencies. This demise in the business community’s duties to workers and society and the lack of regulation to stop it is not inevitable. It’s not based in science or on natural law, but rather supported by a libertarian philosophy underlying human rules and choices.

Our current model of capitalism is leaving too many people behind. Recently, leading Wall Street executives Paul Tudor Jones, II, Ray Dalio, and Larry Fink have publicly agreed with that conclusion and have concurred that the situation is unsustainable. It’s a serious societal challenge that could rise to the level of a national tranquility issue and, thus, a national security issue. We immediately need to begin a national conversation on how to modernize capitalism and prepare our society for the coming Digital Age. Modernizing capitalism is foundational to making the American Dream real again just as it was after World War II.

The American Dream 2.0

Addressing these issues requires a systemic approach that will take time to implement. We can’t wait. “We the People” must start this process now, because our political system is too dysfunctional.

We as a country need to create a new story that’s inclusive of all Americans. It must provide realistic opportunities to find meaning and purpose in a technology-enabled and technology-dominated society in which work will be transformed and unavailable to many. It must include individual rights, responsibilities, and opportunities, and it must include renewed support for the Common Good.

This story needs chapters on modernizing capitalism; transforming our education, tax, healthcare, labor, and social safety net systems; revising how we finance the election of public officials at all levels; minimizing the role of money in making laws and regulations; and creating new laws governing businesses engaged in Interstate Commerce.

We need Federal laws that clearly state that if you want to do business using the laws, capitalist system and resources (broadly defined) of the United States, your business will have a legal fiduciary duty to share your prosperity with your employees, communities and shareholders. Failure to do so would result in strong penalties (including meaningful jail time) that are paid by the perpetrators and not reimbursed directly or indirectly by the corporation or entity.

In addition, we need to create Federal laws pertaining to workers’ (broadly defined) rights, benefits, portability of benefits, and workers’ representation on the board of directors. There are several countries that have high performing market-based global companies that have systems that are more equitable and humane with respect to workers than our System.

This story must overcome the seeds of divisiveness and identity politics and embrace diversity. It must be a humanistic, people-centric, “We the People” story that balances individualism and the Common Good. That story has to reverse our excessively laissez-faire attitudes, our increasing selfishness and greed, and the trend of minimal government in order to protect, implement, and enable the Common Good.

These discussions must begin today at all levels—in local communities, public company board rooms, state government, Congress, and the White House. Business leaders were integral to the Great Prosperity, and they must step up now to address the coming automation of tens of millions of jobs. It’s the patriotic thing to do in my opinion.

Thought leaders already have put forth ideas and raised important questions for this new story:

          Do we need a universal basic income (UBI)? Higher tax rates on the wealthy? Higher minimum wages and more equitable wages for service workers performing personal service jobs involving uniquely human skills? Should meaningful full-time public service jobs be created to absorb technology-driven job losses?

          Should we turn our schools into lifelong learning and maker-innovation centers for current students and adults? Should businesses have a duty to retrain workers displaced by technology? Should higher education be free to all citizens?

          Should the public share in the ‘fruits” of the Digital Age through ownership in the companies that create the job displacement? Or as Bill Gates has suggested, should we “tax the robots”?

          Do we need universal healthcare?

          Should we require two years of public service by every citizen to rebuild Common Good values and mitigate divisiveness?

          If we need UBI, should we revise our immigration policy to limit immigration while not forgetting the historical contribution immigrants have made to our country commercially, artistically, scientifically, and socially?

          Should we outlaw private lobbying and enact public financing of all political campaigns?

          Should we change the capital markets’ focus on “short-termism” and regulate CEO compensation ratios to worker compensation? Should we require that workers have a meaningful number of representatives on public company boards of directors? Should all workers have stock option benefits after six months of service?

          Should we revise our tax system to drive different outcomes than high income and wealth inequality? Should we revise our labor laws to deal with inadequate safety nets, compensation, and benefits for workers?

          Should we enforce and revise our antitrust laws to consider the new platform and other business models that technology has and will create? How do we balance concentration of corporate market power and equity to society—a social responsibility to society (including workers) and social justice regarding results?

If ever there was a time that our country needed strong leadership, it’s now.

In the Era of Great Prosperity, employment was the primary way that people achieved the American Dream. For many, over the last 40 years the American Dream has become a myth because of human choices. Advancing technology with resulting job losses will likely destroy the American Dream if we allow that to happen. The coming societal challenges if not proactively managed could well create our second civil war—one based on the lack of economic well-being and the lack of human hope for a better and more meaningful life.

We urgently need business, education, political, and public service leaders to join together to initiate a grass-roots “We the People” American Dream 2.0 Initiative. This is a Modernizing Capitalism, Future of Work, Future of our Democracy, Human Flourishing, Social Justice, and National Security need. We need to immediately begin serious conversations about these issues in our local communities, corporate board rooms, universities and colleges, and in local, state, and national governments.

I invite you to create that conversation. I invite you to join that conversation. I invite you to help save the American Dream. We can do this!

References

[1] Michael Chui, James Manyika, and Mehdi Miremadi, “Where Machines Could Replace Humans—And Where They Can’t (Yet),” McKinsey Quarterly, July 2016, http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/where-machines-could-replace-humans-and-where-they-cant-yet.

[2] Citi and Oxford Martin School, “Technology at Work v2.0: The Future Is Not What It Used to Be,” Citi GPS: Global Perspectives & Solutions, January 2016, https://www.oxfordmartin.ox.ac.uk/publications/view/2092.

[3] World Bank, World Development Report 2019: The Changing Nature of Work (Washington, DC: World Bank, 2019) retrieved from http://www.worldbank.org/en/publication/wdr2019.

[4] World Economic Forum, The Future of Jobs Report 2018 (Geneva, Switzerland: World Economic Forum, 2018) retrieved from https://www.weforum.org/reports/the-future-of-jobs-report-2018.

[5] Peter H. Lindert and Jeffrey G. Williamson, Unequal Gains: American Growth and Inequality Since 1700 (NJ: Princeton University Press, 2016).

[6] Eleanor Krause and Isabel V. Sawhill, “Seven Reasons to Worry About the American Middle Class,” Brookings (blog), June 5, 2018, https://www.brookings.edu/blog/social-mobility-memos/2018/06/05/seven-reasons-to-worry-about-the-american-middle-class/; Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts: Methods and Estimates for the United States,” Cambridge MA: NBER Working Paper, December 2016, http://gabriel-zucman.eu/files/PSZ2016.pdf.

[7] Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, and Jimmy Narang, “The Fading American Dream: Trends in Absolute Income Mobility Since 1940,” Science 356, no. 6336 (2017): 398-406; Raj Chetty, “Children Born To Parents In The Bottom Fifth Of The Income Distribution Have A 7.5 Percent Chance Of Reaching The Top Fifth,” Ecointersect (blog), December 29, 2016, http://econintersect.com/pages/contributors/contributor.php?post=201612291338.

[8] Will and Ariel Durant, The Lessons of History (Simon & Schuster, 1968): 57.

[9] Lawrence Mishel and Jessica Schieder, “CEOs Make 276 Times More than Typical Workers,” Economic Policy Institute, August 3, 2016, http://www.epi.org/publication/ceos-make-276-times-more-than-typical-workers/.

[10] Drew DeSilver, “For Most U.S. workers, Real Wages Have Garely Budged in Decades,” Pew Research Center (blog), August 8, 2018, http://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/.

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Author of the article
Edward D. Hess, JD, LLM
Edward D. Hess, JD, LLM
Edward D. Hess is Professor of Business Administration, Batten Faculty Fellow, and Batten Executive-in-Residence at the Darden School of Business at the University of Virginia and co-author of Humility Is the New Smart: Rethinking Human Excellence In the Smart Machine Age (Berrett-Koehler, 2017).
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