Growing wealth inequality should be addressed now

In my news feeds today I read that twice as many British households are in poverty as 30 years ago and saw Alex Payne’s letter to Marc Andreessen which calls bullshit on the assumption that tech development will solve our social problems.

I couldn’t agree more.

As well as being plain wrong from an ethical perspective growing wealth inequality will ultimately undermine economic growth. We’ve already seen increasingly frequent riots in London and Paris, a big increase in the popularity of protest parties, and a rising global protest movement generally. If these trends persist economic growth will either be choked by social unrest or by the election of radical politicians.

Unfortunately the underlying drivers of wealth inequality – globalisation and automation – are both accelerating. Like Marc Andreessen, I believe that ultimately developments in tech will create enough wealth that inequality will cease to be a problem, but those days are some way off and the prospect of dark times in the interim is very real.

Many tech enthusiasts are also neo-liberals and have a strong tendency to gloss over the dark times as something ‘the market will fix’. That’s probably true over the long run, but is likely to come at an unacceptable human cost.

Wealth inequality is partly of the technology industry’s making and I would like to see us advocating policies designed to alleviate the problem in the short term. I quickly get out of my depth here but I would expect them to include significant increases in retraining and back to work budgets and measures designed to promote social mobility.

And the time to act is now. The underlying drivers are exponential in nature and if problems come they will come on us in the blink of an eye. We need to take steps in advance of that.

 

  • http://www.venturedeal.com/ Don Jones

    Nic,

    Agreed. But how to effect that change when VCs and tech entrepreneurs are not incentivized to “create jobs” or spread the wealth. VCs are incentivized to produce returns for their investors and to invest in the most efficient tech startups. Entrepreneurs are incentivized to create wealth for themselves and their investors.

    If VC LPs began to require changes to LP agreements to include bonus benchmarks for creating jobs or other quantifiable social impacts, then maybe the incentives would trickle through the system.

    Without a fundamental change of incentives, it’s just talking…

    What do you think?

  • http://www.theequitykicker.com brisbourne

    Hi Don – I think the solution needs to come from government. VCs and techies can lobby.

  • https://www.beauhurst.com/ Pedro Madeira

    Hi Nic and Don,

    Given a recent Economist article (http://www.economist.com/news/finance-and-economics/21602247-well-meaning-governments-are-killing-continents-startups) that says 40% of European LP cash comes from government agencies, I wonder how much governments are already pushing GPs behind the scenes to deliver wider social returns (e.g. jobs).

  • http://www.theequitykicker.com brisbourne

    They are pushing for data on jobs created, but not really pushing for any changes in investment strategy to create jobs

  • John_PopeXIII

    Really well done, Nic, to shine a light on this subject.

    Alas, too few members on the ‘capital management’ side of the equation (shout out to Albert Wenger @USV, too, for his contributions) care to weigh-in publicly on the matter, other than to cherry-pick the odd low-lights from Picketty’s recent Capital – mostly in order to satisfy their own confirmation bias.

    Your observations are both sober and pragmatic – and likely deserve a louder clarion call.

    One thing I will disagree with you on, however, is that the solution needs, or should come from, government intervention. I believe (in fact, I’m absolutely certain) the ‘market’ will solve the problem much faster and more effectively than legislation from any public body, in any country, is capable of introducing. Let’s just allow Joseph Schumpeter’s “Creative Destruction” theory a bit more time to run its course. It’s still early in the game.

    It’s amazing how powerful the Creative Destruction theory actually is – especially when rising social change (inequality) sentiment converges with the democritisation of technology – and, if utilised properly, will be the most powerful instrument for change the technology age has ever seen.

    One thing is for sure, I’m no neoliberal and WOULD NOT typically prescribe anything Hayek or Friedman is selling; however, on this particular occasion, I believe market forces will solve the problem more quickly and organically. This would also be the best solution of all, as the process would be free from lobbyists, or any other narrowly incentivised stakeholders, or legislators who will never be able to keep pace with, and understand the implications of, rapid technological change.

    Acting responsibly and ethically is already part of the Zeitgeist – your post and its related meme is an example of this – and is actively being discussed publicly, more and more e.g. Mark Carney’s recent speech to the City. The ‘idea’ is now out of the closet, and has a life of its own.

    I believe Victor Hugo said it best, and most succinctly, to describe the requisite dynamic:

    “An invasion of armies can be resisted, but not an idea whose time has come.”

    The times, they certainly are a changin’.

  • http://www.theequitykicker.com brisbourne

    In the long run the market will solve the problem by finding demand for new things and creating new jobs. That’s happened before and will happen again.
    This time round in worries the pace of job destruction will be much faster than before and the creative side of the market wing keep up.

  • John_PopeXIII

    Understood. Conventional wisdom and past history would encourage us all to subscribe to the picture you’ve painted – it is, after all, the natural progression of how business and capital have traditionally acted in the past.

    However, the difference between the past and today is, there was much less opportunity for the 99% (labour) to broadcast their discontent – Twitter, other social media outlets and an ability to instantly publish didn’t exist previously. Now they do, and they’re changing the tone, as well as the balance of power of the conversation. The individual has never been so empowered. Having a voice that can potentially reach many others is an effective force for change.

    More to my original point, historically, technology was leveraged to displace many categories of analog labour. In future, technology can, and will, play a role in reversing this trend, and eventually be a catalyst for significant economic and employment growth.

    The first order of business will be for analog methods and processes to lay the
    necessary foundations and infrastructure to allow the future digital world (i.e. Smart Cities, Internet of Things [IoT], Internet of Everything [IoE], etc.) to exist. Much like what took place during the era that built the infrastructure to support all of the modern transportation systems (e.g. rail, highways, electric grid, etc.).

    — As an aside, I highly recommend Jeremy Rifkin’s recent book “The Zero Marginal Cost Society” to gain further insight on topics like the future of energy, construction and digital. It’s a provocative eye opener, for sure.—

    In the past, digital has generally been used to ‘disrupt’ the analog world – In future, digital (technology) will be used much more frequently to disrupt their digital world brethren. This emerging scenario will provide an opportunity for the analog economy to make a comeback, and recapture some of the inevitable digital economic void.

    But rather than continue to wax lyrical about abstract, hypothetical future outcomes, I’d prefer to just show you what I mean. As we’ve designed solutions that will do exactly what I say above:

    – use digital to disrupt and displace digital
    – use digital to dramatically increase analog employment and numerous other forms of economic opportunity around the world – including manufacturing
    – democritise technology – so that the largest portion of society, including the business community, can enjoy maximum benefit from technological progress
    – dramatically reduce the value and size (both real & % of total) of technology’s share of the global economic value chain

    How can all of these outcomes possibly happen from a single, relatively simple solution or source? The answer is, we live in a winner-take-all digital world. If you build a better mousetrap, the world is happy to beat a path to your door – as can be witnessed by Google’s, Facebook’s and even Wikipedia’s present dominance. Adding to that, the once all important network effects will matter very little to the incumbents, as long as the new solutions deliver exponential value to the network in question – n’est pas?

    For example, what do you think would happen if virtually all software was available free or via open-source? What would the result be if every company or organisation had the technological sophistication and audience reach of Google, at little to no cost?

    How do you think this potential scenario would impact the global economy and the problem of growing wealth inequality?

    Do you not think the outcomes I’ve described above would be an excellent result
    for the problem you originally highlighted? We do. And they’re all, of course, market-based solutions. Using existing rules of the game to initiate change, and defeat the problem of wealth inequality has to be seen as a superior solution to having legislators all around the world establish new, consistent sets of rules to combat the issue. If there’s a choice in solutions to a problem, the one that doesn’t require any new laws will surely lead the way.

    We also believe our new models will help sustain and increase the long-term health of our capitalist system, in general.

    We’ll throw in an end to the problem of personal privacy and digital surveillance,
    for good measure – and at no extra charge. No big deal, really… all in a day’s work.

    Like you, I’m also not interested in coins – I’m only going to settle for monumental, socially responsible, positive change.

    Simply put, we should all start acting as if our mother’s were watching.

  • http://www.theequitykicker.com brisbourne

    OK we can agree that market solutions are better, but I see millions of jobs being lost to robots and AI in the next ten years and nothing that’s nearly as real on the job creation side.

    Unless I’m misunderstanding your points do address the point of relative timing.

  • John_PopeXIII

    Nic,

    ***Apologies for the delay coming back to you, I needed some extra time to consider how to most effectively answer your very important question with the requisite impact and argument, but also be somewhat discrete considering the public nature of this forum. As I don’t want to give too much of our farm away, this early in the game.

    As you might expect, the explanation is pretty comprehensive (read TL;DR) – as is necessary for a new model to be explained – whilst also ‘trying’ to be as concise as possible, believe it, or not. Admittedly, I failed on the latter objective.***

    Agreed, I too see millions of future jobs lost to various forms of technology, including robots and AI, and it certainly becomes a much bigger problem if we stay on the current trajectory we’re on, and retain the status quo.

    It is, of course, difficult to predict an accurate number of job losses in the future due to technology, because it’s virtually impossible to know what kinds of solutions and efficiency gains will be derived from future innovations. (I’m not sure if you’ve heard any forecasts on the topic, or already had a specific number in mind?)

    Fortunately though, we definitely won’t stay on this quasi-dystopian trajectory, that includes robots, AI and massive unemployment for low-skilled workers – along with all the other negative social and economic externalities that would result.

    Just to clarify, and before I try and answer your query adequately about “relative timing” – I understand your question in the following context:

    If increasing unemployment over the next 10 years is inevitable due to technology innovations such as robots and Artificial Intelligence – which, as you said in your post, will eventually lead to even greater wealth inequality – the question then becomes, how do we, as a society, business or individual overcome that future problem, reverse the trend of growing income and wealth inequality, create a vastly improved, but more importantly, a VIABLE AND SUSTAINABLE outcome that will have the greatest positive effect on the global economy, and benefiting the most amount of people?

    In order to be as compelling and convincing for your experienced and skeptical mind, I thought I’d help explain what I’m taking about with some ‘back of matchbook’ calculations for a category you know very well – eCommerce – as follows:

    According to eMarketer, global eCommerce was worth $1.7T (US) in 2013 and is expected to grow at 17% (pa) until 2020. In your comment you suggested a ten year horizon, so I’ve extended the growth rate to 12% (to be conservative and reflect a possible slowing growth rate as the category matures) for the last 4 years to get to 2024. The first 6 years at 17% growth, last 4 years at 12% growth.

    2013 – $1.7T (US)
    2014 – $1.9T (US)
    2015 – $2.3T (US)
    and so on…
    2024 – $7.7T (US)

    Which means that 10 years from now eCommerce (digital retail) as an individual category is expected to be worth approximately $7.7T (US) per annum – for those of you counting at home, that’s 77 followed by 11 zeros – globally.

    In 2013, the total addressable market for the digital distribution of goods and services (eCommerce) was worth approximately $306B (US) – $1.7T x 18% (category average distribution cost) – to put it in further context, Google currently owns 20% or ~$60B (US) of this market.

    If the status quo persists, and similar business models being used today still exist in 2024, the producers of goods and services – from which the $7.7T is derived – will continue to allocate approximately 18% [or $1.386T (US)] of that total retail value for digital marketing and distribution expenses.

    This is where the new solution that I referenced in my previous comment – also predicted by Jeremy Rifkin in “ZMCS” – enters the picture and disrupts the current 18% model (eCommerce average) for the digital distribution of goods and services.

    Now imagine a world where it costs the producers of goods and services only 2% of the retail value, rather than the current 18% model for digital distribution. This means that the service of digital distribution will be commoditised – that was what I meant when I said “use digital to disrupt and displace digital” in my previous comment.

    Using the new 2% model to calculate the 2024 marketing & distribution costs, it will then only cost the producers $154B – albeit, still a very big number – rather than $1.386T that it would cost using the current 18% model. Gradually moving to the 2% model will collectively save the producers of goods and services $1.232T by 2024.

    Another way of describing the result is, the new 2% model will make the economy more efficient by $1,232,000,000,000 in 2024. Or you could also say that the market for digital distribution (in eCommerce) will shrink from $1.386T in 2024 to $154B, or by 89% over the next 10 years.

    That $1.232T (US) annual savings will then be re-allocated and re-distributed to other areas of the economy, where it will be put to use to solve other problems, and/or provide other goods and services.

    However, in order to fully understand the total economic impact of those savings or efficiency gains on the greater global economy, a multiplier effect must also be added to the $1.232T (US) savings – to account for the circular flow of money. If we assume a 15% savings rate, and a subsequent multiplier of 6.67, it means that the global economy will actually be stimulated by an unbelievable $8.2T (US) by 2024 – IF a 2% model became the new paradigm for digital distribution.

    If we also assume that 40% of that total $8.2T stimulus would then be allocated to labour (employment) services – which I believe is an accurate rate – then approximately $3.3T worth of additional jobs will be created worldwide. Again, IF the 2% model becomes the new standard.

    If we then assume an average annual income of $50,000 (US) for all the new jobs created, divided by the $3.3T (US) stimulus – 3,300,000,000,000/50,000 = 66,000,000 – that means that approximately 66M new jobs will be created globally by 2024. That’s 66 million more families – or approximately 250 million people worldwide – whose lives will be directly, and positively, impacted by the market adopting this one, single idea.

    Frankly, if that isn’t enough motivation to change the status quo, I don’t know what is.

    —Note: I’ve recently shown this model to a couple of highly qualified economists, and asked them to critique my assumptions and outcomes. They’ve yet to come back with any glaring errors – which I take to be a good sign – but I’d be happy to hear from any other ‘authoritative’ sources to debunk the accuracy of this hypothesis.—

    To summarise and clarify:

    To date, technology/digital has generally been used to commoditise many eCommerce or analog product and service categories – i.e. you can find the same goods and services offered from many different sources of digital businesses and brands. Amazon and Google are two obvious and dominant competitors in the space.

    The solution I’ve advocated for here will instead commoditise technology.

    What that means is, virtually every SME business will have close to free (below 2%) use of the most sophisticated technology available, along with access to the largest consumer audiences.

    And yes, it will certainly displace many of the current dominant Internet players who are in the world of digital distribution – and it will surely create numerous job losses amongst those companies who are in the space today.

    But these are mostly going to be high-skilled, technology related jobs – and there’s obviously no need to worry about engineers, and other high-skilled workers finding new employment in other industries. Their skill-sets are unquestionably still going to be sought after. Only, they will have to be applied to other industries, because the problem of digital distribution for consumer goods and services will pretty much be solved, once and for all. (It is, after all, hard to imagine a model being much more attractive or efficient than a less than 2% margin, no?)

    There are obviously other implications for the model I’m advocating here that haven’t been discussed yet, but I personally don’t loose much sleep wondering how former employees from Google, Facebook, Amazon and Priceline, et al are going to find new jobs. I do, however, loose sleep over how the more low-skilled amongst us will cope in our increasingly digital, future knowledge economy.

    The “Below 2% Model” is PART of the solution for both the future low-skilled worker problem, and the related plight of growing wealth and income inequality.

    So there it is, a single idea or solution – albeit with only a high-level description – that absolutely has the potential to positively impact hundreds of millions of people around the world.

    That’s the kind of monumental change I was talking about previously.

    And it’s also the kind of change that’s going to start soon.

    Very soon.

  • http://www.theequitykicker.com brisbourne

    Interesting. But how do you make sure the savings going from 18% distribution costs to 2% distribution costs get used to create jobs? Recent history would suggest they get appropriated by the wealthy.

  • John_PopeXIII

    Good question.

    Pretty straightforward answer – in two parts.

    Part One:

    That is what the 15% savings rate looks after – I’m assuming that 15% of the savings businesses enjoy from lower distribution costs will be returned to shareholders in some form. This is a standard method for calculating retained savings, earnings or profits when using multipliers to understand broader economic impact for measuring change.

    Business owners or executives working for ‘Capital’ will typically not want to
    retain more than 15%-20% of profits annually – smart money, anyways – i.e. take more than 15%-20% out of the business. Some owners may decide to not take any, in order to continue growing their business. Some may take 50% out if their nearing the end of their business life-cycle, but generally, it will depend on their specific situation.

    Part Two:

    With our model saving businesses 16% on their bottom line AND effectively leveling the marketing and distribution playing field for everyone, businesses will then look to compete or gain a competitive advantage via other means – such as improving the quality of the good or service, or returning some of the value back to consumers through lower prices or value-adds.

    Competing on the quality of their goods or services typically means adding full-time employees for increased expertise or quality of service, or updating their facilities – which also requires specialist services (builders, contractors, etc.).

    In our eco-system/platform, businesses will ONLY compete on the quality of their service, NOT on their ability to jump through – or pay to jump through – Google’s hoops.

    My assumptions stated that just 40% of the total savings – or savings from lower production costs – would be re-allocated to things like employment growth. Which, again, is a fairly standard percentage of operating costs – especially with service-related businesses.

    A hypothetical (intelligent) allocation of savings breakdown, might be as follows:

    15% – Retained to shareholders
    15% – Value to consumers
    30% – Capital Expenses
    40% – Increased employees

    What’s critically important, though, is businesses will no longer need to compete on their marketing and distribution prowess, such as their ability to hire the right digital agency to produce an effective eCommerce website, or SEO/SEM services to play the Google arbitrage game.

    So restaurants can focus on making better food or providing better service, hotels can focus on delivering better guest experiences and widget makers can make better widgets.

    Think about how much this single attribute will stimulate SME business growth – nobody will need to learn anything about Google or Facebook. They just simply do what they do best, and outsource the marketing and distribution to us.

    In our world, Marketing, as a business differentiator, is finished.

    Paradoxically and ironically, we’re a marketing channel that thinks marketing should be considered a waste of money. The best marketing strategy a business can adopt in the future is to relentlessly look at ways to improve the quality or experience of their product.

    That is also how the consumer will ultimately derive maximum value.

    Hope that satisfies your query.

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