Maybe it really is this simple. Maybe the solution (or at least a big part of the solution) to concerns about income inequality, stagnation, and immobility is to turn more workers into capitalists. Since the mid-1980s, as the below chart shows, owners of capital have been gobbling up an ever bigger share of national income at the expense of labor. Among the possible reasons: (a) the offshoring of labor, (b) automation, (c) the entry of women into the labor force.
Image Credit: Cleveland Fed
The left-of-center response is to redistribute from a tiny slice of wealthy workers and owners to middle-and-lower wage workers. Obamacare and the tax hikes financing it are one example. But as technology makes it ever easier to substitute machines for man, this narrow redistribution strategy hardly seems sustainable, either economically or politically.
In Average is Over, economist Tyler Cowen depicts a future where the tech-savvy 15% get fabulously wealthy, while the rest of us make do with flat wages and free online games. In their excellent new book, The Second Machine Age, MIT’s Erik Brynjolfsson and Andrew McAfee argue that while “there’s never been a better time to be a worker with special skills or the right education … there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.”
Ex-banker and current entrepreneur Ashwin Parameswaran offers this alternative to redistribution, which he succinctly and brilliantly summarizes thusly: “Instead we should empower the low and medium wage earners of today to become the capitalists of tomorrow whilst protecting them with a safety net that protects them as individuals rather than protecting the firms and unions that they are members of.”
In short, capitalism for the masses.
Parameswaran points out that it’s never been so easy to start a business, and it’s only going to get easier. First, the explosion and success of crowdfunding and peer-to-peer lending, he explains, “shows us that speculative equity ventures and business loanss can and are being funded by the man on the street.” Second, technology has also made turning a concept into a business simpler than ever — and not just social networking. Whether its using manufacturers in Asia or 3-D printers here at home, even the little guys can move from their bright idea from thought to physical product.
And what is the role of government? Ending big company bailouts, extreme patent and copyright protection, and cronyist licensing requirements would be a good start. “In order to enable every person to become a capitalist, we need to reduce the regulatory burden on all aspiring capitalists as well as removing the protections enjoyed by incumbent large firms,” Parameswaran writes.
And at the same time that we ask Americans to take more risks, however, we need to also modernize the safety net so that it provides a decent standard of living, including healthcare and basic financial services, in a fiscally sound way that minimizes work disincentives and family disorder. Parameswaran:
… no one is entitled to protection from the inherent instability of a competitive capitalist economy. Firms and workers should not be protected by bailouts. Individual investors should not be protected from the risks of investing their money in failed ventures. Everyone deserves a safety net but no one deserves a hammock.
The expanded safety net and increased deregulation go hand in hand. Increasing instability without a safety net will make the system more fragile. … By combining the two, we can achieve the best of both worlds – a robust economic system that can achieve disruptive economic progress whilst protecting individuals from the worst consequences of economic failure.
Among the policy recommendation from Brynjolfsson and McAfee: a universal basic income or negative income tax, taxing consumption rather than human labor, teaching entrepreneurship throughout an improved education system, and keeping the entrepreneurial “peer economy,” such as Airbnb, deregulated.
Entrepreneurship and the safety net, two great ideas that go great together.
Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.