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19 January 2014updated 07 Sep 2021 11:03am

The inequality of the second machine age

By Ian Leslie

Anyone who has ever looked at a graph of income distribution for the UK or the US over the past five decades can’t help but be struck by the same thing. Somewhere around 1979 or 1980, a long decline in the share of income going to the richest members of those societies halted and reversed, and the figure has been climbing ever since. In the past decade this trend has been exacerbated. Middle-class wages have stagnated and started to fall.

So, what happened at the end of the 1970s? We need barely ask. Ronald Reagan and Margaret Thatcher, the two titans of neoliberal economics, cut taxes and regulation, creating more dynamic but more unequal economies, the fundamentals of which remain intact today.

Whatever you think of their legacy, the scale of change they effected is impressive. Reagan and Thatcher were transformational figures – big people doing big things. Obama and Cameron just don’t seem to be in the same league, and few people are yet convinced that Hillary Clinton or Ed Miliband would change the course of history.

Yet what if this story is wrong? What if it wasn’t politics that precipitated this epochal shift in the shape of our societies, but a force more powerful than any controlled by mere politicians?

In a new book, The Second Machine Age, Erik Brynjolfsson and Andrew McAfee note that inequality rose over the same period in most advanced countries, including some with very different policies, institutions and cultures. In Sweden, Finland and Germany over the past three decades, inequality has grown more quickly than in the United States (albeit starting from a much lower base).

The stagnation in middle-class incomes, the authors say, started not in Washington or Westminster, but in California. In 1980, Steve Jobs and Bill Gates were taking digital technology into the office and the home. By doing this they triggered a wave of economic and social change that has been gathering momentum ever since, greatly assisted by the internet. Its benefits have been abundant. Its costs are only now becoming apparent.

People have always worried about new technologies making human beings obsolete. Until now, however, technology has created more jobs than it destroyed, by creating new categories of goods and services. Weavers became typists; typists became computer programmers. Middle-class wages steadily increased; the rising tide lifted all boats. But digital technology, we are now learning, is different. It plays favourites.

Compare two photography companies. Kodak was founded in 1880 and at its peak employed nearly 145,300 people, with many more indirectly engaged through suppliers and retailers. The company’s founding family, the Eastmans, became wealthy while providing skilled jobs for several generations of middle-class Americans. Instagram was launched in 2010 by a team of four people. In 2012 it was sold to Facebook for over $1bn. Facebook, worth far more than Kodak ever was, employs fewer than 5,000 people. At least ten of them have a net worth ten times that of George Eastman.

This, in a nutshell, is why digital technology is changing our societies in such a profound way. In a wired world, it costs virtually nothing to reproduce a photo or an ebook or a piece of software and to send it across the world. Small teams of designers or engineers can make products consumed and paid for by billions, creating vast wealth for the originators. Yet the wealth doesn’t “trickle down” because digital goods require so few people to make them, and digitally organised workplaces require fewer people to run them.

People without the ability or the good fortune to make it to university or acquire high-value skills will find it increasingly hard to make a good living. Many lower-wage jobs will disappear – production-line or supermarket checkout jobs are already disappearing – but as computers become cleverer, even accountants and lawyers will start to feel the heat. Those who keep their job are likely to see their income stagnate as a greater share of wealth is captured by the highly skilled, the highly creative and the highly lucky.

So what can our politicians do about this? Not nothing, but certainly less than they claim or we would like to think. This is a structural shift so profound that no closing of tax loopholes or fiddling with rates can make much of an impact. In retrospect, Thatcher and Reagan didn’t have as much influence over their societies as we ascribed to them. Today, their would-be equivalents can change even less. The age of titans has passed.

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