Inequality, and the Licence Economy

Our article last week, on how the rise of populism in western democracies is being driven by a deep sense of anger at rising economic inequality, sparked a number of responses.  And they can largely be summarised by the question of why, since there has always been a division in society between rich and poor, it should only now be causing such a strong reaction.

The answer would appear to be two-fold.  The first reason is that the inequality seems to be becoming both larger and entrenched, and the second is that the losers are now including for the first time those who have hitherto comforted themselves that they were secure.

To take the second of these first, it is important to distinguish between two types of growing inequality.  Inequality can arise either because the very rich are getting even richer, or because the hitherto comfortably off are getting poorer.  In a good number of western economies, both are in fact the case, but while it is the first that attracts the headlines, as pay levels for senior executives rise ever higher, it is the second, the decline in incomes for the middle and clerical classes, that is the newer and much the more corrosive phenomenon.

A report published by McKinsey earlier this year[1] highlights this transformation in the lives and expectations of large swathes of middle income society.  The report looks across 25 developed nations, ie most of the OECD, and calculates that between 1993 and 2005, 2% of people experienced flat or falling real market incomes.  Between 2005 and 2014 that same number is an astonishing 65-70%;  indeed in some countries, most notably Italy, it rises to statistically very nearly 100%.

This is a staggering change.  For fully 60 years from the end of World War 2 – two complete generations – and with only a brief hiatus in the 1970s, buoyant global economic and employment growth saw almost all levels of society in almost all developed countries experience rising incomes.  As a result, most people in advanced economies were able to assume they would be better off than their parents, and that their children would in turn be better off than them.

This is no longer the case – indeed, even those who are personally comfortably secure are experiencing the frustration second-hand as their children struggle to find a job, afford housing and progress in life.  This strikes at the heart of human emotions – to want your children to succeed is a basic instinct – and leads to both bewilderment as to why it is happening, and then anger that the established politicians seemingly cannot address the issue.

The bad news for the political class is that the financial inequality and resulting deterioration in the economic outlook for so many people does not appear to be a temporary phenomenon. Indeed, McKinsey’s report suggests that from the 65-70% of the western world who are currently experiencing reducing incomes, in the next 10 years this number could rise as high as 80%. And this in turn means that the popular concern and unrest is not going to prove a passing phase.

Two of the reasons which are widely quoted for the economic situation so many people find themselves in are the rise of and competition from the emerging world economies, especially China, and the increase in migrations and immigrant workers.  The first, very simply, is blamed for reducing the number of well-paid jobs in many western economies, and the second for increasing the competition for those that remain, driving wages even lower.

Whatever the truth or economic merit of this analysis – and we do not intend to debate either point here – they are seductively simple and plausible enough for many people to believe them, and this in turn has driven the hostility to free trade and free movement of people that characterises so many of the insurgent populist movements.

But there is, we believe, a third reason for the decline in average incomes – a reason which is even stronger and even more fundamental than the rise of the developing economies and the increase in cross-border migrations. And that is that the nature of economic activity itself is undergoing a seismic change, in its way as big as the change wrought when capitalism first came in.

For much of mankind’s existence, labour was dominant.  People survived by and many prospered from the sweat of their brow.  Few were rich, but most of the population had an acceptable living.  This was the “Age of Labour”.

About 250 years ago, capital started to become dominant.  The way to prosper was not to work hard but to own the means of production.  Wealth became more concentrated, but still half the population had a good living.  This was the Industrial Revolution, and it brought in the “Age of Capital”.

Now though, ideas are dominant.  Success flows to the owners of ideas, those who can licence others to work for them (for example Uber, Airbnb).  Neither labour nor even capital is necessary, just an idea which captures the public’s attention.  Wealth becomes extremely concentrated, and a small percentage of the population have a fabulous living.  This is the Internet Revolution, and it has created a new economy, the “Age of Licences”.  And we have just entered it.

The change from the Age of Labour to the Age of Capital created huge wealth in aggregate, but it also destroyed livelihoods, led to mass unrest and civil strife from those who lost their economic existence, and demanded totally new solutions to the challenges of the times.  In the economic sphere it led to new concepts like the limited company, and in the political sphere it led to a wholly new dialogue between rulers and ruled, with democracy, trade union power and new charters of individual rights all making large advances in the 19th and early 20th centuries.

What is becoming apparent is that the change we are currently undergoing, from the Age of Capital to the Age of Licences, is likely to be every bit as significant and disruptive to the existing order as the Industrial Revolution was 250 years ago.  In industry after industry, the large established companies are finding they have no answer to the new competition, and it is changing the way people work and the money they earn.

In the music industry, for example, in the age before recorded music, many people earned a living from being a musician (though not many got rich);  then with recorded music there was less need to hire musicians but a small number became famous and very rich;  and now, with the internet, it is the owners of the platforms on which music is held (eg iTunes) that end up reaping all the rewards.

Whether it be the way we run our economies (in which there is currently literally no answer to the question “is Uber an employer, are its drivers employees?”), our politics (in which established parties and orthodox policies have no answer to insurgent populism), or even our lives (in which the division of our time between “being at work” and “being off duty” is evaporating fast), the old order is unable to understand, let alone control, the new creators of wealth and the new leaders of politics.

The alienation and anger of those who are being left behind in the new economy is both real and understandable.  It is being driven by real and fundamental changes in the global economy, changes which are not going to stop, far less reverse. Politicians who hope that the current waves of populist unrest are a passing phase are likely to be very disappointed.


[1]              “Poorer Than Their Parents? Flat or falling incomes in advanced economies”, McKinsey Global Institute, July 2016