Saturday, December 03, 2016

The first industrial revolution could have turned out badly

The first industrial revolution could have turned out badly.

That it didn't, that it created prosperity rather than destroyed jobs, has forever since given technophiles and free-market economists a licence to rubbish anyone who complains about jobs and incomes vanishing as a result of technology, even if they are right.

That's the concern of 64-year-old Kaushik Basu, an Indian economist and expert in game theory who was until a few weeks ago chief economist of the World Bank.

At Melbourne's Monash University this week to renew contacts before returning to Cornell University where he will specialise in macroeconomic research, he says the declining importance of paid work is one of the few things that worries him more than President-elect Donald Trump. In fact, he believes it's behind the rise of President-elect Trump.

Basu says throughout advanced economies the share of national income paid out as wages has dropped precipitously since the start of the information technology and automation revolutions that began in the mid-1970s, the first time this has happened in modern history.

The Australian Bureau of Statistics says the wages share of GDP has fallen from 58 per cent in 1975 to 49 per cent today ahead of the next update due on Wednesday.

In the USnited States it has slid from 61 to 57 per cent and in Britainthe United Kingdom from 69 to 56 per cent. Most of what isn't taken out as wages is taken out as profits. Automation, offshoring and glacial wage growth have kept a greater share for profits, meaning that in the in the US at least, there's been no real growth in the median wage for for decades.

History not repeating

That isn't what happened the first time around, in the great British industrial revolution from the mid 1700s to the mid 1800s, but in his cramped temporary office at Monash, Basu tells BusinessDay that it might have.

"During the industrial revolution it was common for workers to work 12 hours a day, 14 hours a day. Industrialists were patenting spinning machines that could be operated by children as young as five5. Reformers who argued in Parliament for reduced hours and protections were told that poor conditions built character."

The reformers won, on the floor of Parliament. But Basu's point is they need not have.

"People very often say: 'Why are you worried about today, we went through the industrial revolution and we came out fine, we are better off'. What they overlook is that it took dramatic changes in our thinking. That's why the industrial revolution did not cause catastrophe and realised its potential benefits.

"These days offshoring and automation are seen as a labour versus labour dispute – workers in Australia or the US versus workers in emerging economies. What's overlooked is that every time labour is outsourced profits in the country goes up and the wage share goes down.

"It's actually a labour versus capital issue. Workers don't realise this, and engage in hypernationalism or vote for people like Trump in a bid to return things to how they were."

Balance needed

What Basu thinks we should be doing is restoring the balance between labour and capital.

"It can't be done by boosting wages – that'll simply send more to the Philippines. What we need, and this is early thinking, but a number of people are writing beautifully about it, is a mechanism that will share profits."

He says if just $1 in every $10 of profit was retained for distribution to to workers, that would leave $9 in every $10 for the owners of capital, more than enough to maintain incentives.

It's similar to thinking behind Australia's aborted mining super-profits tax, except that those proceeds were to be retained by the government rather than distributed to workers.

Without it, without taking this radical idea as seriously as was taken the radical idea of spreading the benefits of the first industrial revolution, there's a chance ordinary citizens will end up worse off after this revolution than they were at the start of it.

"We are reaching a stage in the world where we have to think of these things seriously," he says.

"Without the same type of action as took place in that revolution, this one could leave workers worse off."

Basu thought the global economic outlook was "grim" even before the election of President-elect Trump. Now he thinks it is also unknowable.

If Trump sequences things right, it might be OKokay. If he quickly boosts infrastructure spending as promised he could lift US economic growth from 1.5 per cent to 3 per cent. Only several years on, after the budget had been replenished, would he be able to afford his promised tax cuts. And his threatened trade and currency wars are too awful to contemplate.

Basu finds much of what's ahead too awful to contemplate. But he says we should.

In The Age and Sydney Morning Herald