Human Capital in the Twenty-First Century: Piketty, Progress and the Distribution of Wealth

Thomas Piketty’s magnum opus Capital in the Twenty-FIrst Century made huge splashes especially after the publication of its English translation last spring. The bombshell argument of the huge book, supported by a massive amount of data and analyses, is two-fold. First, income inequality is increasing. And second, this will propel the economy back to the patrimonial capitalism dominated by inherited wealth.

Piketty gave recently a wonderful talk at the London School of Economics about his book. One thing that struck me at the very beginning of the talk was that he emphasized his books reliance on history. While I cannot argue with Piketty’s economical argumentation, which I, along with many of his supporters, believe to be mostly correct, I do believe that its applicability is somewhat suspicious in the present day world. The reason to this is simple: progress.

I believe that using that fancy academic two word disclaimer, ceteris paribus, Piketty is correct. That is to say, all other things remaining the same, as income inequality grows, capital will be accumulated in clusters of already wealthy families and individuals. But I believe the situation is complex enough to warrant further scrutiny.

First, the global economy appears to be in a fluctuation, where structural changes happen faster and faster each year. The dispersion of information, and as its consequence the creation of new innovations (which in turn disperse information faster) creates a spiralling motion where the structure of supply and demand of goods keeps fluctuating faster and faster. Applying historical evidence in a world in such turmoil is perhaps not the best strategy. Modelling patrimonial capitalism of the 19th century may not be at all a viable way to describe the market, even if the capital itself was accumulated to the wealthy individuals. Having lots of money is not worth much, if most of it is tied in sinking assets.

Second, there is the question of whether income inequality is a bad thing. Of course, I would not argue against the massive amount of correlative evidence that goes to show that in countries with more dramatic income inequality also the general well-being of the people is worse. But there is more to well-being than just income.

Interestingly, while income inequality has grown in the last few decades, so has the general overall wealth of people. While capital has been accumulated to the most wealthy individuals, also absolute poverty has been halved from the situation twenty years ago. While the comparative wealth gap has grown, absolute wealth has also been distributed more widely.

I have been a big critic of Adam Smith’s idea of the invisible hand, but in a sense something like that is happening here. The reason, though, is not crumbs of capital falling from the super-rich to the poor, but once again in progress, and its consequent increase in efficiency in producing goods and services.

The luxury of yesterday is the norm of today. This applies as much to luxury goods like TV sets and computers as to basic everyday needs like food and clean water. Producing these goods and services is today far more efficient than it was twenty years ago, and the trend in becoming even more efficient looks good.

The third and what I believe to be the most important feature of progress is the increasing relevance of human capital. That is to say, understanding, knowledge, skills and creativity. Interestingly, with information moving faster and faster, with production efficiency growing, and with the availability of both knowledge and the means of production, the tables are turning.

The significance of monetary capital is becoming less important in a world, where you can build an app worth millions of dollars in a few months in your bedroom. Such leaps to success would not have been possible yet a hundred years ago, where owing to the market structure, just entering an existing market would have required tens or hundreds of thousands of dollars. Now it’s enough that you have a cheap laptop.

The true challenge in capital of the 21st century is, I believe, the equal distribution of human capital. That is to say, guaranteeing equal rights to education and to the knowledge bases we have available to us. While capital will continue to play a significant part in a capitalist market economy, I believe that with the continuing acceleration of both innovation and the market structure, it will be increasingly human capital that will differentiate the future successes from the failures.

The take home messages, I believe, are the following. First, we must take seriously the fact that the world of today is not the world of the past. And more so, the world of tomorrow will be something that no one of us understands perfectly well. So we need humility, and careful optimism in facing the future.

Second, given the increase in production efficiency, we should move from measuring monetary exchange to measuring actual well-being. With more efficient production better products are created at a fraction of the previous price. This will be reflected in slowing economic growth – but also in the increased well-being of the people consuming the better goods.

And finally, we should take seriously the fact that the capital of 21st century is not measured in dollars, but in ideas.

We are, indeed, moving towards a post-capitalist market economy, where true added value for commerce will arise from innovation, not from applied funds.

Passive vs. Active Security

Human beings, to a varying degree, all crave security. This is why some of us stick to a lousy job and others amass all they can.

Security is a double edged sword, though. Even more so in a world where change is picking up pace by the day.

Security, in its classic sense, is static.

It is something that secures, holds in place. It means that you have the necessary resources, that you do not have to fear for personal safety, material loss or mental setbacks. This kind of security is provided by wealth, a well protected society or a welfare state. This is a passive type of security.

The passive type of security is more and more detrimental as the world keeps changing faster. This is well exemplified by the opposition market disruptors like Tesla, Uber and Airbnb have faced. Old players want to stick to an old world. Sorry to say, that world is gone already.

In the new world we need new security. And this is security that is not tied up in wealth or fame or the total penetration of a well trained police force. This is security that arises from individual dynamism: the capability to keep in motion, to dance with the changing world.

In a static world you can secure yourself by amassing wealth. In a changing world, nothing guarantees this security anymore. (To be frank, it didn’t before either. That’s why Scrooge McDuck never had enough.)

In a changing world, security is contained in change itself: your very individual capacity to change, to learn, to adapt and to create.

Security can also be found in searching for what you really want to do, to keep on learning new tricks every year, to keep tabs on what is going on in the world, and most forcibly, to find meaning in the service of the well-being of other human beings.

This is a new kind of security, one such that is not susceptible to the structure-disrupting forces of an accelerating world.

This is active security.

The Digital Divide

World leaders have gathered to Davos to think about the economic future of the planet. In particular, the question of income inequality gives cause to worries.

An economy where the majority of resources is isolated in the hands of the few cannot thrive. An economy is a moving, living thing. When its lifeblood is stored in a vault, be it a digital stowaway or a cave guarded by a dragon, the economy stagnates.

But there is an even worse gap brewing. I mean the Digital Divide that is building up as we speak. This division of intellectual resources will also no doubt contribute to increasing income inequality.

After all, income is not generated out of thin air, but out of activity resulting in smart allocation of resources. Be they capital, gold, water or coal. Or level design for a computer game.

What I mean by the Digital Divide is the phenomenon of inequally distributed learning. Intellectual resources such as tablet universities, online scholarly databases and even children’s learning apps mean that those with access to ubiquitous digital connectivity also have an access to constantly develop their intellectual skillset. The skillset which will also contribute to general success in life.

A five year old who can start learning algebra by playing DragonBox, a teenager who can study differential calculus in Khan Academy and the thirty-something career changer who can participate in a Princeton MBA level class via Coursera are in a massively advanced situation compared to those whose learning is limited by the classical schooling model.

School is simply outdated in the current learning ecosystem, yet the New Learning is only accessible to scarce few.

What causes the Digital Divide are these three elements:

1. Lack of access to digital devices.
2. Lack of knowledge of digital services. And
3. Lack of understanding to employ those services.

We need to build an ecosystem where practically everybody has immediate (mobile) internet access. We need a system to communicate to the mobile users the top notch learning services. And we need schooling that helps people to use those services properly and to sort out the wheat from the chaff.

Unless we do this, and unless we do this pretty soon, we will soon have a society divided into supersmart people who have been able to tap into their personally interesting fields from early on in their lives. I’m pretty sure we will in a moment have an explosion in the future Kurzweils and Einsteins.

But meanwhile we will have a growing number of people who have been thrown off the wagon owing to old structures not yielding fast enough to a world that is changing more rapidly every day.

Teachers resisting “bring your own device” practices or parents being wary of digital learning will leave their students and children with a legacy that I suppose will cause far more dire problems than the present income inequality.

An intellect inequality caused by the Digital Divide will at best create an economy where a great deal of people will have tremendous problems accessing the job market.

At worst, it can cause a division into something like H.G. Wells predicted in his dystopian “Time Machine”: a society of smart but weak Eloi, direly contrasted by the aggressive but slow thinking Morlocks.

Add to this the fact that owing to automation, in a couple of decades there will be scarce few jobs left for those not versed in complex subject matters, one can only speculate on the scope of such dystopian visions.

The silver lining here is that unlike with income inequality, the intellect inequality is something we can deal with pretty much straight away, both as individuals and as a society.

By giving our children, our students and our adult learners access to digital devices by both parental and peer support, school reform and legislation; by creating web portals collecting the best learning platforms; and by incorporating the learning skills themselves (“learning to learn”) into the school curriculum, we can, at a moderate cost, avoid such a division from building up in the first place.

We might not have a future society of Einsteins, nor should we. But we can have a future society where the great majority of people can first tap into what they are truly interested in, and second develop considerable skills in those fields from early on in life.

The digital tools we have available make this possible for a growing number of people right now. To these people the future is now.

The society I believe we should be building is such where the future would eventually be equally distributed.

A society where, instead of a Digital Divide, intellectual abundance touches not only the fortunate few, but the great majority of the human kind – if not, indeed, eventually every single human being.