Larry Summers has a fine review in Democracy of the hot new book by Thomas Piketty, Capital in the Twenty-First Century. He points out that the publication of this book in English corresponds with a political/cultural moment in which we’re anxious, concerned, and to some degree confused by a growing economic inequality.

Piketty’s research (which Summers praises) definitively shows that the last couple decades have seen a remarkable concentration of income and wealth in an increasingly small percent of the population. It’s not the rich so much as the super-rich. The divide between the top ten percent and everybody else isn’t as great as that growing difference between the top 10 percent and the top 1 percent. Still further, “The only groups that have outpaced the top 1 percent have been the top .1 and.01.” 

Piketty has a theory to explain this growing inequality: The economic laws of capitalism favor wealth over labor. In other words, the rich get richer because they’re rich. Summers has technical arguments for why this way of thinking is unconvincing, arguments I’m not sure I understand. 

But what I do understand and find convincing is his alternative explanation: Technology and globalization significantly shift the competitive advantages for certain kind of talent, labor, and expertise. 

Here’s a passage I found particularly helpful: “Think about the contrast between George Eastman, who pioneered fundamental innovations in photography, and Steve Jobs. Jobs has an immediate global market, and the immediate capacity to implement his innovations at very low cost, so he was able to capture a far larger share of their value than Eastman. Correspondingly, while Eastman’s innovations and their dissemination through the Eastman Kodak Co provided a foundation for a prosperous middle class in Rochester for generations, no comparable impact has been created by Job’s innovations.” 

To my mind this contrast captures a great deal of our problem today. Globalization has put vastly more resources at the finger-tips of the so-called creative class. They have quick access to labor across the globe as well as capital. That’s plain to see, and it naturally magnifies and accelerates the economic advantages of being creative (or lucky or well-connected—we shouldn’t discount those sources of competitive advantage!). 

What I hadn’t seen before is the Eastman side of the comparison. His capacity to translate innovation into marketable products requires organizing and improving the social capital of Rochester. The same was true for Henry Ford, who famously raised wages for his factory workers. He saw that increased incentives would accelerate the reorganization of agricultural and small town society around large-scale industrial production, something necessary for him to realize the full economic potential of his innovations in mass production, marketing, and so forth. You couldn’t just invent the modern mega-corporation. It required profound transformations of social capital. 

That still happens, but it’s diffused around the globe in ways that are difficult to see as part of an evolving, healthy social organism (not that American industrialization was trouble free!). Thus Silicon Valley. It’s an amazing source of new wealth in the Bay Area—unprecedented in many ways. But it’s not building a new city, as the auto industry did in Detroit or steel did in Pittsburgh (or for that matter areospace in Los Angeles after WWII). Take General Motors out of Detroit in 1970 and the social structures in that state would be profoundly altered, if not collapse. (That’s what has in fact happened in slow motion over the last few decades.) Suddenly uproot Apple from the Bay Area and I don’t think it would make much of a ripple. 

Income inequality is a problem because it’s an easy way to talk about a deeper and more complex problem, which is the way in which globalization detaches, at least in part, processes of wealth creation from specific regions and communities. This means that it’s not necessary for a city or state or region to participate in new modes of wealth creation—which was the case one hundred years ago when the auto industry grew at a torrid pace. That’s one reason why so many people are being left behind in the new economy. 

Articles by R. R. Reno

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