The Third Pillar

by Raghuram Rajan

  When growth stalled, the prevailing consensus shifted across the developed world, from anti-market to anti-state. In Anglo-American countries where there was always a latent individualism, the intellectual and political pushback against the expansionary state was particularly strong. In some countries like the United Kingdom, it included reducing the role of the community. Politicians campaigned to take away powers that they believed had been usurped by the state, but let them lapse instead of allocating them elsewhere.

  As markets were liberalized across the world, and capital flowed more easily across borders, even countries that were not ideologically predisposed to markets had to worry as much about market reactions to their government’s policies as they did to voter reactions. Even as markets placed limits on government policy, some governments also tied themselves to supranational arrangements like the European Union or the single euro currency, which placed further limitations on the sovereign or local capacity to act.

  Thus as the ICT revolution started affecting jobs, trade, and through trade, jobs again, neither the debt-strapped, overcommitted, and much maligned state nor the disempowered community were in a strong position to respond to the needs of the people. Moreover, in good times the states had set in place immigration policies that were changing the very composition of the communities, without a strong sense that the necessary empathy to hold them together would be in place when times changed. But the times were changing. Technological progress spread rapidly through globally integrated markets, with few borders to slow them down. The people in some developed countries were largely left to respond on their own. The able adapted quickly and well, making matters much more difficult for the rest. These were left in increasingly dysfunctional communities, with growing resentment against the system that had been imposed on them.

  6

  THE ICT REVOLUTION COMETH

  An alien who visited Earth in the mid-1980s and came back today would see one clear difference—far more people in public spaces ignore the world around them and stare at a small rectangular device, which she would later learn is called a “smartphone.” Soon, the smartphone may be replaced by a device implanted in our body that connects with our mind and provides instant access to both computing power and enormous databases. Computer-enhanced humans are no longer the realm of science fiction. The ICT revolution has fundamentally changed what we spend time on, how we interact with one another, what work we do and where we do it, and even how people commit crime. Most importantly, it has upset the balance between the three pillars once again.

  As we will see, the ICT revolution has not just followed the course of previous revolutions by displacing jobs through automation, it has also made it possible to produce anywhere and sell anywhere to a greater degree than ever before. By unifying markets further, it has increased the degree of cross-border competition, first in manufacturing and now in services. Successful producers have been able to grow much larger by producing where it is most efficient. This has created spectacular winners, but also many losers.

  The technology-assisted market has had widely varying effects across productive sectors in a country. Some of the effects stem naturally from technological change, some from the reaction of people and firms to it. Indisputably, it has raised the premium on human capabilities. As a result, some well-educated communities in big cities have prospered, while communities with moderately (typically high school) educated workers in semirural areas dominated by manufacturing often have not. More generally, as with past technological revolutions, the need for people to adapt has come rapidly, before the benefits have spread widely. Indeed, the communities that are required to adapt the most, as always, are the communities that have been experiencing the greatest adversity, and have the least resources to cope.

  The anti-state ideology that gained momentum from the late 1970s has not been inconsequential. While the withdrawal of the state induced more competition in markets that were deregulated, it also allowed the acquisition of rents by the few and the relative shrinkage of opportunity for the many. Technology-induced inequality and human-induced inequality have built on each other.

  The shift in attitudes was best epitomized in a new paradigm to guide corporate behavior, the principle of shareholder value maximization, which focused the corporation’s energy on enhancing value for a narrow class of investors. While, by and large, this has moved corporations toward greater efficiency and away from vague notions of doing social good, it has also undermined their public support by legitimizing actions the community believes are grossly unfair. Corporations have compounded their political vulnerability by attempting to enhance profits, not just by building a better mousetrap, but by influencing rules and regulations in their favor. As a result, not only is the private sector more dependent today on state benevolence to sustain such anti-competitive barriers, which make it a less effective counter to state power, it is also less likely to enjoy broad public support if the state moves against it because it is seen as part of the crony swamp.

  Another important consequence of the ICT revolution is that by enhancing the wage premium that go to those with strong capabilities, it has strained community cohesion. To build the capabilities in their children that the market demands, people who have the incomes and the choice are tempted to move out of mixed or declining communities into communities of people like themselves. This is a phenomenon that can be seen in the United States, but it is also happening elsewhere. While the truly rich have always lived apart, the upper middle class has also been pushed to secede into their own enclaves. Even as job opportunities become more unequal, economic diversity within communities has fallen while diversity between communities has increased. This sorting of human capital across communities has increased the inequality in access to the capabilities necessary to compete in the market.

  Inequality, not just in economic outcomes but in opportunities, has therefore become an enormous problem. In the United States it shows up between residents of big cities or rich suburbs and small, economically devastated rural towns, between workers in big young successful service firms and small older struggling manufacturing ones, and between the top earners and the rest. The roots of this inequality lie not only in technological change, but also in the failure of the community and the state to balance and modulate markets.

  These inequalities are also present, if not to the same degree, in continental Europe. Moreover, the path of integration that continental Europe has chosen has highlighted new inequalities: between the protected jobs of the older generation and the poorly paying jobs available to the youth or immigrants, between the political power of the large European countries and the weakness of the smaller ones, as well as between the economic well-being of disciplined Northern Europe and the relative backwardness of the unreformed southern periphery. Through integration, all these inequalities have come into the European fold.

  In this chapter, we will focus specifically on how the ICT revolution has affected markets, especially job markets, incomes, and trade between countries. We will examine how the various interests in the economy have reacted to the increased competition. In the next chapter, we will turn to how this has affected communities.

  THE EFFECTS OF THE ICT REVOLUTION ON JOBS

  The ICT revolution has had a direct effect on jobs by eliminating certain categories of jobs, while enhancing the importance and reach of other kinds of jobs. It also has had an indirect effect via trade, allowing certain tasks to be outsourced, while increasing the insourcing of other tasks.

  THE DIRECT EFFECTS ON JOBS

  As a number of researchers have pointed out, in recent years new technologies have eliminated jobs that involved well-specified routines or simple, predictable tasks.1 For example, the Amazon Go store (opened first in Seattle) tries to create a shopping experience with no lines and no checkout counters.2 As you walk in, you use the app on your phone to register your presence, pick up what you need, and walk out. Later, your
Amazon account is billed. Computer vision and machine-learning algorithms, similar to the ones used in driverless cars, help identify what you pick up and tote up your bill. Not only does this do away with checkout clerks, the underlying software has also reduced the need for someone to monitor stock levels, order new inventory, or reconcile the store’s books at the end of the day. The automated system does it all.

  Of course, it has not done away entirely with the need for humans. There are still shop assistants to help guide people to where they might find products they are looking for, to stock shelves as they run out, and to prepare some of the fresh meals that Amazon sells. The point is that humans have moved to handling exceptions, and to intermediating as experts between ordinary people and the system. So long as stores structure all this well, they improve the overall buying experience, even while cutting down on costs.

  Routine jobs have been automated out of existence for decades now, regardless of whether the jobs required skills or not. Banks had hundreds of thousands of cashiers taking in and paying out cash, as well as counting it at the end of the day—a routine job that required integrity but no higher skills other than basic numeracy. The job paid decent wages in order to attract honest people, and keep them that way. Automatic teller machines (ATMs) and cash-counting machines displaced them, and now electronic payment systems like Alipay or Apple Pay, which bypass cash entirely, are rendering physical cash and the security apparatus that services it, redundant. Sweden has many bank branches that now refuse to take cash. Churches flash their bank account numbers on a screen so that parishioners can contribute their weekly offering using their cellphone.3 No doubt payments will get easier still in years to come. Yet, if anything, employment in banking has gone up as more, cheaper, bank branches are opened, and tellers morph into relationship managers advising retail customers on their loan options and their investment portfolios.4 According to the Bureau of Labor Statistics in the United States, jobs in commercial banking and related areas have gone up from 2.4 million in 1990 to 2.7 million in 2017 despite widespread automation, and an intervening banking crisis.

  New jobs are being created even as old jobs are lost. Consider, for example, skilled tax accountants, whose specialty was to know every arcane element of the tax code. Such jobs have also been displaced, in this case by tax software available for a few dollars. Interestingly, this leaves the highly trained tax lawyer, whose work is to erect customized international tax shelters for her high-net-worth clients, unscathed. Her work is not routine, since each shelter has to be crafted for the client’s specific situation, where her knowledge of the tax code, prior cases, as well as her creativity are essential. The ICT revolution helps her do her job—she can access prior cases or the relevant tax code much more easily—but it has not displaced her, at least not yet. Indeed, because she can create shelters faster using more readily accessible information, and because she becomes known internationally, both the supply of her services as well as the demand for them increase, enhancing her income significantly.

  Importantly, tax software also creates new jobs for people with moderate skills. A high school graduate with some training and familiarity with computers, employed by a tax preparation agency, can assist ordinary people with their taxes—people who do not want to spend the time doing it on their own, or are unfamiliar with computers. Earlier, they could not afford an accountant. Now, they can afford the assistant.

  Let us focus on this last example more carefully. Historically, the complaint about machines and automation was that they rendered the craftsman redundant. For example, it is well known that Henry Ford added tremendously to his workers’ productivity by manufacturing cars in a moving assembly line. The assembly line broke car assembly into multiple sequential tasks, allowing each worker to specialize in only one of many tasks. Equally important, and less well known, is that Ford insisted parts be honed to high tolerances so that they were interchangeable, that each part did not have to be specially machined to fit the car. Interchangeability, coupled with the breaking down of tasks, allowed Ford to dispense with craftsmen and hire modestly skilled workers for his assembly lines, thus creating the mass-market car. We see similar de-skilling with tax software, with the middle-class tax accountant replaced by a lower-paid computer-literate assistant with only a few weeks’ training. The assistant, aided by software, is probably more competent than most accountants, but less creative. Most people don’t want their tax accounting to be creative. De-skilling makes ordinary craftsmen or accountants largely redundant, but making the car or tax service cheaper increases demand and may increase jobs overall.

  We often think about technological change assuming the aggregate amount of work is fixed, and therefore what is displaced by automation will increase unemployment. Economists sometimes refer to this as “the lump of labor” fallacy—that there is only so much work to go around. To the extent that progress makes products cheaper, there could be more demand for them, and the overall quantum of human work can even increase. The new work will, however, be different.

  Of course, this means some kinds of workers will no longer be needed, at least in their old jobs—the afore-mentioned accountant, for example. Even so, as routine work gets automated, there is more demand for skilled people who can handle the nonroutine exception that is thrown up.5 In Ford’s time, mechanics who truly understood cars could set up repair shops, where they diagnosed and fixed the unique problems that each mass-produced Model T developed through wear and tear. Similarly, the accountant who can go beyond the routine can find employment at the tax-preparation agency or the tax-software firm to handle special-situation queries—for an additional fee. Since such accountants don’t really do routine work anymore, they need more capabilities and enthusiasm than the ordinary accountant, but may be better rewarded for it.

  Thus the direct effect of technological change, at least for the foreseeable future, may not be so much on the aggregate quantum of human work—unemployment in most developed countries is at historical lows at the time of writing—but its redistribution. The rich skilled tax lawyer earns significantly more, and has more work than she can handle; the middle-class tax accountant is typically worse off; and there are entry-level jobs for the computer-literate assistant, without much hope for additional skilling or career progression embedded in it.

  The data certainly are consistent with an increase in the number of jobs at both ends of the skill spectrum, and a decline in the middle. Both better-paid managerial, professional, and technical jobs and lower-paid service jobs have increased significantly in the United States as a share of jobs in the last three decades, even while middle-wage jobs have fallen.6 This polarization of jobs, with low-pay/low-skill occupations and high-pay/high-skill occupations gaining at the expense of jobs in the middle is not just a US phenomenon. Studies find that in fifteen of sixteen European countries for which data are available, high-paying occupations expanded relative to middle-wage occupations in the 1990s and 2000s, and in all sixteen countries, low-paying occupations expanded relative to middle-wage occupations.7

  THE INDIRECT EFFECTS OF TECHNOLOGY ON JOBS THROUGH TRADE

  In the last chapter, we discussed how trade grew substantially after World War II. Apart from falling tariff barriers to trade, there are really two important factors that determine whether goods produced in one part of the world can be sold in another. The most obvious is transportation costs. Less obvious but equally germane, as we will discuss shortly, are communications costs.

  An important contributor to lowering transportation costs was a seemingly innocuous innovation, the standardized container. An American trucking entrepreneur, Malcolm McLean, sent fifty-eight containers in 1956 on a converted tanker from Port Newark to Houston, Texas. His idea was to save on the time to load and unload ships, and to streamline the process by which goods were then transported by train or truck to their destination.8 As his idea caught on, containers became standardized in size, and cranes, container s
hips, storage facilities, and railcars were purpose-built to handle them. Not only did the container allow cargo to be packed only once at the sender’s end and unpacked only once at the destination, it increased the amount of goods a dock worker could load in an hour by almost twenty times.9 It allowed ships to reduce their idle time in port significantly. Importantly, because cargo was sealed, it reduced pilferage by dock workers and thus the cost of insurance—which fell to a sixth of its earlier level.10 A study of trade between developed countries estimates that containers raised the amount of trade between countries in the industries that were amenable to containerization by about twelve times over a period of fifteen years, far more than can be accounted for by all the tariff cutting.11 While emerging markets were late to the game, many started building specialized container infrastructure from the 1980s onward, which reduced their cost of sending goods to developed countries tremendously.

  When communication costs also fell, production and trade were transformed. Traditionally, trade consisted of making the entire product—say, a motorcycle—and then shipping it to the destination where it would be sold to a consumer. The country exporting the good had to be able to do it all, right from research and design to manufacturing, and even after, sales service. Multinational firms did open factories in other countries, but largely to supply local demand. As communication costs came down, though, firms started asking whether it made sense to do everything in-house and domestically. Why not break up the production chain and undertake each segment in the country where costs of production were lowest? After all, the cost of transportation was already low, so moving the intermediate product back and forth was not very costly. By tracking the production of each segment carefully using the latest computer and communication technologies, and intervening early when there were signs of trouble, firms could make sure there was no danger of stock outs and production disruptions. Indeed, if communication channels were seamless, a firm could have a trusted supplier take over a segment of the value chain. Given the low cost of moderately skilled labor in emerging markets, manufacturing segments of the value chain were typically outsourced.