At the end of 2016 I put forward an idea that the intervening years has increasingly reinforced. It is, moreover, an idea that is strongly re-emerging as the world is being reshaped in the wake of the pandemic. I am referring here to the clash that this century is about to experience, a war which is set to irreversibly define human civilization on the very long term.
The war, the clash is between Capital and Labor, the two most important factors of production driving economic activity. Basically, the peaceful co-existence in the rich world of the two production factors after the WWII has been undermined by two critical historical developments that have changed the context: the end of the Capitalism – Communism ideological competition in the victory of the former, on the one hand, and an accelerated process of globalization, on the other.
After World War II, capitalist and socialist countries got locked in a fierce race to prove the superiority of one form of government over the other. The path chosen by the West focused on developing a strong middle class whose wealth would by far outstrip that of the socialist working class. The geopolitical setting at the time provided the right momentum for finding a win-win arrangement between Capital and Labor that ensured a fair distribution of wealth.
Once the “Iron Curtain” collapsed and took with it the ideological competition, this basis for wealth distribution disappeared as well. Moreover, the imbalances in the win-win arrangement were accelerated by the opportunities that globalization was providing. In a market economy, the winner is the one to be the first to perceive opportunities and then bring them to fruition. This recipe of success has also worked like a charm for globalization. The fastest to seize the opportunities that an unprecedented opening up of the world presented, have won.
Indeed, Capital has emerged as a clear winner of globalization from the Capital/Labor competition. Capital had the undisputed advantage of getting across borders fast to the corners of the world with the best multiplication opportunities. Overnight, the capital holding minority gained access to a global pool of workers that replaced the national or regional labor markets. All of the sudden, Capital was dealing with an oversupply of Labor, generously offered by all developing economies in desperate need of capital.
As we all know, it is the supply / demand ratio that sets the price. The ratio has the price of Capital pushed up to the benefit of capital holders, whereas the global labor supply has curbed wages in the developed countries or has even raised unemployment.
The result was stagnating wages and standard of living in the West and rising wages and standard of living across the developing world. Social polarization in the rich economies has gone up, global economic polarization between states has gone down, and Capital holders thrived as the amount of wealth accumulated by the world’s richest people shows.
Faced with this challenge, Labor turned to the one instrument of power left available: the ballot. This is how populist, extremist or anti-elite movements have registered landslide victories in a number of European countries and the US.
We should, however, note that these movements did not win over voters by advancing economic programs meant to help narrow the economic inequalities in developed countries, but by a rhetoric building up on popular phobias and fears: the Chinese, the immigrants, losing one’s national identity, etc. In other words, by distracting the public from ongoing and actual economic concerns and increasing social polarization.
The current pandemic offers fertile ground for continuing to play on the anxieties and fears of people who risk forgetting that the changing times will decide the winner of this war of the century in the blink of an eye.
The ongoing pandemic has drawn our attention to one thing, though. Man, the supplier of Labor, is the weak link in the production chain. The catchphrase “our employees are our most valuable asset” is about to change to “our employees are our main vulnerability”. It follows that Capital will cut its reliance on this weak link to avoid the significant losses that a complete business shutdown involves. Lowering reliance can only be done by stepping up the process of digital transformation that has already been started to segregate people and thus shield them as consumers, with minimum impact on production. Replacing the human resource in the economy, particularly in the fields of production and services where the physical presence of workers is required, will accelerate.
The process will make labor cost less and less relevant. Placing Capital abroad will no longer be justified, all the more so as the unpredictability of some governments with questionable democratic and transparency standards and an increasingly expensive workforce in the once emerging states will also become a factor. We will most likely witness a deglobalization process that benefits regionalization and even repatriation of businesses.
Trumpeted as a success, it will not necessarily result in a rebound of the Western middle class as enhanced digitization will render obsolete some high-skilled jobs performed by middle class workers: doctors, lawyers, architects, accountants, fund managers, bankers, etc. Given all this, the fact that instituting a universal basic income has become such a topical debate is not by accident. The pandemic is the perfect pretext to dress it up as the right short-term measure, when it is actually a sign of a worrying trend in the long run.
It is basically an acknowledgement of the fact that some of those who recently lost their job due to the pandemic-induced economic crisis may never have one. They may be too old, or lack the ability to requalify or even when there is demand for their skills, it is sharply dropping.
The future will come hand in hand with both social and professional polarization. The clear winners will be financial and knowledge capital holders, that is the two ingredients without which accelerated digitization and technological transformation are not possible. Highly-skilled IT experts will continue to be in high demand and competition for their skills is set to place them in an enviable social position.
The problem is that the majority will not be able to keep up with the challenges caused by the new technologies. As a result, Labor suppliers will most likely divide into the elite of high-technology producers and the remaining low-skilled or unskilled workers. The unskilled workers will have to be provided with financial aid in the form of a guaranteed minimum income that is sufficient to live on and also “buy” social peace.
Should such a deal be rejected? Stay home on the government’s money and enjoy a fairly decent standard of living is an offer that some of us would agree to right now and most importantly, would vote for. That would be the first step towards distorting the only instrument that labor has available: the ballot.
Those who would not willingly accept the changes may be swayed to come around. A precedent has already been set by the misuse of data that social media provided. The fact that a game-changing event, such as Brexit, was ultimately decided by a narrow margin following “online” manipulation represents an extremely serious warning as to how the masses of voters can be made to decide on crucial decisions on command. And Brexit is not the only example.
Such approaches have caused public outrage and led to significant counter-measures. And yet, as the pandemic is ongoing, a number of states are proposing and taking steps heralded as containment measures that involve a close monitoring of people’s private lives. The use of technology for surveillance purposes in some totalitarian countries is starting to emerge in democracies as well. This is a dangerous precedent, especially if it is given as an alternative to social isolation. Aversion towards prolonged social isolation may convince many to pick “the lesser evil”, i.e. monitoring of trips, people they interact with and even body temperature.
The prospect of the state intervening in people’s private lives and influencing public options poses a risk to how the ballot can still function as a means to control political elites and protect them from the financial elite’s excessive influence.
At this rate, a solution to the war of the century between Capital and Labor could come much sooner than anticipated.
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