08 December 2018

A More Civil War Between Two Economies

The American Civil War was fought between two economies: the South’s agricultural economy and the North’s industrial economy. Today's more civil war is also a clash of two economies: industrial and information. In the industrial economy are factory workers threatened by globalization and traditional capitalists who want lower taxes and smaller government; in the information economy are knowledge workers and new entrepreneurs who depend on globalization and public investment in education and research. They live in different economies. They want different policies.
In a country as big and complex as the US, people don't vote for or against candidates for just one reason. Still, these two economies explain a lot.

People in congressional districts that voted Democratic in 2018 are more likely to have college degrees, twice as likely to work in digital services and almost half as likely to work in manufacturing.[1] In the 50 counties with the most college grads, Hillary Clinton won by 26 percentage points; in the 50 counties with the least, she lost by 31 points.[2] College grads are the simplest proxy for knowledge workers and have become one of the simplest predictors of how communities vote.
The classic knowledge worker – whether biologists and chemists developing new drugs, engineers designing new products or programmers creating apps – is working towards disruption. Their new product displaces an old one.
By contrast, factory workers and traditional capitalists dislike disruption.
If we define traditional capitalists as people who invest in physical factories or private businesses, it becomes clear that they are more threatened by disruption. They can’t quickly buy and sell their assets like day traders and two things will enhance their investment: lower taxes and protection from sudden obsolescence.
If factory workers are laid-off they could be forced to leave manufacturing – or even town - for lower paying jobs. A new product or technology – the very goal of information workers - could make an entire factory obsolete and that could mean a wave of layoffs that might devastate a small community.
Disruption threatens factory workers and traditional capitalists in the industrial economy but is a goal of the new entrepreneurs and knowledge workers in the information economy.  This drives conflict.
People in the two economies also experience the outside world differently.
Knowledge workers inevitably have immigrant coworkers and foreign customers and suppliers. (As the name suggests, the world wide web isn’t a local service.) About half of Silicon Valley’s startups are co-founded by first or second-generation immigrants. Information shows about as much respect for borders as do clouds and this information economy is a global economy. NAFTA, WTO, and the EU were defined in the 1990s along with the internet. Also, knowledge workers generally live in cities among neighbors, coworkers and family from around the world.
By contrast, factory workers are more likely to see the outside world as a threat. Imagine competing with factory workers from foreign countries who might make as little in a day as you make in an hour. If you live in a rural area you know fewer foreigners. (Foreigners are 27% of California’s population but only 1.6% of West Virginia’s.) West Virginia has 5.6X as many veterans as immigrants; California has 5.3X as many immigrants as veterans. People in rural areas are more likely to meet foreigners through war and occupation than work and dating. To folks in the industrial economy, foreigners are people who take your job or even your life. To folks in the information economy, foreigners are coworkers, neighbors and family.
Everyone wants security. People in the industrial economy want it in the form of protection from the rest of the world and people in the information economy want it in the form of social programs. Factory workers want walls for immigrants and tariffs for trade. Knowledge workers want good social safety nets like generous unemployment insurance, universal healthcare and great education and retraining programs to help them through what they see as inevitable disruption. Knowledge workers want strong government. Factory workers want strong borders.
Traditional capitalists want low taxes and small government. They are trying to maximize their return on investment and aren’t interested in high-taxes to create a strong government. By contrast, the new entrepreneur relies on healthy government investment. The quality of his employees depends on the quality of education. And the knowledge workers the new entrepreneur employs often develop products that depend on government research. Mariana Mazzucato argues that companies like Apple could develop products like the iPhone because of earlier government research into technologies like touch screens and satellites. Government funds the uncertain R (research) and companies invest in the shorter-term D (development). In the information economy, R&D is a collaborative affair between the public and private sectors.
The conflict between knowledge workers and factory workers does not come out of irrational thinking or tribal impulses. They are protecting the economy that defines them.
There is precedent for such a divide.
The American Civil War was fought in the 1860s. Between 1840 and 1890, agriculture’s share of economic output and employment fell by half while manufacturing’s share doubled.[3]
The industrial economy – and Republicans - emerged from the north. Lincoln was the first Republican president, elected just six years after the party was founded. Between 1861 and 1933, a Republican sat in the White House 72% of the time. In 1861 daily life would have been mostly familiar to someone from 1776; by 1933, the nation had automobiles, electricity, telephones, airplanes and radio. Republicans were presidents and capital was king. The industrial economy emerged in gales of creative destruction and the South’s agricultural economy and way of life – both dependent on slavery - were two of the things that it destroyed.
The agricultural economy employed 90% of the workforce at our country’s founding; it now employs 1%. The industrial economy is following its trajectory. From 1910 to 2015, manufacturing as a percentage of employment fell from 33% to 9%.[4] Meanwhile, between 1940 and 2016, the percentage of Americans with four or more years of college rose from 5% to 33%. The industrial economy, like the agricultural economy before it, has proven to be just another phase of economic development rather than its culmination. The industrial economy eclipsed the agricultural economy as a source of wealth and jobs in the late 1800s; about a century later, the information economy has eclipsed the industrial economy. If you define yourself as a farmer or factory worker, such disruptions are a personal threat and not just an economic phenomenon.
People in the industrial economy feel under attack. For that reason alone they rally behind the warrior chief Trump and care little about whether others see him as crude or combative; he’s protecting them from an attack on their lifestyle and livelihood.
But if a transition from an industrial economy is as inevitable as the transition from an agricultural economy, the question becomes, What policies help with the transition? Policies designed to protect jobs, industries or even economies are expensive and defer the inevitable. Policies that protect people rather than jobs, helping them to make transitions rather than resist them, are less expensive and yield a better return. The transition won’t be – has not been – trivial but here are just a couple of suggestions.
Treat career investment more like a common right than a special privilege. States invest about $40,000[5] in knowledge workers who spend five years at a public university. Factory workers (or anyone who doesn’t go to university) deserve a similar investment. The money could be spent on education (vocational or trades schooling, for instance), venture capital for startups or housing allowance to move them into more dynamic communities with better jobs.
Another policy initiative could better integrate rural workers into the information economy. People in cities are 40 to 50% more productive for host of reasons, most stemming from the fact that they are part of richer and more varied communities. It is worth exploring options for better connecting folks in less populous communities with folks in nearby cities or rural hubs so they, too, enjoy more of the economic benefits of living in cities where ease of connection and specialization makes people more productive. 
One step to ending the more civil war between factory workers and knowledge workers is to treat them the same: invest in both and make them part of the same, continually evolving economy. Because as it turns out, the economy is not any one thing: it is an evolving market that will change even more rapidly as it becomes more clearly an entrepreneurial economy rather than the agriculture, industrial or information economies that preceded it.

[1] https://www.cnbc.com/2018/11/15/charts-democrats-represent-modern-economy-republicans-left-behind.html
[2] http://fivethirtyeight.com/features/education-not-income-predicted-who-would-vote-for-trump/
[3] https://www.cambridge.org/core/journals/journal-of-economic-history/article/americas-first-great-moderation/E3217E2FA4B9D3CAD4AA23A67CDCDC62
[4] https://www.bls.gov/opub/ted/2016/employment-by-industry-1910-and-2015.htm
[5] https://www.usnews.com/news/best-states/slideshows/states-investing-most-in-higher-education-per-person

1 comment:

Jason Brunson said...

Great article.
Would it make sense in this context to create a sort of "compromise"?

For example, if the industrial economy supported a strong system of social safety nets and the information economy supported a more "economic freedom index friendly" approach to regulations (including things like vouchers vs top down systems like Medicare for all).

We could even potentially shift part of the tax burden to a high flat tariff (a la Ian Fletcher) and reduce corporate and capital gains taxes.

I think one big concern is still that people on the left side of the IQ bell curve are going to struggle in the information economy in ways they didn't in the agrarian or industrial economies.