[Please note: this piece is Part I of a 3-part series, and is long. It’s also a work in progress. So if you have questions or comments, feel free to post them. All contributions are welcome! And if you like what you’ve read, stay tuned for Part II. Thanks!]

Today’s private progress coincides with growing public peril.

Search “top inventions in the 21st century” on Google, and this is what you’ll get. Nanobots. Flying drones. Birth control patches. Head-of-a-pin operating systems. Virtual reality. Particle accelerators. Digital currency. Gene editing. Artificial intelligence. 3D printing. Lab-grown pancreases. Reusable rockets to Mars… and on and on, among the 6.33 million search results returned in 0.58 seconds.

Search “top issues of the 21st century” on Google, and this is what you’ll get. Global warming. Poverty. Nuclear proliferation. Fake news. Terrorism. Inequality. Famine. Obesity (?!). Deforestation. Population imbalances. Pandemics. Leadership crises… and on and on, among the 237 million search results returned in 0.70 seconds.

So doing the math here, we’re faced with nearly 40 times as many questions as answers — despite the fact that answers include the likes of “nanobots” and “lab-grown pancreases.” Indeed, we can do (dubious) math like this in mere seconds only thanks to the magic of equally mind-boggling internet search technology.

Trite though observations like this may by now be — and pessimistic as some truly are — it still jars to juxtapose human progress with human perils. We can build rocketships for passenger service to Mars, yet we plunder what remains of our plant, air, water, and other scarce bounty back home on Earth. As private sector tech approaches escape velocity, some of our vital public needs seem to be left in the dust.

We can break this phenomenon down.

This series will argue that the best approach to solving today’s big issues will be to couple individuals’ self-interest with the global public good; and it will propose a way to do this. The series comes in three Parts.

1. This first paper presents Part I, identifying the source of today’s biggest issues. We’ll see that government historically solved pressing public problems well — especially when partnering with the private sector — and that government couldn’t have done this alone. But we’ll see that today’s issues will be harder for governments to solve, largely because the private sector won’t be as helpful as it’s historically been. We’ll ultimately be drawn to conclude that governments, firms, and individuals collectively lack the will and ability to address today’s biggest public issues — and especially those that require global coordination.

2. The second paper (coming soon) will present Part II, introducing a model to explain what yields collective will and ability — what we might call ‘directionality’ — to achieve desired outcomes in a given human system; and we’ll use that model to identify a class of solutions promising to deliver greater directionality to solve public problems. In Part II, we’ll see that directionality can be improved by enhancing interactions between incentives, capabilities, and power relationships among key actors in society. And we’ll see that coupling individual incentives more tightly with the global public good would be the single most effective and principled way to produce greater directionality to address global issues. We’ll see further that creating individual incentives that align with the global good could also reduce firms’ problematic and growing power over government as well, addressing both issues in a single stroke.

3. Finally, the third paper (coming later) will present Part III, evaluating a particular idea that lives within the class of solutions arrived at in Part II. I’ll argue that we can create individual incentives to pursue the global public good without jeopardizing the time-tested profit motive, by putting them together. And we’ll see that addressing the root cause of the collective action problems outlined in Part I could solve its many manifestations presenting today around the world.

Historically, government has solved pressing public problems well, especially when partnering with the private sector.

In the past, domestic governments working mostly solo have performed some class acts in, for example, curbing violent crime, educating our young, and promoting responsible parenting, healthy lifestyle choices, and humane labour practices. Globally, governments working together have done well to reduce nuclear stockpiles, adopt more participative forms of government, and broaden global internet connectivity and access.[1]

…government’s greatest triumph has been to foster a thriving private sector…

But perhaps government’s greatest triumph has been to foster a thriving private sector. Indeed, the most remarkable public success stories star private sector partners playing leading roles alongside government actors. The share of the global population living in extreme poverty has plummeted — from 35% in 1987 to less than 11% today, principally as a result of private sector growth in China, India, and to a lesser extent, Sub-Saharan Africa. Hunger has consequently fallen as well. And health outcomes have improved along a number of related measures — such as that under-5 mortality rates have fallen by more than half since 1990, not to mention that maternal mortality rates from childbirth have fallen almost as quickly. Private sector innovation more broadly has driven the adoption of now-common vaccines for measles, diphtheria, tetanus, pertussis (whooping cough) and many other conditions; and far too many other medical advances to name. Private sector contributions to poverty, hunger, and health outcomes are associated with life expectancy improvements around the world of around 40 years — rising from ages in the mid-30’s to the mid-70’s from the early 1900’s to today — not to mention more time to enjoy life, with (developed) country workweeks falling by nearly half (from ~70hrs/week to ~40 hrs/week) over that timeframe.

Taken together, astonishing results like these illustrate how potently a thriving private sector has improved global public outcomes over the last 100 years in some of the most central dimensions of human wellbeing.

Government couldn’t have delivered these outcomes alone.

Hand-in-glove with for-profit firms, governments the world over have achieved some remarkable things in the last 100 years. But this same history has also exposed some of the limitations that make government reliant on private firms to help deliver breakthrough public outcomes in the first place.

First, whereas firms are single-minded in their pursuit of profit to satisfy shareholders, governments pursue much broader objectives to serve their constituents.[2] The downside of this is that government objectives are more poorly defined. Indeed, public outcomes may be less well-defined by design, to address that constituents themselves disagree about what government should pursue. And broader, fuzzier objectives lead to a poorer understanding of how to achieve them — permitting greater scope to (de)emphasize certain metrics to tout one’s own achievements and lay blame on forces outside oneself. And all of this operates to reduce focus and accountability, as there’s no clear basis on which to assess performance.

Second, whereas practically, directive power in firms mostly vests in a single chief executive, (democratic) government powers are intentionally distributed among many bodies — namely, across the executive, legislative, and judicial branches of government — in order to secure effective checks and balances. The downside of this is that governments face more difficulty marshalling support to meet targets; and this makes government less efficient and its commitments less credible.

Third, whereas private sector firms operate almost by definition mostly in private (periodic reporting by public companies apart), (liberal) governments operate more in the public eye. The downside of this is that failure of any kind is much more public; and this leads to greater risk aversion on the part of government actors, which in turn discourages fruitful experimentation. So, greater public scrutiny can encourage public sector leaders to manage more for public perception, rather than for the public good.

…in a given jurisdiction, there’s only one government responsible … while there are typically many firms that can do any given paid job…

But besides these side-by-side comparisons of government and firm, perhaps the main difference between public and private sector operations is that, in a given jurisdiction, there’s only one government responsible (sure, maybe 2 or 3 in federal states), while there are typically many firms that can do any given paid job; and the competition resulting from the existence of multiple suppliers disciplines firms to continually do better. By contrast, in the public sector, if you have a better idea about how to do something than the current government, at best you can wait until the next election to win voters over, if you’re lucky enough to live in a democracy.

These and other inherent differences between governments and firms help explain why governments are typically less effective, efficient, and innovative than firms as a group.[3] And poorer results contribute to (democratic) governments turning over more frequently than firms’ C-suites, making governments relatively less effective yet again. And with a fair chance every 4–5 years that a (democratic) government will turn over, long-term public sector commitments similarly become less credible, as they always run the risk of being undone by the next administration.

…governments have in the past turned to firms to do things they can’t…

Because of these limitations, governments have in the past turned to firms to do things they can’t. To be sure, government has relied on firms’ laser-focus on profit to improve public outcomes. This has especially been the case with health and longevity, where firms can find deep pools of customers with deep pockets to pay for life-enhancing medicines and therapies. It’s also been the case in outcomes relating to prosperity, which rises as firms have bought and paid for cheaper pools of labour to develop and deliver their myriad wares and services. Government has also relied on firms’ i) more-centralized decision-making and ii) discretion and stealth to experiment with new, possibly culture-bucking ideas — and this is borne out unequivocally in the data: although governments in most countries often represent one-third to one-half of all national expenditure, 99%+ of proposed solutions (measured in terms of patents,[4] for example) come from non-government actors. Finally, government has relied on firms to deliver long-term public projects that are likely to outlive any particular administration, often using public-private partnerships for example, to establish a “strategic and robust commitment” to address the fact that focus can otherwise wane.[5]

That capitalism promotes prosperity and progress has been well-documented.[6] Perhaps Professors Trebilcock and Iacobucci put it best when they remark that “the pursuit of self-interest by competitive, profit-maximizing firms drives prices down to marginal cost, which in turn maximizes society’s gains from trade.”[7] Given the constitutional comparison, it’s perhaps no wonder that the private sector features so prominently in humanity’s album of greatest hits.

Government couldn’t have achieved what it has, alone.

Today’s public problems will be harder for governments to solve, largely because the private sector won’t help as much as it has in the past.

Remarkable though past public feats have been, many past successes came from the private sector’s drive to profit — reaping revenues by creating new solutions for paying individuals, or cutting costs by finding cheaper, often foreign, labour and other inputs, which incidentally improved the livelihoods of these workers and third-party vendors. Since past public issues most immediately concerned the health and wellbeing of paying individuals, the public sector could rely on the private sector to improve public outcomes in pursuit of private profits.

… today’s issues are … more about the integrity of the liberal state, international security and human rights, and the planet itself.

Today’s issues are different. Today’s issues are less about individuals, and more about the integrity of the liberal state, international security and human rights, and the planet itself. Since today’s issues aren’t owned by individual persons who are willing to pay, and are instead shared by nations and the world more generally, there’s no identifiable paying customer that the private sector could serve to turn a profit. And less chance to profit means less support from firms. So government can’t rely today as much on private sector support to solve today’s issues.

We can take these assertions in turn:

  1. By exploring how today’s public problems are qualitatively different from yesterday’s, we’ll be able to see that…
  2. … issues today are different in a way that reduces private sector incentives to help solve them.
  3. In fact, problems today are actually aggravated by the private sector itself.
  4. And problematically, the private sector is increasingly immune to government prescriptions.
  5. Worse, the private sector even has incentives to stymy government efforts to address today’s issues.
  6. Indeed, the public sector is becoming increasingly compromised

… And all of this means that it will be harder for governments to solve the public issues facing the world today.

Let’s take these points one by one.

1. Today’s public problems differ from yesterday’s. By distinguishing between five different types of public issue — termed here as Types I through V — we’ll see that today’s issues are qualitatively different than yesterday’s. To arrive at these types, we can baseline against economic theory, which posits that free markets (the private sector alone) delivers Pareto optimal outcomes. Under strict conditions, this follows mathematically, so if these conditions always held, there would be no need for a public sector at all. But relaxing the strict assumptions that bind neoclassical theory together exposes the space where public issues live.

In brief:

  • Type I issues relate to market distortions and localexternalities,’ a concept well-explored in the neoclassical economics literature.
  • Type II issues relate to individual health and wellbeing, assumed in the neoclassical literature of all rational economic agents, but hardly explored and by no means to be taken for granted.
  • Type III issues relate not to individuals in relation to each other, as typically considered in the neoclassical literature, but to issues of individuals in relation to their states. And as this writer is fortunate to live in a liberal nation, Type III issues will be used here to refer to issues of domestic democratic integrity.
  • Type IV issues relate to firms in relation to foreign states — issues including for example globalization’s impacts on foreign government stability, itself important for the achievement of many (international) public outcomes.
  • Type V issues relate to global issues beyond the remit of any individual state, and affected by individuals, firms, and governments all over the world.

It’s worth exploring these issues in slightly more detail to help distinguish yesterday’s issues from today’s.

Type I issues refer to market distortions and local externalities that violate assumptions required to conclude that free markets are Pareto optimal. These issues have been modeled extensively in classical economic theory.[8] To use the language of Professors Trebilcock and Iacobucci, Type I issues often reflect transaction costs that outside parties bear, so that market participants don’t account for them when making decisions; these externalities are often physical — for example, pollution, noise, or unsightly objects. Trebilcock and Iacobucci point to residential garbage collection as an example of a market with externalities.[9] Imperfect information can characterize Type I markets: here, consumers may not be able to assess a good’s quality, which incentivizes suppliers to reduce quality to save on costs. Pharmaceutical products are an example. Natural monopoly is another example of a Type I issue: here, suppliers have market power that can be abused for the firm’s gain at consumers’ expense — through raised prices, for example. Since consumers face no alternatives, they have to live with higher prices. Public utilities, requiring expensive capital outlay and therefore profitable only when servicing millions of consumers, are an example of natural monopolies. Type I issues (and their solutions) relate to preserving competition in markets to sustain Pareto optimal outcomes according to classical economic theory.

…more fundamental matters…

The remaining issue types concern more fundamental matters involved in achieving the public good. These are cases where “other gains can be made which are not sufficiently included or calibrated by an exclusive economic measure”[10] — where “the profit motive is socially inadequate” to achieve the public good.[11]

Type II issues are those defined by their “public identity of social efforts to meet human needs,” in Professor Minow’s language.[12] Trebilcock and Iacobucci term these cases as “distributive concerns”[13] — cases where, by violating Pareto optimality, redistribution may make one person a little worse off but another much better off. But Type II issues are arguably much more fundamental, in fact relating to the rationality and other decision-making integrity assumed of economic actors, ensuring a basic level of physical, cognitive, and emotional welfare to enable uncompromised decision-making. Examples of Type II activities include the operation of “schools, welfare, healthcare, dispute resolution, and corrections.”[14]

Type III issues are those that have the pivotal power to undermine or promote democratic ambition and capacity — where “without public involvement…democracy is itself in jeopardy,”[15] and where “increased participation” would most “multiply and broaden” democratic engagement, to use Hutchinson’s language.[16] These issues are hardly contemplated in classical economics; if they are at all, it might be in assuming that democratic activity entails significant positive externalities, and Type III issues reflect critical impairments in individuals’ abilities to engage in democratic activity. But Type III issues are more readily thought of as relating to the integrity of the group of individuals that comprise a nation, in their relationship as a unit to the state. Indeed, “individual freedom relies on collective rules and institutions” with which individuals as a group engage, and “governments need to protect both the independence and interdependence of individuals.”[17]

Type IV issues are those that have the power to undermine or support the foundations of foreign states and the human rights of their peoples, as some authors have identified.[18] Type IV issues also elude classical economic consideration. Type IV issues relate to preserving the integrity of states vis-a-vis other states, and foreign peoples vis-a-vis their states.

And Type V issues are those relating to shared global welfare. These are the issues most in the news these days: global health crises, climate change, rising inequality, and the like. Type V issues relate to nothing less than the preservation and sustainability of the planet and its peoples as a whole.

…today’s news is filled with Type III issues … and perhaps especially with issues of Types IV and V …

Looking at these types, the public issues in yesterday’s news (in e.g. developed countries) tended to be more of Types I and II: public utility regulation (e.g. energy, telecommunications, and the like), healthcare reform, civil rights reform. By contrast, today’s news features Type I and Type II issues, yes; but to an increasing extent, today’s news features more issues of Types III, IV, and V — domestic inequality and democratic integrity, the threats of globalization, international inequality, climate change, and the like. And as we can see from the definitions above, today’s issues of Types III-V are qualitatively different from yesterday’s issues of Types I-II, relating much more to the integrity of groups and society as a whole, rather than to the health and wellbeing of individuals.

2. The private sector doesn’t have incentives to solve many of today’s big problems. One might hope that private sector actors would rise to the challenge of addressing today’s public ills. After all, the private sector has historically brought its efforts to bear on all manner of projects outside the original scope contemplated for use of the corporate form.[19] And indeed, when yesterday’s issues were in some cases exacerbated by yesterday’s firms, other firms often arose to offer remedies— think, for example, smoking addiction and harm remedied by nicotine patches and private sector class action law suits.[20]

But as we’ve seen, yesterday’s problems related primarily to individuals and individual outcomes — issues of Types I and II. Type I issues aside — addressed well as they are by the existing literature — today’s problems still pertain to individuals’ issues of (physical and) mental health and wellbeing (Type II), yes. But today’s issues are shifting more toward underlying fundamentals like domestic democratic integrity, the stability of foreign states, and global sustainability — issues of Types III, IV and V. And these type distinctions matter because individuals are willing to pay to improve their own lives, but it’s unclear who will pay to remedy today’s fundamental issues of democracy, foreign state stability, and global sustainability. And if no one is willing to pay, firms can’t turn a profit, so will be (rightly) unwilling to assist.

3. Today’s problems are actually aggravated by the private sector. In fact, today’s issues are largely the systemic consequence of natural — and otherwise-salutary — private sector rent-seeking (excess-profit seeking) behaviour. To see this, we can evaluate the impact of the private sector on today’s issues — relating to (a.) Type II, (b.) Type III, and (c.) Types IV/V.

(a.) Type II issues: firms’ drive to establish niche market power ultimately exacerbates certain mental and social health issues.

Type II issues relate to matters of domestic individual security, health, human freedom, and the like. Now firms have never been above neglecting customers’ physical health and safety within legal limits (and sometimes beyond them) to turn a profit — think Big Tobacco, gun companies, and perhaps less obviously, trans-fat-promoting fast-food chains. But when firms like these have put profits before their customers’ and communities’ health and safety, other firms have in the past stepped up to offer natural foils, with counterbalancing paid solutions like nicotine patches, better home security systems, and healthy low-fat substitutes.

…firms’ rent-seeking behaviour today more problematically promotes … issues relating to mental and social health and wellbeing…

But firms’ rent-seeking behaviour today more problematically promotes Type II issues relating to mental and social health and wellbeing — and these issues have become more pronounced as firms’ coffers, expertise, and media influence have grown across borders and over time. Firms’ relentless drive to create “long-term, sustainable, competitive differentiated advantage” — to create “moats”[21] to deliver long-term profits — leads firms to seek competitive niches where they enjoy market power (the power to command rent-bearing prices). And the issue arises when firms’ marketing actually creates niches, needs, and neuroses where none may have existed before — which is in fact an openly-avowed objective of modern marketing.[22] Firms spend hundreds of billions of dollars on advertising each year[23] to deepen customers’ perceived needs for their products and services, and firms’ combined efforts to whet consumer appetites creates a psychological ulcer with little in the way of counter-balancing media of a more Spinozan persuasion — to be satisfied with what one has — to even out the psychological pH balance.

Perhaps just as caustic to mental and social health is the new class of products and services dominating the so-called “attention economy.”[24] Facebook, Twitter, Instagram, Vine, TikTok, and other firms make money from individuals’ deep-rooted social needs for affiliation[25] and our collective “fear of missing out” (“FOMO”), literally hacking our minds’ wiring to turn users’ attention into ad revenues. And recent research has shown strong and statistically significant correlations between increased social media usage and reduced individual contentment and happiness.[26]

Finally, as a class, the private sector makes money by delivering goods and services aimed mainly at improving the quality of our material experience. And this invites the accusation that capitalism induces materialism at the expense of individuals’ deeper spiritual (or, if you prefer, cognitive, affective, and conative) well-being. While the private sector appears to be waking up to the potential to slake (for a fee) individuals’ thirst for meaning beyond the material (with the likes of Headspace and similar services), the question remains whether there may be a fundamental incompatibility between mental health and wellness experts’ growing consensus that satisfaction comes in part from more fully appreciating one’s experience today,[27] contrasted against the capitalist chorus to seek “more, more, more.”

(b.) Type III issues: unregulated innovation and consolidation tend to exacerbate democratic instability.

Type III issues relate to the integrity of democratic systems. Now, to be effective, all governments need stability first, garnered either through force or public acceptance;[28] and if through public acceptance, then governments need to be seen as legitimate. Thus democratic integrity depends on legitimacy.

…democracy works best when members of a society share a common basis for negotiation, decision-making, and agreement…

Now, John Rawls argues in The Idea of Public Reason Revisited that democratic legitimacy and integrity depend on society’s commitment to engage in reasonable discourse. Rawls defines this as some common moral commitment to coexist by finding an “overlapping consensus;” otherwise, factions will descend into civil strife over their various conceptions of the good.[29] By contrast, Eduardo Penalver contends that “it is not clear that social stability depends on shared modes of moral reasoning … as much as on the effectiveness of … symbolic and cultural commitments that bind national communities together.”[30] James Madison notes in his Federalist №10 that more pluralistic societies may lead to greater democratic stability[31] in democracies that operate agonistically (arguably a more realistic description of most of today’s democracies around the world): over time, the coalition-building that parties must undertake to cobble together support for policies piece by piece “may actually foster the very virtues of moderation and pragmatism that reduce the threat posed by faction and thereby help to stabilize a diverse society.”[32] But all such thinkers reflect the view that democracy works best when members of a society share a common basis for negotiation, decision-making, and agreement. Whether it’s an overlapping consensus, shared cultural attachments, or the basic trust and willingness to horse-trade for piecemeal gain, democracy relies on a common basis of trust and understanding to arrive at decisions seen as legitimate by most.

…natural capitalist dynamics … erode this common basis of trust and understanding…

Problematically, as we will argue in a moment, natural capitalist dynamics these days tend to deepen material divisions between society’s “have’s” and “have-not’s,” as many topical statistics baldly depict;[33] and this drives greater lifestyle inequality, social immobility, and other societal divisions,[34] eroding this common basis of trust and understanding necessary for a shared sense of governmental legitimacy.

Natural capitalist dynamics deepen material divisions first and foremost through innovation’s impacts on labour demand (which determines who earns what). We’ll see that labour demand reductions from “productivity-improving” innovation outpace labour demand increases from “lifestyle-enhancing” innovation; and this creates excess labour supply with lesser bargaining power and correspondingly depressed wages. By extension, more productive firms selling to shrinking customer bases (given wage-poorer workers) yields firms larger relative to their markets — which is to say, markets become more concentrated. And so inequality is further exacerbated by the swelling threat of market abuse in more concentrated markets. What follows will elaborate on these points in turn.

To start, the premise that innovation tends to marginalize labour is not a trivial one. It relies on:

  • i) the distinction between two different kinds of innovation[35] — “productivity-improving” versus “lifestyle-enhancing” innovation— as alluded to above;
  • ii) the fact that productivity-improving innovation reduces demand for labour while lifestyle-enhancing innovation increases demand for labour (where as an aside, both complement each other to make economies more productive and dynamic); and
  • iii) the fact that resulting labour demand reductions tend to outpace labour demand gains, absent growth in exports to foreign consumers (which describes mature open economies well, given that exports’ contribution to growth there has tended to plateau).

Let’s take these points too in turn.

i) Two different kinds of innovation play the largest role today in inequality, which largely results from labour market dynamics.[36] The first of these two kinds enables firms to deliver more of the same goods and services with fewer or less expensive inputs; this is what we might call “productivity-improving” innovation — or what has in other contexts been called “process innovation.”[37] This innovation operates directly only on firms’ supply curves; it may act indirectly on consumers’ demand curves to the extent that firms pass savings on to customers (if demand is elastic, say), which would theoretically expand consumers’ budget constraints and induce a budget reallocation according to a standard Slutsky analysis of income effects and substitution effects.

But a second class of innovation enables firms to deliver new goods and services of better quality or variety that was previously non-existent for end users seeking to satisfy their ultimate motivations — e.g., physiological, safety, social, esteem, and self-actualization needs.[38] We’ll call this “lifestyle-enhancing” innovation, or what in other contexts has been called “product innovation.”[39] This innovation operates directly only on consumers’ demand curves; it may act indirectly on firms’ supply curves to the extent that labour demand to supply this new kind of product or service draws on labour pools currently employed in the production of existing goods and services, driving up wages across the board.

(Now, as a related aside, it’s worth noting one other class of innovation that plays a role in labour market dynamics but matters less for our analysis. This class we may broadly term “labour-opportunity-enhancing” innovation. This innovation operates not to improve the quality or delivery efficiency of goods and services meeting people’s ultimate needs, but instead operates to provide workers with greater access to jobs in other labour markets. Such innovation includes, for example, improved training in specialized skills, enhanced physical or social mobility, or better access to creative capital. This kind of innovation helps smooth demand and supply between labour market segments, which can otherwise feature disparate wages (think flipping burgers at McDonald’s versus coding for Google). But it doesn’t directly influence capital owners’ total demand for labour as a whole.[40] To the extent that stagnant/falling wages today are driven more by excess labour-to-capital, as opposed to labour imbalances between labour markets, labour-opportunity-enhancing innovation can play only so large a role in smoothing the gains accruing to economic actors in a society.

Whether imbalances in gains today are indeed more driven by imbalances between capital and labour, and less by imbalances between labour segments, is certainly worth further study. But we adopt this premise here on the (admittedly more anecdotal) basis that today’s largest, most successful platform firms boasting the greatest demand for some of the world’s most specialized and in-demand information-age labour (software engineers, machine learning specialists, data scientists, etc.) themselves appear already to be reaching the limits of their demand for this highly-specialized labour. If this is so, rebalancing between lower-demand professions to higher-demand professions, such as these, could only be marginal. If this is right, then we face less need to account for the (marginal) labour market impacts of labour-opportunity-enhancing innovation.)

…greater productivity means firms can produce the same quantities of outputs with fewer inputs, including labour…

ii) So returning to the two types of innovation pivotal to our analysis, we can start by looking at the labour demand effects of productivity-improving innovation. Productivity-improving innovation ultimately reduces the total demand for labour, in closed economies. The theory behind this is straightforward: greater productivity means firms can produce the same quantities of outputs with fewer inputs, including labour. Given consumers’ diminishing marginal utility that effectively sets a cap on product quantities demanded by consumers, and assuming that inventories spoil over time, firms don’t have an incentive to produce beyond a certain level that consumers can pay for now or in the future. So as new efficiencies resulting from productivity-improving innovation become available to firms, firms profit-maximize by reducing the number of people they hire (also causing consumer bases to shrink, as those laid off now buy less stuff). In the result, total labour demand falls (and so does GDP, in fact[41]).

Indeed, today’s most famous firms demonstrate how innovation and consolidation yield greater profits with fewer and less expensive inputs — especially (relatively expensive) human labor in today’s age of automation. Platform economics and the network effects they entail fuel the rise of some of today’s seemingly unstoppable firms, which accelerate relentlessly toward (natural) monopoly. The accumulation of proprietary data gives incumbent software firms — that represent a large and growing share of value-added economic activity, as software continues its relentless drive to “ea[t] the world” — a daunting advantage over would-be upstart competitors. Incumbents hoover up the limited stock of talent available to perform the sophisticated high-value-added work that remains in today’s information economy.[42] The few startups that show promise of achieving escape velocity are often promptly acquired by incumbents, folded and streamlined into existing operations.

…new products incite new demand…

Now, on the other hand, lifestyle-enhancing innovation is different. Lifestyle-enhancing innovation ultimately increases the total demand for labour in closed economies. The theory behind this is perhaps even more straightforward: new products featuring previously-unknown quality or variety incite new demand from those who can afford to pay: since lifestyle-enhancing innovation offers net new utility, those with disposable income are willing to pay net new dollars that they would otherwise put away in savings. Firms require net new labour to meet this net new demand, and labour must be drawn from pre-existing pools.[43] Indeed, we often hear the contemporary argument that innovation doesn’t destroy jobs; it creates new and better ones. These are those jobs — the ones that arise when productivity-enhancing innovation takes place in parallel with lifestyle-enhancing innovation to replace jobs that otherwise would simply disappear (absent room to export more to foreign consumers).

Both productivity-improving and lifestyle-enhancing innovation ‘grow the economic pie,’ but they do so in different (and complementary!) ways. Productivity-enhancing innovation enables people to make a greater quantity of existing solutions given the same level of inputs. Lifestyle-enhancing innovation enables people to make solutions of greater or entirely new kinds of valuable quality. The short- and medium-term economic effects of both types of innovation will depend on some of the specific aspects of the innovation, its customer base, and its creators.[44] And importantly, productivity-enhancing innovation actually makes it more possible to create lifestyle-enhancing innovation in the long term, laying the foundations for future growth (the iPhone would not have been possible were it not for the irrepressible progress in computer processing power per square inch borne out in Moore’s Law, for example). But, the key takeaway is this: if productivity-enhancing innovation takes place faster than lifestyle-enhancing innovation, then labour demand will tend to shrink, and wealth and power will tend to concentrate.

…productivity-improving innovation … takes place faster than lifestyle-enhancing innovation…

iii) And there are strong reasons to think that productivity-enhancing innovation typically takes place faster than lifestyle-enhancing innovation, when compared on the basis of demand for labour, and absent growth in exports to foreign consumers. Perhaps chief among the theoretical reasons why the pace of lifestyle-enhancing innovation lags behind that of productivity-enhancing innovation is that firms today already offer solutions for many of our most deeply-held human needs, so lifestyle-enhancing innovation is harder. In order to create something new or markedly better to soak up new share of wallet from natural persons who have disposable dollars, it often requires increasingly deep expertise, networks, and capital these days to invent something new. And this expertise becomes scarcer as the time to accumulate it rises, and as fewer have either the opportunity to develop on-the-job training in increasingly rarified jobs, or the means to pursue the needed expertise.[45][46] Indeed, “a widening wealth gap leads low-earning families to invest less in education and skills. This probably hurts growth by reducing the number of skilled — and more highly productive — workers available for hire in the economy.”[47]

These fundamentals contrast with those bearing on (incremental) productivity-enhancing innovation, which follows a more linear path: “While earlier stages of the technology life cycle are characterized by a competition over innovative product characteristics, product design stabilizes after some time, and process innovation to lower costs becomes the dominant innovation mode.”[48]

And besides these supply-side reasons distinguishing lifestyle-enhancing innovation from productivity-improving innovation, demand-side reasons also factor in. Namely, it is often harder to evaluate the likely profitability of lifestyle-enhancing innovation, because it is harder to estimate at the outset potential customers’ willingness to pay; productivity-improving innovation, by contrast, often features clearer business cases, based on cost savings that are easier to estimate, making future streams of profit more certain, less risky, more investable.

Therefore, reading points i) through iii) together, we can conclude that labour demand reductions from productivity-improving innovation outpace labour demand increases from lifestyle-enhancing innovation in closed economies. This creates excess labour pools with lesser bargaining power and correspondingly depressed wages. And indeed, the same seems to hold in mature open economies, where the boosts to labour demand from exports of domestic goods appear to have begun to wane relative to innovation’s downward pressure on labour demand.[49]

So the foregoing implies that, on a net basis, more productive firms selling to ultimately-shrinking domestic customer bases today yield firms larger relative to their markets — which is to say, markets will continue to become more concentrated domestically.

And finally, these natural competitive outcomes yield advantages for today’s dominant firms that dampen the disciplining effects of competition, leaving these firms freer to abuse the market power they have so assiduously accrued, for the benefit of their capitalist masters at the expense of everyone else. Even if novel technologies like blockchain, or innovations in law or regulation, were to democratize some of the proprietary resources (such as data) that underpin incumbents’ market power, top firms have already developed sophisticated internal systems and tooling[50] to the point where it’s hard to imagine how others could ever pose a disciplining competitive threat to such established dominance in spaces where these proprietary advantages can be brought to bear.

The upshot is that innovation and consolidation tends today toward concentration and the greater potential for abuse of market power. And while innovation and consolidation bring productivity and quality improvements that have arguably more than offset their negative effects (especially when coupled with redistributive policies), innovation on balance now tends toward greater income inequality, driving social immobility,[51] lifestyle inequality,[52] and the like — all of which shrinks the common basis of experience, understanding, and trust required for democratic legitimacy and stability.[53]

…natural capitalist dynamics … also … deepen perceived divisions…

And the kicker is that, besides deepening material domestic divisions, natural capitalist dynamics these days tend also to deepen perceived divisions between society’s “have’s” and “have-not’s,” meaning more deeply-rooted and inflexible stances on disparate values and attitudes between different factions in society. And this further undermines effective democratic functioning. Twitter, Facebook, and other social media platforms turn a profit by serving up content customized to each user’s demonstrated tastes, creating echo chambers filled with the voices that most confirm each given user’s pre-existing viewpoints. Worse, research has shown that the more sensational the content, the more it gets shared,[54] creating incentives for platforms and their users to promote fringe views with perhaps only the thinnest connection to reality. Improvements in technology to fabricate media — bots that mimic human expression, doctored photos and videos, and the like — make it harder to distinguish fact from fiction. And nor does it help that competition for users’ attention has resulted in technology designed specifically to be the most attention-grabbing — and this has actually reduced users’ attention spans, and so also the ability to undertake critical debate and deliberative democracy. These factors, too, tend to erode democratic foundations.

(c.) Type IV/V issues: unregulated globalization tends to exacerbate international power imbalances and global instability.

We’ll recall that Type IV issues relate to the integrity of foreign states and the human rights of their peoples, and Type V issues relate to our shared global welfare.

Now when it comes to Type IV issues, globalization can entrench and worsen foreign nations’ economic dependencies. This follows from the fact that success begets success: innovative firms can appropriate a substantial share of the net value they provide, since innovative firms provide added-value, monopoly (or monopolistic) goods that others can’t reproduce, and so can charge much more; and rents (excess profits) garnered can be reinvested as capital into new innovations or paid out as dividends to (mainly domestic) shareholders to spend at home, enriching local business. Meanwhile, commoditized industry by definition captures little of the value it provides, since substitutes are a dime-a-dozen, so suppliers can charge only slightly above cost to earn little in profit.[55]

So, when international commerce reinforces that some countries have a comparative advantage in value-adding industry, while other countries have a comparative advantage in commoditized industry, international commerce can cement and exacerbate global inequality. Indeed, we see this perhaps well in the so-called “North-South divide,” reinforced by capital mobility in the form of vertical FDI (foreign direct investment).[56] Here, some more value-adding links in the supply chain are serviced in global North countries (like design and engineering for Apple products in the U.S.) and other more commoditized links are serviced in global South countries (like manufacturing for Apple products at Foxconn in China). This can entrench comparative advantage that benefits some (global North) countries with value-adding industry to the relative detriment of other (global South) countries with a deepening comparative advantage in commoditized industry. (Note that this is so even though, in absolute terms, all countries should be better off relative to where they started, per Ricardo’s theory of comparative advantage.)

Thus, for the fruits of global production to be reaped fairly, all countries participating in global commerce require the means to establish their own innovative, value-adding industry. Otherwise, foreign states will remain dependent on richer ones for scarce, high-value-added means of production, which worsens international power balances.

…power imbalances … contribute significantly to other Type V issues…

Such power imbalances speak directly to some key Type V issues — global inequality, for example. And they also contribute significantly to other Type V issues. Weaker and more dependent states invite the destabilizing growth of insurgent elements (e.g. Taliban, ISIS, etc.),[57] which not only keep host states insecure, but also undermine the stability of neighbouring states.[58] Powerful non-state actors (Al Qaeda, for example) also threaten global security.[59] And the growing availability of cheap instruments of destruction and human suffering only worsens threats stemming from weak and/or hostile or repressive states (e.g., Saudi Arabia, North Korea, Iran, Syria).

Global private sector activity is certainly not the exclusive driver of Type V issues; extremism, tribalism, and nationalism driven by other causes are no doubt behind much of the mayhem we see around the world. But global private sector activity can indeed exacerbate international economic inequality, making some states relatively weaker and more dependent.

…in sum, today’s issues are worsened by … private sector profit-seeking behaviour…

As this discussion has attempted to demonstrate, looking across today’s issues and the types they increasingly represent, we can see that today’s issues are systemically worsened by natural, and otherwise-salutary, private sector profit-seeking behaviour. Put bluntly, today’s problems are exacerbated by the impact of natural private sector activities.

4. Problematically, the private sector is at least partially immune to many individual governments’ prescriptions designed to address the worsening of public ailments. Private sector immunity to public sector prescriptions also applies to each of the public issue types discussed above.

Type II issues are often difficult constitutional issues but with the right political will, there are likely solutions available such as those that have worked in the past with respect to other Type II issues, in the form of targeted regulation to limit harmful behaviour on the part of individual firms. When it has come to suppliers of goods and services to improve physical health, for example, the U.S. Food and Drug Administration establishes standards and approval processes to keep consumers safe. In the same vein, public health ordinances requiring parents to inoculate their children against preventable illnesses protect communities from these ills through herd immunity. Such protections still cause controversy in some spheres in (e.g. American) civil society; but by and large, they are accepted infringements on the constitutional guarantees that establish the independent freedom of every U.S. citizen, for the good of the community.

…the post-industrial landscape lends itself to natural monopoly…

Type III issues are less tractable. These often arise not in connection with the undesirable behaviour of individual firms, but from natural capitalist dynamics resulting from firms’ largely desirable behaviour to deliver more value over time. The platform economics, talent scarcity, and development of proprietary internal utilities that characterize the modern post-industrial landscape lend themselves to natural monopoly, which we can see in the likes of firms such as Google, Twitter, Apple, Facebook, and their kin. And domestic governments are right to hesitate to curb this natural growth, as natural forces will tend toward global monopoly in any event, when the marginal costs of serving additional customers are effectively zero and firms are free to relocate operations anywhere in the world (bringing valuable tax revenues with them). Capitalist governments can reasonably conclude that they may as well accept what corporate tax revenues they can command, be grateful for the good jobs these firms furnish, and appreciate the global economic relevance that these firms bestow on host states. To successfully regulate private sector activity so that more can share more equitably in the bounty it produces would ultimately require international coordination on corporate tax regimes, labour laws, and similar, to deny firms the opportunity to relocate to avoid regulation unfavourable to reaping maximal profits.

…such issues are particularly intractable: since no single body is empowered to deliver on multinational or global outcomes, such outcomes defy resolution…

Following this logic, solutions to Type III issues will ultimately be found in solutions to Type IV and Type V issues, which by their very definition require multinational coordination. And unfortunately such issues are particularly intractable: since no single body is empowered to deliver on multinational or global outcomes, such outcomes defy resolution, as is all too apparent today. Projects like the United Nations, the World Trade Organization, and the International Court of Justice reflect the relative toothlessness of international law, despite the best efforts of many of the world’s most devoted and talented diplomats.

5. More problematically still, the private sector has incentives to stymy governments seeking to remedy today’s public issues. To be sure, private sector actors have been known to co-opt the public sector seeking favourable legislation through aggressive lobbying, wheels greased and doors opened by substantial contributions to governing bodies’ political campaigns. Much less offensively — but perhaps more problematically — private sector compensation, potential for personal growth, and other professional attractions compete for a finite pool of talent shared between both the private and public sectors; and private sector actors are increasingly winning that competition,[60] as the potential to make a mark on the world hews more and more toward private sector firms. This reduces the public sector’s capacity to address public ills, and establishes a vicious cycle, whereby the public sector becomes less attractive to talented people, the less effective the public sector becomes. Moreover, this private sector primacy operates to make public service less attractive not only in fact, but more enduringly also in society’s collective consciousness, relative to the much shinier private sector.[61]

6. The public sector is becoming increasingly compromised. Unfortunately, private sector primacy does indeed appear to be weakening public sector capacity. On many institutional measures, government fares poorly relative to private sector actors — and the trends are worsening. Not only are governments relatively less efficient than other institutions in society, but they leave customers less satisfied; and correspondingly, liberal governments are continuing to lose their citizens’ trust.[62] In representative democracies around the world, this is correlated with widespread apathy and cynicism among voters,[63] many of whom don’t even bother to vote anymore — making governments not only ineffective and disliked, but also less legitimate.

All in all, government on its own appears to be increasingly out of its depth in tackling the enormously challenging and interconnected public issues facing the world today.

Governments, firms, and individuals all lack yesterday’s will and ability to address today’s prevailing public issues — and especially those ultimately requiring global coordination.

The discussion to this point has tended to show that private sector actors are at present ill-incentivized to solve the pressing public problems of our day, and that governments are becoming less able to do so. The foregoing further suggests that our “collective action” problems are becoming more acute: each day they get worse as a result of natural dynamics, and correspondingly harder to solve. And while there are exceptional individuals who may be able to help — billionaires’ funds and similar philanthropic initiatives among the world’s wealthiest and most influential may yet prove pivotal — it seems risky and uncertain to bet the future of democracy and, frankly, mankind, on the goodwill (and ongoing availability) of a handful of people with only a personal (though deeply felt) incentive, but no inherent accountability or cultural imperative to help mankind. And it seems especially risky and uncertain given that success requires overcoming the powerful, natural, and systemic forces leading the private sector to generate or reinforce global issues in the first place.

…man-made problems, requiring man-made solutions…

These public issues are man-made problems, requiring man-made solutions. Human beings are not limited in our capacities to overcome seemingly-impossible challenges, as we can see in the litany of nearly miraculous triumphs touched on at the outset of this discussion. But human systems in operation today — including transnational bodies, national governments, private sector organizations, bound together by domestic and international legal regimes and global cultural norms — do not provide sufficient motivation for enough people with sufficient means to successfully solve the public problems facing us today, and especially those ultimately requiring global coordination.

In short, our present systems fail to generate sufficient governmental, private sector, and individual will and ability to face down our shared, critical, global challenges.


[Thanks for reading! Be sure to keep an eye out for the second in this series — Part II — which will introduce a model endeavouring to explain what yields collective will and ability (‘directionality’) to achieve any desired outcome in a given human system, and which will use that model to identify a class of solutions that promise to yield greater directionality to solve (global) public issues. And of course, please feel free to post questions or comments inline or in the comments section below. Thanks again!]

Innovation can be subdivided according to the key roles that individuals play as economic actors and the benefits sought in each of these roles. For example, as an end user, we can see innovation that saves us time, improves the degree to which we can enjoy the time we have, and so on. Business owners can see innovation that ultimately operates to reduce costs or improve revenues. As workers, we can see innovation that makes us more able to take up new labour opportunities (additional training, access to exclusive networks, and so on), or that which makes us more able to start a new business. Finally, some innovations are truly foundational, impacting to various degrees each of the other categories. These include, for example, the internet, the general application of electrical power, and the advent of decentralized blockchains.

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Kinds of Innovation By Benefit for Each Distinct Economic and Political Role Played By Individuals

As depicted in the chart above, once we recognize that cost-saving innovation for end-users and owners/investors are practically one and the same (as firms will pass on savings to customers on balance given any price elasticity in demand), and similarly that benefit-improving innovation for end-users goes hand-in-hand with revenue-enhancing innovation for firms (as greater or previously non-existent quality can command net new revenue dollars), we are left with 5 categories of innovation:

  1. Productivity-improving innovation, making today’s goods, services, and experiences more efficiently;
  2. Lifestyle-enhancing innovation, creating new and better-quality goods, services, and experiences;
  3. Labour-opportunity-enhancing innovation, making the walls between labour segments more porous;
  4. Capital-formation-enhancing innovation, making the wall between labour and capital more porous; and
  5. Foundational innovation, which (i) brings people, places, and resources closer together (transportation, communication, virtual experiences), serving to reshape supply- and demand-side market boundaries; (ii) transforms the land and resource requirements to create goods, services, and experiences (primary energy markets, for example), serving to redefine the shape of global supply chains; and (iii) redefines relationships between economic actors, enabling previously-unknown business models.

Note that foundational innovation also includes that which attends individuals’ roles as political actors, which could include, for example, that which facilitates the selection of political alternatives, or the creation of new alternatives altogether (e.g., by facilitating the funding of campaigns for previously-unknown political entities, say).

To analyze the effects of the two different classes of innovation — productivity-enhancing versus lifestyle-enhancing — we can start by imagining a very simple closed island economy.

Baseline economy

  • 2 goods and services: (i) coconuts to eat, and (ii) “palm-fronding” services to stay cool during leisure time
  • 7 people, all of whom need to eat ½ a coconut/day to survive, but would prefer 1 coconut/day, and up to 2/day: (i) 2 who own 1 coconut-producing palm tree stand each; (ii) 1 who owns a source of palm fronds to provide palm-fronding services; and (iii) 4 who own nothing

In this economy, people work palm trees to gather and crack coconuts to eat or sell to others. Everyone has the capability to do this, but not everyone needs to, as we will see. People with leisure time can also use the specialized services of the palm-fronder to better enjoy their time off, by staying cool. Not everyone can be a palm-fronder — only one among the island-dwellers has the innate talent to do this well. And for the rest — those coconut gatherers working for a daily wage — it’s best to work in pairs. Here’s the production function for coconut gathering:

  • If 1 person searches a palm tree stand for coconuts, he will be able to find and crack 1 coconut/day.
  • If 2 people search a palm tree stand for coconuts, they will be able to find and crack 4 coconuts/day.
  • If 3+ people search a palm tree stand for coconuts, they will be able to find and crack 4 coconuts/day.

Two people working together is best because one person can scale the treetops finding the coconuts and knocking them to the tree-floor, while the other person can spend the day cracking the coconuts. An additional person adds nothing because a given palm tree stand yields no more than 4 coconuts per day for harvest.

This island economy also features a numeraire good — specifically, 14 inimitable seashells. Each person has 2 seashells, which we can call $2 for convenience. Each coconut costs $1, and half a day of palm-fronding services costs $1. These prices reflect the island-dwellers’ relative demand for savings versus consumption: each person would like to have $1 in savings, to ensure that he or she has enough to eat enough over the next day or two.

Here’s what exchange looks like in a typical day on this island, given these parameters:

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Daily exchange in a simple island economy

Palm tree stand owners can get away with paying very little to coconut gatherers — $½ per day — because there’s an abundance of these workers (owners could step in and work too, if they wanted), and all workers need to eat; so workers are forced to accept a subsistence wage of $½ in order to afford the ½ coconut to survive.

By contrast, the palm-frond owner can command a much higher wage from the palm tree stand owners who have the leisure time to enjoy his services. Each palm tree stand owner would like palm fronding services, but the palm frond owner only needs $1 a day to be perfectly content (which the palm tree stand owners are perfectly willing to pay, since they have all they need), with ½ a day of leisure to spare. Some days if the palm frond owner is feeling particularly peckish, he might be willing to work a whole day for a 2-coconut feast in the evening.

In the result, here’s what the distribution of daily gains looks like across this island economy:

  • For each of the 2 owners of the palm-tree stands: (i) 2 full coconuts consumed; (ii) 1 full day of leisure; (iii) ½–1 day of palm-fronding enjoyed; (iv) $2 left over
  • For the 1 palm-frond owner: (i) 1–2 full coconuts consumed; (ii) 0–½ day of leisure; (iii) $2 left over
  • For each of the 4 coconut gatherers: (i) ½ coconut consumed; (ii) 0 leisure time; (iii) $2 left over

Unsurprisingly, those who own scarce means of production (capital or skills) for goods and services that are highly in-demand (coconuts, then palm-fronding) enjoy a better lifestyle than others.

Productivity-improving innovation

Now let’s suppose that, one day, one of the palm tree owners discovers a new technique that enables a single worker to harvest all 4 coconuts available in a palm tree stand in a given day. (The technique involves, say, fastening a series of ropes to key trees in the palm tree stand, in a way that enables the worker to swing twice as quickly between trees to harvest the coconuts, leaving the rest of the day to crack and prepare the coconuts for use and sale.) Given this innovation, here’s what exchange on this island economy would now become:

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Daily island exchange after a productivity-improving innovation

Palm tree stand owners need to hire only 2 coconut gatherers to maximize productivity. As a result, 2 former workers now become unemployed, with nothing productive to contribute to society.

In the result, here’s what the distribution of daily gains looks like across this island economy:

  • For each of the 2 owners of the palm-tree stands: (i) 2 full coconuts consumed; (ii) 1 full day of leisure; (iii) ¼ day of palm-fronding enjoyed, on average (½ a day every 2 days); (iv) $2 left over
  • For the 1 palm-frond owner: (i) 1–2 full coconuts consumed; (ii) 0–½ day of leisure; (iii) $2 left over
  • For each of the 2 coconut gatherers: (i) ½ coconut consumed; (ii) 0 leisure time; (iii) $2 left over
  • For each of the 2 unemployed members of the island: (i) ½ coconut consumer for 4 days; (ii) $0 left over after 4 days; (iii) starvation after 4 days

In this scenario, where workers are unable to find alternative ways to add value to society, a productivity-improving innovation actually deepens inequality and reduces GDP. But, where workers are able to find other ways to add value to their societies — through lifestyle-innovation, for example — productivity-improving innovation frees people up to do things that make their economies richer and more diverse, as we will explore next.

Lifestyle-enhancing innovation

Let’s now suppose further that one of these newly-unemployed, but highly-motivated, workers spends one of her newly-unoccupied days exploring the island, where she finds a deserted beach not too far away. She claims the property and prepares the beachfront for the relaxation and renewal of the wealthy patrons to whom she plans to market. To do this well, she’ll need one worker of her own to keep the beachfront in pristine condition throughout each day, but she anticipates that she’ll be able to command a healthy fee for the luxurious waterfront retreat. Given this innovation, here’s what exchange on this island economy would now become:

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Daily island exchange after both a productivity-enhancing and a lifestyle-enhancing innovation

The new beachfront owner is able to command a healthy fee for this new high-end luxury service, and also places new demand on existing labour on the island. As a result, previously-unemployed labour now finds itself able to command higher wages (of $1 per day instead of $½ per day), as more employers now compete for their labour.

In the result, here’s what the distribution of daily gains looks like across this island economy:

  • For each of the 2 owners of the palm-tree stands: (i) 1–1½ coconuts consumed; (ii) 1 full day of leisure; (iii) ¼ day of palm-fronding enjoyed, on average (½ a day every 2 days); (iv) 1 full day of beachfront luxury (can be enjoyed simultaneously with palm-fronding); (v) $2 left over
  • For the 1 palm-frond owner: (i) 1–2 full coconuts consumed; (ii) 0–½ day of leisure; (iii) $2 left over
  • For the 1 beachfront owner: (i) 1 coconut consumed; (ii) 1 day of leisure; (iii) $2 left over
  • For each of the 3 labourers: (i) 1 coconut consumed; (ii) 0 leisure time; (iii) $2 left over

In this scenario, where workers are able to find alternative ways to add value to society, a productivity-enhancing innovation in combination with a lifestyle-enhancing innovation reduces inequality, enhances GDP, and introduces diversity of opportunity and experience, improving the overall enjoyment possible on the island.

It’s worth noting that, in the baseline scenario of this island economy, labour-opportunity-enhancing innovation that enables labourers to upskill to provide palm-fronding services would also have helped to improve overall wellbeing on the island, by shifting labour from oversupplied, low-wage coconut gathering to undersupplied, high-wage palm-fronding.

And finally, it’s also worth noting that, were this island economy to open to foreign trade, higher demand for labour can be sustained in the period where trade is deepening with foreign markets. We could suppose, for example, that a palm tree stand owner meets an offshore explorer. The explorer bears grapefruit, which the palm tree stand owner wants; the explorer is interested in buying the coconuts. Because grapefruits are abundant offshore, the explorer offers the palm tree stand owner 10 grapefruits at a cost of $1 (enough to buy 1 coconut). The palm tree stand owner accepts. The explorer subsequently pays $1 to buy a coconut. In the result, island dwellers have had to produce 1 more coconut. (In the scenarios above, this wouldn’t impact labour demand, because there was excess capacity; but were we to avoid the integer effects inherent in our simplified scenarios, then on the margin, exports to foreign buyers would increase labour demand to produce additional coconuts.) So higher labour demand can be sustained when trade is deepening with foreign markets.

[1] Dylan Matthews, “23 Charts and Maps that Show the World is Getting Much, Much Better,” Vox Media, last modified October 17, 2018, https://www.vox.com/2014/11/24/7272929/global-poverty-health-crime-literacy-good-news.

[2] Hal G. Rainey and Barry Bozeman, “Comparing Public and Private Organizations: Empirical Research and the Power of the A Priori,” Journal of Public Administration Research and Theory: J-PART, 10, no. 2, Tenth Anniversary Issue (Apr., 2000): 447–469, https://www.jstor.org/stable/3525651?seq=1.

[3] Michael J. Trebilcock and Edward M. Iacobucci, “Privatization and Accountability,” Harvard Law Review 116, no. 5 (March, 2003): 1429, https://www.jstor.org/stable/1342731?seq=1.

[4] “Science and Engineering Indicators: 2018,” National Science Board, accessed August 31, 2020, https://www.nsf.gov/statistics/2018/nsb20181/report/sections/invention-knowledge-transfer-and-innovation/invention-united-states-and-comparative-global-trends#:~:text=The%20government%20sector%20receives%20a,may%20reveal%20sensitive%20security%20information.

[5] Michael Della Rocca, “The Rising Advantage of Public-Private Partnerships,” McKinsey & Co., last modified July 17, 2019, https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/the-rising-advantage-of-public-private-partnerships.

[6] Supra note 3.

[7] Ibid at 1430.

[8] Ibid at 1431–1435.

[9] Ibid at 1431.

[10] Allan Hutchinson, “The Companies We Keep: Corporate Governance in a Democratic Society,” (Toronto: Irwin Law, 2005), 285.

[11] Supra note 3 at 1426.

[12] Martha Minow, “Public and Private Partnerships,” Harvard Law Review 116, no. 5 (March, 2003): 1230.

[13] Supra note 3 at 1435.

[14] Supra note 12 at 1262.

[15] Ibid at 1260.

[16] Supra note 10 at 271.

[17] Supra note 12 at 1262.

[18] See Denis G. Arnold, “Transnational Corporations and the Duty to Respect Basic Human Rights,” Business Ethics Quarterly 20, no. 3 (July, 2010): 371.

[19] See, e.g., Margaret M. Blair, “Locking in Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century,” UCLA Law Review 51, no. 2 (December, 2003): 428.

[20] Of course, once smoking became recognized as a public health problem, governments also intervened, suing to recover health care costs (an externality) and introducing regulation (however inadequate) like warnings on cigarette packages.

[21] Warren Buffett, “1995 Shareholder Letter,” Berkshire Hathaway, last modified 1995, https://www.berkshirehathaway.com/letters/1995.html.

[22] Eben Harrell, “Neuromarketing: What You Need to Know,” Harvard Business Review, last modified January 23, 2019, https://hbr.org/2019/01/neuromarketing-what-you-need-to-know.

[23] A. Guttmann, “Advertising industry revenue in the United States 2004–2018,” Statista, last modified Dec 3, 2019, https://www.statista.com/statistics/183932/estimated-revenue-in-advertising-and-related-services-since-2000/.

[24] “You are the Product: Giancarlo Pitocco and the Attention Economy,” Harvard Business Review, last modified May 16, 2019, https://hbr.org/podcast/2019/05/you-are-the-product-giancarlo-pitocco-and-the-attention-economy.

[25] Abraham Maslow, “A Theory of Human Motivation,” Psychological Review 50, no. 4 (1943): 370–96.

[26] Markham Heid, “Is Social Media Making Me Miserable?” Time Inc., last modified August 2, 2017, https://time.com/4882372/social-media-facebook-instagram-unhappy/.

[27] Aaron Ahuvia, Neil Thin, Dan M. Haybron, Robert Biswas-Diener, Mathieu Ricard, & Jean Timsit, “Happiness: An Interactionist Perspective,” International Journal of Wellbeing 5, no. 1 (January, 2015): 1–18, doi: 10.5502/ijw.v5i1.1.

[28] Shaun Goldfinch, “What Makes a State Stable? Good Governance, Legitimacy and the Legal-rational State Matter Even More for Low-income States,” Civil Wars 14, no. 4 (December, 2012), https://doi.org/10.1080/13698249.2012.740201.

[29] John Rawls, “The Idea of Public Reason Revisited,” University of Chicago Law Review 64, no, 3 (1997). See also, Ingolf Bamberger, “Values and Strategic Behaviour,” Management International Review 26, no. 4 (1986), https://www.jstor.org/stable/pdf/40227818.pdf?seq=1.

[30] Eduardo Penalver, “Is Public Reason Counterproductive,” West Virginia Law Review 110, no. 1 (Fall 2007): 528, citing Joseph Raz See also Jim A. C. Everett, Nadira S. Faber and Molly Crockett, “Preferences and Beliefs in Ingroup Favoritism,” Frontiers in Behavioral Neuroscience 9, no. 1 (February, 2015), https://doi.org/10.3389/fnbeh.2015.00015.

[31] James Madison, Federalist №10: “The Same Subject Continued: The Union as a Safeguard Against Domestic Faction and Insurrection,” New York Daily Advertiser, November 22, 1787.

[32] Penalver, supra note 30 at 531.

[33] Juliana Menasce Horowitz, Ruth Igielnik and Rakesh Kochhar, “Trends in Income and Wealth Inequality,” Pew Research Center, last modified January 9, 2020, https://www.pewsocialtrends.org/2020/01/09/trends-in-income-and-wealth-inequality/#:~:text=From%201970%20to%202018%2C%20the,%2C%20a%20gain%20of%2049%25.&text=The%20share%20flowing%20to%20lower,in%20the%20decades%20since%201980.

[34] “A Family Affair: Intergenerational Social Mobility across OECD Countries,” Economic Policy Reforms: Going for Growth, OECD, last modified 2010, http://www.oecd.org/tax/public-finance/chapter%205%20gfg%202010.pdf.

[35] See Appendix A for a proposed taxonomy of innovation.

[36] Ibid.

[37] Christian Rammer, “Measuring Output of Process Innovation at the Firm Level: Results from German Panel Data,” (paper presented at the Blue Sky Conference, Ghent, Belgium, September 2016), 4, https://www.oecd.org/sti/127%20-%20Rammer_BlueSky2016_ProcessInnovationOutput.pdf.

[38] Supra note 25.

[39] Supra note 37.

[40] Now, labour-opportunity-enhancing innovation might indirectly influence total labour demand, if, for example, reduced friction in labour markets drives up overall wages, which generates greater consumer demand, then causing greater demand for labour; but the impacts here I would conjecture are marginal.

[41] Brian Keeley, “Income Inequality: The Gap Between Rich and Poor,” OECD Insights, OECD, last modified 2015, https://doi.org/10.1787/9789264246010-en. See Appendix B for a stylized 2-good, 3-factor economy that illustrates these dynamics.

[42] Indeed, there may be limits to the natural stock of aptitude available to staff critical information economy positions, even if education systems were overhauled.

[43] See Appendix B for a stylized 2-good, 3-factor economy that illustrates these dynamics.

[44] Relevant aspects include, for example, what benefits the innovation brings (more time, money, longevity, etc.), whether target consumers are relatively wealthy or not, and which labour/capital pools the innovators draw from to introduce and scale the innovation.

[45] Inequality cements itself, by making educational attainment more unequal, which slows the pace of lifestyle-enhancing innovation, which helps productivity-enhancing innovation outpace the former, which widens inequality. See supra note 41.

[46] Benjamin F. Jones, “The Burden of Knowledge and the ‘Death of the Renaissance Man’: Is Innovation Getting Harder?” The Review of Economic Studies 76, no. 1 (January 2009), https://www.jstor.org/stable/20185091?seq=1.

[47] Supra note 41.

[48] Supra note 37 at 5.

[49] Here, it is worth noting that, while real-dollar U.S. exports per capita continue to rise, long-term U.S. employment rates have passed their moving-average plateau in the 1990’s — 2000’s, and U.S. capacity utilization rates have steadily fallen, suggesting that the stimulating effects of foreign exports on domestic U.S. demand have increasingly diminishing force today.

[50] See, e.g., a discussion of Google’s internal tooling: Alex Handy, “Google Reveals the Secrets of DevOps,” The New Stack, last modified July 17, 2018, https://thenewstack.io/google-reveals-the-secrets-of-devops/.

[51] Supra note 34.

[52] Harvard T.H. Chan School of Public Health, “Life Experiences and Income Inequality in the United States,” Robert Wood Johnson Foundation, last modified January 9, 2020, https://www.rwjf.org/en/library/research/2019/12/life-experiences-and-income-inequality-in-the-united-states.html.

[53] K. Wiesner et al, “Stability of Democracies: a Complex Systems Perspective,” European Journal of Physics 40, no. 1 (November, 2018), https://doi.org/10.1088/1361-6404/aaeb4d.

[54] Soroush Vosoughi, Deb Roy and Sinan Aral, “The Spread of True and False News Online,” Science 359, no. 1 (March, 2018), https://doi.org/10.1126/science.aap9559.

[55] See Ricardo Hausman, Dani Rodrik, and Andres Velasco, “Growth Diagnostics” in The Washington Consensus Reconsidered (Oxford: Oxford University Press, 2008) at 332: “In some economies, the [growth] ‘constraint’ may lie in low returns, in others it may be poor appropriability, and in yet others too high a cost of finance” — commoditized industry arguably suffers from low appropriability.

[56] See Elhanan Helpman, Understanding Global Trade (Cambridge, MA: Harvard University Press, 2011) at chapter 6.

[57] Daron Acemoglu, Giuseppe De Feo, Giacomo De Luca, “Weak States: Causes and Consequences of the Sicilian Mafia,” Review of Economic Studies 87, no. 2 (2020), https://doi.org/10.3386/w24115.

[58] Zaryab Iqbal and Harvey Starr, “Bad Neighbors: Failed States and Their Consequences,” Conflict Management and Peace Science 24, no. 4 (2008), https://doi.org/10.1080/07388940802397400.

[59] Stewart Patrick, “Weak States and Global Threats: Assessing Evidence of ‘Spillovers,’” (working paper, Center for Global Development, 2006), https://www.cgdev.org/sites/default/files/5539_file_WP_73.pdf.

[60] Andrew Balls, “Wage Compression Limits Quality of Public Sector Workers,” National Bureau of Economic Research, last accessed August 31, 2020, https://www.nber.org/digest/jun03/w9313.html.

[61] Accenture, “Recruiting and Retaining Talent in the Public Sector: the Differences that Make the Difference,” Accenture, last modified 2015, https://www.accenture.com/t20170411t142500z__w__/in-en/_acnmedia/accenture/conversion-assets/dotcom/documents/global/pdf/dualpub_20/accenture-804116-talent-retention-pulse-survey-v06-lr-no-crops.pdf.

[62] “Public Trust in Government: 1958–2019,” Pew Research Center, last modified April 19, 2019, https://www.pewresearch.org/politics/2019/04/11/public-trust-in-government-1958-2019/.

[63] “Political Trust, Satisfaction, and Voter Turnout,” Comparative European Politics 5, no. 4 (December, 2007), https://www.researchgate.net/publication/31960520_Political_Trust_Satisfaction_and_Voter_Turnout.

Alex Mucalov is a keen observer of human social systems. He has enjoyed diverse and direct exposure to some of democratic society’s key economic and political institutions through varied experience in financial services, government, and regulatory bodies. Alex holds a JD/MBA from the University of Toronto, a Master’s in Economics from the London School of Economics and Political Science, and a Bachelor’s in Commerce from Queen’s University.

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