Addressing the nation’s political unrest will require a rejection of some cherished economic dogmas.
Political developments in the past year—notably the 2016 electoral campaign in the United States, and Brexit in England—have revealed a depth of anxiety and resentment among citizens in many rich nations that go well beyond the economic environment and probably cannot be addressed by economic policy alone. Nonetheless, the economy appears to have been the key to the political upheaval through which we are now living, and though solutions to these problems may no longer be enough to stabilize the political and social environment, it is difficult to imagine how we can restore a sense of order without addressing the economic concerns.
Those concerns are the product of the pressures for structural change and adjustment that have battered the economy over the course of at least the past 30 years. Pressures for structural change and adjustment are of course inherent in any dynamic economy; indeed, they are the engines of economic growth and development. One can argue about whether the recent pressures have been greater than those that the economy has absorbed in the past, but in the United States, at least, there is no question that whatever their absolute magnitude, their costs have been very concentrated in the old industrial heartland of the Midwest, where the communities in which people’s identities were embedded have been undermined and to some extent abandoned. These communities were a key constituency of the Democratic Party, and their desertion of the party was the determining factor in the electoral victory of Donald Trump.
The principle forces producing the structural changes against which the Midwest electorate was reacting were globalization and technological change. But they have been aggravated by institutional changes in corporate governance associated with financialization. Most important, in my view, the country has been guided in its response to these pressures by an approach to economic analysis that makes the forces producing these changes seem beyond the control of politics and policy, and thus cripples our ability to anticipate the problems that globalization and technological change have engendered, and to conceive of alternative solutions.
An intellectual vacuum
The analytical approach I single out can be understood in terms of what might be called policy paradigms, the broad frameworks through which policy-makers tend to think about the economy, judge its performance, and attempt to influence its direction. In the post-World War II period, policy has been guided by three such paradigms: a Keynesian paradigm in the immediate postwar decades; the so-called Washington consensus, emerging in the late 1970s and continuing through the 1990s and into the new millennium; and more recently what might be called the Silicon Valley consensus encapsulated by a mantra along the lines of “innovation and entrepreneurship in the knowledge economy.” The Silicon Valley and Washington consensuses, in turn, are each linked to globalization in a way that almost amounts to an additional paradigm. In the Silicon Valley consensus, globalization is seen as the product of innovations in communication and transportation. In the Washington consensus, it is promoted by trade treaties and innovations in regional and international governance conceived as an expression of the efficiency of a market economy as understood in terms of standard economic theory.
That such paradigms exist and that they vary over time is difficult to deny. Where they come from and what role they actually play in the evolution of the economy is on the other hand unclear: Do they reflect social and economic reality, or do they actually influence and direct its evolution? Are they, to borrow a phrase from the University of Edinburgh sociologist Donald MacKenzie, a camera or an engine?
The difficulties that conservatives in Britain and Republicans in the United States are having in translating the political reaction that brought them to power into a coherent program bring this question to the fore and suggest the intellectual vacuum in which the political reaction is taking place. These are ominous developments, given the way communism, fascism, and two world wars grew out of the collapse of what my MIT colleague Suzanne Berger calls the “first globalization” in the early twentieth century. And the parallels and dangers were reinforced in the summer of 2017, at least in the United States, in Charlottesville, Virginia, by the marching of youths shouting Nazi slogans, and seemingly encouraged by President Trump. But this is not the 1930s. Today, the reaction against globalization is occurring without the kind of alternative paradigm that communism and fascism offered in the earlier period, and this is a good thing, because it creates an opportunity to meet the challenge with a new series of ideas.
It would be premature to try to specify what an alternative policy paradigm might look like. But at least with respect to issues surrounding income distribution and human resource policy, one can, I think, identify some of the limits of the prevailing paradigm that any alternative would have to take into account.
The country has been guided in its response to these pressures by an approach to economic analysis that makes the forces producing these changes seem beyond the control of politics and policy, and thus cripples our ability to anticipate the problems that globalization and technological change have engendered.
Two pillars of the Silicon Valley consensus are “innovation” and the “knowledge economy.” Considered together, they imply the evolution of labor toward sophisticated technology that must be created and managed by highly skilled workers. When additionally combined with globalization, this evolution implies that as legacy industries become increasingly dependent on low-cost, low-skilled, uneducated labor, they will migrate to the developing world, meanwhile abandoning that part of the US labor force that cannot be absorbed into the high-tech sectors.
Implicit here are views of both technological change and knowledge that are highly suspect, and that distort policy and investment decisions in public and private sectors alike.
The view that technological change must always require a more skilled workforce is particularly suspect given that it is not attached to any real theory or strong empirical evidence about the direction of such change. Rather, it is promulgated in a world in which there is a belief, reinforced by the Silicon Valley consensus, that pursuing a broadly predictable direction of technological change is the key to economic prosperity, for individual actors and for cities, regions, and nation-states alike. Such a deterministic view about knowledge and technology is bound to play a role in what projects inventors choose to work on and which ideas entrepreneurs and financiers choose to develop. Its role in this respect seems to have been enhanced by the changes in corporate governance associated with financialization. As business has become increasingly dependent on outside financing, outsiders have become increasingly influential in business decisions. And management is called upon to justify decisions that depart from fad and fashion to people who are not in a position to form an independent judgment about what the business is doing.
But the commitment to the development of Silicon Valley technology goes well beyond a diffuse consensus that influences private decision-making. In the United States, the federal government plays a pivotal role in the evolution of technology. Though the government finances less than a third of national expenditures on research and development (R&D), it has been responsible for key innovations since World War II in areas as diverse as communications, materials, aviation, and biomedicine. Its role remains important today, for example in financing and promoting robotics technology, most prominently through the DARPA Robotics Challenge, a competition funded by the US Defense Advanced Research Projects Agency. As the loss of manufacturing jobs became a major concern of public policy in the Obama administration, the federal role included a new program to promote advanced technology in a way that—ironically—sought to preserve manufacturing by reducing the employment requirements and increasing the educational requirements of the jobs that remain. To the extent that this program sought to address the gap between worker qualifications and job requirements, the focus was on raising worker qualifications, rather than promoting technological developments that could lower job requirements and hence bridge the distance between the existing labor force and employment requirements of the labor market.
At the same time, the consensus that technology must evolve toward an economy that demands a more technically qualified workforce leads policy-makers to tilt investments in education and training toward the formation of engineers and scientists and, more broadly, toward institutions of higher education, rather than, for example, primary and secondary education or vocational training, or training on the job. Developing economies such as China, India, and the Philippines have also bought into this deterministic view of knowledge and technology, and have overinvested in higher education, resulting in the emigration of a part of their educated labor force to North America and Europe, and facilitating the movement toward the advanced technologies embodied in their skill sets. The widely shared belief in the inevitability of this kind of technological change has led to a virtual panic about the availability of skilled and highly trained workers, perhaps best exemplified by the influential 2007 National Academies report Rising Above the Gathering Storm. This despite the fact that half of the graduates in science, technology, engineering, and mathematics—the STEM fields—trained in the United States are working in non-STEM jobs and occupations. Thus, there is an interaction between the policies of the United States and those of India and China that is leading to increasing immigration of highly educated workers from abroad, as opposed to adjustments in job design and recruitment practices at home in which business might otherwise be forced to engage.
The second problem with the Silicon Valley consensus is that the “knowledge” that it so valorizes through tropes such as “the knowledge society” is exclusively formal knowledge acquired through classroom learning in distinct educational institutions, and carried into the productive sector by students who graduate from these institutions and by their professors working as consultants and entrepreneurs. This view of knowledge does not recognize tacit or clinical knowledge, acquired on the job in the process of production. Clinical knowledge, moreover, appears to evolve informally through practice as less educated workers, working alongside formally trained engineers and managers, gradually take over many of their tasks, actually inventing other ways of doing the job and understanding the work. The relationship between formal and clinical knowledge is unclear in large part because clinical knowledge is seldom explicitly recognized, and because it goes unrecognized it is understudied. Recognition is complicated by the fact that tacit knowledge is by definition immeasurable and its nature, even existence, draws on anecdotal evidence that is easily dismissed as atypical or anachronistic and that is destined to be replaced by the kind of formal “scientific” analysis that we think of as characteristic of modernity.
Given that we think of information technology as emblematic of contemporary modernity, the role of tacit knowledge in the development of software is especially relevant to my point here. Efforts to standardize and formalize software development have proven particularly frustrating, and instead rapid, efficient development depends on the tacit understanding embedded in a community of practice that grows up through direct, personal interaction among a team of developers and the architects and designers of the programs they are attempting to write. Thus, for example, General Electric, when it began offshore development in India, found that it needed at least 30% of the Indian workforce to be physically present in the United States at any given time to engage in face-to-face contact with their US contractors. And Frederick Brooks in his famous 1975 treatise on software development, The Mythical Man-Month, argues that adding new people to a development project as it falls behind schedule actually slows down the development process even more because the newcomers do not share the tacit understanding of the architecture, an understanding that can be developed only through interaction with experienced members of the team on the job. For certain processes, clinical knowledge simply seems to be indispensable. But even where clinical and formal knowledge can be substitutes for each other, clinical know-how should provide opportunities for upward mobility to workers for whom a lack of resources or formal educational preparation bars access to formal education. But clinical knowledge goes largely unrecognized and certainly undeveloped when employers are able to recruit formally trained labor abroad, a bias reinforced by public policy.
The third problem with the Silicon Valley consensus emerges from a widely recognized and almost universally ignored intersection with globalization. Both technology and trade policies in recent years imply fundamental structural changes in the economy. As professors are quick to point out in elementary economics courses, such changes typically generate both gains and losses. The structural changes are desirable and the public policies that encourage them justifiable if the gains outweigh the losses—if, in other words, there are net social gains. Where this is the case, the gainers can compensate the losers. But in fact net gains are not enough to justify such policies. In the conventional theoretical framework, the structural changes are justified only if the compensation is actually paid. In practice, compensation is almost never actually paid. Nor is this surprising: No institutional mechanism is in place to ensure that compensation will be paid. Indeed, no institutional mechanism exists for systematically weighing the gains against the losses to determine whether there is a net social benefit. The people who make the critical decisions and reap the gains are not generally linked to the people who experience the losses. In fact, it is not usually possible to trace worker displacement to particular causal factors, and certainly not the displacement of a particular worker. If, as I and many others have argued, technological change and globalization have been imposed together on the same communities so that alternative employment opportunities have been limited and ancillary economic activities in these communities destroyed, those costs cannot be directly related to any identifiable gain, so policies that provide for direct compensation are not even theoretically possible.
The key decisions that affect structural change—in technologies and in trade—are made by institutional actors who reap the benefits of these changes but escape accountability for the social cost they have created.
The major exceptions here are programs designed to provide training (or rather retraining) to workers displaced by globalization. Such programs exist in virtually all advanced developed countries. And in the trade debate ignited by the US presidential campaign, the only concrete policy that the Democratic candidate, Hillary Clinton, proposed in response to the criticism of her earlier support of trade was an expansion of adjustment assistance of this kind for displaced workers. But such programs are everywhere also very limited in scope, and their success has been limited as well, even for those displaced workers who actually get to participate. Studies suggest that the returns to participation in such programs relative to control groups of similarly displaced workers who do not participate are barely enough to yield a positive return on the investment, let alone actually compensate workers for the loss of previous jobs. The reasons for those failures are complex, but the basic problem is the institutional difference between the schools that run the retraining programs and the businesses that would have to hire the graduates of the programs. Schools and productive enterprises have different missions and face different constraints and different incentives.
To take one example, schools face a hard budget constraint that leads them to minimize the wear and tear on the equipment and wastage of material used in the teaching process, whereas businesses are willing to tolerate equipment damage and material scrap in order to meet tight delivery schedules. Thus, schools train workers to be, from a business perspective, overly solicitous of equipment and material consumption, and in the eyes of business, graduates from school training need to be retrained; often it is easier to hire untrained workers than to break what business views as the bad habits cultivated by the schools. Unless the enterprises take an active interest in the schools and intervene to mold the programs to their needs, the schools do not produce graduates who are useful to employers.
That enterprise participation is important is now widely recognized, particularly in the literature on vocational education and community colleges. What is not recognized is that getting the enterprise to take an interest in the schools is itself an institutional problem: The firms have no incentive to do so if they can find trained workers more easily by poaching from other enterprises or recruiting immigrants from other countries. Most programs try to recruit business participation by appealing to civic responsibility. But businesses are getting appeals for help from the Boy Scouts, breast cancer patients, and homeless advocates too, so it is unclear why they should put displaced workers at the top of their civic responsibility list.
Ideally, the pace of employment displacement would be held to the rate of natural employee attrition; for a variety of reasons, such a goal would be very costly and difficult institutionally to achieve (although government restrictions upon layoff and discharge do work in this direction). But policy-makers do not even know how the impact of the different treaties and technical innovations they have promoted in recent years relate to each other. In retrospect, it seems crazy that in the waning years of the Obama administration, when the political reactions to job dislocation in the form of the Trump and Bernie Sanders candidacies were already gaining momentum, policy-makers were promoting two new major trade treaties, one with the countries of the Pacific Rim and the other with Europe. (The “fast track” process through which trade treaties are reviewed by Congress encourages the negotiation of multiple treaties at the same time.) What could have been presented as a question of the pace and timing of globalization was instead made an issue of being either for or against globalization itself. Moderation in the pace of change could in fact have been built into the treaties, and their impacts spread out over time, but this was never considered.
It’s the disequilibria, stupid
Indeed, the analytical frameworks implicit in the Silicon Valley and the Washington consensuses would never lead to these considerations. In this sense, the failure to consider time and geographic dimensions of trade are basically symptoms of the general problem with the paradigms in which policy has been conceived in recent years, especially in their treatment of structural change. The paradigms all imply major changes in the structure of the economy; they promote and celebrate such changes, viewing them generally as producing desirable increases in social welfare, at times arguing that such changes are inevitable. But they are focused on the end point of the changes they advocate, and have very little to say about the process of change, about alternative paths of adjustment. They foresee an increase in overall social welfare, but offer no insight into the costs as well as the benefits, nor as to how those costs and benefits will be distributed. Thus, the whole debate around the North American Free Trade Agreement, arguably the pivotal point in the US turn toward globalization, was conducted in terms of what economists call “computable general equilibrium models,” focused as the name implies on a comparison of equilibria under the new and old trading regimes, with no capacity to consider the political and social costs of the transition from one regime to the next. But such costs may be very real indeed. Consider the sudden end in 2005 of the Multi-Fibre Arrangement, which had governed the world trade in textiles and garments over the preceding 30 years and imposed quotas on the amounts that developing countries could export to developed countries. Its end led directly to an abrupt concentration of production in Bangladesh, which the real estate market there did not have time to anticipate. Production facilities moved into hazardous buildings, one of which collapsed, causing thousands of fatalities. Other tenants had moved out of the building when it was condemned, but the garment manufacturer remained, fearing that if it moved it would miss the tight production deadlines imposed by the international brands and be blacklisted as a result, denied any contracts in the future.
The Silicon Valley consensus, and the Washington consensus that preceded it, have thus had the effect of divorcing the process of adjusting workers to jobs and to new technologies from the productive process itself. The result is that forms of learning and understanding that would facilitate worker adjustment are neglected. Most importantly, the key decisions that affect structural change—in technologies and in trade—are made by institutional actors who reap the benefits of these changes but escape accountability for the social cost they have created. As a result, the costs are not only uncompensated; they easily go unrecognized as well and are not taken into account in the key decisions that determine the direction in which the economy evolves.
This was not true of institutional structures that emerged out of the first of the postwar policy paradigms, the Keynesian consensus. In the early postwar decades, businesses were not free to lay off workers when they introduced new technologies or developed new patterns of trade. The restrictions on their ability to do so varied from country to country, but for the most part layoffs required the consent of government or worker representatives or both, and typically compensation was required as well. Nor were companies free to adjust wages to attract better trained substitutes and thereby avoid providing training themselves or adjusting new technologies so that jobs were accessible to the existing labor force. The institutional structures that the policy paradigm sustained forced adjustment to take place within the productive sector, closely linked to the production process.
Such structures operated not only in Western Europe and Latin America, but also in the United States where, in the early decades of the postwar period, union seniority rules imposed restrictions that made layoff and discharge costly and adjustments in the wage structure virtually impossible. The threat of union organization imposed these restraints even on nonunion firms. Wage adjustments were further inhibited by federal government incomes policy: The policy involved statutory wage controls during the WWII and Korean War periods that left a legacy that persisted in the 1950s. After formal controls were lifted, in the 1960s, the wage-price guidelines were promulgated by President John F. Kennedy and enforced by, among other things, public shaming and regulatory and tax harassment, which had a similar effect. Statutory controls were reinstituted once again in 1971 by President Richard Nixon, and only finally eliminated at the end of the decade—at which point, probably not coincidently, the income shares at the top of the distribution began to diverge sharply and progressively from those that had prevailed in the earlier postwar decades.
Yet restrictions of this kind are not an ideal way to force companies to take into account the social costs of structural adjustment. Where individual firms compete with new companies that do not have any institutional obligations to the legacy of older forms of production, restrictions that force the enterprise to absorb the costs of structural adjustment jeopardize the efficiency and competiveness of the economy. Obviously this problem is more serious in an open, global economy than in the relatively closed economies in which the Keynesian paradigm was conceived. But as Andrew Schrank and I have argued elsewhere, the general systems of labor inspection in Southern Europe and Latin America have the administrative flexibility to adjust the regulations to accommodate competitive pressures of this kind. And a similar flexibility was introduced into the US system by the collective bargaining that generated the restrictions in the first place.
Thus, my point here is not to promote a revival of the Keynesian paradigm nor of the particular institutions to which it gave rise and sustained. It is to use the contrast between Keynesian and the prevailing policy paradigms to overcome the limits of the frameworks in which policy is currently conceived, and to widen the range of approaches with which we can respond to the political pressures created by existing policy. The institutions of the Keynesian period are not irrelevant here, but the world has changed and they cannot be uncritically re-created.
What is more relevant is the critical spirit that Keynes brought to the policy process at a time when other mainstream economists were reluctant to question the ruling economic paradigms of that earlier era. Such a spirit would be worthwhile at any time, but seems particularly important at the current moment, which in so many ways resembles the interwar period where public policy was caught by surprise, unprepared and ill-equipped to respond to the political reaction against globalization.
Room for action
In that earlier period, economic policy was paralyzed by an intellectual impasse between market liberalism and Marxist historical materialism, diametrically opposed to each other, but each deterministic in a way that left little room for policy innovations to address the crisis. What is most unsettling today is the way in which this dichotomy is reproduced in the contrast between the Silicon Valley consensus and the Washington consensus. Indeed the former is technologically deterministic in the way that Marxism was—however different the technological trajectory that it thinks we are forced to accommodate—while the latter is basically a revival of the deterministic market liberalism of the interwar period. In this context, the great contribution of the Keynesian paradigm is the notion that there is room for action. And it is that aspect of Keynes that we need to recover today—a sense of option and opportunity, rather than passive acceptance.
We have subscribed to a kind of technological determinism, and ignored the role of the federal government through its financing of R&D that contributes to the upskilling of jobs, and then facilitates an institutional environment that dampens pressures to prepare the labor force to meet the jobs that public policy has promoted.
After all, as Keynes famously quipped, “In the long run we are all dead.” The point in this context is that the dominant policy paradigms, particularly that of globalization, have focused on the far horizon, where we reach a new, long-run equilibrium without recognizing the process through which we get there or the path that we follow in doing so. The paradigms do not allow for the possibility that there may be alternative adjustment trajectories or indeed that the end point might not be independent of the adjustment process. Nor do they recognize that the process may be more or less rapid, more or less spread out over time in ways that are critical to the welfare impact of change and, not incidentally given the present moment, to the political tolerance for the policies that promote it.
Economists and other analysts, not to mention policy-makers and business leaders, who have stood behind and rationalized the Silicon Valley and Washington consensuses have failed to recognize and take responsibility for the role that public policy has played in putting us where we now are. We have subscribed to a kind of technological determinism, and ignored the role of the federal government through its financing of R&D that contributes to the upskilling of jobs, and then facilitates an institutional environment that dampens pressures to prepare the labor force to meet the jobs that public policy has promoted. In reaction, democratic politics has taken matters into its own hands. As President Trump proposes an increasing array of tariffs aimed at redressing the dislocations of the past several decades, it may seem incredible that he is resorting to such an antiquated, blunt, and potentially counterproductive instrument. Yet those of us in the business of providing new policy options and opportunities have been asleep at the wheel. We need to wake up.
Michael Piore is David W. Skinner Professor Emeritus at the Massachusetts Institute of Technology. His latest book, with Andrew Schrank, Root Cause Regulation, will be published in April 2018 by Harvard University Press.
Suzanne Berger, “Puzzles from the First Globalization,” in Miles Kahler and David Lake (eds.) Politics in New Hard Times (Ithaca, NY: Cornell University Press, 2013), 150-68.
Frederick Brooks, The Mythical Man-Month (Reading, MA: Addison-Wesley, 1975).
Sandra Cavaco, Denis Fougère, and Julien Pouget “Estimating the Effect of a Retraining Program on the Re-employment Rate of Displaced Workers,” Empirical Economics 44, no. 1 (2013): 261–287.
Peter Doeringer and Michael Piore, Internal Labor Markets and Manpower Analysis (Lexington, MA: Heath, 1971).
Natasha Iskander and Nichola Lowe, “Hidden Talent: Tacit Skill Formation and Labor Market Incorporation of Mexican Immigrant Workers in the United States,” Journal of Planning Education and Research 30, no. 2 (2010): 132-146.
Louis Jacobson, Robert J. LaLonde, and Daniel G. Sullivan, “Is Retraining Displaced Workers a Good Investment?” Economic Perspectives 29, no. 2 (2005): 47-66.
Lori G. Kletzer and William L. Koch, “International Experience with Job Training: Lessons for the United States,” in Job Training Policy in the United States, (Kalamazoo, MI: Upjohn Institute, 2004), 245-287.
Michael J. Piore and Andrew Schrank, Root Cause Regulation (Cambridge, MA: Harvard University Press, 2018).
Karl Polanyi, The Great Transformation (Boston, MA: Beacon Press, 1944).