From Welfare State to Innovation State
PRINCETON – A specter
is haunting the world economy – the specter of job-killing technology.
How this challenge is met will determine the fate of the world’s market
economies and democratic polities, in much the same way that Europe’s
response to the rise of the socialist movement during the late
nineteenth and early twentieth centuries shaped the course of subsequent
history.
When the
new industrial working class began to organize, governments defused the
threat of revolution from below that Karl Marx had prophesied by
expanding political and social rights, regulating markets, erecting a
welfare state that provided extensive transfers and social insurance,
and smoothing the ups and downs of the macroeconomy. In effect, they
reinvented capitalism to make it more inclusive and to give workers a
stake in the system.
Today’s
technological revolutions call for a similarly comprehensive
reinvention. The potential benefits of discoveries and new applications
in robotics, biotechnology, digital technologies and other areas are all
around us and easy to see. Indeed, many believe that the world economy
may be on the cusp of another explosion in new technologies.
The
trouble is that the bulk of these new technologies are labor-saving.
They entail the replacement of low- and medium-skilled workers with
machines operated by a much smaller number of highly skilled workers.
To
be sure, some low-skill tasks cannot be easily automated. Janitors, to
cite a common example, cannot be replaced by robots – at least not yet.
But few jobs are really protected from technological innovation.
Consider, for example, that there will be less human-generated trash –
and thus less demand for janitors – as the workplace is digitized.
A
world in which robots and machines do the work of humans need not be a
world of high unemployment. But it is certainly a world in which the
lion’s share of productivity gains accrues to the owners of the new
technologies and the machines that embody them. The bulk of the
workforce is condemned either to joblessness or low wages.
Indeed,
something like this has been happening in the developed countries for
at least four decades. Skill and capital-intensive technologies are the
leading culprit behind the rise in inequality since the late 1970s. By
all indications, this trend is likely to continue, producing
historically unprecedented levels of inequality and the threat of
widespread social and political conflict.
It
doesn’t have to be this way. With some creative thinking and
institutional engineering, we can save capitalism from itself – once
again.
The key is
to recognize that disruptive new technologies produce large social gains
and private losses simultaneously. These gains and losses can be
reconfigured in a manner that benefits everyone. Just as with the
earlier reinvention of capitalism, the state must play a large role.
Consider
how new technologies develop. Each potential innovator faces a large
upside, but also a high degree of risk. If the innovation is successful,
its pioneer reaps a large gain, as does society at large. But if it
fails, the innovator is out of luck. Among all the new ideas that are
pursued, only a few eventually become commercially successful.
These
risks are especially high at the dawn of a new innovation age.
Achieving the socially desirable level of innovative effort then
requires either foolhardy entrepreneurs – who are willing to take high
risks – or a sufficient supply of risk capital.
Financial
markets in the advanced economies provide risk capital through
different sets of arrangements – venture funds, public trading of
shares, private equity, etc. But there is no reason why the state should
not be playing this role on an even larger scale, enabling not only
greater amounts of technological innovation but also channeling the
benefits directly to society at large.
As Mariana Mazzucato has pointed out,
the state already plays a significant role in funding new technologies.
The Internet and many of the key technologies used in the iPhone have
been spillovers of government subsidized R&D programs and US
Department of Defense projects. But typically the government acquires no
stake in the commercialization of such successful technologies, leaving
the profits entirely to private investors.
Imagine
that a government established a number of professionally managed public
venture funds, which would take equity stakes in a large cross-section
of new technologies, raising the necessary funds by issuing bonds in
financial markets. These funds would operate on market principles and
have to provide periodic accounting to political authorities (especially
when their overall rate of return falls below a specified threshold),
but would be otherwise autonomous.
Designing
the right institutions for public venture capital can be difficult. But
central banks offer a model of how such funds might operate
independently of day-to-day political pressure. Society, through its
agent – the government – would then end up as co-owner of the new
generation of technologies and machines.
The
public venture funds’ share of profits from the commercialization of
new technologies would be returned to ordinary citizens in the form of a
“social innovation” dividend – an income stream that would supplement
workers’ earnings from the labor market. It would also allow working
hours to be reduced – finally approaching Marx’s dream
of a society in which technological progress enables individuals to
“hunt in the morning, fish in the afternoon, rear cattle in the evening,
criticize after dinner.”
The
welfare state was the innovation that democratized – and thereby
stabilized – capitalism in the twentieth century. The twenty-first
century requires an analogous shift to the “innovation state.” The
welfare state’s Achilles’ heel was that it required a high level of
taxation without stimulating a compensating investment in innovative
capacity. An innovation state, established along the lines sketched
above, would reconcile equity with the incentives that such investment
requires.
Dani Rodrik is Professor of Social Science at the Institute for Advanced Study, Princeton, New Jersey.
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