Wealth and Power in the 21st Century

For one such as myself, with a critical bent, it is disappointing not to find more with which to disagree in Richard Florida’s essay. In particular, I agree with Professor Florida’s first three points, though not the fourth. Here are the points of agreement:

  1. Compensation for work in the US is having, and will continue to have, an increasingly large “creative” component.
  2. The creative/innovative/talent-based jobs have historically been highly clustered geographically, and that clustering is not likely to be materially affected by the communications technologies of the New Economy: the cell phone, e-mail, and the Internet.
  3. Talent is far from equally distributed, and as talent becomes a larger component of compensation, inequality will inevitably rise, and with that comes deeper and different schisms in social relations, politics, and culture.

With all that agreement, I think I can still find something useful to say: The word “creative” as used by Florida is an ambiguous term that I think to some extent takes us in the wrong direction, since in some ways it overstates the break from the past, and in other ways it understates the seriousness of the problems that lie ahead.

I prefer the word “talent” to suggest abilities that some of us have, but others don’t, and can never acquire. That’s the problem. There are going to be winners and losers, and there is little that we can do about it. When Professor Florida writes, “Our only path forward is to make the creative economy work for us—by understanding the regional, national, and global efforts to harness the creativity of each and every human being, aligning the further development of human creative capabilities with the further growth and development of our economies,” he joins Pangloss in turning something alarming into something benign.

But first, we should understand that, in some ways, this isn’t new. The transfer of tasks from humans to machines is the foundation of the productivity advances that have turned a subsistence pre-industrial world into the bountiful reality enjoyed by those lucky enough to live in the developed, industrialized world today.

In the 20th century, it was the mundane repetitive manual tasks that were transferred to machines. While that process continues today, something new is happening: mundane repetitive intellectual tasks are being transferred to personal computers. Of course, clerks have been helped for a very long time by the abacus, the slide rule, the time clock, and punch card tabulators, all of which gave way to mainframe computers in the 1950s. But the personal computer and the Internet represent a giant leap forward. What is new is the cheapness, size, power, and ubiquity of the PC.

When the transfer of tasks to machines or to computers occurs, what’s left for humans to do? That’s the critical question.

As it turned out, the mechanization of manual work in the first seven decades of the 20th century left plenty of good jobs for workers in manufacturing in the United States. After all, someone had to operate that new equipment, and those operators were well paid because they were so productive. Though the productivity gains that allowed a few to do the work of many was a force for fewer jobs, that was offset by the increased demand for workers to make the vast panoply of new products that came from American workshops and laboratories. The decline in production jobs in manufacturing from the peak of 14.5 million in 1979 to only 10 million today is partly from the movement in jobs overseas, partly from a burst of productivity since 1995, but mostly from slower product innovation that has not kept pace with the usual productivity gains.

Innovation, standardization, and mechanization are the steps in the process. Innovation creates new jobs. Standardization and mechanization raise productivity and therefore eliminate jobs. The outcome depends on which is occurring more rapidly.

That’s looking backward. The future may be very different. The computerization of mundane intellectual work has a character that is different from the mechanization of mundane manual work. I pose the problem by asking the rhetorical question: Is a personal computer like a forklift or a microphone?

Both the forklift and the microphone require operators, which creates work. But the kinds of operators are very different. It doesn’t matter much who drives the forklift, but it matters a lot who sings into the microphone. Think about the forklift first. You might be a lot stronger than I, but with a little bit of training, I can operate a forklift, and I can lift just as much as you. Thus the forklift is a force for income equality because it eliminates the strength advantages some have over others. That is decidedly not the case for a microphone. We cannot all operate a microphone with anywhere near the same level of proficiency no matter what is the amount of training. Indeed, I venture the guess that I would have to pay you to listen to me sing, not the other way round. And I seriously doubt that a lifetime of training would allow me to compete with Springsteen, or Pavarotti.

The effect of the microphone and mass media has been to allow a single talented entertainer to serve a huge customer base and accordingly to command enormous earnings. Thus, as opposed to the forklift, the microphone creates a powerful force for inequality. I don’t mean necessarily a winner-take-all contest, as in some “creative” enterprises like entertainment. What I mean is that the computer has a huge impact on the productivity of some knowledge workers, but much less on others. The forklift attenuates genetic differences; the microphone amplifies them.

A personal computer is both a forklift and a microphone. Clerks in McDonald’s no longer have to be able to read or compute—they only have to recognize the picture of a hamburger on the cash register. That’s the forklift. It doesn’t much matter who punches the buttons. Thus your intelligence advantage over me is eliminated by the computer, just as your strength advantage was eliminated by the forklift. But for many other operations it matters enormously who types on the computer. One example is computer programming. The vast majority of people are incapable of producing commercially viable computer code. That’s the microphone. It amplifies your natural advantages.

Computer technology may be taking us into a future where there are a few very talented, very well-paid people, and the rest of us are doing the mundane computer-assisted tasks which don’t require us to read, write, or even think very much. Just push the right button now and then.

Thus the information revolution may be a powerful force for income inequality by raising the compensation for natural talents and also the interaction between talent and training. It is the interaction between talent and training that is particularly difficult to deal with. If talent and training had additive effects on earnings, then compensatory education for the disadvantaged could be a low-cost solution for income inequality problems. But if training is much more effective for the talented, the talented will naturally receive more of it, and the amount of compensatory training that is needed to equalize incomes may be enormous and a great social waste—think of me and Pavarotti.

Thus I disagree with the entirely optimistic tone of Professor Florida’s essay. I also disagree with his fourth point:

  1. The geography of wealth globally is being driven by the increasing role of talent in the production process.

Most of the growth in the developing countries, including China, comes from old-style manufacturing, not post-industrial intellectual service work. The geographic concentration of growth along the coast of China is not something new at all. It parallels the geographic concentrations created in the Industrial Age in which a very large fraction of GDP originated within 100 miles or less of major waterways, allowing manufacturers to get their products cheaply to faraway markets.

Better, I suggest, to think of there being two distinct forces that are changing the economic landscape. (1) The economic liberalizations in China, Mexico, Brazil, Indonesia, Russia, India, and so on have created huge arbitrage opportunities that allow the transfer of mundane manufacturing from the high-wage countries of North America and Europe. (2) The United States, Japan, and Northern Europe can no longer rely on growth in manufacturing and are stumbling into a post-industrial age. The nature of that age is being fundamentally altered by the personal computer and the Internet.

Edward E. Leamer is director of the UCLA Anderson Forecast. Dr. Leamer holds the Chauncey J. Medberry Chair in Management at UCLA Anderson, along with joint academic appointments in the departments of statistics and economics.

Also from this issue

Lead Essay

  • In this month’s lead essay, Richard Florida, bestselling author of Rise of the Creative Class, argues that the old industrial era has given way to a new creative era. Science and technology, art and design, and culture and entertainment have superceded natural resources and industrial infrastructure as the key to economic success. Talent is now the key factor of production and winners in global economic competition will be those who can best deploy and attract it. However, the creative economy is a source of increasing inequality both within and between nations. Florida argues that the key to bridging the gap between the creative and service sectors is to harness the creativity of service sector workers to make their jobs both higher-paying and more satisfying.

Response Essays

  • In his reply to Florida’s lead essay, George Mason economist Robin Hanson argues that creativity matters less for economic growth and the future of work than Florida thinks. According to Hanson, Florida’s emphasis on creativity distracts us from the prospect of a truly revolutionary change to work and economy just over the horizon: rapidly exponential growth driven by smart machines. “An economy with intelligent machines could grow very rapidly indeed,” Hanson argues, “and induce rapidly falling human wages.” Will we be prepared if we’re busy making the Creative Class comfortable?

  • MIT economist Frank Levy agrees that creativity is more important than ever in a world where computers and foreign workers can do routine work less expensively than domestic workers. This shift, Levy says, requires better education in problem-solving. But education can only do so much. The gains from rising labor productivity are going largely to the wealthy, Levy argues. Unless policies and norms are reinstated that spread those gains more widely “all of the nation’s institutions will be at risk.”

  • While agreeing with much in Florida’s essay, UCLA economist Edward Leamer suggests that the key to understanding the future of work isn’t creativity, but talent. “Is a personal computer like a forklift or a microphone?” Leamer asks. Forklifts are forces for equality, washing out individual differences in ability. Microphones, on the other hand, amplify difference in ability and talent. If training cannot create talent, but can only enhance it, the gains to training will be highest for the talented, and it will not be possible to close the talent and wage gaps by offering more training to the less talented.