The intangible capital case for equality

Last week, the Brooking Institution held a symposium on the 40th anniversary of Arthur Okun’s classic essay Equality and Efficiency: The Big Tradeoff (see also Brad DeLong’s posting on the event). While the event celebrated Okun’s economic insights, the speakers debated the relevance of the essay’s central argument. Many pointed out that the context of 1975 is very different than today. One of the speakers, Heather Boushey, went as far as to state (in her blog) that

Rereading Okun in 2015, however, feels about as relevant to my work as an economist as does reading Hilary Mantel’s “Wolf Hall,” about 16th century Britain. Both are interesting and enjoyable swings through the historical past-and I highly recommend them-but neither should be used as a roadmap for today’s policymakers.

Robert Samuelson echoed this theme in his look at the traditional argument for an equality/efficiency trade off in the Washington Post (Poof goes the big tradeoff). Even the keynote speaker, Larry Summers, while praising the book made this point:

In my forward to the reprinting of Equality and Efficiency I describe the major changes in the economy, and speculate about what Art would be recommending if he were with us today. Rather than reprising that discussion here, let me conclude by noting how in areas relating to equity and efficiency my thinking has changed in response to a changing economy over the last 40 years. This is not I believe because my values have changed but is rather because of changes in the economy and our understanding of it.

One of the ways that the economy (and our understanding of it) has changed is the nature of work. The speakers touched on this
lightly, mostly in the context of new technology and the role of education. I would argue that there is a fundamental difference in how we view the workforce compared with 40 years ago.
In 1975, standard view of labor was a mind-hand split. Most workers were “doers” (physical labor) not “thinkers.” This is the classic Taylorist vision of the economy. It even translates into the “post-industrial” vision of the economy which highlighted the leading role of the knowledge class and the centrality of formalized knowledge. The “thinkers” contribute more to economic growth and need to be groomed (through elite education) and valued (paid more). They need to be rewarded for the risks they take, otherwise they would not take those risks. The result is this group of risk takers are rewarded more — i.e. unequally. The natural result is some level of inequality.
We have since come to understand the importance of the “doer” class. It turns out that the human capital of those other workers is huge. Both tacit and experiential knowledge, not just codified and science-based knowledge, are important. A decade ago, I noted in a posting that the changing nature of the economy made tacit knowledge more important:

The ability to innovate and to “design a compelling experience” are the important intangible assets. Routine activities — no matter how technically sophisticated or important — will gravitate to the cheapest workforce or be automated. Key to non-routine activities is a person’s tacit knowledge as well as problem solving abilities.

In order to put those skills and knowledge to proper use, organizational structure comes into play. The old hierarchical systems of the industrial age are no longer adequate or appropriate. New adaptive organizations which encourage innovation are needed. What we use to be called “High Performance Work Organizations” are needed to effectively utilize worker skills and knowledge. In other words, we need all forms of intangible capital for economic growth.
As I’ve noted in earlier postings, inequality undermines the development of various forms of intangible capital that are needed to sustain economic growth. Inequality undermines human capital development by limiting education and the ability of all to contribute. Inequality undercuts strategic capital by weakening opportunity for entrepreneurship. It destroys relationship capital by undermining trust. Finally, inequality undercuts social capital through political instability and uncertainly.
Thus, let us acknowledge to contributions of great scholars such as Arthur Okun. But let us also understand how their work fits into the context of today. In this case, we need to understand the new relationship between equality and growth. Otherwise, we are trapped on Keynes’ famous warning about being “slaves of some defunct economist.”

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