Until the 1980s, about 70% of income went to labor income and 30% to capital income. But, since then, the share of income going to labor has declined in all rich countries. It is now at about 58% of GDP. According to research by the economists Loukas Karabarbounis and Brent Neiman, half of this decline is the result of cheaper information technology...
The implications are serious...It is possible we have been fighting the wrong war. As the scarcity of human capital declines in importance, the rapid expansion of education may not be the answer to the challenges of globalization that we hoped it would be.And yet, capital as a whole is not as dynamic or substantial as it may appear. Even though human capital can be restored as the missing wealth dynamic, no one should mistake the process of getting there to be "more of the same", i.e. skim the best and disregard the rest.
Human capital formation need not be considered a scarce quantity, in spite of what present day credentialing might appear to insist. Plus, human capital could still provide the best means to a greater end, just as formal education was once able to promise. However, the development of human capital potential needs to be approached more directly - particularly as population growth is moving into a global slowdown phase which could otherwise stall innovation and investment. As Karl Smith notes:
Lower population growth rates have the potential to undermine the virtuous cycle of risk taking and innovation. Without policy changes, economies will find themselves trapped in rapid boom and bust cycles that net out to pathetically slow growth rates even in per capita terms.Fortunately, tapping into the potential of time use aggregates would provide many of the same benefits in terms of investment and opportunity, as a growing population. What governments can't afford to do in today's mature marketplace, is to continue parking time use value in housing formations, just to make up for time aggregates which are supposedly not "needed".
While the "housing as primary wealth" strategy worked temporarily, it should not have been expected to provide a permanent wealth solution for the future. Housing is only a passive investment which is an end result of dynamic activity, not the beginning of a wealth creation process. The private property which was once such a driver of progress, has declined in practical (usable) terms as compared to knowledge use property.
Just the same, individuals do not own knowledge use rights in the same way they are allowed to own other forms of property. Investment for knowledge acquisition mostly "pays" to the extent it can be tapped in the event someone is hired in the marketplace. Except now, possibilities for hiring often do not exist among individuals wherever they reside, but by public and private interests which are but a fraction of the population. This is why it has not been possible to treat human capital - thus far - as real wealth. However, the process of creating better pathways for knowledge use has not even begun.
Instead of needed services production reform, governments continue to reach for more taxation to pay for services. What's more, would be consumers receive much of the societal blame, if they can't pay for housing definitions they never even asked for. Governments can no longer expect the most "qualified" citizens to carry the burden of societal responsibility of services for the rest, through housing formation monetary flows. And yet, this is what happens, when the "rest" do not have adequate economic access to participate either in services production or investment opportunity.
Those who cannot readily contribute to the prevailing equilibrium, need a chance to define services and production through more locally driven means. Not only would this allow lower income levels to help themselves, it would allow the primary equilibrium to regain balance in production and services formation. What's more, this could gradually restore the earlier portion of income going to labor, and the apparent discrepancy of additional capital (as parked in housing) would return to more normal levels.
Regular readers are familiar with my insistence on restoring human capital to the marketplace. That's the main reason why I was dismayed with Thomas Piketty's arguments, even before completing his recent book. Why did he dismiss human capital as directly important for wealth creation? Possibly - just possibly - because that makes it all the easier, to insist on further taxing the capital monster under the bed which isn't really there. Even the attempt to do so, simply glosses over the fact that capital needs to be more closely associated with human potential, instead of dismissed out of hand as unimportant.
Wealth as human energy in motion, was reflected in the creation and definition of GDP in the 20th century. There are a number of reasons why housing began to supplant human activity as wealth. One of them, is that no one saw fit to make certain human activity remained at the center of the wealth equation, as automation gradually supplanted the need for production to subsidize labor.
Did anyone think that production residuals or government redistribution were the only ways knowledge use could be tapped? Apparently so. Indeed, Piketty scarcely worried about the role of human capital as wealth, for his primary concern was with the way that corporations appeared to be getting the "best" of governments. Given the degree of wealth that already exists in Washington compared to the rest of the U.S., how is such an argument even possible?
Missing in these arguments is the fact that governments are negligent in creating the marketplace people need for services formation. There is little about the further taxation of capital, that would improve this situation. The more governments became dependent on traditional manufacture for services and knowledge use, the more production became necessary to fulfill those services needs. And yet - how is this even possible - the more the political left complained about "excess" production. Argh.
Now that traditional production has slowed somewhat in the developed world, it is sorely missed as knowledge use remains caught in the grip of special interests of both political parties in the U.S. If only the gains of innovation and traditional production had been recognized for the freedom they have offered for so long. Imagine the direct knowledge use formation which could have taken place, already.
Still, the potential time freedom from an automated workplace, would have meant challenging the knowledge use guilds, which also require heavy resource use to maintain the way their institutions are presently structured. Unfortunately, the "easy way out" of refusing good deflation in building construction to generate wealth, has met its limits. As less labor was needed in the marketplace, fewer consumers were available to purchase either low innovation housing or services.
The decline of labor income from 70 percent to 58 percent of GDP wasn't "inevitable", nor does it have to be, now. But the desire to keep knowledge use under wraps, has also meant a slow decline for knowledge use work since the start of the 21st century. 58% is not a number which is the result of corporations sitting on holdings and the luck of the one percent. It is a result of the guild formations which came to define knowledge use services.
That missing 12 percent is simply the portion of knowledge use which has been held back thus far. It is also the missing marketplace which became apparent in the output gap in the Great Recession. And without production reform for services and knowledge use, gaps in knowledge use and GDP potential will only grow wider. Human capital is the crop that all who can, invest for and hope to harvest. This crop also relies on the right of each of us to use the time we actually have on any given day. Skimming the best, while throwing out the rest is sheer folly.
For Thanksgiving, I want to thank my readers for having the patience to put up with my ongoing rants. I would also like to give thanks for the potential of the human mind, and I continue to pray for the aspirations so many hearts hold, just to belong to the world in their midst.