December 10, 2018

There’s No Such Thing as a Free Lunch — True or False?

Last time, we were introduced to the idea of a universal basic income (UBI). We can assume that the pros and cons have been thoroughly researched and reasonably analyzed, and that each side holds its position with utmost conviction.

We can also assume that none of that reasonableness and conviction will convert anyone from one side to the other, or win over the uncommitted. Reason doesn’t move us: we use it to justify what we already decided, based on what we believe. SeeWhy Facts Don’t Change Our Minds,” The New Yorker (February 2017) and “This Article Won’t Change Your Mind,” The Atlantic (March 2017).

History doesn’t guide us either — see Why We Refuse to Learn From History from Big Think and Why Don’t We Learn From History, from military historian Sir Basil Henry Liddell Hart. The latter contains conventional wisdom such as this:

The most instructive, indeed the only method of learning to bear with dignity the vicissitude of fortune, is to recall the catastrophes of others.

History is the best help, being a record of how things usually go wrong.

There are two roads to the reformation for mankind— one through misfortunes of their own, the other through the misfortunes of others; the former is the most unmistakable, the latter the less painful.

I would add that the only hope for humanity, now, is that my particular field of study, warfare, will become purely a subject of antiquarian interest. For with the advent of atomic weapons we have come either to the last page of war, at any rate on the major international scale we have known in the past, or to the last page of history.

That’s seems like good advice, but it mostly goes unheeded. It seems we’d rather make our own mistakes.

If reasoned analysis and historical perspective don’t inform our responses to radically new ideas like UBI, then what does? Many things, but cultural belief is high on the list. Policy is rooted in culture, culture is rooted in shared beliefs, and beliefs are rooted in history. Cultural beliefs shape individual bias, and the whole belief system becomes sacred in the culture’s mythology. Try to subverts cultural beliefs, and the response is outrage and entrenchment.

All of which means that each of us probably had a quick true or false answer to the question in this week’s blog post title, and were ready to defend it with something that sounded reasonable. Our answer likely signals our kneejerk response to the idea of UBI. The “free lunch”— or, more accurately, “free money” — issue appears to be the UBI Great Divide: get to that point, and you’re either pro or con, and there’s no neutral option. (See this for more about where the “no free lunch” phrase came from.[1])

The Great Divide is what tanked President Nixon’s UBI legislation. The plan, which would have paid a family of four $1,600/year (equivalent to $10,428 today) was set to launch in the midst of an outpouring of political self-congratulation and media endorsement, only to be scuttled by a memo from a White House staffer that described the failure of a British UBI experiment 150 years earlier. UBI was in fact a free lunch; its fate was thus sealed.

As it turns out, whether the experiment failed or not was lost in a 19th Century fog of cultural belief, so that opponents of the experiment pounced on a bogus report about its impact to justify passing the Poor Law Amendment Act of 1834 — which is what they wanted to do anyway. The new Poor Law was that era’s version of workfare, and was generated by the worst kind of scarcity mentality applied to the worst kind of scarcity. Besides creating the backdrop to Charles Dickens’ writing, the new Poor Law’s philosophical roots still support today’s welfare system:

The new Poor Law introduced perhaps the most heinous form of “public assistance” that the world has ever witnessed. Believing the workhouses to be the only effective remedy against sloth and depravity, the Royal Commission forced the poor into senseless slave labor, from breaking stones to walking on treadmills. . . .

For the whole history lesson, see “The Bizarre Tale Of President Nixon’s Basic Income Plan.”

And so we’re back to asking whether UBI is a free lunch or not. If it is, then it’s an affront to a culture that values self-sufficiency. If it isn’t, then it requires a vastly different cultural value system to support it. The former believes that doing something — “making a living” at a job — is how you earn your daily bread. The latter believes you’re entitled do sustenance if you are something: i.e., a citizen or member of the nation, state, city, or other institution or community providing the UBI. The former is about activity, the latter is about identity. This Wired article captures the distinction:

The idea [of UBI] is not exactly new—Thomas Paine proposed a form of basic income back in 1797—but in this country, aside from Social Security and Medicare, most government payouts are based on individual need rather than simply citizenship.

UBI is about “simply citizenship.” It requires a cultural belief that everybody in the group shares its prosperity. Cultural identity alone ensures basic sustenance — it’s a right, and that right makes Poor Laws and workfare obsolete.

The notion of cultural identity invites comparison between UBI and the “casino money” some Native American tribes pay their members. How’s that working? We’ll look at that next time.


[1] Yes, Milton Friedman did in fact say it, although he wasn’t the only one. And in a surprising twist, he has been criticized for advocating his own version of UBI.

 

Kevin Rhodes studies and writes about economics in an effort to understand the world his kids are growing up in, which is also the world he’s growing old in. You might enjoy his latest LinkedIn Pulse article “The Fame Monster: Rockstars And Rockstar Entrepreneurs.”

Old Dog, Old Trick, New Showtime

Blockchain consultant and futurist Michael Spencer called it a conspiracy by the 0.01 percenters to enslave the rest of us for good.[1] A growing number of those 0.01 percenters have already supported it, but they’re not alone: this poll conducted shortly after the 2016 election showed that half of Americans supported it as well. A parade of think tanks (here’s one) and other professional skeptics (more than I can cite with hyperlinks in a single sentence) have given it a thorough vetting and mostly concluded yeah well maybe it’s worth a try.

What is “it”? This idea: give the poor what they lack — money. Ensure everyone a livable income while getting rid of the expensive and draconian welfare system. And just to be fair, go ahead and give everyone else money, too, even the billionaires.

The idea mostly goes by the name “universal basic income” (UBI). It’s rooted in the futuristic fear that technology will eventually put humans out of work. That’s not an old fear: UBI is “far from a new idea,” says Martin Ford, another Silicon Valley entrepreneur and a popular TED talker, in his New York Times Bestselling Rise of the Robots: Technology and the Threat of a Jobless Future.

In the context of the contemporary American political landscape . . . a guaranteed income is likely to be disparaged as “socialism” and a massive expansion of the welfare state. The idea’s historical origins, however, suggest something quite different. While a basic income has been embraced by economists and intellectuals on both sides of the political spectrum, the idea has been advocated especially forcefully by conservatives and libertarians.

Friedrich Hayek, who has become an iconic figure among today’s conservatives, was a strong proponent of the idea. In his three-volume work. Law, Legislation and Liberty, published between 1973 and 1979, Hayek suggested that a guaranteed income would be a legitimate government policy designed to provide against adversity, and that the need for this type of safety net is the direct result of the transition to a more open and mobile society where many individuals can no longer rely on traditional support systems:

There is, however, yet another class of common risks with regard to which the need for government action has until recently not been generally admitted. . . . The problem here is chiefly the fate of those who for various reasons cannot make their living in the market . . . that is, all people suffering from adverse conditions which may affect anyone and against which most individuals cannot alone make adequate protection but in which a society that has reached a certain level of wealth can afford to provide for all.

LBJ foresaw the possibility of massive technological unemployment back in the 60s and appointed an “Ad Hoc Committee on the Triple Revolution” to study the topic. The Committee included co-Nobel Prize winners Friedrich Hayek and Swedish economist and sociologist Gunnar Myrdal.[2] Rise of the Robots describes the Committee’s findings:

“Cybernation” (or automation) would soon result in an economy where “potentially unlimited output can be achieved by systems of machines which will require little cooperation from human beings.” The result would be massive unemployment, soaring inequality, and, ultimately, falling demand for goods and services as consumers increasingly lacked the purchasing power necessary to continue driving economic growth.

The Ad Hoc Committee went on to propose a radical solution: the eventual implementation of a guaranteed minimum income made possible by the “economy of abundance” such widespread automation would create, and which would “take the place of the patchwork of welfare measures” that were then in place to address poverty.

The Triple Revolution report was released to the media and sent to President Johnson, the secretary of labor, and congressional leaders in March 1964. An accompanying cover letter warned ominously that if something akin to the report’s proposed solutions was not implemented, “the nation will be thrown into unprecedented economic and social disorder.” A front-page story with extensive quotations from the report appeared in the next day’s New York Times, and numerous other newspapers and magazines ran stories and editorials (most of which were critical), in some cases even printing the entire text of the report.

The Triple Revolution marked what was perhaps the crest of a wave of worry about the impact of automation that had arisen following World War II. The specter of mass joblessness as machines displaced workers had incited fear many times in the past — going all the way back to Britain’s Luddite uprising in 1812 — but in the 1950s the 60s, the concern was especially acute and was articulated by some of the United States’ most prominent and intellectually capable individuals.

Four months after the Johnson administration received the Triple Revolution report, the president signed a bill creating the National Commission on Technology, Automation, and Economic Progress. In his remarks at the bills signing ceremony, Johnson said that “automation can be the ally of our prosperity if we will just look ahead, if we will understand what is to come, and if we will set our course wisely after proper planning for the future.” The newly formed Commission then . . . quickly faded into obscurity.

A few years later, Richard Nixon introduced UBI legislation that he called “The most significant piece of social legislation in our nation’s history.” That legislation also faded into obscurity — more on that another time.

Thus, UBI is an old idea responding to an old fear: how do we make a living if we can’t work for it? A half century after LBJ and Nixon, that fear is all too real, and lots of people think it might be time for the historical UBI solution to make its appearance.

But not everyone is jumping on the UBI bandwagon. The very thought that jobs might not be the source of our sustenance is the rallying cry of UBI’s most strident opponents.

More on UBI next time.


[1] Spencer followed with a similarly scathing assessment in this article.

[2] Myrdal’s study of race relations was influential in Brown v. Board of Education. He was also an architect of the Swedish social democratic welfare state. Hayek and Myrdal were jointly awarded the Nobel Prize in Economics in 1974.

Fireflies and Algorithms

We’ve been looking at workfare — the legislated link between jobs and the social safety net. An article published last week — “Fireflies And Algorithms — The Coming Explosion Of Companies[1] brought the specter of workfare to the legal profession.

Reading it, my life flashed before my eyes, beginning with one particular memory: me, a newly-hired associate, resplendent in my three-piece gray pinstripe suit, joining the 4:30 queue at the Secretary of State’s office, clutching hot-off-the-word-processor Articles of Incorporation and a firm check for the filing fee, fretting whether I’d get my copy time-stamped by closing time. We always had to file today, for reasons I don’t remember.

Entity choice and creation spanned transactional practice: corporate, securities, mergers and acquisitions, franchising, tax, intellectual property, real property, commercial leasing… The practice enjoyed its glory days when LLCs were invented, and when a raft of new entity hybrids followed… well, that was an embarrassment of riches.

It was a big deal to set up a new entity and get it just right — make sure the correct ABC acquired the correct XYZ, draw the whole thing up in x’s and o’s, and finance it with somebody else’s money. To do all that required strategic alliances with brokers, planners, agents, promoters, accountants, investment bankers, financiers… Important people initiated the process, and there was a sense of substantiality and permanence about it, with overtones of mahogany and leather, brandy and cigars. These were entities that would create and engage whole communities of real people doing real jobs to deliver real goods and services to real consumers. Dissolving an entity was an equally big deal, requiring somber evaluation and critical reluctance, not to mention more time-stamped paperwork.

“Fireflies and Algorithms” sweeps it all away — whoosh! just like that!— and describes its replacement: an inhuman world of here-and-gone entities created and dissolved without the intent of all those important people or all that help from all those people in the law and allied businesses. (How many jobs are we talking about, I wonder — tens, maybe hundreds of thousands?) The new entities will do to choice of entity practice what automated trading did to the stock market, as described in this UCLA Law Review article:

Modern finance is becoming an industry in which the main players are no longer entirely human. Instead, the key players are now cyborgs: part machine, part human. Modern finance is transforming into what this Article calls cyborg finance.

In that “cyborg finance” world,

[The “enhanced velocity” of automated, algorithmic trading] has shortened the timeline of finance from days to hours, to minutes, to seconds, to nanoseconds. The accelerated velocity means not only faster trade executions but also faster investment turnovers. “At the end of World War II, the average holding period for a stock was four years. By 2000, it was eight months. By 2008, it was two months. And by 2011 it was twenty-two seconds.

“Fireflies and Algorithms” says the business entity world is in for the same dynamic, and therefore we can expect:

[W]hat we’re calling ‘firefly companies’ — the blink-and-you-miss-it scenario brought about by ultra-short-life companies, combined with registers that remove records once a company has been dissolved, meaning that effectively they are invisible.

Firefly companies are formed by algorithms, not by human initiative. Each is created for a single transaction — one contract, one sale, one span of ownership. They’re peer-reviewed, digitally secure, self-executing, self-policing, and trans-jurisdictional — all for free or minimal cost. And all of that is memorialized not in SOS or SEC filings but in blockchain.

“So what does all this mean?” the article asks:

How do we make sense of a world where companies — which are, remember, artificial legal constructs created out of thin air to have legal personality — can come into existence for brief periods of time, like fireflies in the night, perform or collaborate on an act, and then disappear? Where there are perhaps not 300 million companies, but 1 billion, or 10 billion?

Think about it. And then — if it hasn’t happened yet — watch your life flash before your eyes.

Or if not your life, at least your job. Consider, for example, a widely-cited 2013 study that predicted 57% of U.S. jobs could be lost to automation. Even if that prediction is only half true, that’s still a lot of jobs. And consider a recent LawGeex contest, in which artificial intelligence absolutely smoked an elite group of transactional lawyers:

In a landmark study, 20 top US corporate lawyers with decades of experience in corporate law and contract review were pitted against an AI. Their task was to spot issues in five Non-Disclosure Agreements (NDAs), which are a contractual basis for most business deals.

The study, carried out with leading legal academics and experts, saw the LawGeex AI achieve an average 94% accuracy rate, higher than the lawyers who achieved an average rate of 85%. It took the lawyers an average of 92 minutes to complete the NDA issue spotting, compared to 26 seconds for the LawGeex AI. The longest time taken by a lawyer to complete the test was 156 minutes, and the shortest time was 51 minutes.

These developments significantly expand the pool of people potentially needing help through bad times. Currently, that means workfare. But how can you have workfare if technology is wiping out jobs?

More on that next time.


[1] The article was published by OpenCorporates, which according to its website is “the world’s largest open database of the corporate world and winner of the Open Data Business Award.”

 

Kevin Rhodes studies and writes about economics in an effort to understand the world his kids are growing up in, which is also the world he’s growing old in. You might enjoy his latest LinkedIn Pulse article “The Fame Monster: Rockstars And Rockstar Entrepreneurs.”

The Success Delusion

How did the social safety net turn into a poverty trap? It was a victim of the success of the job as an economic force.

Psychologists call it “the success delusion.” You do something and get a result you like, so you keep doing it, expecting more of the same. It keeps working until one day it doesn’t. Do you try something new? No, you double down — it worked before, surely it will work again. You keep doubling down until you’ve made a mess.

You’re a victim of your own success. If you could listen, hindsight would tell you that there was more to it than what you were doing, that a lot of what happened was you being in the right place at the right time. You might believe that or not, but what matters now is that the times have changed and you didn’t.

That’s what happened to social welfare. 40 years of post-WWII economic success positioned the steady job as the cornerstone of economic prosperity and upward mobility. Then, in the 80s and 90s, about the time the job was starting to lose its economic vitality, policy-makers doubled down on it: work had raised the welfare of the whole world since the days of the telegraph and railroad, and surely it was still the best route out of poverty. So now we had workfare instead of welfare, and, as we saw last time, social welfare became “a system of suspicion and shame.”

Standin’ in line marking time
Waiting for the welfare dime
‘Cause they can’t buy a job
The man in the silk suit hurries by
As he catches the poor old lady’s eyes
Just for fun he says, “Get a job.”

That’s The Way It Is”
Bruce Hornsby and the Range

Rutger Bregman sums it up this way:

We’re saddled with a welfare state from a bygone era when the breadwinners were still mostly men and people spent their whole lives working at the same company. The pension system and employment protection rules are still keyed to those fortunate to have a steady job, public assistance is rooted in the misconception that we can rely on the economy to generate enough jobs, and welfare benefits are often not a trampoline, but a trap.

Utopia for Realists (2017).

Guy Standing explains it this way:

The period from the nineteenth century to the 1970’s saw what Karl Polanyi, in his famous 1944 book, dubbed “The Great Transformation.”

The essence of labourism was that labour rights — more correctly , entitlements — should be provided to those (mostly men) who performed labour and to their spouses and children.

Those in full-time jobs obtained rising real wages, a growing array of “contributory” non-wage benefits, and entitlements to social security for themselves and their family. As workers previously had little security, this was a progressive step.

Labourism promoted the view that the more labour people did, the more privileged they should be, and the less they did the less privileged they should be. The ultimate fetishism was Lenin’s dictate, enshrined in the Soviet constitution, that anybody who did not labour should not eat.

The labourist model frayed in the 1980’s, as labour markets became more flexible and increasing numbers of people moved from job to job and in and of employment.

To defend labour-based welfare, social democratic governments turned to means testing, targeting benefits on those deemed the deserving poor.

The shift to means testing was fatal. As previous generations of social democrats had understood, benefits designed only for the poor are invariably poor benefits and stand to lose support among the rest of society.

Ironically, it was mainly social democratic parties that shifted policy towards workfare, requiring the unemployed to apply for non-existent or unsuitable jobs, or to do menial, dead-end jobs or phony training courses in return for increasingly meagre benefits.

Today, we are living in a Second Gilded Age — with one significant difference. In the first, which ended in the Great Crash of 1929, inequality grew sharply but wages on average rose as well. The Second Gilded Age has also involved growing inequality, but this time real wages on average have stagnated or fallen. Meanwhile, those relying on state benefits have fallen further behind, many pushed into homelessness, penury and dependence on inadequate private charity.

Since the 1980s, the share of income going to labour has shrunk, globally and in most countries of economic significance. . . . The labour share fell in the USA from 53 per cent in 1970 to 43.5 per cent in 2013. Most dramatically, it slid by over twenty percentage points in China and also dropped steeply in the rising industrial giant of South Korea.

Besides falling wages, there has been an increase in wage differentials and a less-documented decline in the share of people receiving non-wage benefits, such as occupational pensions, paid holidays, sick leave or medical coverage. Thus worker compensation, in terms of “social income,” has fallen by more than revealed by wages alone.

As a consequence of these developments, “in-work poverty” has rocketed. In some OECD [Organisation for Economic Cooperation and Development — 34 industrialized member countries], including Britain, the USA, Spain and Poland, a majority of those in poverty live in households where at least one person has a job.

The mantra that “work is the best route out of poverty” is simply false.

The Corruption of Capitalism (2017).

Not only are jobs doing a poor job at social welfare — for both employed and unemployed alike — but they are themselves an endangered species. More to come…

 

Kevin Rhodes studies and writes about economics in an effort to understand the world his kids are growing up in, which is also the world he’s growing old in. You might enjoy his latest LinkedIn Pulse article “The Fame Monster: Rockstars And Rockstar Entrepreneurs.”

Poverty Gets Personal

“In the sixties we waged a war on poverty and poverty won.” – Ronald Reagan

“Poverty is a ‘personality defect.’” – Margaret Thatcher

The Gipper was referring to LBJ and his Great Society, but he got it wrong: the Great Society failed to eliminate poverty because it never got all the way to dealing with it. Instead it took a more politically acceptable path focused on education and community involvement — not bad things, but there’s a difference. As for the Iron Lady, there’s actually some truth in what she said (we’ll look at that in a moment), but I suspect not in the way she probably meant it. She was more likely voicing the common attitude that the poor are intellectually impaired, morally flawed, prone to bad lifestyle choices, and criminally inclined, and therefore worthy of only the most grudging kind of help. That attitude and the Great Society’s reputed loss[1] in its War on Poverty explain a lot about today’s prevailing approach to poverty relief.

Rutger Bregman tackles this tough subject in his book Utopia for Realists: And How We Can Get There (2017):

A world without poverty— it might be the oldest utopia around. But anybody who takes this dream seriously must inevitably face a few tough questions. Why are the poor more likely to commit crimes? Why are they more prone to obesity? Why do they use more alcohol and drugs? In short, why do the poor make so many dumb decisions?

He continues with more tough questions:

What if the poor aren’t actually able to help themselves? What if all the incentives, all the information and education are like water off a duck’s back? And what if all those well-meant nudges [toward self-help and away from government assistance] only make the situation worse?

He then profiles the work of Eldar Shafir, a psychologist at Princeton, and Sendhill Mullainathan, an economist at Harvard, who formulated a theory of poverty based on the concept of “scarcity mentality.” Their research shows that the chronic poor are really good at scrambling after short term solutions, but tend to be inept at sustainable long-term thinking. It’s a matter of mental bandwidth: today’s urgency gets all the attention, leaving other matters to go begging (sometimes literally). In fact, their research estimates that poverty costs a person about 13-14 IQ points. In other words, living in a chronic state of being poor can eventually rewire the human brain to the point where clear thinking and prudent behavior are challenged.

Hence the grain of truth in Margaret Thatcher’s comment.

One problem with that attitude, though, is that it uses the terms “poor” and “poverty” interchangeably. But not everyone who’s poor is also impoverished. At the simplest level, the poor are poor because they lack money. But poverty goes further: it’s a chronic condition that generates a specific outlook and way of approaching life. When that condition is shared, it becomes a culture. You know it when you’re around poverty; you might not know it when you’re around poor.

Government assistance programs don’t make that distinction. As a result, as Bregman states, social welfare has “devolved into a behemoth of control and humiliation.”

An army of social services workers is needed to guide people through the jungle of eligibility, application, approval, and recapture procedures. . . . The welfare state, which should foster people’s sense of security and pride, has degenerated into a system of suspicion and shame.

Is it really that bad? Try applying for food stamps sometime.

Our bank account was thin after a business failure and some health issues. Following the advice of family, my wife applied for food stamps. Her experience was everything Bregman describes. Case in point: after two mandatory daylong job search classes (how to write a resume, set up a LinkedIn page, use the internet to check out online job postings…), she had to prove her willingness to work by reporting for 8 hours per week of wall-washing duty at a church community center. She washed the same walls every week — the same walls that other people were also washing every week — the cleanest walls in Denver. Washing walls — pointlessly, needlessly, endlessly — to prove you’re not a slacker.

Help with the grocery bill was bittersweet for a couple months, then we opted out. It’s easy to intellectualize and debate about “all the information and education” and “the jungle of eligibility, application, approval, and recapture procedures.” It’s not so easy when they get personal. We were poor but not impoverished, and the system was just too demoralizing to continue. Maybe that was the point.

Plus, earning money reduces or eliminates benefits — a result which economist Guy Standing calculates is equivalent to the imposition of an 80% tax. The quandary is obvious: earn money or opt out of the system— either way, you pay the tax. Most people — even the cognitively-impaired — wouldn’t agree to a deal like that.

How did “Brother, can you spare a dime?” turn into this? Curiously, the current welfare system derived from the same post-WWII economic surge that rewarded working people. We’ll look at how that happened next week. In the meantime, have a listen:

This week’s post uses portions of a LinkedIn Pulse article I wrote last year about poverty, crime, and homelessness. Next week’s post will also tap that source. You might like to jump ahead and read the article: Why Don’t We Just solve Some Problems For a Change?


[1] Not everyone agrees that we lost the War on Poverty. See this article that considers both sides.

 

Kevin Rhodes studies and writes about economics in an effort to understand the world his kids are growing up in, which is also the world he’s growing old in. You might enjoy his latest LinkedIn Pulse article “The Fame Monster: Rockstars And Rockstar Entrepreneurs.”

The Rentier Economy: A Primer (Part 2)

My plan for this week’s post was to present further data about the extent of the rentier economy and then provide a digest of articles for further reading.

Turns out that wasn’t so easy. The data is there, but it’s mostly buried in categories like corporate capitalization, profits, and market concentration. Extracting it into blog-post-sized nuggets wasn’t going to be that easy.

Further, the data was generally only footnoted in a maelstrom of worldwide commentary. Economists and journalists treated it as a given, barely worthy of note, and were much more interested in revealing, analyzing, and debating what it means. The resulting discourse spans the globe — north to south, east to west, and all around the middle — and there is widespread agreement on the basics:

  • Economic thinking has traditionally focused on income from profits generated from the sale of goods and services produced by human labor. In this model, as profits rise, so do wages.
  • Beginning in the 1980s, globalization began moving production to cheap labor offshore.
  • Since the turn of the millennium, artificial intelligence and robotics have eliminated jobs in the developed world at a pace slowed only by the comparative costs of technology vs. human labor.
  • As a result, lower per unit costs of production have generated soaring profits while wages have stagnated in the developed world. I.e., the link between higher profits and higher wages no longer holds.

Let’s pause for a moment, because that point is huge. Erik Brynjolfsson, director of the MIT Center for Digital Business, and Andrew McAfee, principal research scientist at MIT, wrote about it in their widely cited book The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (2014). The following is from a chapter-by-chapter digest written by an all-star cast of economists:

Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress.

On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States. For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the “great decoupling.” And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.

Okay, point made. Let’s move on to the rest of the rentier story:

  • These trends have been going on the past four decades, but increased in velocity since the 2007–2009 Recession. The result has been a shift to a new kind of job market characterized by part-time, on-demand, contractual freelance positions that pay less and don’t offer fringe benefits. Those who still hold conventional jobs with salaries and benefits are a dying breed, and probably don’t even realize it.
  • As non-wage earner production has soared, so have profits, resulting in a surplus of corporate cash. Low labor costs and technology have created a boom in corporate investment in patents and other rentable IT assets.
  • Rent-seeking behavior has been increasingly supported by government policy — such as the “regressive regulation” and other “legalized monopoly” dynamics we’ve been looking at in the past few weeks.
  • The combination of long-term wage stagnation and spiraling rentier profits has driven economic inequality to levels rivaled only by pre-revolutionary France, the Gilded Age of the Robber Barons, and the Roaring 20s.
  • Further, because the rentier economy depends on government policy, it is particularly susceptible to plutocracies, oligarchies, “crony-capitalism,” and other forms of corruption, leading to public mistrust in big business, government, and the social/economic elite.
  • These developments have put globalization on the defensive, resulting in reactionary politics such as populism, nationalism, authoritarianism, and trade protectionism.

As you see, my attempt to put some numbers to the terms “rent” and “rentier” led me straight into some neighborhoods I’ve been trying to stay out of in this series. Finding myself there reminded me of my first encounter with the rentier economy nine years ago, when of course I had no idea that’s what I’d run into. I was at a conference of entrepreneurs, writers, consultants, life coaches, and other optimistic types. We started by introducing ourselves from the microphone at the front of the room. Success story followed success story, then one guy blew up the room by telling how back in the earliest days of the internet, he and Starbucks’ Howard Schultz spent $250K buying up domain names for the biggest corporations and brand names. Last year, he said, he made $76 Million from selling or renting them back.

He was a rentier, and I was in the wrong room. When it was my turn at the mic, I opened my mouth and nothing came out. Welcome to the real world, my idealistic friend.

As it turns out, following the rentier pathway eventually leads us all the way through the opinionated commentary and current headlines to a much bigger worldwide issue. We’ll go there next time.

 

Kevin Rhodes studies and writes about economics in an effort to understand the world his kids are growing up in, which is also the world he’s growing old in. You might enjoy his latest LinkedIn Pulse article “The Fame Monster: Rockstars And Rockstar Entrepreneurs.”

The Rentier Economy — Primer Part 1

As we saw last week, the original Monopoly game — then known as The Landlord’s Game — offered a choice of two different games, one played under “Prosperity” rules and the other under “Monopoly” rules. The post-WWII economic surge was a real-life Prosperity game: it generated a rising tide of economic benefit that floated all boats across all social classes. The surge peaked in the 1970’s, and since then the Monopoly rules have increasingly asserted themselves, resulting in, among other things, stagnant employee compensation (except for the top 10%) and rising returns to capital owners — the lion’s share paid in the form of rents. The latter reflects the rise of a “rentier economy.”

First, we need to define “rent”:

Economists use the term ‘rent’ in a special way. For them, rent refers . . . to the excess payment made to any factor of production (land, labor, or capital) due to scarcity.

The scarcity factor that gives rise to rents can be natural, as with the case of land.

But rents can also arise from artificial scarcity — in particular, government policies that confer special advantages on favored market participants.

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality, Brink Lindsey and Steven Teles (2017).

And “rentier”:

A rentier is someone who gains income from possession of assets, rather than from labour. A rentier corporation is a firm that gains much of its revenue from rental income rather than from production of goods and services, notably from financial assets or intellectual property. A rentier state has institutions and policies that favour the interests of rentiers. A rentier economy is one that receives a large share of income in the form of rent.

The Corruption of Capitalism, Why Rentiers Thrive and Work Does Not Pay, Guy Standing (2016)

Economists didn’t see the rentier economy coming. They especially didn’t foresee how government policy would create it. The following is from The Corruption of Capitalism:

John Maynard Keynes, the most influential economist of the mid-twentieth century, famously dismissed the rentier as the ‘functionless investor’ who gained income solely from ownership of capital, exploiting its ‘scarcity value.’ He concluded in his epochal General Theory that, as capitalism spread, it would mean the “euthanasia of the rentier,” and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital:

“Whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. . . . I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work.”

Keynes was mistaken because he did not foresee how the neoliberal framework built since the 1980’s would allow individuals and firms to generate ‘contrived scarcity’ of assets from which to gain rental income. Nor did he foresee how the modern ‘competitiveness’ agenda would give asset owners power to extract rental subsidies from the state.

Eighty years later, the rentier is anything but dead; rentiers have become the main beneficiaries of capitalism’s emerging income distribution system.

The old income distribution system that tied income to jobs has disintegrated.

And this is from The Captured Economy:

The last few decades have been a perplexing time in American economic life. Following a temporary spike during the Internet boom of the 1990’s, rates of economic growth have been exceptionally sluggish. At the same time, incomes at the very top have exploded while those further down have stagnated.

As a technical matter, rent is a morally neutral concept. . . . Nevertheless, the term ‘rent’ is most commonly used in a moralized sense to refer specifically to bad rents. In particular, the expression ‘rent-seeking’ refers to business activity that seeks to increase profits without creating anything of value through distortions to market processes, such as constraints on the entry of new firms.

Those advantages can also take the form of subsidies or rules that impose extra burdens on both existing and potential competitors. The rents enjoyed through government favoritism not only misallocate resources in the short term but they also discourage dynamism and growth over the long term. Their existence encourages an ongoing negative-sum scramble for more favors instead of innovation and the diffusion of good ideas.

Economists have had an explanation for the latter trend, which is that returns to skill have increased dramatically, largely because of globalization and information technology. There is clearly something to this explanation, but why should the more efficient operation of markets be accompanied by a decline in economic growth?

Our answer is that increasing returns to skill and other market-based drivers of rising inequality are only part of the story. Yes, in some ways the US economy has certainly grown more open to the free play of market forces during the course of the past few decades. But in other ways, economic returns are now determined much more by success in the political arena and less by the forces of market competition. By suppressing and distorting markets, the proliferation of regulatory rents has also led to less wealth for everyone.

To be continued.

 

Kevin Rhodes studies and writes about economics in an effort to understand the world his kids are growing up in, which is also the world he’s growing old in. You might enjoy his latest LinkedIn Pulse article “The Fame Monster: Rockstars And Rockstar Entrepreneurs.”

The Landlord’s Game

“Buy land – they aren’t making it anymore.”
Mark Twain

You know how Monopoly games never end? A group of academicians wanted to know why. Here’s an article about them, and here’s their write-up. Their conclusion? Statistically, a game of Monopoly played casually (without strategy) could in fact go on forever.

I once played a game that actually ended. I had a strategy: buy everything you land on, build houses and hotels as fast as possible, and always mortgage everything to the hilt to finance acquisition and expansion. I got down to my last five dollars before I bankrupted everybody else. It only took a couple hours. Okay, so the other players were my kids. Some example I am. Whatever economic lessons we might have gained from the experience, they certainly weren’t what the game’s creator had in mind.

While Andrew Carnegie and friends were getting rich building American infrastructure, industry, and institutions, American society was experiencing a clash between the new rich and those still living in poverty. In 1879, economist Henry George proposed a resolution in his book Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy.

Travelling around America in the 1870s, George had witnessed persistent destitution amid growing wealth, and he believed it was largely the inequity of land ownership that bound these two forces — poverty and progress — together. So instead of following Twain by encouraging his fellow citizens to buy land, he called on the state to tax it. On what grounds? Because much of land’s value comes not from what is built on the plot but from nature’s gift of water or minerals that might lie beneath its surface, or from the communally created value of its surroundings: nearby roads and railways; a thriving economy, a safe neighborhood; good local schools and hospitals. And he argued that the tax receipts should be invested on behalf of all.

From “Monopoly Was Invented To Demonstrate The Evils Of Capitalism,by new economist Kate Raworth.[1]

George’s book eventually reached the hands of Elizabeth Magie, the daughter of newspaperman James Magie and a social change rabble-rouser in her own right. Influenced by her father’s politics and Henry George’s vision, she created The Landlord’s Game in 1904 and gave it two sets of rules, intending for it to be an economic learning experience. Again quoting from Ms. Raworth’s article:

Under the ‘Prosperity’ set of rules, every player gained each time someone acquired a new property (designed to reflect George’s policy of taxing the value of land), and the game was won (by all!) when the player who had started out with the least money had doubled it. Under the ‘Monopolist’ set of rules, in contrast, players got ahead by acquiring properties and collecting rent from all those who were unfortunate enough to land there — and whoever managed to bankrupt the rest emerged as the sole winner (sound a little familiar?).

The purpose of the dual sets of rules, said Magie, was for players to experience a ‘practical demonstration of the present system of land grabbing with all its usual outcomes and consequences’ and hence to understand how different approaches to property ownership can lead to vastly different social outcomes.

The game was soon a hit among Left-wing intellectuals, on college campuses including the Wharton School, Harvard and Columbia, and also among Quaker communities, some of which modified the rules and redrew the board with street names from Atlantic City. Among the players of this Quaker adaptation was an unemployed man called Charles Darrow, who later sold such a modified version to the games company Parker Brothers as his own.

Once the game’s true origins came to light, Parker Brothers bought up Magie’s patent, but then re-launched the board game simply as Monopoly, and provided the eager public with just one set of rules: those that celebrate the triumph of one over all. Worse, they marketed it along with the claim that the game’s inventor was Darrow, who they said had dreamed it up in the 1930s, sold it to Parker Brothers, and become a millionaire. It was a rags-to-riches fabrication that ironically exemplified Monopoly’s implicit values: chase wealth and crush your opponents if you want to come out on top.

“Chase wealth and crush your opponents” — that was my winning Monopoly strategy. It requires a shift away from the labor economy — selling things workers make or services they provide — to the rentier economy — owning assets you can charge other people to access and use. The scarcer the assets, the more you can charge. Scarcity can be natural, as is the case with land, or it can be artificial, the result of the kind of “regressive regulation” we looked at last time, that limits access to capital markets, protects intellectual property, bars entry to the professions, and concentrates high-end land development through zoning and land use restrictions.

Artificial scarcity can also be the result of cultural belief systems — such as those that underlie the kind of stuff that shows up in your LinkedIn and Facebook feeds: “7 Ways to Get Rich in Rental Real Estate” or “How to Create a Passive Income From Book Sales and Webinars.” In fact, it seems our brains are so habitually immersed in Monopoly thinking that proposals such as Henry George’s land ownership  tax — or its current equivalents such as superstar economist Thomas Piketty’s wealth tax, Harvard law and ethics professor Lawrence Lessig’s notions of a creative commons, or the widely-studied and broadly-endorsed initiation of a “universal basic income” — are generally tossed off as hopelessly idealistic and out of touch.

More to come.


[1] Kate Raworth holds positions at both Oxford and Cambridge. We previously looked at her book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist  (2017).

 

Kevin Rhodes studies and writes about economics in an effort to understand the world his kids are growing up in, which is also the world he’s growing old in. You might enjoy his latest LinkedIn Pulse article “The Fame Monster: Rockstars And Rockstar Entrepreneurs.”

The Great Gatsby Lawyer

How okay are we, really, with the right of everyone (a) to make as much money as they want, and (b) to spend it any way they like? If we would limit (a) or (b) or both, then how and why?

Consider for a moment what your (a) and (b) responses have been to the upward mobility stories we’ve looked at so far: Richard Reeves, Matthew Stewart, Steven Brill. Travie McCoy. David Boies, Eric and I. Now consider this story from an article in Above the Law:

[P]ersonal injury attorney Thomas J. Henry threw a lavish bash to celebrate his son, Thomas Henry Jr.’s, 18th birthday. And the price tag for the Gatsby-mixed-with-burlesque-themed fête? A cool $4 million.

To rack up such a hefty bill, the event had lots of performers which included showgirls, aerial performers, art installations, and contortionists (oh my!). Plus, there were musical performances and celebrity guests.

And don’t think the over-the-top party was the only gift the birthday boy received:

The star of the party, who sat on a throne-like chair when he wasn’t dancing, was given a fully loaded blue Ferrari, an IWC Portugieser Tourbillion watch and a custom-made painting from Alec Monopoly.

Henry’s work as a trial attorney is obviously pretty lucrative. The big payouts he’s been able to secure for his clients have made him a member of the Multi-Million Dollar Advocates Forum.[1]

Henry is known for throwing giant parties. Just last year, he spent $6 million for his daughter’s quinceañera. I guess we know which one is really daddy’s favorite.

The writer telegraphs her attitude about the story with the article’s tone and with the understated lead line, “this seems extreme.” Apparently she would cast a vote for limitations on (b). When I’ve shared the story with friends, the response is usually stronger than “this seems extreme.”

I wonder why. Maybe it’s because this looks like a case of conspicuous consumption, which never goes down well. Economist/sociologist Thorstein Veblen coined the term in his 1889 book, The Theory of the Leisure Class, to describe how the newly prosperous middle class were buying things to communicate their move up the social ladder. The neighbors were rarely impressed — that is, until they made their own purchases, and then the game turned into keeping up with Joneses.

The conspicuous consumption shoe might fit here: Mr. Henry’s website tells a bit of his upward mobility story — German immigrant, raised on a farm in Kansas, etc. Or maybe there’s something going on here that transcends his personal story. In that regard, the term “affluenza” comes to mind.

The term “affluenza” was popularized in the late 1990s by Jessie O’Neill, the granddaughter of a past president of General Motors, when she wrote the book “The Golden Ghetto: The Psychology of Affluence.” It’s since been used to describe a condition in which children — generally from richer families — have a sense of entitlement, are irresponsible, make excuses for poor behavior, and sometimes dabble in drugs and alcohol.

From an article by Fox News. See also these descriptions from CNN and New York Magazine.

Definitions of the term come loaded with their own biases, judgments, and assumptions. This is from Merriam-Webster:

Affluenza: the unhealthy and unwelcome psychological and social effects of affluence regarded especially as a widespread societal problem: such as

feelings of guilt, lack of motivation, and social isolation experienced by wealthy people

extreme materialism and consumerism associated with the pursuit of wealth and success and resulting in a life of chronic dissatisfaction, debt, overwork, stress, and impaired relationships

And this is from the popular PBS series that came out shortly after The Golden Ghetto:

Af-flu-en-za n. 1. The bloated, sluggish and unfulfilled feeling that results from efforts to keep up with the Joneses. 2. An epidemic of stress, overwork, waste and indebtedness caused by dogged pursuit of the American Dream. 3. An unsustainable addiction to economic growth.

Affluenza made quite a splash in the estate planning world where I practiced, spawning a slew of books, CLE presentations, and new approaches to legal counseling and document design. Affluenza went mainstream in 2014 with the highly-publicized trial of Ethan Couch, the “Affluenza Teen,” when a judge reduced his sentence on four counts of intoxicated manslaughter and two counts of intoxicated assault after an expert witness testified that his wealthy upbringing had left him so psychologically impaired that he didn’t know right from wrong.

For a great number of my clients, that their kids might catch affluenza was their worst nightmare.[2] Their fear suggests this consensus to Thomas Henry’s partying habits:

(a) it’s okay to make all the money you want,

(b) but it’s not okay if you use your money to make your kids a danger to themselves and to others.

I wonder — would it temper our rush to categorize and judge Mr. Henry if we knew his philanthropic history and philosophy? This is from his website:

Mr. Henry’s overall philosophy is that helping others when you have the good fortune of being successful is not an elective decision but a mandatory decision. People who achieve success have a duty to help others.

That statement closely mirrors the beliefs of Robber Baron Andrew Carnegie. We’ll look at that next time, along with the perceptions of other 0.01 percenters about the social responsibilities of wealth.


[1] The Forum’s website says that “fewer than 1% of U.S. lawyers are members,” which appropriately signals Thomas Henry’s position in the economic strata.

[2] I used to tell my clients that if I had a dime for every time a client said, “I don’t want my money to ruin my kids,” I would have been a rich man. That was hyperbole, of course: a dime each time wouldn’t have made me rich. On the other hand, a million dollars each time might have made me a billionaire. A billion is a BIG number.

 

The Matthew Effect

“For to everyone who has will more be given, and he will have abundance;
but from him who has not, even what he has will be taken away.”

The Gospel of Matthew 25:29, Revised Standard Version

Economists call it the Matthew Effect or the Matthew Principle. Columbia sociologist Robert K. Merton used the former when he coined the term[1] by reference to its Biblical origins.[2] The more pedestrian version asserts that the rich get richer while the poor get poorer.

According to the Matthew Effect, social capital is better caught than taught, better inherited than achieved. That notion is borne out by current economic and demographic data[3] showing that the only children with a statistically relevant shot at experiencing a better standard of living than their parents are the ones born with a silver spoon in their mouths — or, as David Graeber says in Bullshit Jobs, the ones “from professional backgrounds” where they are taught essential social capital mindsets and skills “from an early age.”[4]

Statistics are susceptible to ideological manipulation, but bell curves conceptualize trends into observable laws of societal thermodynamics. The Matthew Effect bell curve says it’s harder to get to the top by following the Horatio Alger path: you’re starting too many standard deviations out; your odds are too low. On the other hand, if you start in the center (you’re born into the top), odds are you’ll stay there.

That might depend, however, on how long your forebears have been members of the club. Globetrotting wealth guru Jay Hughes has spoken and written widely of the concept of “shirt sleeves to shirt sleeves in three generations.” According to the aphorism, if the first generation of a family follows the Horatio Alger path to wealth, there’s a 70% chance the money will be gone by the end of the third generation, which means the social capital will be gone as well. That first generation might defy the odds through hard work and luck, but odds are they won’t create an enduring legacy for their heirs.

My own law career was an exercise in another folk expression of the Matthew Effect: “you can take the boy out of the country but you can’t take the country out of the boy.” (No, that’s not me in the photo — I just thought it made the point nicely.) My career finally hit its stride when I created a small firm serving “millionaire next door” clients — farmers, ranchers, and Main Street America business owners who became financially successful while remaining in the social milieu where they (and I) began. Nearly all of those families created their wealth during the post-WWII neoliberal economic surge, and are now entering the third generation. I wonder how many are experiencing the shirt sleeves aphorism.

Curiously, my transition out of law practice was also dominated by social capital considerations — in particular, a social capital misfiring. I had a big idea and some relevant skills (i.e., some relevant human capital — at least other people thought so), but lacked the social capital and failed to make the personal transformation essential to my new creative business venture.[5]

In fact, it seems the Matthew Effect might be a larger theme in my life, not just my legal career. In that regard, I was surprised to find yet another one of my job stories in Bullshit Jobs. This one was about a townie who took a job as a farm laborer. His job included “picking rocks,” which involves tackling a rocky field with a heavy pry bar, sledge hammer, pick axe, spade, and brute strength, in an effort to remove the large rocks and make it tillable. I’d had that job, too. I was a teenager at the time, and it never occurred to me that it might be “completely pointless, unnecessary, or pernicious” (Graeber’s definition), which is how the guy in the book felt about it. In fact, when I told my parents about my first day of picking rocks over dinner, my dad was obviously so proud I thought he was going to run out and grill me a steak. Obviously I’d made some kind of rite of passage.

Picking rocks is just part of what you do if you work the land, and there’s nothing meaningless about it. I enjoyed it, actually — it was great training for the upcoming football season. I can scarcely imagine what my law career and life might have been like if I’d felt the same way about my first years of legal work as I did about picking rocks.

The Matthew Effect has far-reaching social, economic, legal, and ethical implications for the legal profession, where social capital is an important client- and career-development asset. Next time we’ll look at another lawyer who, like David Boies, rose from humble origins to superstar status, and whose story brings a whole new set of upward mobility issues to the table.


[1] Merton was originally trying to describe how it is that more well-known people get credit for things their subordinates do — for example, professors taking credit for the work of their research assistants — the professors enriching their credentials at the expense of their minions’ hard and anonymous work. Merton might just as well have been talking about law partners taking credit for the work of paralegals, law clerks. and associates.

[2] As for why “Matthew” when the other Synoptic Gospels (Mark and Luke) have the same verse, I suspect that’s in part because Matthew is the first book in the New Testament canon, but it may also substantiate a derivative application of Merton’s law made by U of Chicago super-statistician Stephen Stigler, known as the Law of Eponymy, which holds that “No scientific discovery is named after its original discoverer.” I.e., later arrivals collect the accolades the” original discoverer” never did. In that regard, Mark’s gospel is believed to have been written first, with Matthew and Luke’s coming later and deriving from it. That would make Mark the true original discoverer. That this economic phenomenon is not called the “Mark Effect” is therefore another example of Stigler’s law.

[3] See, e.g., the “Fading American Dream” graph and the “Geography of Upward Mobility in America” map in this NPR article.

[4] The phenomenon has been widely reported. See this study from Stanford and our trio to new Meristocrats from a few weeks back: Richard V. Reeves and his book Dream Hoarders and his Brookings Institute monograph Saving Horatio Alger (we looked at those last time). The second was philosopher Matthew Stewart, author of numerous books and a recent article for The Atlantic called The 9.9 Percent is the New American Meritocracy. The third was Steven Brill, founder of The American Lawyer and Court TV, author of the book Tailspin: The People and Forces Behind America’s Fifty-Year Fall—and Those Fighting to Reverse It and also the writer of a Time Magazine feature called How Baby Boomers Broke America.

[5] I’ve told that story elsewhere, and won’t repeat it here, but if you’re interested in more on this issue, a look at that particular social capital disaster might be illustrative. See my book Life Beyond Reason: A Memoir of Mania.

 

Rebel Without A Cause

Continuing with David Graeber’s analysis of Eric’s job experience from last time:

What drove Eric crazy was the fact that there was simply no way he could construe his job as serving any sort of purpose.

To get a sense of what was really happening here, let us imagine a second history major — we can refer to him as anti-Eric — a young man of a professional background but placed in exactly the same situation. How might anti-Eric have behaved differently?

Well, likely as not, he would have played along with the charade. Instead of using phony business trips to practice forms of self-annihilation, anti-Eric would have used them to accumulate social capital, connections that would eventually allow him to move on to better things. He would have treated the job as a stepping-stone, and this very project of professional advancement would have given him a sense of purpose.

But such attitudes and dispositions don’t come naturally. Children from professional backgrounds are taught to think like that from an early age. Eric, who had not been trained to act and think this way, couldn’t bring himself to do it.

Like Eric, I couldn’t bring myself to do it either — although it was not so much that I couldn’t, it was more a case of not knowing how. I was bright enough, had a knack for the all-important “likeability factor” with clients and colleagues, and worked with lots of clients and other professionals who were members of the Red Velvet Rope Club. But like Eric, I remained on the outside looking in, and I spent a lot of time feeling envious of others who fit in so easily.

Those dynamics dogged the early years of my law career. In time, a general sense of inadequacy became depression, which I compensated for by nursing a rebel-without-a-cause attitude.

My experience didn’t have to be that way. Consider, for example, the story of super-lawyer David Boies. Like Eric and me, Boies was also born to working class parents and grew up in a farming community, but that’s where the resemblance ends. Chrystia Freeland introduces him this way in her book Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else(2012):

As the world economy grows, and as the super-elite, in particular, get richer, the superstars who work for the super-rich can charge super fees.

Consider the 2009 legal showdown between Hank Greenberg and AIG, the insurance giant he had built. It was a high-stakes battle, as AIG accused Greenberg, through his privately-held company, Starr International, of misappropriating $4.3 billion worth of assets. For his defense, Greenberg hired David Boies. With his trademark slightly ratty Lands’ End suits (ordered a dozen at a time by his office online), his Midwestern background, his proud affection for Middle American pastimes like craps, and his severe dyslexia (he didn’t learn how to read until he was in the third grade), Boies comes across as neither a superstar or a member of the super-elite. He is both.

Boies and his eponymous firm earned a reputed $100 million for the nine-month job of defending Greenberg. That was one of the richest fees earned in a single litigation. Yet, for Greenberg, it was a terrific deal. When you have $4.3 billion at risk, $100 million — only 2.3 percent of the total — just isn’t that much money. Further sweetening the transaction was the judge’s eventual ruling that AIG, then nearly 80 percent owned by the U.S. government, was liable for up to $150 million of Greenberg’s legal fees, but he didn’t know that when he retained Boies.

What did Boies have that Eric and I didn’t? Well, um, would you like the short list or the long? Boies is no doubt one of those exceptionally gifted and ambitious people who works hard enough to get lucky. I suspect his plutocrat switch was first activated when his family moved to California while he was in high school, and from there was exponentially supercharged by a series of textbook upwardly mobile experiences: a liberal arts education at Northwestern, a law degree from Yale, an LL.M. from NYU, joining the Cravath firm and eventually becoming a partner before leaving to found his own firm.

That’s impressive enough, but there’s more to his story: somehow along the way he was transformed into the kind of person who belongs — in his case, not just to the 9.9% club, but to the 0.1 %. Yes, his human capital was substantial, but it was his personal transformation that enabled him to capitalize (I use that term advisedly) on the opportunities granted only by social capital.

And now, if the 9.9 percenters we heard from a couple weeks back are correct, the pathway he followed is even more statistically rare (if that’s even possible) than when he travelled it — in part because of an economic principle that’s at least as old as the Bible.

We’ll talk about that next time.

Eric and Kevin’s Most Excellent Career Adventures

       

David Graeber’s book Bullshit Jobs is loaded with real-life job stories that meet his definition of “a form of employment that is so completely pointless, unnecessary, or pernicious that even the employee cannot justify its existence even though the employee feels obliged to pretend that this is not the case.” One of those stories rang a bell: turns out that “Eric” and I had the same job. The details are different, but our experiences involved the same issues of social capital and upward mobility.

Eric grew up in a working class neighborhood, left to attend a major British university, graduated with a history major, landed in a Big 4 accounting firm training program, and took a corporate position that looked like an express elevator to the executive suite. But then the job turned out to be… well, nothing. No one would tell him what to do. He showed up day after day in his new business clothes and tried to look busy while trying in vain to solve the mystery of why he had nothing to do. He tried to quit a couple times, only to be rewarded with raises, and the money was hard to pass up. Frustration gave way to boredom, boredom to depression, and depression to deception. Soon he and his mates at the pub back home hatched a plan to use his generous expense account to travel, gamble, and drink.

In time, Eric learned that his position was the result of a political standoff: one of the higher-ups had the clout to fund a pet project that the responsible mid-level managers disagreed with, so they colluded to make sure it would never happen. Since Eric had been hired to coordinate internal communication on the project, keeping him in the dark was essential. Eventually he managed to quit, kick his gambling and drinking habits, and take a shot at the artistic career he had envisioned in college.

My story isn’t quite so… um, colorful… but the themes are similar. I also came from a strong “work with your hands” ethic and was in the first generation of my family to go to college, where I joined the children of lawyers, neurosurgeons, professors, diplomats, and other upper echelon white collar professionals from all 50 states and several foreign countries, At the first meeting of my freshmen advisory group, my new classmates talked about books, authors, and academic disciplines I’d never heard of. When I tackled my first class assignment, I had to look up 15 words in the first two pages. And on it went. Altogether, my college career was mostly an exercise in cluelessness. But I was smart and ambitious, and did better than I deserved.

Fast forward nine years, and that’s me again, this time signing on with a boutique corporate law firm as a newly minted MBA/JD. I got there by building a lot of personal human capital, but my steel thermos and metal lunch bucket upbringing was still so ingrained that a few weeks after getting hired I asked a senior associate why nobody ever took morning and afternoon coffee breaks. He looked puzzled, and finally said, “Well… we don’t really take breaks.” Or vacations, evenings, weekends, or holidays, as it turned out.

A couple years later I hired on with a Big 4 accounting firm as a corporate finance consultant. My first assignment was my Eric-equivalent job: I was assigned to a team of accountants tasked with creating a new chart of accounts for a multinational corporation and its subsidiaries. Never mind that the job had nothing to do with corporate finance. Plus there were two other little problems: I didn’t know what a chart of accounts was, and at our first client meeting a key corporate manager announced that he thought the project was ridiculous and intended to oppose it. Undaunted, the other members of the consulting team got to work. Everybody seemed to know what to do, but nobody would tell me, and in the meantime our opponent in management gained a following.

As a result, I spent months away from home every week, trying to look busy. I piled up the frequent flyer miles and enjoyed the 5-star accommodations and meals, but fell into a deep depression. When I told the managing partner about it, he observed that, “Maybe this job isn’t a good fit for you.” He suggested I leave in two months, which happened to be when our consulting contract was due for a renewal. Looking back, I suspect my actual role on the team was “warm body.”

Graeber says that, at first blush, Eric’s story sounds like yet one more bright, idealistic liberal arts grad getting a real-world comeuppance:

Eric was a young man form a working-class background… fresh out of college and full of expectations, suddenly confronted with a jolting introduction to the “real world.”

One could perhaps conclude that Eric’s problem was not just that he hadn’t been sufficiently prepared for the pointlessness of the modern workplace. He had passed through the old educational system . . . This led to false expectations and an initial shock of disillusionment that he could not overcome.

Sounds like my story, too, but then Graeber takes his analysis in a different direction: “To a large degree,” he say, “this is really a story about social class.” Which brings us back to the issues of upward mobility and social capital we’ve been looking at. We’ll talk more about those next time.

In the meantime, I can’t resist a Dogbert episode: