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May 11, 2018

Inequality as Systemic Risk, Part II

Part one of this series laid out why economic inequality could lead to our society’s downfall. In part two, we address potential solutions.

Coauthor Arina Abbott is responsible for marketing at Green Alpha Advisors.

In part one of this post, we discussed some of the causes of economic inequality and the resulting risk of eroding societal wellbeing. This is part of what Stanford’s Walter Scheidel describes as “a disturbing pattern: that throughout American history, periods of lowered inequality and strengthened political and societal cohesion have alternated with those darkened by growing gaps between the haves and the have-nots and a violent fraying of the social fabric.” Scheidel then asks a key question: “Can it really be true that there is nothing new about our troubled time, and that similar ages arise periodically for similar underlying reasons?” Can we avoid the same fate suffered by previous societies?

There is a good argument that we cannot. Each one of us is running the same Stone Age operating system on hardware (the human brain) that is anatomically indistinguishable from that of our ancestors of 100,000 or more years ago. Given our species’ track record, who can credibly say that humans are capable of overcoming millennia of individual and group-level selection that gave rise to tribalism and the desire to accumulate wealth?

Yet, what is different now is the panoply of new tools in our hands thanks to the cumulative results of millennia of technological progress. We’re still us, but these advancements are powerful. As Stuart Brand has said, “You can’t change human nature, but you can change tools, you can change techniques…you can change civilization.”

As with the power of compounding interest on money, compounding millennia of innovation have brought us to the precipice of something new— an era of unprecedented change. In an article featuring technologist and futurist Ray Kurzweil, Big Think captured the grand potential of exponential innovation: “Problems that may seem intractable now could become eminently solvable in the near future. Not only should this inform investing and planning for the future, it should also change what you think of as possible for humanity. Soon, things which we could barely have imagined decades before might be within reach.”

Many of these “things” may help us address our key systemic risks, including inequality and climate disruption. For example, the technological progress that serves a more ecologically efficient economy can be used to more equitably allocate wealth. A more diverse workforce can come up with creative climate solutions that serve the many rather than the few. To build an economy that can thrive over the long-term, solutions to these risks must go hand-in-hand.

So what are some of the most promising solutions?

Preparing people for the jobs that will add value in a digital, automated age

As we face this era of change, we need to look honestly at where the economy is headed and how humans fit into the picture. People are genuinely afraid that the tech-based, automated future will be jobless. If we continue thinking only in terms of the past–where buoying coal jobs is prioritized over transitioning coal workers to long-term work, and basic income is dismissed because we’re tethered to the idea that humans will only understand “hard work” if they receive a paycheck–then Americans will indeed have something to fear.

This unfolding economy is increasingly based on innovation-generated and technology-leveraged productivity expansion, offering unprecedented opportunity if we get it right. For one, it creates sustainable growth while reducing environmental damage, which is a systemic risk and an exacerbator of inequality in its own right. By improving efficiency across the economy, it’s possible to shrink every individual’s ecological footprint and ultimately reach the point where we have good standards of living without crossing planetary boundaries (see E.O. Wilson). The law of accelerating returns can mean we’ll achieve far more economic output from far fewer inputs, driving wealth creation and sustainability.

An innovation-driven economy can also elevate the value of human creativity. The jobs vulnerable to machine automation, for now, are those that use people as machines. Already, we see “a trend toward automating those elements of jobs that are repetitive, error-prone and even dangerous. What’s left are the creative, intellectual and emotional roles for which humans are still best suited,” according to AI expert Fei-Fei Li.

Artists, scientists, designers, engineers and business strategists fall into this category. Jobs that are highly unpredictable or ones that require building complex relationships with people—nurses, client service professionals—are also here to stay.

So instead of clinging to the economy of the past, let’s set people up for the economy of the future. This means making deliberate public and private investments in educating and transitioning people so they can fill these creative, intellectual and emotional positions that are so necessary for a healthy economy.

Ensuring developing technologies are designed to empower people

But if all these advanced means of productivity generation are primarily owned by the 1 percent, will elites share their massive new windfalls? The answer is, they won’t. Those that inherit large sums of wealth tend to protect it rather than spend or invest it, so the idea that they will immediately start using it to pay and raise wages doesn’t really hold up. We have to start by making these new technological platforms common goods, as with the Internet.

The blockchain and similar transparency-driven exchange technologies have the potential to disintermediate powerful monopolies and other authorities. They enable peer-to-peer value exchange in the form of cryptocurrencies, as well as IP and innovation itself in ways that allow everyone to participate. Applications built on blockchains are governed by users, rather than any single entity like a bank or government, meaning they can potentially be governed by everyone. As such, blockchain also provides transparency, making inequality-worsening corruption more difficult. It also allows us to maintain high-level systems without any one person owning a database.

From a viability point of view, blockchain is still very much untested compared to what it can become. It is both a business model and a technology, which is almost unprecedented. Today, we have no idea what applications may or may not emerge from its development and practical use. For investors, that means we need to stay tuned, have a long timeframe, be prepared to pivot and consider hiring technical due diligence.

While much remains untested, blockchain’s potential to mitigate inequality can’t be underestimated. A number of thought leaders, including philanthropist and investor Nicolas Berggruen, have begun to explore how blockchain can create a “pre-distribution” rather than “re-distribution” ownership model. In other words, the blockchain can allow us to go “from redistributing wealth to distributing value and opportunity fairly in the first place, from cradle to grave,” Alex and Don Tapscott write in a piece for the World Economic Forum. The possibilities for economic empowerment are endless, including “enabling citizens to own and monetize their data (protect privacy) through owning their personal identities” and “creating [a] true sharing economy by replacing service aggregators with distributed applications on a blockchain,” they write.

This “cradle to grave” principle is being considered in the Artificial Intelligence and Artificial General Intelligence space as well. Elon Musk’s Open AI endeavors to “ensure AGI’s benefits are as widely and evenly distributed as possible,” because Musk’s team expects “AI technologies to be hugely impactful in the short term, but their impacts will be outstripped by that of the first AGIs.” The CEO of the Allen Institute for AI, Oren Etzioni, has even proposed a Hippocratic Oath for AI practitioners, wherein they swear to do no harm.

Crowdfunding platforms, like Patreon and Kickstarter, are another positive development. The more open and equal the access to capital, the more potential for innovation and growth. As Joseph Stiglitz reportedly said, “The financial sector used to be about injecting money into American businesses. Now it is about extracting money.” Crowdfunding can change this by bringing meaningful investment opportunity, and therefore more distributed ownership of the results, to a far greater portion of the socioeconomic spectrum. Moreover, greater access to capital for business founders will spur more innovation overall. How many ideas have floundered because an entrepreneur couldn’t get a meeting with a venture capital firm?

Investing in a diverse workforce to build an equitable, resilient, productive economy

On the human side of this wealth-concentration equation, there is one absolute requirement to realize a more prosperous, equitable economy: addressing chronic underinvestment in businesses run by and for unrepresented groups, like women, people of color and LGBTQ+ people. As panelists at the Data for Black Lives Conference put it, “the next 15 years of advancement in the digital revolution will present a window of opportunity for people of color.” If people who have been historically marginalized are elevated on the eve of this digital revolution, we could see a real dent made in inequality while generating economic growth.

As people access the resources they need, the opportunity to develop innovative solutions to inequalities snowballs. “People who’ve never had to navigate the inequities experienced…cannot create the solutions to these problems,” says Piper Harron, a mathematician and panelist at the Data for Black Lives Conference.

The people who encounter inequities are some of the best candidates to identify and develop solutions to them. Having come from a small town in Mississippi with only one bank, Sheena Allen developed CapWay, an online banking and financial literacy app that serves the unbanked, underbanked and people living paycheck to paycheck. Her aim? Prevent people from getting sucked into “a cycle that’s really hard to get out of,” she said in an interview with CNN, since many unbanked people struggle to build credit, buy homes and save when relying on wallet-draining services like payday loans and check-cashing services. Clearly, there are swaths of profitable and beneficial markets that have gone largely unnoticed by the predominantly white, male investment industry.

A more inclusive economy bodes well for the labor market, too. The number of women-owned small businesses is growing at twice the rate of small business growth overall. Given that small businesses have been responsible for nearly all net job creation since 1980, it’s unsurprising that women are having a major impact on economic growth. Meanwhile, the booming cybersecurity industry is likely to face a labor shortfall in a hyper-connected economy. Developing an inclusive economy that taps into a broader, more diverse set of workers would be an ideal way to fill this void.

Of course, the value of diversity extends beyond creating direct solutions to inequality; it generates value and wealth across industries. As our team has pointed out before, diverse groups are more creative, evaluate more facts to inform better decisions and are more likely to achieve both short- and long-term goals than more homogeneous teams.

So when we think about deliberately investing in diverse groups of people, we aren’t thinking about charity or philanthropy, we’re actualizing an immense economic and social opportunity. As Arlan Hamilton, founder of Backstage Capital, put it in her viral post back in 2015: “It’s not about ‘helping’ founders, it’s about fueling an untapped ecosystem so that you may be lucky enough to reap the rewards in years to come…Because of the blind spot investors have for this group of people right now, there’s an enormous opportunity to invest at undervalued prices. It won’t always be this way.”

Create policy that empowers people in a digital age

Another idea that may be worth a shot, especially as more activities are displaced by technology, is basic income. Early experiments have so far been encouraging.

The Eastern Band of the Cherokee Indians has been putting basic income to the test since 1996. One community member remarked that the income “changed the entire mindset of the community” over the course of 20 years. Extensive research conducted by Jane Costello of the Duke Institute for Brain Sciences supports this experience. Costello’s team, which began studying Cherokee youth in 1993, found that the sharp rise in household income of many Cherokee families translated to significant reductions in behavioral problems, drug addiction and alcohol addiction among children. The earlier the children received this infusion of cash, the greater the impact.

Will people receiving a basic income stop working or looking for work? One large, long-term study says no. Lapowsky, who wrote about the Cherokee income system, cites a 2010 analysis of Costello’s data, led by Randall Akee of UCLA’s Luskin School of Public Affairs, which found a small increase in the share of people working part-time, but no impact on overall labor participation.

Income today continues to move from workers to owners, so it’s very possible that income alone will not suffice to reverse inequality. Working just doesn’t pay what it used to, and something has to make up the shortfall. A new study by the Brookings Institute finds that automation has not yet significantly shifted employment, but “it has reduced labor’s share in value-added.” The activities most susceptible to automation–including middle- and high-skill activities–make up 51 percent of economic activities, amounting to almost $2.7 trillion in wages.

Basic income could work as one piece of the puzzle to create a thriving populous and economy. A more successful population equals a more successful economy overall. As one prominent theory has it: “low-income people can be more successful if we take away everyday burdens… basic income should be seen less as a handout and more as ‘venture capital for the people.’”

Moreover, economies grow when people spend. If we don’t address widening inequality at every socioeconomic and population level, it will be difficult for even the top 1 percent, much less everyone else, to continue enjoying the economic growth rate they have become accustomed to over the last couple decades.

But where will the resources to pay for this come from? If, as it is often said, data is the new oil, then why not attempt an approach like one Chris Hughes has suggested, to provide a basic income based on the vast, wealth-spawning datastream we’re collectively and continually creating? It could work in much the same way Alaska provides a basic income for its citizens on the basis of their oil wealth. This so-called “National Data fund” could be one way to let individuals monetize the data they currently give up for free and do a little to prevent the entire data windfall from flowing only to the stream’s current owners.

Inclusive and sustainable prosperity at our doorstep

These goals require careful application, and the time to have the debates about how best to apply them is now, while these world-changing techs are still in their cradles. As Musk has said, “When you’re building something smarter than you, you have to get it right on the first try.”

Whatever the eventual map of the Next Economy, one required consideration is this: Unless a technology or an algorithm is deployed in a way that improves lives, it is likely serving inequality exacerbation and, therefore, undermining social cohesion. It’s equally true that the only way for us to evade the worst outcomes of inequality and climate change will be to apply our amazing capacity for compounding innovation, thereby using our innate adaptability to literally invent a better world. We can achieve an economic construct that contemplates the wellbeing of tar sands workers as much as it does Elon Musk or David Koch; we can create the conditions where everyone determines for themselves where they best fit into the economy, and where they don’t just have to accept whatever machine-like job happens to be local to them.

Within the context of portfolio construction, what can asset managers do about all of this? We can invest in solutions where they exist and buy leading companies driving the productivity revolution, while paying special attention to the companies that are directly addressing the potential social problems that come along with this major shift. We can endeavor to look for firms that are driven by diverse leadership and are tapping into underserved markets. We can buy companies with a strong program for employee ownership and that value and invest in education for their employees and community. We can look for enterprises that have prioritized providing access to the information sphere, the distributed ledger and other techs that counter inequality on a global scale.

Can the manner of our investing be equal to the task of addressing our largest problems? No. Is it one necessary part of the grand solution? Yes. As always, we remind you that de-risking the underlying economy, not correlating to some benchmark, is our best shot at reducing real risk and therefore realizing long-term returns.

Can it Even Be Done?

In part one of this post, we considered how dangerous inequality proved to be for past human civilizations. But what about civilizations that may have avoided this trap? Examples of societies persisting for a long time without running into this risk are painfully scarce, yet recent evidence indicates there was one right here in North America that lasted for 500 years.

“New archaeological finds at Teotihuacán suggest something astounding: It flourished without a massive underclass,” reads one headline. “How did the Teotihuacános accomplish this? …it’s possible that the city’s wealth from trading and other economic activity was spread throughout a population that lacked or even actively suppressed strong social class distinctions.”

Evidently, it can be done.

However the Teotihuacános accomplished their equally shared prosperity, they did it without many of the means we have at our disposal. We now have the tools to create our own five centuries of prosperity. “It’ll never work” is not an excuse.

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