Developed economies in the modern era are driven by information and communications technology (ICT). This has shaped what Lord Adair Turner calls our hi-tech hi-touch world and has, he believes, profound consequences for capitalism and for human welfare.
In the fifth lecture of the Capitalism on the Edge series, the academic, businessman and former Chairman of the Financial Services Authority presents trends, arguments and observations which have persuaded him that ICT has undermined the orthodox justification that free market capitalism necessarily increases welfare in developed countries.
Close to magic
Just imagine, says Lord Turner, that thirty years ago someone had invented a magic word enabling friends to talk with each other from anywhere in the world. Then, consider the economic consequences of this discovery: provided the discoverer had filed an intellectual property right, they would now be supremely rich; their intellectual property lawyers would have earned considerable sums, and their estate agents would have raked in fees for several high value properties.
The lucky discoverer would no doubt also have spent large amounts on fashion and parties. Yet, as Turner points out, in this scenario nobody has yet been employed in the “magic word company” that has generated so much wealth.
Of course, the magic word is a thinly veiled comparison to the mobile phone, or to Facebook. And Turner is arguing that the technology behind it has features which seem a lot closer to magic in their economic consequences than previous technologies, such as those of the electromechanical age.
The orthodox case for capitalism
To explain, Turner outlines the orthodox case for capitalism which justifies the free market as a superior system to deliver growth and increases in welfare. This so-called instrumental argument is based on four assumptions:
- Technical progress drives productivity which drives growth (measured by GDP/capita) which leads to increased welfare
- Market competition maximises efficient allocation and growth
- Wealth reflects efficient capital accumulation because high savings leads to high investment which leads to growth which delivers wealth
- Inequality is acceptable because over time, the rising tide of wealth floats all boats
In the ICT era, says Turner, this orthodoxy is being shaken. “There are changes going on in the nature of our economy which challenge every one of these assumptions,” he says.
Turner acknowledges that the financial crisis of 2008 and its aftermath have struck a body blow to confidence in the ability of capitalism to deliver growth and then welfare. Yet moving beyond well- versed explanations for the slow and difficult recovery, Turner cites American economist Robert Gordon, who raises a more fundamental question: “Are we running out of opportunities to improve GDP per capita and thus to improve human welfare?”
Personally, Turner doubts that we are, but he is emphatic in agreeing with Gordon’s related argument; that even if we are making productivity improvements, they are simply less important to human welfare than the productivity and income improvements of a previous era.
By comparing what happened to standards of living in developed economies between 1870-1970 and between 1970-2015, Gordon argues that the earlier century is far more transformational for human welfare than the subsequent 45 years; that welfare gains during the first period were substantially greater.