Complexity Gaps Lead to Inequality

Excerpts from the book Confronting Complexity: X-Events, Resilience, and Human Progress by

John L. Casti

Roger D. Jones

Michael J. Pennock

preface

table-of-contents

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Inequality Kills Everything

American political scientist Francis Fukuyama announced the “end of history” in his essay of the same name published in 1989. In that article, Fukuyama argued that communistic social and economic principles collapsed along with the Soviet Union thus leading to a victory for liberal-democratic capitalism in their decades-long battle. What many people missed in Fukuyama’s essay was the part in which he wondered whether citizens in the West would proceed to lose moral and spiritual purpose now that the Cold War had ended the East- West ideological conflict.

In point of fact, what we have seen over the past quarter of a century is that the market system can happily coexist with many sorts of political ideologies, today’s China and Russia both illustrate this fact by maintaining systems that are economically capitalistic but politically authoritarian, with both also being highly nationalistic in ideology. As Michael Ignatieff has noted, what we see here is an experiment to answer the question: can a regime continue to exist when it allows its citizens private freedoms but restricts their public freedoms? Put in the terms of this book, what we have here are two systems in interaction: the private enterprise-based economic system and the very publicly-based political system. From a Western point of view, these two systems are in conflict and cannot peacefully coexist for any extended period. By thinking of the complexity levels of these systems, we can rephrase the question as whether the complexity gap between the two systems can be maintained at a level small enough to ensure that no X-event (coup, revolution, or civil war) will take place to break the connection between the two systems.

In his 2014 book Political Order and Political Decay, Fukuyama states that “there is a clear directionality to the process of political development,” claiming that democracy is where political history is headed. If he’s right, then the complexity level of the political system will increase so as to close the gap with the economic system. This process will, in turn, reduce the stress in the overall social system allowing it to at least persist, if not necessarily thrive, for an extended period. In other words, for today’s Russia and China to survive, their political ideologies must move toward becoming more democratic.

A necessary condition for Fukuyama’s argument to work is a rise in the world-wide middle class. The reason is that as incomes rise, people demand the rule of law to protect their property. They then also demand political partici- pation to preserve and protect their social status, both for economic and moral reasons. As Ignatieff observes, “People become insulted when authoritarian systems of rules treat them as disobedient children.”

The United States is perhaps the most clear-cut challenge to Fukuyama’s thesis as we have seen a dramatic decline in the American middle class by all measures over the past several decades. This, in turn, seriously challenges American democracy as conceived more than two centuries ago by the founding fathers of the country. We saw this steady disappearance of the middle class in America in the three graphics presented earlier. Just to hammer home the point, here are four additional pointers showing the downward trajectory of the American middle class.

 

Income Inequality versus Income Tax Rates: Figure 3.4 shows the changes in the share of national income versus the top marginal income tax rates since 1960 for 18 of the world’s largest countries in the developed world. What we see here is the change in share of income for the top 1 percent correlates very strongly with decreases in the top tax rates, with the United States prominently leading in this particular race to the bottom (for tax rates versus share of income).

Rich-Poor Employment Gap: The rate of unemployment for the lowest-income families, those earning less than $20,000 per year, topped 21 percent in 2013, almost as high as the total unemployment rate for the Great Depression of the 1930s. But those from households having an income of $150,000 or more, the unemployment rate was just a bit over 3 percent—more than seven times lower, and a level normally considered as “full employment.” As noted by Andrew Sum, director of the Center for Labor Market Studies, “One part of America is in depression, while another part is in full employment.”

Neighborhood Segregation: A 2013 study by Kendra Bischoff and Sean Rear- don found that the segregation of families by socionomic status, i.e., the rich living with the rich, the poor with the poor, had greatly accelerated in recent decades. Thus, the percentage of families living in middle-income neighborhoods dropped to 42 percent in 2009 from 65 percent in 1970. By way of contrast, the percentage of families living in wealthy neighbor- hoods more than doubled from 7 percent to 15 percent over the same time period, as did the fraction of families living in poor neighborhoods, which jumped to 18 percent from 8 percent previously.

 

Downward Mobility: The Baby Boomer generation grew up in a world (the mid 1950s–1970s) of massive individual choices and opportunity. It was a highly individualistic culture, prizing the idea that you could really build your- self. Their children not only inherited this mind-set, but even in the face of today’s uncertain economy and daily crises are leading lives dominated and shaped by personal, not collective, values. There will almost surely be a day of accounting for this cognitive dissonance between what people think the world owes them and what the world is prepared to actually hand over. To illustrate this point, Lisa Kahn of the Yale School of Management studied the relationship between growing up in a poor economy and the financial impact that has for young people later in life. Her study found that for each percentage point increase in unemployment, income levels fell by around 6 percent. The most salient point, though, is that this decrease persisted for over 15 years. So graduating from college at the wrong time, economically speaking, means that the graduates will never fully recover and move into higher-paying jobs after the economy comes back to life.

What these facts add up to is that if you grow up when the economic growth is low and unemployment is high, you are already on the slippery slope to downward mobility in every aspect of life. And no amount of self-help books and motivational seminars are going to change this state of affairs. The problem with downward mobility is that it runs against the entire post World War II faith in onward and upward prosperity. Such a world view became a kind of secular religion. And if popular expectations are washed away, the population begins fearing the future rather than welcoming it—the very definition of negative social mood. That, in turn, may well lead to a kind of death spiral for the entire welfare state.

While no country is entitled to economic success, the future is not entirely cast in concrete. As noted by Robert J. Samuelson in a very perceptive and detailed account of this entire process, there are three factors that must be taken into account when making the argument that US prosperity will decline in the coming years.

First, as Niels Bohr once stated, forecasting is very difficult—especially about the future. The graveyard of history is filled with the corpses of forecasts that were simply wrong. For example, many economists thought that there was no engine available to drive the US out of the economic stagnation of the Great Depression. But they failed entirely to anticipate the Baby Boom expansion fol- lowing the Second World War, and the technologies that drove the expansion into the suburbs in the 1950s.

 

A second factor to bear in mind is that perhaps economic growth by itself will not be valued so highly in coming years as in the past. Perhaps Americans will voluntarily cut back on the massive over-consumption of goods and services that has driven the American way of life for the past 50 years or more. Perhaps tomorrow’s middle-age American will feel perfectly comfortable with a life with fewer material possessions and more time for their personal lives.

The last item on Samuelson’s list is the observation that we are not helpless. We might well be able to soften, if not totally neutralize, the demographic, political, and global economic forces that are driving the middle-class decline. He notes that perhaps the realization that we will live longer lives will motivate people to work longer. And perhaps people will acknowledge that wealthier retirees should not receive subsidies from less well-off younger workers.

These rather bleak facts about the middle class address the question of “What?” But the underlying reason for this hollowing out of the middle class, the “Why?”, remains unclear. Let’s take a look at what some have proposed for an answer.

Fukuyama believes the basic problem underlying this steady erosion of the middle class rests in a growing distrust in government. To function, the US political system requires that politicians from both sides of the aisle trust one another, at least to the extent that they will generally engage in political com- promise. The way things are structured today, the complexity level of the gov- ernment has way too many political players (i.e., too high complexity) who can each veto any proposed rules. Courts lead the list, but there are also congres- sional committees, lobbying interests like the American Medical Association, regulatory agencies, and the like. In the end, too many can veto, while too few can act. This is complexity mismatch in action, leading to a state of paralysis.

The foregoing scenario can be summed up by saying there is too much law and too much democracy relative to the capacity of the country to accommodate it. In short, a complexity mismatch, and one that is growing greater by the day. Fukuyama lays this difficulty at the doorstep of the rise of “adversarial legalism,” a polite term for way too much formal litigation in the courts and way too few quiet consultations and back-room com- promises in the halls of Congress. So paradoxically, we see that too much transparency and public accountability can actually impede the process of government by making politicians loathe to be seen wheeling and dealing in smoke-filled rooms if those wheelings and dealings are going to be on the national news later in the evening. Politicians need some measure of privacy and discretion to do their work and make things happen. And that is exactly what cannot happen if investigative reporters, whistle-blowers, intrusive bloggers, and the like are looking over their shoulder at every moment. To sum it up, less democracy means less veto holders, thus less paralysis in the day-to-day business of government. Put another way, downsize or die!

 

So Fukuyama’s argument is sociologically-based: lack of trust in government and other institutions. But there is a technical argument as well leading to the same conclusion. That is the ever-increasing role that technology plays in everyday life. We alluded to the impact this development has on the core issue in the demise of the middle class, the polarization of the job market. Let’s reprise this argument from a slightly different perspective.

A surprise best-seller in the bookstores in the spring of 2014 was a 700- page tome with the unpromising title Capital in the Twenty-First Century written by French economist Thomas Piketty. The author states that wage inequality in the United States is “probably higher than in any other society at any time in the past, anywhere in the world.” That seems to cover the issue clearly and definitely from all space-time directions! As noted above, the rapid pace of technological developments in the US and else- where over the past few decades resulted in the elimination of traditional middle-class jobs. What was left was demand for either highly skilled technically trained workers or low-skill, lowly paid laborers. Piketty’s argument says that this process by itself is not sufficient to account for the enormous wealth inequality in the US today. His claim is that it is also driven by the fact that at pay-setting institutions like banks and large corporations, “Above a certain level it is very hard to find in the data any link between pay and performance.” Piketty also points a finger at laxity in corporate governance, another contributor to the large-scale mistrust people have today in such organizations.

A central argument in Piketty’s book is that when the rate of return on capital becomes greater than the economic rate of growth, then the money that the rich make from their wealth piles up while wages grow much more slowly, if they grow at all. This fact implies that the US is entering a period that will be dominated socially and politically by people with huge amounts of inherited wealth. Piketty calls this a “Jane Austen world” in which people’s lives are determined by their inheritance, not their talents and hard work. He goes on to claim that “The belief that technological progress will lead to the triumph of human capital over financial capital and real estate, capable man- agers over fat-cat stockholders, and skill over nepotism is largely illusory.”

But some economists question Piketty’s rather pessimistic arguments. For example, Erik Brynjolfsson of MIT says that technology is the main driver in the rich-poor gap and is concerned that even as digital technologies expand overall income, an ever-increasing share of the workforce will not participate in this largesse. He argues that “technology-driven economy greatly favors a small group of successful individuals by amplifying their talent and luck.” Brynjolfsson also distinguishes between Piketty’s “supermanagers” and what he terms “superstars.” The distinction is important, as the superstars obtain their high income directly from the technology they create, not simply from moving money and people from one side of the desk to the other. In essence, Brynjolfsson’s argument is that the economy will be increasingly driven not by managers but by a small elite that innovates and creates. So the forces that drive the income inequality are primarily the demand for highly-skilled workers, while those with less expertise get left behind.

In either the Piketty or Brynjolfsson paradigms, though, the essential ele- ment is a growing complexity gap between one segment of the workforce (the supermanagers or skilled elite) and the rest (the worker bees or the unskilled). This gap widens daily. And as it does, the social stresses grow in just the same way that the stresses increase between two tectonic plates as they slowly move in different directions. In both cases, the stresses ultimately must be released. The typical form of that release is a rapid break or crash. In the social realm, that usually takes the form of a revolution of some type; in nature, the form is an earthquake. And in both cases, a huge amount of damage is done to the social or physical structure. Of course, the landscape that remains after the crash has many new hills and valleys that the surviving “organisms” can exploit. In the next chapter, we will take up this point in detail.

For now, though, let’s close out our discussion of inequality by reporting briefly on the role negative social mood has played recently in the withdrawal of young people from traditional forms of social interaction. While these examples are not specifically within the domain of inequality, income or otherwise, they again illustrate better than any social theory just how the landscape of social interaction is and has changed in America over the past few decades. Our first example harkens back to the downward mobility factor that we discussed a moment ago, while the second involves the way young people are “hooking up” in the eternal search for a soulmate. As Stephen Stills put it, ”There’s something happening here.”

Traditionally, Americans are noted for their social and geographic mobil- ity, not to mention being ready to take a risk to move up in the social hierarchy. But sometime in the past couple of decades, young Americans have reversed that trend—they have become positively sedentary and risk-averse. For example, the likelihood of someone in their twenties moving to a new state has dropped by more than 40 percent in the last 30 years. And this is not just for uneducated high-school dropouts. The very same numbers apply to the college-educated, as well.

Even more stunning is the fact that a steadily increasing number of teen- agers are not even bothering to get their driver’s license any more. In the early 1980s, 80 percent of 18-year-olds obtained a license. By 2008 that number had dropped to 65 percent. And this is not due to the Great Recession, or rising gas prices. Rather, researchers suggest that Facebook and its associated social media clones bear a much greater share of the reason, as several studies have shown that young people spend more time on the Internet than they do on the road.

 

As an example of this reversal of the American historical tradition, we note that in the mid-1970s when every high-school male and many females too opted for their driver’s license and a chance to hit the road, Bruce Springsteen recorded his breakthrough album Born to Run. But a couple of decades later, Mr. Springsteen’s offerings have a much more somber tone, epitomized by the dead-end dirge “The Ghost of Tom Joad,” referring to the main character in John Steinbeck’s masterpiece, The Grapes of Wrath. This is just what one would expect to see if the young people were in a mind-set that saw the future as a fearful place rather than an environment where opportunity lay around every street corner. In short, in a world in which negative social mood is the dominant belief.

As a capstone to this relentless story of negative social mood and its impact on American life, both at the collective and individual levels, we find that in today’s world even the most elemental activities have been “outsourced” to technology. In the film Her, a computer so convincingly mirrors human thought, emotion, and speech that the film’s male lead, Theodore Twombly, initially dismisses the idea of falling in love with his computer’s operating system. Of course, that’s exactly what happens. And why? Mostly because when flirting and falling in love with other humans, people usually feel insecure and vulnerable. But when you do it with a machine or by remote control via a social net- working site, you can hide. So there is no chance of being judged and rejected.

According to Daniel J. Jones, editor of the Modern Love page in the New York Times, the most commonly written about topics in his periodic essay contests were either the theme of trying to figure out “How to navigate a sexual relationship that excluded emotion, or figuring out how to navigate a personal relationship that excluded sex.” So nowadays, young people engage in cyberintimacy! Instead of meeting in person at the local bar or fitness club or rock concert, students today spend their evenings on Skype or in chat rooms, exchanging messages deep into the night with their e-lovers. The strange thing is that e-lovers do occasionally actually meet. But when/if that occurs, as often as not the relationship goes up in flames. It seems that being together physically just doesn’t “feel right.” Jones offers two possible explanations for this.

The first is that perhaps the two e-lovers didn’t really get to know each other as well as they had imagined. Instead, what they got was a collection of images, text, and perhaps audio. So the messy parts of a relationship are never on display, only ideal versions of themselves. The personal encounter yanks away that version almost immediately, a very uncomfortable and jarring emotional experience, one that most such e-relationships cannot survive.

 

A second explanation Jones puts on the table is that the urge to find plea- sure through a machine rather than through a person who’s in the same room might be a habit difficult to break. In short, the grass always looks greener on the other side of the street. Or in this case, perhaps on the other side of the world.

The role of social mood in this movement from the personal to the mechanical in the romance department is easy to see. When people start fearing the future they are more inclined to withdraw into themselves for protection from an increasingly hostile environment. One way of doing this is not to take chances by putting your inner thoughts, feelings, and emotions on the line for someone else to shoot down. Rejecting rather than welcoming is one of the polarities that dominates in a world of fear. Machine romance is simply one manifestation of that dichotomy.

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