The Resolution

The changing dynamics of capital and labour: What boards need to know

The world is currently in the middle of a revolution. Far right candidates and populist parties like President Donald Trump, Senator Pauline Hanson and France’s Marine Le Pen are all signals that the division between capital and labour is transforming before our eyes.

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The world is currently in the middle of a revolution. Far right candidates and populist parties like President Donald Trump, Senator Pauline Hanson and France’s Marine Le Pen are all signals that the division between capital and labour is transforming before our eyes.

The first industrial revolution lasted about 70 years and created a division between capital and labour that most of us have grown up with. The new digital revolution began in the 1980’s and has dramatically transformed how we work and play day-to-day, yet many still view society and organisations through the traditional lens created in back in the 18th century.

In reality, there are many new factors that are driving economic progress and creating social conflict. Everything around us is happening at such a rapid rate that it’s challenging for government and business to keep up with the new world order. Technology is forcing issues like education to bubble to the surface because they’re changing the value of people’s labour and shaping human behaviour.

It’s imperative that we not only understand what’s driving this change, but also address it in an intelligent way.

Education has created a new fault line

The new world is still very difficult to map and it’s impossible to fully comprehend where it’s going to land. The traditional model of labour and capital is no longer a simple dichotomy. The economic framework today is now more complex and diffused.

While there’s still a capital labour fault line, the line is now blurred. For example, things like superannuation cross the line, because labour is now a significant owner of capital. The ruling elite is also shifting. Where it once owned the capital that ran the show, now education and skills are playing a more significant role. The new elite are those who are able to extract a real premium out of white collar and professional employment.

The new dominant fault line in western societies is education. Whether you have a university education now largely determines your role in the production process, and your potential returns from the process. When you look at the majority of voters in favour of the far right, the three things that stand out are the low proportion of higher education graduates, their older age, and nationalistic values. In contrast the emerging new world is characterised by higher education, specialised skills, comfort with abstract thought, cosmopolitan values, and socially liberal attitudes.

The former group is being fuelled by an understandable resentment that the economic realities of the modern world are moving adversely to them. Their incomes are, in many cases, either stagnating or going backwards. When they look at the new world, they see people engaging in activities that they neither understand nor respect, yet their incomes are soaring.

This redistribution of wealth and income is driving change that needs to be dealt with head on. The old mechanisms to manage discontent that emerged in the industrial era were based on a nation state, and they have little place in a world that’s now global. It’s only natural that the nation state is central to the rhetoric of the far right - because this is what protected and enhanced those who were less well off in the industrial world. Closing borders, tightening regulations, creating protectionist barriers are all about fortifying those interests.

We need to stand in each other’s shoes

What makes this such a complex issue is the multiple perspectives involved. Some boards are confronted with these issues head on because they deal directly with consumers. In a world where inequality is growing, demand for everyday products will flatten because half the population's income is either stagnating or going backwards.

Consumer businesses, like retail shops, are grappling with this directly and should be in favour of people in the lower sections of the income distribution increasing their income because that means they’ll spend more in their shops. Other businesses don’t have the same direct exposure, but they need to look at the world through the eyes of those consumers to see the bigger picture.

Trying to understand how somebody sees the world and why, goes a long way towards understanding why they seek out the solutions they do. After all, why did a person who is living in a declining rust belt economy with limited prospects and low education brush aside some of the outrageous things that Donald Trump said?

They did this because for a lot of people right now, their world looks bleak. Board members need to actually put themselves in the shoes of others to get a sense of what the world looks like when you’re in that position. This can be very hard when you’re a natural high achiever, successful and highly educated.

Employment is the big unknown

Since the 1950’s there’s been a massive growth of services jobs, and industries have evolved that weren’t previously part of the formal economy. Sport, childcare, entertainment and even tourism were amateur industries or things that only rich people did. In the past few decades we’ve seen hyper productivity in the necessities of life, and that has unleashed huge amounts of time and money to be directed into these industries.

While there’s presumably a natural limit to this change, the great mystery is where does it end?

If we no longer need to employ truck or taxi drivers because we're all being driven around in autonomous vehicles, what happens to all the drivers? Historically, as technological change unfolds, some jobs are destroyed and new jobs are created elsewhere. So it’s reasonable to expect that there will be new jobs, but it’s difficult to anticipate what the labour market may look like in 40 years time.

The big unknown is the amount of disruption. While structural change is inevitable and new jobs will emerge, it’s typically not the people who have lost the old jobs who can access the new ones. This gives rise to a need to manage the change process and be as prepared for it as possible. To do this we must bring our society into the digital economy.

Digital capability is now critical

In many ways, the changes we’re going through now are a new industrial revolution. To this end there are a lot of things we can learn from the social change that occurred as a result of the industrial revolution from the mid-18th through to the mid-19th century.

For example, the key response in getting the ball rolling back towards social fairness after the massively inequality of the 19th century was the spread of universal education and literacy.

Now, we're moving into a different world and the modern equivalent is people’s capability to participate in a digital society. Ensuring that people are able to participate as equals in a digitally dominated world is a crucial objective for future governments and business.

Public policy needs to address a changing digital world

The key to this is the education system. Our current education system is dominated by industrial age mindsets and frameworks. We need to bring it into line with where the world of work is heading. This requires a giant transformation, not just tweaks around the edges.

In addition, we need to question taxation and the role of government intervention. One of the challenges here is that the ability for governments to collect revenue (and use it for social good) is being eroded. But to address inequality and income distribution the government has a critical role to play.

One emerging concept is that of a basic income. Rather than having a range of benefits that are given out in a scattergun and complex way, every citizen gets a minimum amount of income irrespective of their circumstances. This concept is gaining popularity as an idea to try in many parts of the world. Another approach is to tax robots, which then makes human inputs more attractive.

The reality is these are very complex issues in a still unfolding set of phenomena. They aren’t necessarily going to be solved by simplistic responses, as these will probably lead to whole different set of anomalies and contradictions. There’s a big philosophical discussion to be had about what kind of society we want to live in.

Technological advances continue at a rapid rate and we’re moving deeper into the new digital world, so we’re now being forced to address these issues. We simply can’t ignore them any longer. While ignoring is a form of response, by ignoring the issues, we’re in effect making a set of choices about how we want to proceed. But now is not the time to put our heads in the sand. It’s time for us to understand each other’s perspectives and decide who we as a society really want to be.