Blog Archives

So You Want to Get Rich: Focus on Human Capital

So you want to get rich: OK, what’s the plan? If you ask youngsters how to get rich, many will respond by listing the professions the media focuses on: entertainment, actors/actresses, pro athletes, and maybe a few lionized inventors or CEOs.

The media’s glorification of the few at the top of these sectors masks the statistical reality that those who attain wealth in these pursuits number in the hundreds or perhaps thousands, not in the millions. As in a lottery, the odds of joining such a limited group are extremely low.

There are 330 million Americans and 150 million people reporting income, so statistically, the odds of getting rich improve significantly if we focus on joining the ranks of the 11 million people who are getting rich from their human capital rather than on the few thousand people earning big bucks in music, film, sports, etc.

As I noted yesterday in The “Working Rich” Are Not Like You and Me, the nature of work and capital is changing. Markers that were once scarce–college degrees, for example– are now abundant, and have lost their scarcity value. What’s scarce isn’t credentials–what’s scarce are skills that generate productive problem-solving: human capital.

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The Rowboat (Wages) and the Yacht (Assets)

The reason why the status quo has failed and is fragmenting is displayed in these three charts of wages, employment and assets: wage earners (labor) are in a rowboat trying to catch the yacht of those who own assets (capital).

Here is a chart of weekly wages of those employed fulltime: up a gargantuan $4/week in the 18 years since 2000. Let’s see, $4 times 52 week a year–by golly, that’s a whole $208 a year. Brand new Ford F-150, here we come!

If we go back 38 years to 1980–an entire lifetime of work–we find real (adjusted for official inflation, which seriously understates big-ticket expenses such as rent, healthcare and college tuition/fees) wages have notched higher by $10/week–a gain of $500 annually.

If we adjusted wages by real-world income, we’d find wages have declined since 1980 and 2000.

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Do the Roots of Rising Inequality Go All the Way Back to the 1980s?

I presented this chart of rising wealth inequality a number of times over the past year. Do you notice something peculiar about the inflection points in the 1980s?

Correspondent W.S. noted that the inflection point for the top .1% (late 1970s) preceded the inflection point of the bottom 90% (around 1986): both increased their share of household wealth from 1978 to 1986, and then the share of the top .1% took off, essentially tripling from 8% to over 22%, while the share of the bottom fell precipitously from 36% to 23%.

(Note that the data stops at 2012; if we extend the trends to the present, the lines have certainly crossed and the share of the .1% now exceeds that of the bottom 90%.)

So what happened between 1978 and 1986? The first phase of the financialization of the U.S. economy.

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Work Won’t Be Scarce–It’s Paid Work That Will Be Scarce

All the media chatter about work disappearing due to automation fails to draw the critical distinction between useful but unpaid work and profitable work.Since value (and profits/wages) flow to what’s scarce, what matters is not the decline of useful work–there’s plenty of that even in a society that has automated production–but the supply of paid work–work that is profitable and hence worthy of wages.

Mark Jeftovic and I discuss work, profit and new models of paying for useful work(44:47) in a free-ranging podcast on my book A Radically Beneficial World.

The great fantasy that many are depending on to solve the decline of paid work is taxing the robots and software that ate all the jobs. These taxes are supposed to pay for the Universal Basic Income that everyone will enjoy once work is automated and jobs become scarce.

The problem with the fantasy is that profits only flow to what’s scarce, and as the tools of automation are commoditized, they will no longer be scarce. Once anyone can buy the same robots/software you own, where is your competitive advantage? If anyone on the planet with some capital can buy the same robots and software, where is the pricing power that is essential to reaping big profits?

Commoditization and globalization push profits down to near-zero. In a world of ever-cheaper, ever more abundant commoditized tools and software, it becomes much more difficult to generate increases in productivity and profits.

Those who dream of the the end of work forget that robots will only be purchased to perform profitable tasks. Much of human life is not profitable. For example, maintaining dedicated bikeways is useful work that serves the health and transportation needs of the community and economy.

There is no way to make this work profitable unless you charge bicyclists for using the bikeways, which defeats the purpose of the bikeways.

The typical response is that governments will pay for robots to maintain bikeways.But that leads right back to the decline of profits and paid labor: since government depends on profits and paid work for its revenues, as those decline, where will government get the revenue to make good all its vast promises for pensions, services, healthcare etc., and buy and maintain robots to do unprofitable but useful work such as maintain bikeways?

Take a look at these charts of productivity and income. Ultimately, increases in jobs, wages and profits flow from increases in productivity, which typically rises as a result of investments in better tools, training and processes.

Productivity struggles when investment stagnates, external costs (such as paying to remediate industrial pollution) reduce the available pool of capital/profits to invest, and new technologies are either limited in scope or do not scale well.

All these factors played a role in the 15-year stagnation of productivity from 1966 to 1980.

As computer/digital technologies improved and dropped in price (i.e. scaled up to impact the entire economy) and financialization (i.e. abundant credit and leverage, and the commoditization of financial assets) provided new sources of profits, productivity increased from 1981 to 2005.

Since then, growth of productivity has been in a freefall: financialization has reached diminishing returns, the technologies of automation have been commoditized, and globalization has opened up a vast new labor force and new places to invest capital.

In sum: what was once scarce is now abundant, and thus it no longer generates value or profits.

When new productivity tools were scarce (unique to American factories and workplaces) and required a growing labor force, productivity growth translated into higher wages. But when productivity growth relied on financial capital and processes and higher-level technical/managerial skills, the gains flowed only to those who owned these processes and skills: generally speaking, the wealthy owners of productive capital and the highly educated technocrat/managerial class (the top 5% and to a lesser degree, the top 20%.)

All of which is to say the model of paying wages for profitable work (or collecting taxes from profits and profitable work to pay government workers) is broken: not slightly broken, but fundamentally broken.

We need a new economic model that recognizes the value of useful work that isn’t necessarily profitable, an economic system that creates money to pay those doing useful work at the bottom of the pyramid rather that creating money only for banks, corporations and financiers at the very top of the pyramid.

There is plenty of work that is useful but not profitable. Work won’t disappear; it’s paid work and profits that will become increasingly scarce. We need a new system that enables an abundance of paid work. This is the topic of my book, which Mark Jeftovic and I Discuss in this podcast (44:47).

A Radically Beneficial World: Automation, Technology and Creating Jobs for All is now available as an Audible audio book.

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A Teachable Moment: to the Young Person Who Complained About Her Job/Pay at Yelp and Was Promptly Fired

This open letter from a young customer support employee of Yelp in San Francisco to her CEO has garnered a variety of comments that display a common bifurcation: some are sympathetic to her struggle to get by in a very costly region on a modest salary, while others wonder if the letter is an Onion parody of clueless entitlement: An Open Letter To My CEO.

I am sympathetic to anyone who arrives in a very competitive “big city” with no local contacts and not a lot of experience or specialized training. That describes me when I arrived in the San Francisco Bay Area a few decades ago.

My B.A. is in philosophy, which has a similar market value to your degree in English, i.e. near-zero. But this doesn’t mean my training in philosophy has no value; it simply means you can’t walk up to a potential employer and say, “Hi, I have a degree in philosophy, hire me.”

The value is only reaped by applying what you have learned. Studying philosophy taught me a number of specific analytic skills: to seek out false assumptions and identify problems and potential solutions. If you can’t frame the problem accurately and coherently, it’s impossible to identify any useful solutions.

These skills have served me well, despite my “worthless” degree. Though nobody had any sound reason to pay me a lot of money simply because I had a B.A. in philosophy, life presents a constant flow of problems that need to be analyzed in ways that enable the development of solutions.

In other words, there is a super-abundance of opportunities to apply what I learned.

Taking my own experience as an employee, employer, business owner and entrepreneur, I’ve condensed what I’ve learned about creating value (i.e. earnings) and the emerging economy into a book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It is less a career-guidance book and more of an explanation of how the economy actually works. It covers the eight essential skills you need to successfully navigate the economy as it is, not as we wish it was.

Rather than tell you the book is useful, I’ll apply what’s in it.

I don’t think your age, gender, ethnicity, etc. is relevant. Anyone can apply what I’m sharing.

You have identified what you perceive as your two big problems: the cost of living in the S.F. Bay Area is very high, and your pay is too modest to enable the lifestyle you anticipated/expected.

You identified these two problems but do not propose any solutions to either one; and you missed the two real problems. Problems don’t solve themselves; problem-solving requires analysis, diligence and a willingness to learn from others, to experiment and fail–not once, but continually.

You did not identify the third problem: your expectations are completely mis-aligned with reality. The S.F. Bay Area is one of the most attractive, stimulating, dynamic urban regions in the world, and it attracts capital and talent from all over the globe.

The demand to live and work here outstrips the supply of dwellings and high-paying jobs, so the costs of living are very high and the pay for labor is low unless you’re able to take advantage of specific skills or social contacts.

Many of the people who come here seeking work are highly educated, experienced, creative, ambitious, hard-working, dedicated, etc., and many possess enviable social skills (social capital).

If you intend to find work here (i.e. if you don’t have a large monthly income from a trust fund), you will be competing against extremely competitive, ambitious people, many of whom focus not on the hardships but on the opportunities. Expecting to outcompete these people for a high-paying job is unrealistic unless you have competitive skills, a strong work ethic, abundant social and human capital, etc.

Whatever you lack, you will have to acquire in order to be competitive in this environment.

if you want a degree that opens doors, earn a PhD in EE/CS from UC Berkeley or Stanford, or get top marks in your Stanford/Haas School (UCB) MBA program.

For the rest of us mere mortals, credentials don’t offer much advantage, as this is one of the most over-credentialed locales on the planet.

The question is: what can you do to create value? It’s not so much a matter of having job skills or experience; it’s how those can be applied to create value–either for your employer or for your own enterprise.

So the real problem you have is: what can you do to increase your value creation and thus your earnings? “Unfair” doesn’t count. Labor has a market value, end of story. Unfortunately, there is an oversupply of labor around the world and a scarcity of high-paying jobs.

It may seem like there is an abundance of high-paying jobs in the Bay Area because we’re in the bubble factory of the world, but this is only a reflection of frothy VC-fueled valuations of zero-profit companies and highly paid employees’ ability to make their employers obscene amounts of money.

if you want to earn $100,000, you need to bring in $500,000 in revenues for your employee, minimum.

The second problem you have is: what can you do to dramatically lower your cost of living? Since you didn’t properly identify the actual problems, you were incapable of finding solutions. Now that we’ve identified your real problems, we can seek solutions.

As for living costs: your goal should be to live on one of your two paychecks a month: $733. Immigrants often get by on low-paying jobs and yet manage to buy a house and pay the mortgage off in five years. They do this by sharing expenses. If you want a very low-cost lifestyle, try befriending immigrants in your social circle (or add them to your circle). Someone will likely know someone in their extended group who has a room for rent (in a house they’re buying by pooling six adults’ modest wages).

As for food–shop only in Chinatown or ethnic markets. If you are careful and observe what the older ladies are buying, you will not be able to carry $20 of groceries. Just recently, I bought two pounds of beautiful tangerines for $1 in Chinatown and wonderfully fresh yao-choy veggies for less than $2. Many fish are available for $2 or $3 a pound; if you’re vegan, pressed tofu is a cheap substitute for meat.

Asian-style cooking only uses a few ounces of meat/meat substitute anyway.

A carton of black beans used for seasoning (it adds umami) will cost you $1.29, and last you a year. A jar of chili bean sauce (a teaspoon enlivens a dish most wonderfully) costs $2.29.

You get the point: learn to cook vegetable-based meals and your costs to eat gourmet food will drop under $100 per month. A pound of beans and some Asian veggies will feed you for a week, and with some cheap seasoning, it will be delicious.

We eat better at home for $150 than people who spend $2,000 a month eating out. Anybody can learn how to cook with low-cost ingredients on YouTube University. Make a pot of spicy dal, experiment.

If you don’t have any family to share expenses with, form a family-type group of responsible, honest friends. Rent a house with them, make some basic good-neighbor rules, and kick out whomever fails to fulfill their duties and responsibilities. It will be good experience for running your own enterprise.

Here is my version of a letter you could have sent Yelp’s CEO:

Dear CEO:

I know you’re busy, but I have two ideas that will immediately lower the costs of providing customer support while boosting productivity and employee retention.

After three months in customer support, I’ve observed that a few employees have developed ways to handle customer issues quickly and with relatively few coupons. Others solve customer issues by throwing coupons at everyone.

I’ve developed a brief, concise training program that would give every customer support employee the tools to resolve customer problems more efficiently and at lower cost than the present system.

If customer support teams were able to earn bonuses based on their improved productivity and lower costs, this would immediately improve employee retention, at a modest cost that would be more than paid for by higher productivity.

The benefits from these two ideas would be immediate. I am hoping you can get me fifteen minutes with the V.P. of customer support to present my training/productivity ideas, and I’m excited by the possibility that we could make dramatic improvements with a modest investment of time and virtually no capital costs.

Sincerely,

Yelp Employee

cc: V.P. of customer support

Which letter do you think would be more effective in accomplishing your goal of earning more money–your letter or my letter? As management guru Peter Drucker noted, businesses don’t have profits, they only have expenses. Value creation boils down to cutting costs, boosting revenues and increasing productivity.

This is as true of a sole proprietorship as it is of a major corporation.

If the management of Yelp failed to show interest in your letter/proposal and did not even hear you out, you learned a very important lesson:

Yelp’s management is incompetent and/or dysfunctional, and there is no opportunity for you at Yelp. This new knowledge clarifies your solution: find a job at a company/agency that is open to new ideas and is thus a place where you might be able to contribute value and grow your own human/social capital–and your earnings.

If you want to be in PR/media, start designing media/PR campaigns for small businesses for free. Most won’t have any social media exposure; they will welcome your efforts to boost their revenues/customer base.

This is your job from hour 41 (after your full-time gig) to hour 55. Convincing small businesses to give you, an inexperienced person with no track record, hard cash, will be difficult; convincing them to let you design and produce a social-media campaign and share any increase in revenues with you is a much easier sell, because you’re taking the risks: if the campaign flops, you earn nothing, and the business owner isn’t out any cash.

But you will have learned a lot by the time you run 10 or 20 such campaigns, and if you do a good job, are honest, forthright and do what you say you’re going to do, you’ll assemble a useful network of contacts that will lead to opportunities you cannot anticipate.

There is much more in my book, but I hope you’ve learned something that can be applied to your future endeavors from this Teachable Moment.

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The Most Profitable Work Will Be Automated: The Rest Will Be Left to Us

What’s abundant and what’s scarce? The question matters because as economist Michael Spence (among others) has noted, value and profits flow to what’s scarce.What’s in over-supply has little to no scarcity value and hence little to no profitability.

What’s abundant is unprofitable work, commoditized goods and services, and conventional labor and capital (which is why wages are declining and yields on capital are near-zero).

What’s scarce is profitable work, highly profitable niches that are immune to commoditization/ automation, and meaningful work.

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The World of Work Has Changed, and It’s Never Going Back to the “Good Old Days”

The world of work has changed, and the rate of change is increasing. Despite the hopes of those who want to turn back the clock to the golden era of high-paying, low-skilled manufacturing jobs and an abundance of secure service-sector white collar jobs, history doesn’t have a reverse gear ™.

The world of work is never going back to the “good old days” of 1955, 1965, 1985, or 1995.

Those hoping for history to reverse gears place their faith in these wishful-thinking fantasies:

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Why The Status Quo Is Doomed, Part 1

We’re like the passengers on the Titanic 10 minutes after the mighty ship struck the iceberg: there is virtually no evidence to those on deck or those snug in their warm cabins that everything they reckoned was safe and secure was doomed to perish.

Only those who witnessed the damage below the waterline and who knew the limitations of the ship’s design grasped that the loss of the ship was inevitable and could not be reversed.

The current world-system (call it whatever you like–cartel-crony neoliberal-state capitalism, etc.) is as doomed as the Titanic, for the same reasons: the design of the system is the source of its failure.


 

I recently had the opportunity to discuss the inevitable systemic failure of the current arrangement with Chris Martenson of PeakProsperity.com and Cris Sheridan of theFinancial Sense Newshour. The podcasts are:

With Chris Martenson: Fixing The Way We Work: Closing the wealth gap with meaningful work (44:54)

With Cris Sheridan: Book Interview: A Radically Beneficial World

Why is the current world-system doomed?

1. Automation will not just continue replacing human labor–the pace of this trend is increasing exponentially.

2. The wishful thinking that technology always creates more jobs than it destroys is, well, wishful thinking: just ask the music industry, which “grew” in the era of digital technology from a $14 billion industry to a $7 billion industry.

3. The wishful thinking that taxing the owners of robots and software will pay for guaranteed income for all: nobody who favors this seems to have done any math. Current corporate profits (which are about to be eviscerated by global recession and the commoditization of goods and services via automation) are around $1.9 trillion annually, while current government (federal, state, local) spending is $6.2 trillion.

So if the state took every single dollar of corporate profit (and how realistic is that?), that would fund less than a third of current state spending. And if the state is going to pay tens of millions of additional households a guaranteed income, state expenditures will rise by trillions more.

The idea that profits can support this enormous spending is simply not realistic.

4. Since taxing profits won’t work, let’s tax wealth. Once again, this isn’t realistic. For one thing, concentrated wealth has captured the political machinery, so politicos aren’t going to impose wealth taxes on the hands that feed them.

Secondly, wealth is increasingly mobile. When faced with high taxes, wealth simply moves to more hospitable locales.

5. Well, then we’ll tax land–they can’t move that, can they? No, but as economist Michael Spence and his colleagues have pointed out, profits and gains are increasingly flowing not to traditional labor or capital (financial capital, land, etc.) but to the third form of capital, which is innovation, new business models, etc.

So taxing land may look promising on paper, but wealth will flow to outsized returns, and if land starts getting taxed at a high rate, wealth will migrate to the third form of capital, which is mobile and global.

Remember that we’re not talking a mere trillion or two here: to fund the existing government we need to lay our hands on $6.2 trillion every year, and paying a guaranteed income to everyone replaced by automation will kick that higher by a few more trillion.

6. The issuance of money and credit are not connected to the creation of jobs. Very little of the vast sums of money and credit issued since the 2008 Global Financial Meltdown flowed into productive investments that generated new jobs. Most of the money went into “investments” that are wealth-skimming operations that don’t create a single job: stock buy-backs, for example, or buying rental units and raising the rents.

It doesn’t require a single additional worker to maintain those rental units under the new owner; the only things that changed were the rent (higher), the profits skimmed by the new owner (higher) and the disposable income of the tenants (lower).

7. We can pay for everything we want essentially forever with borrowed money. More wishful thinking…

8. The system requires permanent growth of everything simply to keep from imploding: more debt, more jobs, more wages (and payroll taxes on those wages), more profits, more consumption, more taxes, more, more, more. Unfortunately, there are limits on all of these, and the moment the system stops growing it doesn’t just lag–it implodes.

9. Nearly “free” credit/capital only further incentivizes the replacement of labor (whose overhead costs are rising relentlessly) with robotics/software.

There is much more in these two discussions; please give them a listen.

This entry is drawn from my new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All: The Future Belongs to Work That Is Meaningful. Get a 25% discount on my new book (offer extended to 11/22/15).

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Why I Will Never Hire Anyone, Even at $1/Hour

One of the most appealing beliefs about technology–that it will always create more jobs than it destroys–is no longer true. It was true in the first and second industrial revolutions, for one simple reason: the new industrial revolution created vast numbers of low-skill jobs that offered displaced workers abundant opportunities for work that did not require more than entry-level skills.

It only took a few minutes to learn one’s job on an assembly line in the first industrial revolution, and many workers recoiled from the sheer boredom and physical repetitiveness of this work. This is one reason why Henry Ford famously raised his workers’ wages to the then-princely sum of $5/day: the high turnover of people quitting was killing him.

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Automation Doesn’t Just Destroy Jobs–It Destroys Profits, Too

The idea that taxing the owners of robots and software will fund guaranteed incomes for all is not anchored in reality.

Automation is upending the global order by eliminating human labor on an unprecedented scale–and the status quo has no reality-based solution to this wholesale loss of jobs.

Two recent articles highlighted the profound consequences of advances in robotics and AI (artificial intelligence) on employment: four fundamentals of workplace automation and Robots may shatter the global economic order within a decade as the pace of automation innovation has gone from linear to parabolic (via Mish).

The status quo apologists/punditry have offered two magical-thinking solutions to the sweeping destruction of jobs across the entire spectrum of paid work:

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Technology, Competition and the ‘Crapification’ of Jobs

Two recent articles shed light on the ‘crapification’ of jobs and the rise of income inequality:

Martin Wolf on the Low Labor Participation as the Result of the Crapification of Jobs (Naked Capitalism)

The Measured Worker: The technology that illuminates worker productivity and value also contributes to wage inequality. (Technology Review, via John S.P.)

While both articles offer valuable insights into the secular trend of stagnating employment and wages, I think both miss a couple of key dynamics.

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