(This article first appeared in the March/April 2009 issue of Tikkun Magazine.)
Ancient Wisdom and the Modern Knowledge Economy
By Gar Alperovitz and Lew Daly
Today the top 1 percent garners more income than the bottom 120 million Americans taken together. The top 1 percent owns nearly half of all individually held investment capital—roughly as much as the entire bottom 99 percent taken together. Traditional religious tenets in general—and Jewish tradition in particular—offer a powerful challenge to such inequities. What is striking is that new economic and historical studies provide new affirmation of ancient moral wisdom in ways particularly appropriate—and of great political relevance—to today’s knowledge economy.
Consider Leviticus 25, which provides for a jubilee every fifty years to restore broadly distributed ownership of the commonly inherited land. “In this year of jubilee you shall return, every one of you, to your property…. The land shall not be sold in perpetuity, for the land is mine; with me you are but aliens and tenants” (Lev. 25:13, 25:23). Under this law, a property right is always a temporary entitlement. While it may be traded and the land sold, “in the jubilee it shall be released, and the property shall be returned” (Lev. 25:28). God’s original gift of the land, Leviticus 25 holds, instills in all productive resources the moral imperative of common access if not equal benefits. Extreme inequalities of ownership and economic well-being can only mean that we have defaulted on the debt owed God for his original gift of Creation.
Although land was once the primary basis of all wealth, modern studies show that knowledge is now the primary driver of economic growth, and further, that this makes traditional moral arguments more, not less, relevant today. To understand why—and what it means both morally and politically—we need to grasp some basic facts about economic growth and how we accumulate wealth.
Economists have traditionally taught that economic growth depends primarily upon the inputs of land, labor, and capital. After World War II, however, new studies overturned the traditional tale. A pioneer in this work was MIT economist Robert Solow, who, in a brief but now-famous paper published in 1957, made a startling discovery (he later won a Nobel Prize for this work). In contrast with the then-dominant assumption that increases in the supply of capital (factories, machines, etc.) were the main engine of economic growth, Solow found that less than 13 percent of growth in the first half of the twentieth century could be attributed to capital accumulation or increases in labor supply (in fact, labor supply per person had been diminishing as the forty-hour week became the norm).
Most of the growth was not coming from the conventional inputs of labor and capital, which workers and employers supply. The nearly 88 percent of growth that remained unaccounted for—the portion that became known as the “Solow Residual”—could only be attributed, Solow concluded, to something broader and deeper than the everyday economic activity embodied in labor effort and capital accumulation. Solow defined this as “technical progress in the broadest sense,” or, in other words, the cumulative knowledge and technological capacity of our society.
We have also traditionally been taught that there is no “free lunch” in the economy: nothing is achieved without a cost. And yet, most of the knowledge currently driving our economy is the product of decades and even centuries of socially nurtured and socially transmitted advances in mathematics, physics, chemistry, agronomy, metallurgy, and many other sciences and technological fields—all of which come to us as the free gift of the past. Nobel Laureate economist Kenneth Arrow puts it this way: technical progress is one area in which nothing can “take the place of history,” and the “set of opportunities for innovation at any one moment is determined by what the physical laws of the world really are and how much has already been learned and is therefore ‘accidental’ from the viewpoint of economics.” One of the nation’s leading economic historians, Joel Mokyr, explains what this means: in fact, there is a free lunch in economics—the knowledge created by previous generations and inherited at no cost or at very low cost by people living today.
The moral question is, who owns knowledge? Or who should own knowledge? Put another way, if most of our wealth comes from inherited knowledge—not what we do “today”—then isn’t this part of our wealth, this knowledge, something which rightly should belong to everyone as a common inheritance?
As Solow’s growth data indicate, the inheritance of the past is far more important economically than what any of us can possibly contribute as individuals today. Another highly respected economist, William Baumol, argues that “nearly 90 percent … of current GDP was contributed by innovation carried out since 1870.” Although many technical issues are still debated, there is no longer significant dispute about the trend: modern prosperity is largely the result of expanding knowledge.
We work no harder today than our ancestors did in 1800 or in the ancient past, and we are no more intelligent in terms of basic brain capacity and reasoning ability. The cave paintings of earliest human culture are works of roughly the same basic intelligence as the theory of relativity. And yet our economy is more than 1,000 times larger than it was in 1800, and the best measure of prosperity, per capita Gross Domestic Product (GDP)—the amount of output the economy generates for every person—is twenty times higher today than it was in the early nineteenth century (it was $42,000 in 2006, the equivalent of almost $170,000 for a family of four). The key to such growth, experts agree, is rising productivity, usually measured in terms of the amount of output per hour of work, which rose more than fifteen-fold since 1870.
It is these productivity-driven gains, largely fueled by expanding knowledge, that bring the traditional ethical concerns into clear focus in the modern economy. The key moral question is, are we more productive as individuals, or as a society? Warren Buffett, one of the wealthiest men in the world, argues that “society” is in fact “responsible for a very significant percentage of what I’ve earned.” To make his point, he asks how much money he would have if he were in Bangladesh, or if he were born in North America in 1700. His point is that the individual qualities we usually associate with “success” are in fact far less important, and far less morally significant, than the knowledge and technological capability available to those born later in the development of a society rather than earlier.
Recent developments in cognitive science also illuminate the workings of knowledge-based growth. In his influential book Origins of the Modern Mind, Merlin Donald explains the great advance that came with writing, which is the externalization of memory. The use of writing led to the invention of books, journals, libraries, databases, and other systems of symbolic storage, which constitute an essential (and still expanding) “hardware” change in humanity’s cognitive architecture. Essentially, knowledge now accumulates outside of the limits of biological memory.
Only with this external capacity can human thought advance to what Donald calls “theoretic culture,” the mind’s increased capacity for the integration of knowledge at higher and higher levels of abstraction. And this, in turn, is the basis of collaborative, cross-fertilized and cumulative innovation. Without it, there can be very little progress.
Economic historian Douglass North emphasizes the central role of external memory as “mental scaffolding” that is essential to economic growth. It is the “transmission belt” that passes cumulative knowledge down through the ages as an inheritance available for productive use in our own time. Moreover, there could be neither the widespread passing on of the many, many contributions that make up what we call knowledge, nor external memory itself, without the development of, and our inheritance of, very specific institutions that make this possible.
Again, the point is clear: society at large is rightly the inheritor of that which society at large has created over long periods of history. In a recent book urging taxation of large estates like the one his own son will ultimately leave, Bill Gates Sr. (along with coauthor Chuck Collins) writes: “Success is a product of having been born in this country, a place where education and research are subsidized, where there is an orderly market, where the private sector reaps enormous benefits from public investment. For someone to assert that he or she has grown wealthy in America without the benefit of substantial public investment is pure hubris … what is it worth to operate within this marvelous system?”
Gates’s statement also raises an important point about the role of invention. It is commonly assumed that great geniuses and innovators make contributions that society would not otherwise have had—and because of this, their often very large rewards are morally justified. In fact, examples of such heroic invention are exceedingly rare. A more accurate picture is a cumulative process of tinkering until the available knowledge, or the “state of the art,” as Thorstein Veblen termed it, reaches a point where the next step is all but self-evident. In these “breakthrough” moments, we commonly witness the phenomenon of “simultaneous invention”—-multiple independent discoveries or inventions of the same thing at the same time. Alexander Graham Bell and Elisha Gray filed patents for the telephone on the same day in 1876. The person deemed the inventor is often simply the one who gets to the patent office first. Charles Darwin and Alfred Russel Wallace conceived the idea of natural selection simultaneously. Newton and Leibniz both invented calculus.
It is also well documented that numerous fundamental technological developments resulted from government funding and support, from agricultural techniques and transportation systems to the Internet and cutting-edge biotechnologies. Together these insights unveil a process of innovation, the legacy of which is a truly social inheritance, rather than the claim of a small set of individuals. If so, there is a clear argument that society, the ultimate source, should receive most of the benefits it creates.
It is admittedly a disturbing point. We are trained to view success as an individualistic process of some people achieving more than others because they work harder or are smarter. But if much of what we have comes to us as the free gift of many generations of historical contribution, there is a profound question as to how much can reasonably be said to be “earned” by any one person, now or in the future. This is especially true in connection with inherited knowledge. An equally profound question arises as to how to return to society a fair share of the gains that—over many generations—society as a whole has created.
The long history of Western philosophical reflection on economic justice, reaching back through the major religious traditions of humanity, also comes back time and time again to the distinction between “earned” and “unearned” gains, a distinction ultimately based on the principle of individual deservingness or “getting one’s due.” We find a classic statement of this principle in Justinian’s Institutes (535 C.E.), defining justice as “the set and constant purpose which gives to every man his due.” But this logic is deeply embedded in both testaments of the Bible as well. In Galatians (6:7) Paul declares, “Whatever a man sows, that is what he shall reap.” When God brings “new heavens and earth,” Isaiah writes, “you will not build houses and others live in them … or plant trees and others eat the fruit.”
The contemporary knowledge economy is booming with wealth, but it is concentrated in the hands of a small elite to an unconscionable degree. Long ago, in The Vested Interests and the CommonMan, Thorstein Veblen suggested that the fundamental reason why modern wealth became concentrated in so few hands was that traditional moral views of entitlement had not been sufficiently adapted to the modern industrial system. In fact modern understanding of the sources of wealth points in the direction of ancient wisdom, bringing renewed importance to a long-developing moral tradition. As Nobel laureate George Akerlof put it, “our current standard of living,” is something we “owe” to the past. The fruits of current labor or current savings “are due almost entirely to the cumulative process of learning that has taken us from stone-age poverty to twenty-first-century affluence.”
A famous American president named Roosevelt once suggested that the survival of civilization depended on eliminating unearned wealth. Progressive taxation was the remedy he proposed, and he was the first American president to truly advance that cause. John McCain might be surprised to learn that the Roosevelt in question was his Republican hero Teddy, not Barack the Distributor’s oft-slandered “socialist” role model, Franklin.
Looking forward, the most obvious areas for reform appropriate to the new economic and moral understanding include increasing the income taxation of the top 1-2 percent, raising the current cap on Social Security taxes, increasing corporate taxes (and especially on windfall gains in connection with oil industry profits), and increasing inheritance taxes on large estates. Private inheritance of large amounts of capital in particular violates the principle that what one “deserves” should be related to what one contributes and “earns”—both because an heir does nothing directly to earn her inheritance; and because that inheritance itself, like all wealth, derives overwhelmingly from the contributions of inherited knowledge.
Proceeds from new taxation might be allocated to a variety of public purposes ranging from universal health care to the maintenance and development of the nation’s failing infrastructure. Particularly appropriate uses might be to support educational and research institutions that generate and pass on knowledge at all levels; to offer tuition relief (and possibly something akin to a new GI Bill to expand opportunities for college education); and to provide much more generous underpinnings for low and moderate incomes—perhaps modeled on a greatly expanded version of the current Earned Income Tax Credit (as suggested, for example, by Jerome M. Segal in Graceful Simplicity).
In addition to these and other related policies, a number of newer progressive strategies do not involve traditional forms of redistribution. Among the most important are “asset-based” approaches that emphasize the wealth people accrue, “have,” and invest—as opposed to the income people “receive,” and spend or save. In the Boston Review of December 1996, Harvard economist Richard Freeman writes:
Our main strategy—be we left or right—for fighting income inequality under capitalism, should be to assure a fair initial distribution of physical and human capital themselves. Equality of income obtained in the first instance via greater equality in those assets, rather than as an after-the-fact (of earning or luck) state redistribution of income from rich to poor, would enable us to better square the circle of market efficiency and egalitarian aspiration.
A forward-looking proposal that also alters ownership has recently been put forward by Yale law professors Bruce Ackerman and Anne Alstott. This would allocate a “capital stake” of $80,000 to every citizen on reaching adulthood—to be used for any purpose an individual chooses (most will likely choose a college education). The program would initially be financed by a 2 percent annual wealth tax, thus simultaneously challenging the top beneficiaries of the current system with a strategy that could provide large numbers with the means of acquiring knowledge. The capital stake would be recouped at death through an inheritance tax.
Another promising, rapidly growing, asset-based approach is the employee-owned firm, which is currently encouraged by certain federal tax policies. When properly structured, such enterprises (especially small and medium-sized firms) are demonstrably more, rather than less, efficient than comparable privately owned traditional firms. An obvious reason is that people tend to work better and harder when they have a stake in the outcome. Though little noticed by mainstream media, there are, in fact, more than 10,000 firms now operating in the United States that are wholly or substantially owned by employees. Policies to provide further support for such firms could both help broaden the ownership of wealth and simultaneously achieve greater economic efficiency.
As the ongoing advances of the knowledge economy continue to teach us the extraordinary possibilities—and sources—of this nation’s bountiful development, the question of precisely why so few deserve to benefit so greatly while so many are in pain may well become impossible to evade. If so, the ultimate gift that comes to us as an inheritance from the past may be the renewal of traditional economic teachings like those of the Hebrew Bible and, with this, a renewed moral and political understanding of the responsibilities that come with a simple acknowledgement of the immensity of our common inheritance. It is an understanding particularly appropriate to the new Obama era.