Friday, November 16, 2007

Tectonic Shift, Part III

The idea of the tectonic shift first came from Mohnish Pabrai's Mosaic, in which he mentions:
There is currently a broad tectonic shift going on- businesses are profiting while jobs are being outsourced, but white- and blue-collar wages are eroding.
This is Part III in our look at this effect being caused from globalization. (Links are here for Part I, Part II) I recently finished reading Robert Reich's The Work of Nations, which takes a close and honest look at this problem. Below are some key points from the book.

The economic well-being of Americans no longer depends on the profitability of the corporations they own, or the prowess of their industries, but on the value they add to the global economy through their skills and insight. This is because today capital and goods can flow nearly uninhibited. So, corporations seek to invest where the skills they require can be attained for the lowest cost.

There are 3 broad categories for American jobs:
1. Routine production services - repetitive tasks, done over and over again, performed in the high-volume enterprise. These face competition from worldwide labor and require little skill, and so these jobs are quickly moving to areas with the cheapest labor.

2. In-person services - Like routine production services, in-person services also entail simple, repetitive tasks. Their pay is also a function of hours worked or amount of work performed, they are closely supervised, and they need not have acquired much education. The big difference is that these services must be provided person-to-person, and thus are not sold worldwide. Included in this category are retail sales workers, waiters and waitresses, hotel workers, janitors, cashiers, etc. Because of this local requirement, their wages are not deteriorating as fast as routine production services, but supply and demand still does not bode well for them. As routine production services move offshore, there is a larger supply of workers looking for these in-person service jobs.

3. Symbolic-analytic services - includes all the problem-solving, problem-identifying, and strategic-brokering activities. Examples include consultants, specialists, engineers, bankers, scientists, etc. This group is adding the most skills to the global economy and can not be easily replicated.

There is a growing inequality, as the skilled get richer and poorest get hurt by competition.
The law of supply and demand does not bode well for routine and in-person services.
Differences in education has played a very large part in wage outcome.

The important skill is learning how to conceptualize problems and solutions. There are 4 basic skills: abstraction, system thinking, experimentation, and collaboration.
1. Abstraction- making sense of all the data that surrounds us.
2. System-thinking- relating abstraction to different information; seeing the whole.
3. Experimentation- continuously trying out new things.
4. Collaboration- working with peers to share information and expand knowledge.
From then on, knowledge comes from doing.

There are two reasons America will stay ahead of the pack:
1. No nation educates its most fortunate and talented children as well as America.
2. No nation has the same agglomerations of symbolic analysts already in place, with the ability to learn continuously and informally from one another.

America has several large cities with special skills; think Hollywood for film production, Silicon Valley for technology, New York for finance and law. More talent is encouraged to these areas because there are more opportunities and there is a large network to informally learn from.

The role of the nation within the emerging global economy should be to improve its citizens' standard of living by enhancing the value of what they contribute to the global economy. The problem is some Americans are adding substantial value, while most are not. This is leading to growing inequality, and the bottom four-fifths requires the fortunate fifth to share its wealth and invest in the wealth-creating capacities of other Americans. Ironically, as the rest of the nation grows more economically dependent than ever on the fortunate fifth, the fortunate fifth (the symbolic analyst) is becoming less and less dependent on them.

Finally, just a particular quote I like from the book:
The predictable failure of all prediction notwithstanding, the public continues to pay attention to stock analysts, trend spotters, futurologists, weather forecasters, astrologers, and economists. Presumably such respect is due less to the accuracy of their prophecies than to the certainty with which they are delivered. The reader of these pages is duly warned...


Anonymous said...

The fifth truly are fortunate, since their wealth is dependent upon a stable environment, largely preserved by the efforts of the other four.

But I doubt the ability of the symbolic analysts, as a group, to escape the rest of the world's desire for parity. Inevitably, it seems that the majority take back power one way or the other.

Nnejad said...

This is addressed in the chapter "The Politics of Secession", where he gives a few reasons why the majority might not "mandate that a larger proportion of the burgeoning incomes of symbolic analysts be taxed and transferred to them".

1. Basic lack of understanding- many people do not have time to understand government affairs and international economics, and so do not know or care about this problem.

2. Many people still view the success of the American economy based on the success of American corporation. So they believe they must ensure that American investment enjoys generous returns to protect their livelihoods.

3. Perception in this country that the wealthy have earned it, and that to separate the wealthy from their wealth would be unjust confiscation.

4. Sense that political action would have no effect in any event.

5. Economic motivations. The lower four-fifths is dependent upon how and where symbolic analysts decide to dedicate their energies and money, and the symbolic analysts are the most mobile part of any nation's work force.

But I think you are right; if things got too extreme, we would see more pressure for wealth redistribution.