Economic growth: inclusive, green, no-cost.

Consequences

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Income inequality, persistent poverty, diminished public services, hollowed-out jobs, precariousness, corporate power, climate degradation, debt, seething unfairness, systemic risk. Inequality of markets underpins them all.

 

 

Upwards attraction

Passively allowing an elite to have such superior markets was never going to create a balanced economy. But how much of the blame for trends like flatlining wages, de-skilling and precariousness belongs to this factor alone?  We suggest it’s significant. Buyers of any commodity gravitate to the most efficient forum. In a domestic example; if a cheaper, more convenient supermarket with a bigger range opened nearby, you would likely shift location for the weekly shop.

New transaction technologies have created three tiers of trading efficiency in any economy:

TIER (1): Modern markets: The best exchanges imaginable for buyers and sellers.

TIER (2): Modern ordering systems: These are more useful for buyers, which forces sellers to use them.

TIER (3): The old ways: Plenty of economic activity is still arranged through phone calls, face-to-face interactions or low-tech websites.

 

Tier (1) is mostly confined to the global financial system. Their exponential increases in trading efficiency drives financialization, a suck of money from lower tiers of the economy into financial markets. When datapoints, overheads, responsiveness, and liquidity are this good; an investor’s money will perform better in speculation, acquisitions, stock buy-backs, re-structuring or other financial engineering than in Tier (3) activity in the friction-laden real world.

 

 

Alternative explanations

Since 2014, only 15% of funds generated in global financial markets have gone to non-financial firms. Typical explanations for this financialization tend to make light of trading technologies. Instead commentators look at; deregulation, disintermediation, more precise pricing, increased granularity and increased demand for finance (because of cheap credit or aging wealthy populations for example).

But, in the same timeframe as financialization, labor markets also experienced; deregulation (scaled-back protections, right-to-fire rules), disintermediation (collapsing union membership, moves to independent contractor status, outsourcing), more precise pricing with smaller purchases (rise of on-demand workers) and increased demand (precipitous falls in unemployment). Yet, sellers (workers) in these markets experienced a downturn in relative wealth.

 

Is globalization the differentiator? Financial assets now ricochet between territories in search of opportunity. But in a perfect labor market, each individual could enjoy instant frictionless movement between countless types of work to maximize value of their skills and enthusiasms. We do not have a perfect labor market; lack of data, overheads and gaps in safety nets keep workers confined.

Some stress price volatility as the root of disproportionate trading opportunities for financiers. But, again, a better labor market would foster that. How much might a pressed middle-class parent, keen to go out this evening, pay for three hours babysitting by a moonlighting teacher popular at their kids’ nursery? Possibly a multiple of the educator’s hourly salary. But we rarely find out; that price action is suppressed in Tier (2) childcare platforms and typically carries prohibitive organizational overheads in Tier (3).

Could the hardships, stagnation and political unrest of recent decades really be explained by “Big Finance grabbed new trading technologies, the rest of us didn’t”?  Only partially. Multiple policies have stoked inequality, but Modern Markets working for the elite act as its enabling infrastructure.

 

Closing of markets

Tier (1) and Tier (2) platforms create significant efficiency within their silos of activity. But they push externalities into the wider economy, many of which drive social problems. Externalities include:

 

  • Re-evaluation of assets: Some resources are ideal fodder for Modern Markets. Property for example is physically static with change of ownership requiring nothing more than amending a record in a land registry. Leases for buildings can be bundled, securitized and hold value even if not utilized. Labor, by contrast, is amorphous, unpredictable and lacks rigid structures. Property has climbed in value in the Modern Markets era. Labor has gone the other way.

 

  • Administrative burdens: Searching for the best possible Tier (2) platform can require registration for multiple services, each with their own business model, geographic strengths and contractual agreements. If cleaning a house through an app, can you use the bathroom? It depends: some apps allow it; others make it a contractual offense. Sellers have to grasp all these differences.

Widespread use of Dark Patterns adds another front to this battle. The age-old problems of navigating bureaucracies for regular people have morphed into faceless, profit-driven, algorithmic processes. Because so much buying power is within these systems, they restrict options in the wider world.

 

  • Loss of opportunity: Amazon is rushing to develop flying drones to solve “the last mile problem”; getting packages from local hubs onto doorsteps. But that was solved 100 years ago; teens on bikes can deliver goods. And, unlike quadcopters, they will ring doorbells, climb stairs, even interact with neighbors. But that model, giving millions of youngsters responsibility and local networks, doesn’t play to Amazon’s strengths. So, investment pours into the challenges of automation, not building a modernized entry-level labor market.

 

Similarly, imagine a La Paz resident keen to earn by ferrying bikes up that Bolivian city’s steep hills on the back of a car. He could set up a business with all the overheads and risks but could then be starved if “UberPedal” (ridesharing with bike racks) arrives in La Paz propelled by Uber’s technology, userbase and subsidies. That’s assuming UberPedal hasn’t already been cancelled worldwide as authoritatively rumored. As former Soviet citizens will attest; central planning by capricious authorities stifles economic dynamism.

Sometimes the opportunity killing is blatant. Handy, charges cleaners $100 if they and a client form an off-platform relationship (by agreeing to a part-time job for example). Other platforms simply contractually ban this kind of personal progression for sellers. It’s hard to up your productivity when boxed in like this.

 

  • Bias to bigness: Trading technologies get dramatically more effective with bigger datasets and wider application for their outputs. That makes expansion such a priority for companies that can benefit from those technologies. It’s why, for example, a chain of fast food outlets with mandated processes and interchangeable staff will now operate with dramatically less cost and risk than a family-run café.

Lower-profile Tier (2) platforms like Workforce Dimensions from Kronos give large employers sophisticated tools to manage employment costs very precisely. Too often that drives workers into precarious employment while disadvantaging small competitors.

 

Gatekeepers get their way

Access to increased efficiency is controlled by unaccountable gatekeepers. Their rent-seeking and concentration of wealth is widely noted. Less obvious is the way their agenda so often becomes the agenda:

  • Framing the issues: When a news anchor mentions “the markets” we know she’s not talking about labor exchanges or other vital forums where buyers and sellers meet. Ensuring markets rise is vital for economic opportunity. But if media and politicians focus primarily on placating financial markets, because they allocate so much resource with such precision, that marginalizes other activity.

Organizations at the apex of new trading technologies use their control to set the agenda in countless ways. Voters care about climate change for example. But Wall Street pours increasing sums into fossil fuels because that’s what their markets demand.

 

  • Data dominance: Platform operators can become apex predators. Amazon has 1.9m small sellers, attracted by its 50% of all online consumer sales. When Amazon launches an own-brand product they can first synthesise results of trial-and-error by thousands of third-party sellers on their system, then compete against them.

 

  • New risks: Tier (1) markets can reach an efficiency equilibrium inside the trading eco-systems they spawn. Money keeps pouring in from other parts of the economy because the markets overall are so efficient. However, among the sellers, everyone’s figured out the successful algorithms and copied them. So, there has to be ever more complex, and risky, instruments like derivatives to create a competitive edge. That fosters easy credit and imperils everyone, as we learned in 2008.

Would the financial crisis have happened if Modern Markets either hadn’t existed, or were evenly spread through the economy? There would not have been the concentration of resources and power in one sector.

Financiers may still have constructed impenetrable investment vehicles, but they wouldn’t have sucked in such large proportions of national wealth. Or, those instruments would have been able to equally speculate in traditional assets like human capital. An over-skilled workforce resulting from a bubble of that investment would be manageable.

 

Trickles in the torrent

Social inequalities were attacked in past eras. Redistributive taxes, education, selective tax breaks like opportunity zones and controls on corporate activity help. But trickling wealth up or down could be less effective faced with this generation’s upwards suck into Tier (1) and Tier (2) trading technologies.

Take perhaps the most radical solution on offer; Universal Basic Income. If every citizen were to get a living wage as a right, where would they spend? Probably a lot of chain stores and eateries because they are big enough to run Tier (2) systems forcing down their costs. That makes those businesses more convenient and cheaper than Tier (3) localized businesses. Those profits, partly derived from slashing costs with a on-demand workforce, then get sucked into the magnetic pull to Tier (1) activity.

 

How to tackle this structural issue? As a thought-experiment, imagine a world of Road Inequality: The 1% have built tarmacked, lit, interlocking, regulated highways for themselves. Everyone else travels on rutted tracks not ready for motorized vehicles; or costly, erratic, uncoordinated, toll roads.

That injustice would demand action. Compulsory speed limiters on the elite’s cars, new highway taxes, anti-trust rules forcing highways to be less co-ordinated, teaching citizens how to better traverse ruts, lower tax on the muddiest pathways, even Universal Free Horses could each redress the balance. But why not also do what most governments did in the early 20th Century: just ensure a modern road system that everyone can access?

Market Inequality is less visible. That shouldn’t negate the obviousness of just directly leveling the playing field. The rest of this site covers; how that might be done, the services that could be created and what would potentially follow.

 

→ GAMECHANGER: A legal framework