By Chrystia Freeland
YALTA, Ukraine, Sept 20 (Reuters) - One of the paradoxes of our age is that we are simultaneously living through a time of positive economic innovation and also a time of the painful erosion of the way of life of many middle-class families.
Listening to Yuri Milner, the Russian Internet investor, at a conference in Ukraine a few days ago brought home this contrast. Milner is a billionaire thanks to his Internet investments: He has done well both in his homeland, supporting some of Russia’s most successful start-ups, and, even more spectacularly by venturing abroad, taking pioneering stakes in Facebook, Zynga and Groupon.
When Milner talks about the technology revolution, he paints a dazzling picture of literally unprecedented innovation, bringing tremendous savings and benefits to consumers.
But when you talk to economists about the impact of those same forces on middle-class jobs, you come joltingly down to earth. The revolution Milner describes is part of a sea change in how the economies of Western industrialized nations work - and one that is hollowing out the middle class.
The technology revolution has become so familiar - grandmothers are on Facebook and toddlers navigate YouTube on their parents’ iPads - that it is easy to forget how revolutionary it still is. But Milner, speaking at an annual conference held by the Ukrainian billionaire Victor Pinchuk, argued that it had just begun to radically reshape our lives. (Disclosure: I moderated many of the sessions.)
Milner’s focus is on what he calls the three big “stories” in business innovation: “platform,” “free” and “e-commerce.” By “platform,” Milner is referring to the ability of the breakthrough Internet companies to build their businesses using the work and ideas of others. One example is Amazon.com. Milner said that “about 2 million independent merchants are selling on the platform every day. And that adds up to $25 billion of annual sales.” If those merchants were housed in a brick-and-mortar mall, they would occupy a “space equal to the island of Manhattan.”
The second big strand of the Internet revolution that Milner homed in on is “free.” Here, again, Milner argues that something unprecedented is going on: Thanks to the revolutionary impact of “free,” massive global brands can be created almost overnight.
Milner’s final major trend is less abstract: e-commerce. Again, this is hardly a novel phenomenon. But what Milner thinks is new is the impact of e-commerce as it moves from being the sideshow to becoming the main event.
Today, Milner estimates that 6 percent of retail sales is done online. He believes that number will be 20 percent within a decade, and he thinks it will be 50 percent within two decades. That shift, Milner argues, will have a profound and positive impact on the world economy: an 8 percent increase in efficiency. Another predicted consequence is less benign: “a pretty significant job loss in the retail sector to the tune of 40 million jobs in the next 20 years.”
Milner is a winner in all three of his generation’s big revolutions: the collapse of communism, globalization and the technology revolution. So he is inclined to believe the disappearance of retail jobs will have a happy outcome: The vanishing, low-paying retail jobs will be replaced by better-paying technology work.
But economists who have been studying the impact of globalization and the technology revolution on the labor market in Western industrialized economies are less sanguine, at least in the short term.
John van Reenan, professor of economics and director of the Center for Economic Performance at the London School of Economics and Political Science, is one of the foremost students of this transition. He thinks the biggest impact of the e-commerce revolution, and its counterparts in sectors like the law or accounting, won’t be on the number of jobs in the economy; it will be on how well they pay.
“The worry isn’t the quantity of jobs; it is the quality of jobs,” he said in a telephone interview from his base in London. “Other jobs will appear, but they may not be very attractive jobs.”
Van Reenan believes this trend has already begun, with deep social and political consequences. “It is a continuation of the hollowing out of the middle class, which we have seen,” he said. “People will find it harder to support a middle-class family.”
We’ve been in this paradoxical place before. The American economist and politician Henry George described the tumultuous change that his country was undergoing in the 19th century in an 1879 best-seller, whose title says it all: “Progress and Poverty: An Inquiry in the Cause of Industrial Depressions and of Increase of Want With Increase of Wealth The Remedy.”
What makes today’s political economy so hard to come to terms with is that the thrilling innovation and the hollowing out of the middle class - the progress and the poverty - aren’t two inimical trends. They are, instead, opposite faces of the same coin. But that’s something we don’t like to talk about, either in the hot spots where innovation is happening, or in the depressed regions where its malign side-effects are being felt most acutely.