Over 22,000 children live on the streets of New York- a stunning statistic, the highest since the times of the Great Depression. The problems don’t end outside the walls of the Big Apple- the 22,000 children in NYC form part of 1.2 million across the United States.
Homelessness is one of the major signs of extreme poverty, caused by the dropping economic standing of the poorest in society.
The problems of homelessness go further than the obvious- of course we don't want to see people forced to live on the streets- but it can have further implications on society as a whole, often causing both societal and economic problems such as drug abuse and crime.
Homelessness certainly matters- the speed an effects of its growth provide real threat to American society, particularly those edging closer to losing their homes. It is a prominent sign visible to all of the growing level of economic inequality present in the US.
The Middle Class: Wage stagnation
The causes of wage stagnation go further than just the recent economic crash- wages of most Americans have actually stagnated for the last few decades.
This stagnancy in the face of a boost in productivity, and general economic growth (averaging 3.27% since 1947) in previous decades is surprising; had wages kept up with economic growth since 1970, the median household income would be around $92,000. In 2012, the US Census Bureau reported the median household income to be just $51,371.
Increase in productivity has also failed to lift average wages- between 1979 and 2012 the median worker’s productivity has risen 74.5%; yet their wages have only gone up by 5%.
Of course, technology has also played a role in this productivity boom. Computers have revolutionised word processing, the internet communication and so on- so one could perhaps expect it to bring a drop in working hours, resulting in more leisure time. But according to Erik Rauch of MIT, “if productivity means anything at all, a worker today should be able to earn the same standard of living as a 1950 worker in only 11 hours per week”.
An 11-hour working week is unheard of today- suggesting today’s workers are working harder, producing more than their 1950s counterparts by far- yet their compensation is not proportionately higher.
The minimum wage has also been stagnant. 5 states are yet to even establish a minimum wage. Currently the highest minimum wage is available in Washington, at $9.32, set at the turn of 2014, but according to a 2012 study by the Centre for Economic and Policy research, even this is too low. The study, setting inflation and productivity as benchmarks, concluded that if the minimum wage had kept pace with productivity and inflation increases since the year minimum wages peaked, 1968, the figure would have reached $21.72 per hour- over double that of the highest in the USA.
It seems apparent that wages for the general population has failed to keep pace with economic growth and productivity- so where has the extra capital created by a growing economy gone? Fig.1 shows clearly; the top 1% has benefited disproportionately, enjoying an increase in salary of over 240% between 1979 and 2009.
The Upper Class: The 1%
While the wages of most of the population stagnated during the economically relatively non-turbulent years, the resistance of the incomes of the wealthiest could be observed just in the recent economic crash. The average CEO salary dipped in 2008, but it was back up on its feet by 2010- back to 243 times the wage of the average worker.
Questions have been raised over these huge salaries- mainly the question over whether they really deserve it. Under a true meritocracy, people would be paid according to a mixture of their effort, production and influence- so do CEOs really work 243 times harder than an average worker, or produce 243 times as much? Many would argue that CEOs have it easier than the worker- enjoying the power to delegate work more than doing it- but perhaps the CEOs themselves would argue the salary is more a reward for the hard work they have done to get to that position, rather than their current activities alone.
The ‘1%’ of wealthiest Americans have become the faces, to many Americans, of the problem of wealth inequality that is present. After all- how can the USA, a country with the most billionaires in the world (515, far ahead of second-placed China with just 157) have at the same time one in seven people living in poverty?
The practice of neoliberal capitalism in the USA has been the focus of much debate. In this third instalment of The American Inequality Series, we will take a look at two of the key tenets of neoliberal capitalism: the beliefs in the right of the free-market to rule the economy, and in the idea that the pursuit of self-interest will lead to the best outcome for society.
Scottish icon Adam Smith, the 'Father of Modern
Economics', laid the foundations for much of
neoliberal economic theory.
Free markets rule
An idea that has dominated Western economics for quite some time now is marginal productivity theory- the idea of the competitive, regulation-light free market being the best instrument for aligning productivity, social benefits and private returns. Essentially, those who have skills that help them to be more productive will be in more demand in the competitive market- thus their ‘price’ (income, job benefits) will be higher than those incapable of being productivity.
This meritocratic system is what most people would like- but the key question here is how to achieve this, and marginal productivity theory answers that the free market is most effective in doing so. So to examine their claim further, what are the tenets of free marketism in the USA? Is there a ‘laissez-faire’ approach, where markets are given total free reign, or a more regulated way to keep competition alive?
A popular argument against regulating fast food chains such
as McDonalds has been that the free market will itself find the
best solution over time.
Well, as is often the case, there is no definitive answer. US economic policy is not entirely coherent (no nation’s policy is); for example, observing the lack of regulation over fast food, that has contributed to the quadrupling of adolescent obesity between 1980 and 2012, one would think America is running a free market almost fully dependent on the ‘invisible hand’, that guides resources to where they are most needed by itself. Yet a glance at antitrust laws such as The Clayton Act, that bans the monopolistic practice of merging market dominators, suggests the contrary.
Individualism
Perhaps the most retold saying of Adam Smith is his thoughts on us as consumers,
how "it is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest".
Theory states that the businessman inevitably has the contentment of his customers in his own self interests- if he doesn’t make the customer happy, the customer will not return to him and thus the businessman will lose out. So following his self interests will benefit both himself and his customers.
The internet is held often as an example of such a successful self-regulating market where companies such as Google and Facebook have succeeded of their own merit, while others such as ask.com and Myspace have felt the consequences of failing to appease the market.
However, free markets have been seen by many to be against the interests of the ‘customers’. Allowing American companies to outsource employment is a pertinent example. Free international trade has allowed companies (particularly in the primary and secondary sectors) to hire cheaper employment in places like China, resulting in a wave of job losses in America. In the decade 2000-10, US multinationals sent 2.4m jobs overseas, simultaneously putting 2.9m Americans out of work.
Gates' Microsoft dominated the computer market during
the 1990s.
Monopolies such as that of Microsoft over the IT market in the 1990s highlighted further free market failure- a lumbering giant was unrestrained from crushing competition such as Netscape, resulting in a lack of choice that prevented any market self-regulation from taking place. If people didn’t like Windows or Internet Explorer, there was nothing else they could choose- they had to deal with it, without the democratic power free market theory promised.
Paul Samuelson (the first American to win the Nobel Prize in economics), claimed how “utterly mistaken was the Milton Friedman notion that a market system could regulate itself”. And while free market has arguably created the environment for new businesses to prosper, it has failed to live up to its promise of market democracy- as recent monopolistic activity and the loss of domestic employment have shown, the consumers have little power over the market.
So in an article from a while ago we went through some of the benefits of privatisation- the main conclusion was that, in the main, privatisation leads to an increase in efficiency by replacing ambiguous, short termist political motives with one distinct motive- to make profit.
But this motive itself is one that is strongly debated over. Private businesses are pushed more than their state equivalents to turn over profits- but is this something that benefit those stakeholders outside of the company as well as those inside?
The pro-profit motive argument claims that free markets create environments that encourage profit-seeking competition. For example, in the British department store industry, which the state has little involvement in, competition is visible- Debenhams, John Lewis, House of Fraser and so on are competing to gain the highest profits. The contrary is perhaps visible in the British healthcare industry- the state-owned NHS dominates this market, and thus there is little (albeit growing) competition for profits in this sector.
Apple and Samsung's rivalry has brought
rapid advancements in mobile technology.
Though it is arguably not the only means to do so, market competition is key in bringing improvements and allocating resources efficiently in the economy. The global technology market has been a great example of this: Apple and Samsung have constantly been battling over the past 5-7 years over their mobile phones, and what has resulted is an unprecedented rapid development of mobile technology. Look at how far the iPhone, for example, has developed since its release in 2007. The current iPhone 6 is thinner, lighter and of better quality material than the original iPhone- yet it is decisively faster and more advanced. Competition with Samsung's 'Galaxy' phone drove Apple to proactively seek better technologies for every single generation of iPhone, which has brought us advancements in almost every aspect of the phone.
These companies have had to keep up with market demands- if they released a product few people liked (like the iPhone 5C), they would be damaged by it by a drop in their profits; they would by their competitors and over the long term marginalised, or even worse driven out of the market. RIM (producers of Blackberry phones) have seen this- they saw huge success in the 2000s but they failed to keep up when the iPhone came.
Apple and Samsung created huge advancements in the tech industry with the primary motive of chasing profits. They have shown the potential positive effects of profit-making motives.
However, this idea of competitive market democracy brought about by the importance of profits is not always appropriate.
An industry where there is a monopoly is one example of this- this company is desensitised to most activities of the market, because it has no competitors to protect itself against. More on the idea of the monopoly can be read in this past article.
Questions can also arise with regards to whether these motives work in certain areas of the economy. Healthcare, for example, is seen as something some see as a right to citizens of a developed country, rather than something they should have to pay for. Privatised healthcare in the USA has seen some rocky results. In principle it is a dangerous idea (what if you have a car accident and wake up to foot a bill you can't pay for?), and in reality it has followed suit. The cost of insurance (as these 21 graphs illustrate in detail) is far too much in comparison to other nations, meaning many in America aren't insured- and for these people a single health accident has the potential to destroy their lives not just health-wise but financially.
Private hospitals such as those in the USA face a dilemma- should their primary motive be to turn profits or heal patients? The answer is more often than not the former, resulting not just in the inflation of healthcare costs that we've seen but occasionally irresponsible behaviour- it's opened the door to doctors prescribing excess amounts of expensive medicines, suggesting unnecessary appointments; generally practices that are not so helpful to the patient but helpful to the hospital's finances.
The Big Mac: High margins, high calories.
Profit-seeking has had visible socially negative effects in the food industry- particularly in fast food. It is far easier for companies to cut down costs than to try to increase income, and born from this came much of the artificial junk food we see today. Healthy, organic food has become something of a premium in the food industry, as the influx of Big Macs, with their far higher profit margins, have dominated the fast food market. Seeking profits, companies such as McDonalds and Burger King have sacrificed quality in their products. They have sought to make a cheap (and not so cheerful) product that has damaging impacts on the healths of those who consume it, rather than making a product that adds genuine nourishment value to consumers. Financially, their current activity is incredibly sound- but in the real world? Not so much the case.
So while there is a valid argument for private profit-seeking opening up industries to market competition and all its benefits, this is something that is perhaps not applicable to the economy as a whole. With regards to healthcare, profit-seeking is a dangerous motive to have when the primary motive of any such establishment should be to cure their patients. Similar problems arise with fast food businesses, which damage the customer's health but bring in lucrative profits.
As it often is with economics, there is no straight answer. With different industries come different situations, and thus profit seeking has the potential to be both extremely beneficial and damaging to society as a whole.
The phenomenon of easy access to credit and the debt has been a key factor in the stability of the USA’s modern economy. Borrowing plays a huge role- consider the housing market, whose dependence on the lending industry has drastically increased in the past 50 years; between 1949 and the turn of the millennium, the mortgage debt to household income ratio rose from just 20% to 73%.
There are many reasons for this phenomenon of ‘credit addiction’- the principle of these being increasingly easy access to credit, changing consumer decisions and the squeezing of incomes. Let’s analyse these and see which contributes most, if at all, to American wealth inequality.
Credit addiction has without doubt been encouraged by the financial sector in America. The subprime market’s recent catastrophic explosion exemplified how open credit has become in the US. The subprime market emerged from a restricted financial industry- previously, banks had to take great care in selecting who they could lend to, to minimise the likelihood of future unpaid debts. This process was rigorous- any previously outstanding debts, or missed payments would almost rule you out of contention for a mortgage.
The subprime market sought to open a whole new world of profitability- opening the door to credit to these individuals who were previously deemed unsuitable to receive a mortgage. The industry boomed- at its peak in 2005 the subprime industry had granted $625bn of loans, contributing to over a trillion dollars in loans made by subprime lenders between 1994 and 2007.
Their open availability made subprime mortgages incredibly attractive- a complex arrangement between financial institution and bond traders meant banks were in little danger if mortgages were to go unpaid. They could benefit from cheap loans, avoiding the traditional risks associated with defaulting customers.
Unsurprisingly, the result was devastating- the recent subprime crisis had severe implications on homelessness for example. According to the National Coalition for the Homelessness (NCH), there were 342,038 foreclosures of US properties in April 2009 alone- a third higher than the already high foreclosure figure of April 2008.
The authorities have also played a role in this disaster- attempting to kickstart the economy following the dot-com crash of 2000, the Federal Reserve cut long term interest rates from 6.5% to just 1%- former Chairman of the Fed Alan Greenspan admitted that this move “fundamentally engendered” the development of the doomed housing bubble whose explosion caused this economic trouble.
One could argue Western society has developed a culture of debt-accumulation. Availability of finance on any consumer product, from a blender to a Mercedes, has encouraged people to be less financially responsible. You no longer need to take a single heavy hit on your bank account to purchase a car- finance allows the (greater) cost to be spread over a few years. As a result, prices in the short term are lower and thus customers are more likely to be seduced to purchase a car that is beyond their financial boundaries.
Additional interest payments make the situation worse- Jeremy Vohwinkle of GenerationX Finance describes new car purchasing as borrowing money at a high rate of interest to invest it in a stock guaranteed to lose value rapidly. Yet March 2014 saw the average amount borrowed by American car buyers surpass $27,000 for the first time ever.
The wealthy are not so reliant on financing- cash purchases ultimately cost less and often cars do not represent a significant enough hit on a millionaire’s finances that he has to take a loan for it.
The ever-present temptation of taking loans, trading short term gain for a greater long term loss, to cover purchases such as cars and more significantly homes, has driven down the economic prosperity of much of the poor and middle class.
Debt has also been piled on by the US’ social welfare system (or lack of one). Take the medical system- a NerdWallet survey found that Healthcare bills were the primary cause of personal bankruptcy. Healthcare is special in this regard because unlike a house or a car, we usually have no choice as to whether we need it or not. After a car accident, one cannot choose not to go to hospital- they are taken by emergency services, and often they wake up to the bill- which they must pay, as they’ve already been treated.
This unlucky 20 year old got charged $55k for an appendectomy.
Even after insurance contributions, he had $11k left to pay.
One could argue that health insurance solves this problem- but even ignoring its ever-rising price (family health insurance topped $16k for the first time ever last year) over 10 million fully insured Americans aged 19-64 are expected to face bills they will be unable to pay in the near future. Plus, as the picture on the right shows, even health insurance can leave a substantial bill for the individual to pay. This idea of healthcare being financially unattainable is something that, while far from being exclusive to the USA, is pretty much unheard of in similarly developed countries like the UK and much of Europe.
These problems are mostly faced by the poorer of society. Like an overly expensive house or car, it adds to personal debt. However, usually being an involuntary expenditure, it can be even more damaging.
Stefan van der Fluit is a man whose experience in startups and entrepreneurship defies his age. A Dutchman raised in Silicon Valley, Stefan started his first business at just 15- a web design company Nafets Solutions, that he ran alongside his studies. During his 4 years studying Management at The University of Warwick, he continued his entrepreneurial activity with a campus discovery tool, Unibubble.
Having been recognised by the likes of HRH The Duke of York, and now being a TEDx speaker, I caught up with Stefan after his recent talk at The University of Bath, to discuss his latest project- Nuklius- and get his opinion on wider entrepreneurial and business issues.
Your relatively new startup Nuklius is a service aimed towards other budding entrepreneurs. What was your initial vision for Nuklius, and what does it do?
Nuklius is a talent-mapping app connecting people & their skills to projects or startup ideas, within a given network. We help people with ideas find their collaborators and team members; if you haven’t got an idea, we find you projects for you to get involved with which are looking for people with your particular skills.
The initial concept for Nuklius came to me whilst giving a guest talk at Warwick, around my previous startup experiences. The main question asked during the Q&A was where I found my (brilliant) cofounder and close friend, Alex Dobinson. Lots of people there had the issue of having ideas, however none of them had the necessary skill set to act on them. This is when it occurred to me that a big reason why people don’t get involved with startups isn’t because they aren’t motivated, or haven’t got good ideas of their own, etc. Its the very simple fact that, alone, they haven’t got all the skills needed. And this is a very normal problem: no one has all of the skills needed to create a successful startup. If you look at all the fantastic companies now, they all have one thing in common and that is that they were founded by teams.
I fundamentally believe that startups drive true social and economic innovation, so to me, the more people we could help act on their ideas, the better. This was the initial vision for Nuklius - now it has evolved into something a bit larger; we want to become the platform for the future of work, where we see the future to be moving from “I’ve had x amount of jobs” to “I’ve been involved with x amount of projects”. Now knowing what you are an expert in, how can we find you projects for you to work on, whether they are in your organisation you work for or external to it, which match your personal interests and passion. This helps employees create a more motivating and stimulating career for themselves, essentially empowering them to steer their own careers, internally. For the organisation, their benefits include increased talent retention, quicker access to talent which speeds up their innovation processes, cross-departmental collaboration which is key when it comes to innovating, etc.
50% of our time on this planet is spent working. We believe you should enjoy every minute of it and have a say in what it is. Having been an active entrepreneur from such a young age, you must have learnt a lot of lessons about entrepreneurship- which one lesson would you say is the most important, and how did you learn it?
I would say the most important lesson I have learnt is to not be afraid of sharing your idea with others. There seems to be a sense of paranoia amongst many starting entrepreneurs where they believe that their idea is the next big thing, and therefore defacto, is worth millions already. After having been through the ring a couple of times, its safe to say that ideas on their own, are absolutely valueless. It is all about the execution of your ideas.
In order to successfully execute, you need to share your idea, to first of all see if it is something people are looking for - will what you are intending to create resonate with those you are creating it for. This is impossible to do, if you are not willing to open up about your idea.
Other reasons why this is so important:
how will you find a cofounder if you can’t tell them what they will be working on with you
how will you create key partnerships / relationships if you can’t tell them who and what they are partnering with
how will you undergo the crucial customer development process if you can’t talk about what it is you want to create
and the list goes on…
To address the paranoia of “stealing ideas” I wanted to share this anecdote. A professor of mine at Cambridge, Simon Stockley has been in the startup sector for 15+ years, and not once has he seen an idea be stolen. Why? Because there are two types of people in this world. One, those who are too lazy to act, and the second; those who are not lazy and therefore are already working on their own things (and don’t have the time, even if they wanted to, to copy yours).
Ideas are unique to the person they came from; you cannot copy this. I may give you an idea where you can probably make out steps 1,2 and 3 but I, because its my idea see step 1-100. So if you have an idea, the best thing you can do is act on it, get it out there and see if its worth pursuing.
One small addition to this: just because it is your idea, do not expect this to be a valid reason to retain 80+% equity within your startup. Your cofounders are key to the success of your business, so they should feel adequately motivated and have the representative ownership position to validate their risk, etc. Technical cofounders are not ‘resources’ as many business people see them as, they are incredibly talented, creative and hardworking individuals who add just as much value as the sales/marketing/business development cofounder. I guarantee you, that if you consider technical talent to be a resource to “go build this for me” - you won’t get very far. How do you think your childhood in Silicon Valley has influenced your mindset and outlook on business?
Great question and to be honest I think it doesn’t really have to do with where I grew up, rather who raised me (Also I was quite young during my time in the Valley). My parents have always encouraged us as children to not be bound by what we perceive our ‘limitations’ to be, or what others “tell” you are your limitations. This really helped when I decided to found my first company at 15, rather than being told that its daft, or impossible, etc. they simply said, sounds good - go do it.
Since both of my parents have spent their careers in the technology space, all of our dinner conversations were always evolving the latest and greatest within the industry, from this I developed a deep love and respect for technology as I saw first hand how it was created, who was behind its creation, etc.
I must admit, it is a bit surreal growing up in an area where you have so many ‘idols’ in one place. When I was a kid we used to trick or treat in Steve Jobs’ neighbourhood (his wife was the one to open the door and pass the candy), my sister was best friends with one of the daughters of an ORACLE cofounder, so we would regularly spend time with his family, etc. Which companies or individuals inspire you as an entrepreneur, and why?
I have a lot of respect for anyone who takes a concept from nothing and grows it out to something for others to benefit from. Having been involved with this process for a couple of years now, you never can truly realise and respect how tough and challenging this journey is, until you yourself try it as well.
I am very much inspired by companies whom are design driven; design not purely in its aesthetic meaning but also how a product or service gets created, around and for the individual they are targeted for. Good design, with all these elements combined is incredibly difficult and hard to pull off. Apple, Square and IDEO are companies that I take a lot of learnings from as well as their respective founders, Jobs, Dorsey and Kelly and Jony Ive (not an Apple founder, but a lot of their current success lies with his genius).
One entrepreneur I deeply respect and admire is John Mackey, the founder of Whole Foods. Reason being is his deep respect and understanding for the social responsibilities of business (he also coined the phrase conscious capitalism) as this is something which resonates deeply with myself. I think that for a long time, since WW2 the majority of organisations have been focused around maximising profits and seeing this as the primary metric of a successful business (Friedman Doctrine) whereas I think its quite clear that in order to be a successful business you also need to consider social contributions and your responsibilities to the communities in which you operate, your supply chain, employees, etc. Not only is it the right thing to do from a moral perspective; its actually proven to make good business sense too. One of your most popular talks has been the one you gave on the topic of ‘Conscious Entrepreneurs’. Could you summarise what a ‘Conscious Entrepreneur’ is, and why the world needs them?
Great question- and I'm glad you enjoyed the talk! To me, a conscious entrepreneur is someone who has a certain perspective of what a business and its purpose is. Rather than seeing it as a profit machine a conscious entrepreneur sees a problem they are passionate about and seeks to address it through setting up a business/venture. The conscious entrepreneur's vehicle of driving change is through a company, as you can have significantly more impact as an organisation than you ever could on your own.
Conscious Entrepreneurs set off to create value, not only for themselves but for everyone involved in their business operation; from their suppliers, to the end user. They see a business with a more holistic perspective and incorporate values and a culture of openness, transparency, do-good, sense of belonging for this working in the organisation, etc.
One key thing to remember is that conscious entrepreneurs are no different than any other business person, meaning they are most definitely in it to make money - however the purpose or meaning of money is perceived as not the end goal, rather a tool to build more value with. According to Fortune Magazine, for every start up that succeeds, there are 9 that fail- what do you think are the most notable differences between a startup that fails and one that succeeds?
There are unfortunately way too many factors involved with the success of a venture (speaking to the right people, timing, the founding team, raising capital, the product, the marketing, etc.) that its not all too easy to pinpoint the main differences - though one thing I have noticed and something you probably hear all the time, is the importance of the founding team.
Having the right people, people who are not only skilled and passionate about what it is they are doing but are also flexible in their ways of working, meaning that they don’t bend at the first sight of setbacks, that they are willing to make changes to their approach if need be, that they are stubborn in the sense that they keep pursuing no matter how many times you are told it won’t work. I’d actually like to stop and focus on this point as this is an important lessons I have recently learnt; there is no universal truth. What I mean by this is that no one in the world can tell you whether you idea is a good or bad one with absolute certainty. Its no one’s place to tell you whether its worth pursuing or not; only you can, the founders. All else is just peoples’ opinion, that’s it (some opinions are backed up by experience, but they stay opinions none the less).
The only way you can find out if something isn’t worth pursuing, is through trial and error. Thats what entrepreneurship is all about. Lots of trial and error. This is why it is so crucial to truly believe in what it is you are doing as otherwise, with all the nay-sayers out there, you will most likely give up. Believe in yourself and what you know, don’t be afraid to call yourself an expert (as honestly, if you work 13-14 hours a day for two years straight in a particular field, you wouldn’t be wrong to do so) and don’t be afraid to kick back and tell people, who might be older and more experienced than you, that they are wrong. It is not uncommon to hear every once in a while that this whole startup movement is just a bubble about to pop (รก la dot com bubble). Do you think the future is bright for startups like yours?
Honestly I do not think about these things. Sure there might be a lot of “first world problem” solutions out there which after a period of time people might turn around and think do we really need this in our life…but as long as you are creating something which solves a true problem, you will always be needed.
This is why our team focusses on building something which addresses a true pain point. As an entrepreneur, always try to be a pain killer rather than a vitamin. Stefan's latest startup Nuklius is open for investment for a limited time on Seedrs. Click here to find out more about how you can become a part of his journey.
This stagnancy in the face of a boost in productivity, and general economic growth (averaging 3.27% since 1947) in previous decades is surprising; had wages kept up with economic growth since 1970, the median household income would be around $92,000. In 2012, the US Census Bureau reported the median household income to be just $51,371.
