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«Capitalism, Complexity, and Inequality Geoffrey M. Hodgson Under capitalism there is a potential for increasing socioeconomic complexity and greater ...»

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Increasing business competition from developing countries, such as India and China, further compounds these problems. Businesses in the developing world can now take on, at much lower wage costs, much of the manufacturing or service work formerly confined to the developed countries. The existence of cheaper skilled capabilities abroad, with cost-cutting revolutions in transport and communications technology, has meant the relocation of some manufacturing and service production from developed to 476 Geoffrey M. Hodgson developing countries. The developed world now imports cheap but sophisticated manufactured goods and computer software or hardware from India or East Asia. In India in particular, the existence of a number of skilled, English-speaking workers has led to the development of an indigenous software industry and the relocation of company call centers and accountancy departments. Accordingly, in the West there has been a significant loss in employment opportunities for workers with the more routine jobs in manufacturing or services. In addition, there has been relatively more migration of skilled workers from developing to developed countries, further increasing the inequalities of skill and income both within and between countries.

With the march of complexity in modern capitalism, workers with high levels of transferable or specialist skills, particularly substantive and interaction skills, are at a premium. They are likely to command increasing relative and absolute levels of remuneration. In contrast, those lacking such skills seem at an increasing relative and absolute disadvantage. Skill is important, alongside other factors that affect wages. Unless remedial policies are implemented, increasing complexity can be associated with increasing inequality of income.

Concluding Remarks

Education-centered economic policies are vital to sustain economic growth and to diminish inequality and unemployment. It is not possible for developed countries to compete with the newly industrialized countries in terms of lower costs. The low wage levels required are politically and economically infeasible. Instead, the strategy must be to concentrate on knowledge-intensive, high quality goods and services. In pursuit of this approach the developed West has no acceptable alternative but to invest massively and continuously in education and training. Redistributive taxation also has a role, but it is more likely to be accepted in the context of growing real incomes.

The increasing relative importance of the knowledge worker has important implications for the distribution of income. Income inequality has widened in many countries since the 1970s, including in Britain and the United States. While institutional, political, and other changes have clearly affected the distribution of income, there is strong evidence that rising skill differentials, and rising relative wages for skilled and experienced workers, are a major force behind the change.

A problem is to break the link between growing knowledge intensity on one hand and growing pecuniary and social inequality on the other. The remedy must involve heavy investment in education and training, to widen access to knowledge and to increase the relative and absolute supply of skilled and educated workers. Countries that have traveled more than others down this road, particularly Germany, have witnessed a lower increase in income inequality since the 1970s and have been more able to train and relocate workers of relatively lower skill (OECD 1993). We can learn many lesCapitalism, Complexity, and Inequality 477 sons from international comparisons of this type. One of them is that the logic of globalization and the learning economy implies no single model for national success.

It is not simply the “amount” of education and learning that is important but also its quality, access, and distribution. Knowledge and learning work at different levels, combining both the general and the specific, and the tacit and the codifiable. The recent German experience emphasizes the importance of widening the distribution among the population of detailed, technical skills. Many of these skills are tacit and require on-site training. In addition it is necessary to enhance flexible and transferable skills. Many of these involve capabilities of a more


and conceptual nature. There is little value, for instance, in educating a workforce simply in the use of one particular technology, when any such technology is increasingly likely to become obsolete in a short time. To face the challenges of the future, people do not simply need to learn. They need to learn how to adapt and to learn anew.

The purpose of education is not simply to enhance workplace skills. In an increasingly complex society, knowledge is required to act effectively as a consumer and a citizen. If democracy is to survive in the face of growing complexity, then education must play a major part.


1. The author is very grateful for participants at the January 2003 AFEE session for their comments on this paper.

2. If we represent interactions in an economy in matrix form, with the cells of this matrix showing the intensity of interaction between relevant agents, then growing complexity means an increasingly dense matrix of interactions. A measure of economic complexity becomes possible, related inversely to the degree to which the matrix can become triangulated. Frederic Pryor (1996, 11–12) claimed that complexity in the postwar U.S. economy has increased by this measure.

3. The problem of measurement of skills is discussed in more detail in OECD 1996, Pryor 1996, Stasz 2001, and Elias and McKnight 2001.


Ashton, David, and Francis Green. Education, Training, and the Global Economy. Cheltenham, U.K.: Edward Elgar, 1996.

Braverman, Harry. Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century. New York:

Monthly Review Press, 1974.

Chamberlin, Edward H. The Theory of Monopolistic Competition. Cambridge, Mass.: Harvard University Press, 1933.

Drucker, Peter F. Post-Capitalist Society. Oxford: Butterworth-Heinemann, 1993.

Elias, Peter, and Abigail McKnight. “Skill Measurement in Official Statistics: Recent Developments in the UK and the Rest of Europe.” Oxford Economic Papers 53, no. 3 (July 2001): 508–540.

Goldin, Claudia, and Lawrence F. Katz. “Technology, Skill, and the Wage Structure: Insights from the Past.” American Economic Review (Papers and Proceedings) 86, no. 2 (May 1996): 252–257.

478 Geoffrey M. Hodgson Gottschalk, Peter. “Inequality, Income Growth, and Mobility: The Basic Facts.” Journal of Economic Perspectives 11, no. 2 (spring 1997): 21–40.

Hodgson, Geoffrey M. Economics and Utopia: Why the Learning Economy Is not the End of History. London and New York: Routledge, 1999.

———. How Economics Forgot History: The Problem of Historical Specificity in Social Science. London and New York:

Routledge, 2001.

———. “Capitalism, Employment, and Complexity: With Further Critical Comments on Another Hodgson.” Journal of Economic Issues 36, no. 1 (March 2002): 190–196.

Johnson, George E. “Changes in Earnings Inequality: The Role of Demand Shifts.” Journal of Economic Perspectives 11, no. 2 (spring 1997): 41–54.

Marx, Karl. Capital. Vol. 1. Translated by Ben Fowkes from the 4th German ed. of 1890. Harmondsworth, U.K.: Pelican, 1976.

Nickell, Stephen, and Brian Bell. “Changes in the Distribution of Wages and Unemployment in OECD Countries.” American Economic Review (Papers and Proceedings) 86, no. 2 (May 1996): 302–308.

Organization for Economic Cooperation and Development (OECD). Employment Outlook. Paris: OECD, 1993.

———. Measuring What People Know: Human Capital Accounting for the Knowledge Economy. Paris: OECD, 1996.

Pryor, Frederic L. Economic Evolution and Structure: The Impact of Complexity on the U.S. Economic System. Cambridge and New York: Cambridge University Press, 1996.

Pryor, Frederic L., and David L. Schafer. Who’s Not Working and Why. Cambridge: Cambridge University Press, 1999.

Rosser, J. Barkley, Jr. “On the Complexities of Complex Economic Dynamics.” Journal of Economic Perspectives 13, no. 4 (fall 1999): 169–192.

Rueschemeyer, Dietrich. Power and the Division of Labor. Stanford, Calif.: Stanford University Press, 1986.

Saviotti, Pier Paolo. Technological Evolution, Variety, and the Economy. Aldershot, U.K.: Edward Elgar, 1996.

Stasz, Cathleen. “Assessing Skills for Work: Two Perspectives.” Oxford Economic Papers 53, no. 3 (July 2001):


Tainter, Joseph A. The Collapse of Complex Societies. Cambridge and New York: Cambridge University Press, 1988.

Topel, Robert H. “Factor Proportions and Relative Wages: The Supply-Side Determinants of Wage Inequality.” Journal of Economic Perspectives 11, no. 2 (spring 1997): 55–74.

Warsh, David. The Idea of Economic Complexity. New York: Viking, 1985.

Wood, Adrian. North-South Trade, Employment, and Inequality: Changing Fortunes in a Skill-Driven World. Oxford:

Clarendon Press, 1994.

Zolo, Danilo. Democracy and Complexity: A Realist Approach. Cambridge: Polity Press, 1992.

Zuboff, Shoshana. In the Age of the Smart Machine: The Future of Work and Power. Oxford: Heinemann, 1988.

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