The rise of populism in the politics of the Global North—to be found most telegenically in the Trumpenproletariat in the United States and the Brexiteers in the United Kingdom—has several causes. One particularly salient one is the growing sense among the losers from globalization that their elites have at best ignored their interests or at worst deliberately tried to rig the system against them. The first claim is undoubtedly too often true; the second may resemble a conspiracy theory, but, to take just one example, the Panama Papers revelation that trillions of dollars annually escape lawful taxation, turning tax codes that are progressive on paper into codes that are regressive in reality, makes charges of willful plutocratic shenanigans hard to discredit.

Traditional working classes in many countries are increasingly feeling the churn of economic change playing out on a global scale, and if this churn is an example of Schumpeterian “creative destruction” they sense mostly the destruction, not the creativity. Economists tell the newly déclassé and dispirited that, while the Gini Coefficient in their country has widened, it has shrunk for the world as a whole, and that eventually the newly empowered middle classes in formerly poorer countries will generate a huge demand for the Global North’s imports. Such arguments among disemployed steelworkers in Sheffield and autoworkers in Detroit play poorly, to put it mildly. They sense that, by means fair and foul, lawful and not quite lawful, redistribution in recent decades has been upward, sometimes very high upward. It suits not their mood to wait patiently on the dole while burgeoning Chinese, Nigerian, and Bangladeshi middle classes generate some import demand.

Whatever the politics and the emotions may be, one thing cannot be doubted: The 2008–09 financial collapse constituted an inflection point accelerating and proving that the trends giving rise to the Great Recession were not just or mainly about outsized business cycles, and that the recession itself was not a V-shaped but a L-shaped recession. The shift in the labor profile proved highly class-unequal. “Turbo-capitalism,” as Edward Luttwak labeled it two decades ago, has been an unmitigated catastrophe for the less educated, less mobile, less flexible portion of the population. While the economy recovered relatively quickly for the rich and well-educated—banking profits quickly bounced back and times have never been better in Silicon Valley—the blue-collar and service sector jobs that disappeared in 2008 have mostly never returned.

In other words, the populist class-based anger we see has a basis in economic reality, and what it means politically is that the United States (and, indeed, almost all the advanced Western countries) needs a new social-political compact that provides avenues for broadening the class base of wealth creation in the old industrial core of the Global North. Until and unless we develop such a compact, ugly political things will continue to unfold, and the longer that ugliness goes on the more damage will be done to advanced societies—to their reservoirs of social trust, to their self-confidence and sense of personal and communal security, and possibly to their national security as well.

If you are a victim of the churn, you may have little patience for the observation that this sort of thing has happened before. And in times past the outcome has not always been a continual descent into the abyss. If things sometimes change for the worse, they have also changed for the better. In that regard, I believe there are good reasons for short-to-medium term pessimism, but for optimism over the longer term.

Where the Anger Comes From

The empirical economic basis for populist economic-based anger is not hard to show. Lower-education, low-mobility groups in the population have been most adversely affected, as the following chart illustrates:

Source: World Economic Forum

Indeed, beyond cold data, the level of social destruction that has unfolded in the United States over the past few decades is hard to overstate. Whole communities, especially in the small towns and rural areas, have experienced wholesale economic and social collapse, as documented in a diverse array of books, including the likes of Charles Murray’s Coming Apart (2012), Robert Putnam’s Our Kids (2015), Sam Quinones’s Dreamland (2015), and J.D. Vance’s Hillbilly Elegy (2016). For the traditional working classes, gone are not only jobs but also the wellsprings of traditional forms of social esteem, replaced with a blighted landscape of deindustrialization, drug addiction, and elite disdain. To be sure, African-Americans have been experiencing this sort of social devastation forever; what is new is whites experiencing the same, while at the same time being denied the traditional consolation prize of elite-sanctioned ethno-racial supremacism.

Moreover, almost no one has been held accountable for the collapse. Individual homeowners who borrowed more than they could afford have suffered, yes, but virtually none of the financial or political elites who engineered the system that collapsed in 2008 have been held to account. Only one mid-level banker went to jail, and what he did a few times, hundreds of others did daily during the crunch period of offloading toxic assets in 2007 and 2008.

This lack of accountability represents a moral crisis that is now manifesting itself as a crisis of political legitimacy for elites of all sorts, especially for political elites who have overseen the development of this system over the past forty or so years. As Francis Fukuyama wrote here five years ago,

The collapse undermined the fundamental moral justification for material inequality in a politically egalitarian society. Basic to the legitimacy of market capitalism is the efficient markets hypothesis—that is, the notion that in a truly competitive market, everyone earns something close to his or her ‘social’ rate of return.

To be fair, the problem with the efficient market hypothesis was not exactly unknown; thirty years ago Larry Summers provided his famously parsimonious refutation of it: “There are idiots. Look around.”¹ Nonetheless, as Fukuyama continued,

The crisis made it glaringly obvious that the efficient market hypothesis was wrong: Oversized returns were flowing to innovative financial entrepreneurs who, in their avidity to create new and more complex financial instruments and products, were destroying rather than creating value for society as a whole. The crisis also shed light on the fact that corporate America was doing very well for its officers and shareholders (many of whom were not American citizens) but much less well for the Americans awaiting the trickle as jobs were outsourced and automated by the millions. Perhaps corporate America’s social rate of return approximated the expectations of the EMH, but only if ‘social’ no longer referred to American society alone.

In truth, of course, the gains from globalization have been highly unevenly distributed. While Thomas Piketty’s Capital in the 21^st Century provided definitive documentation of how the so-called 1 percent has gained enormously, Branko Milankovic has done equally important work by showing how, except for the very poorest, the bottom two thirds of the global income bracket have also gained enormously. That explains the Gini Coefficient effect mooted above. The one group whose income has not increased much if at all in real terms—and thus has dropped dramatically in relative terms—is the Western lower middle class. (See figure below.) In addition, the rate of labor productivity increase has slowed, which means there are fewer gains to distribute, and ever more of them being captured by the top.

Source: Harvard Business Review

The Political Economy of Long Capitalist Waves

The real question turns out to be twofold. First, why are the gains of the economy so poorly distributed? Second, why has productivity growth slowed so much over the past ten years? Let us take the second question first, and then come back to the question of distribution.

There actually is a well-known (though not uncontroversial) historical explanation for why we should not be surprised that the past few years have been a period of slowing productivity growth in the old industrial core of the North Atlantic—in other words, in countries on the technological frontier. And that is because, starting at about the time the dot-com bubble burst in 2000, we have entered the declining-growth stages of the current phase of global capitalism that kicked off in the 1970s.

The theory that capitalism at the technology frontier operates in higher- and lower-growth cycles was originally developed nearly a century ago by the Russian economist Nikolai Kondratiev, who, for his efforts to explain capitalism’s seemingly inexorable ability to renew itself, was executed by Stalin in 1938. Kondratiev’s theory postulates that over the past 250 years or so, capitalism has evolved through a series of forty- to sixty-year cycles, based on what the leading industrial sectors were for countries at the technology frontier. According to Kondratiev’s theory, each of these “K-waves” follows a similar cycle. (See Figure) First, a new breakthrough technology or set of technologies is invented and rolled out broadly. What defines these technologies is that they are “platform” technologies (what economists call “General Purpose Technologies”) that not only dramatically enhance worker productivity, but also enable the creation of new businesses and whole new categories of employment previously unimagined.²

After about twenty or thirty years, however, most of the gains associated with the new technology have been realized and productivity growth begins to slow. With technological differentiation no longer enabling business growth as effectively, businesses respond by creating various regulatory barriers to competition, or by moving production to lower-cost sites away from the sites of the technological frontier. For the sites on the technological frontier, this is a time of dearth. As always, it is the lower orders who suffer most, and thus what begins as technological senescence develops into economic stagnation and, if not addressed by political elites, eventually builds into a crisis of political legitimacy.

Source: Wikipedia

Thus the arrival of the steam engine fueled the first K-wave of growth in the early 19^th century: the steam-driven textile mills wreaked havoc on craft cloth producers, of course, but also produced enormous productivity gains, most of which were captured by the early industrialists of midlands England and the Americans in New England. Eventually, however, as other regions and countries began to catch up technologically to the steam engine, the relative productivity and thus profitability of these industries began to decline in the 1820s. However, just as this was taking place, a new set of platform technologies began to emerge in the form of railways and steel mills, which among other things enabled a drastic reordering of the way farmers could bring their crops to market, thus again increasing overall productivity.

In Kondratiev’s telling, the course of K-waves were almost exclusively determined by technology. However, it is important to understand that technology always is situated and gets developed within a particular set of political and economic institutions—institutions that from time to time must be reconfigured in order for a country’s political economy to be able to maximize the productivity benefits of emergent technology platforms. This is a crucial point, and one that Kondratiev himself did not sufficiently appreciate: In order for countries to thrive, technology is not enough; rather it is the assemblage of technology and institutions that is critical. States that fail to reconfigure their political and economic institutions to accommodate and exploit the new technologies risk ceding their countries’ spot on the technology frontier to nimbler competitors.

From this perspective, what was critical to the British economy’s ability to reap the productivity benefits associated with the second technological wave of railroads and steel were institutional reforms, including the abolition in 1846 of tariffs on grain imports, which lowered the cost of food for the growing class of industrial laborers. In other words, as railroads and steamships technologically enabled the creation of transnational grain markets, institutional reform allowed Britain to translate that technological potential into improved productivity across the industrial landscape.

This pattern of K-wave decline repeated again in the 1870s as the rail and steel technology platforms matured. As in the 1830s and 1840s, the industrial core of the global economy suffered from a prolonged depression from the 1870s to the 1890s. In the United States, this original “Great Depression” led to the rise of both progressivism and populism—the former a largely elite project aimed at redressing the harshest aspects of capitalism through moral exhortation, improved social services, business regulation, and greater use of science in industry; the latter a sometimes vulgar and nativist movement rooted in a deep distrust of and hostility toward industrial, political, financial, and cultural elites of all stripes.

What really reignited productivity growth in the late 19^th and early 20^th century, however, was the combination of progressive- or populist-inspired political reforms and the emergence of new platform technologies rooted in the electrical engineering and chemical industries. Again, the K-wave ran its course, producing great economic productivity gains and whole new industries in the countries at the technology frontier, especially Germany and the United States, until the crash of the 1930s.

What generated the rebound of the next K-wave was the combination of New Deal political reforms, which broadened the base of beneficiaries from the economy’s growth, and the rebuilding of the economy around the new petroleum-fueled platform technologies of the internal combustion engine and petrochemicals, a project that produced good economic growth until the 1970s. This technological platform was supported by the post-New Deal labor compromises, which also ensured that the wealth benefits associated with the productivity gains were broadly shared across the population. Scholars refer to this K-wave as the “Fordist” regime of accumulation, which reached its zenith in Western Europe and the United States in the 1950s and 1960s.

The 1970s: The Crucible of Our Current Economic Order

The 1970s were a time of convulsive change masked as drift. Productivity growth slipped, especially in sectors associated with the oil and gas industry that had been the key drivers of growth during the ascent phase of the K-wave.³ Stagflation and malaise were the bywords of the time. At the same time however, the seeds of our present plutocratic moment emerged in the 1970s through a combination of the political reforms made in those years and the emergence of a new technology platform enabling great productivity gains. These political reforms are today often labeled “neoliberal,” but rather than use that epithet, it is worth specifying in some detail what these reforms entailed.

First, in terms of financial management, it involved the floating of currencies (symbolized by President Richard Nixon’s closing of the “gold window” in 1971) and the political institutionalization of “independent” central banks—that is, central banks allowed to set monetary policy without concern for democratic interference. In order to tackle the inflation that beset so many economies in that decade, central banks needed to be able to take monetary action even if it required politically unpopular increases in interest rates. The result has been a financial order that radically favors bond holders over labor.

Second, it involved a change to economic development doctrine through the forced abandonment of import-substitution industrialization strategies in favor of export-oriented global economic integration. As many countries, particularly in the Global South, experienced various forms of debt crisis in the 1970s and 1980s, the World Bank and IMF used structural adjustment programs to force them to cut social welfare benefits and to open up their economies to global trade, as part of the package of reforms that became known by the late 1980s as the “Washington Consensus.”⁴

Third, it entailed the denationalization and deregulation of industries, to enable greater “flexibility.” Once privatized and freed from many significant government restrictions, particularly with respect to labor, individual companies and whole industries restructured from national to global supply chains to take advantage of wage and regulatory arbitrage opportunities. Labor lost here too, this time ceding bargaining power to capital, which could threaten to, and often did, move manufacturing facilities to countries or locations with less politically effective unions and lower labor costs.

Fourth, the 1970s were also the moment when the aforementioned “efficient market hypothesis” went from theoretical musing to the central ideological justification for the distributional consequences of our current capitalist order. Whereas the post-New Deal moral economy of the United States frowned upon drastic disparities in pay between workers and bosses, after the 1970s the “wealth creators” found themselves able to justify ever more disparate pay packages. As a result, the ratio of CEO-to-worker pay has grown dramatically, from 18-to-1 in 1965 to 27-to-1 in 1978 to 137-to-1 in 1995, to 202-to-1 in 2012.⁵

Fifth, the 1970s also saw dramatic increases in immigration from the Global South to the Global North, which eventually increased the foreign-born populations in Western Europe and the United States to levels beyond anything in living memory. This provided cheap labor for business owners, and cheaper goods and services for consumers, but again eroded labor’s bargaining power and set the stage for cultural tensions as immigrant communities did not always assimilate as expected. (See figure below.)

Source: Congressional Budget Office

Finally, and crucially, the 1970s also marked the end of the New Deal liberal consensus around a government-managed mixed economy, and its displacement by the so-called conservative political hegemony, symbolized by the election of Ronald Reagan, who declared at his inauguration, “In the present crisis, government is not the solution to our problem; government is the problem.” The extent of that hegemony became apparent during the first Clinton presidency, which completed the work of the Reagan revolution by “ending welfare as we know it,” that is, replacing welfare with a carcereal disciplinary logic designed to repress those excluded from the benefits of the new economy.

All of these politically driven reforms in turn dovetailed beautifully (from the point of view of productivity growth) with the emergence of a new Kondratiev technology platform, namely, silicon-based information and communications technology. What these technologies enabled was, again, the creation of whole new industries—from software to mobile phone networks. But perhaps even more importantly, it drove the recasting of older industries around global supply chains, thus producing sustained productivity gains in many other industries, not just in the formal “tech” sector. All the political measures designed to enable “flexibility” created enormous opportunities for computer-driven redesign of global supply chains. No sector gained more in terms of profitability growth than the financial services sector which, once freed of 1930s-vintage regulations designed to enable the previous K-wave and enabled by computer technology, refashioned itself into a giant proprietary trading machine designed to capture the productivity gains of other sectors for its own profit. But the key point is this: Without the political reforms of the 1970s and early 1980s, the potential inherent in the new silicon platform would not have been realized, at least not to the same extent or in the same places.

In the event, as this new system consolidated in the early 1980s, it launched a new K-wave that, for more than two decades, produced a great renewal of productivity growth, along with a host of new industries. The iconic businesses of this period of American capitalism were of course software companies like Oracle, Microsoft, and Google. But perhaps more emblematic was the inexorable rise of Walmart, a company built on the exploitation of software-enabled inventory management and global supply chains. Symbolizing the economic polarization of this era, founder Sam Walton’s bevy of plutocratic heirs today are collectively worth more than $100 billion, while at the same time the company employs more than two million people at wages that require supplemental government welfare subsidies in order to be made livable.

In effect, this has turned the Federal government into the handmaiden of the Big Box business model itself, and so constitutes a somewhat novel form of corporate welfare. Since the 1970s, median family incomes in the United States have stagnated even as the silicon-driven K-wave has dramatically improved the economy’s total factor productivity. The uneven social distribution of gains—with the profits captured by elites rather than broadly shared —is the signature feature of the post-Fordist structure of accumulation that emerged in the 1970s.

Around 2000, however, this latest K-wave began to subside, that is, it reached mature (“R”) phase. Since 2000—not coincidentally, the year the dot-com bubble burst—productivity gains in the U.S. economy have slowed dramatically. (See figure below.) Whereas companies like Oracle and Microsoft, whose business software drastically increased the economic productivity of their users, typified the first phase of the infotech revolution, the emblematic software company founded since 2000 has been Facebook, a media company that, although not without its virtues, has also been an unsurpassed anti-productivity machine in the history of technology.

Source: Economist Intelligence Unit

Furthermore, while the income benefits associated with the productivity gains were somewhat broadly spread in the 1990s, since 2000, virtually all the gains have gone to the upper income echelons. This uneven distribution was also a direct result of the political reforms of the 1970s that were necessary in order to enable the Silicon Valley K-wave to unleash such broad productivity growth. Even if some of the uneven distribution of the productivity gains is a result of features intrinsic to the nature of the information technology as a platform, the political decision to curtail redistributional tax policies and welfare benefits was not.⁶ After the dot-com crash, loose credit and wealth effects from the consequent real estate bubble helped mask the effects of divergent economic fortunes. But after 2008 that mask fell away, and the naked differences between the winners and losers in the economy have become undeniable. The efficient market hypothesis, as noted above, is no longer an adequate ideological justification for this outcome.

In sum, the post-2008 “Great Recession” represented the implosion of structure of accumulation associated with the 1970s-vintage K-wave, and the death knell to the political arrangements of that era. As with every other late-stage K-wave, what began as a productivity crisis first became a broader economic crisis before developing into social crisis and finally a crisis of political legitimacy. Not only has information technology largely run its course in terms of its ability to deliver huge new productivity gains, so too have the political arrangements forged in the 1970s. Trumpism and Brexit represent the death throes of this system. What remains to be seen is what will emerge in its wake.

Two Crucial Questions

The world economy since about 1800 has seen five successive K-waves. In each case, at the end of the wave, declarations of the end of capitalism found bountiful and varied expression—sometimes in sorrow, sometimes with glee. But in each case, these obituaries have been premature, as capitalism, ever changing, has found a way to renew itself through a combination of the emergence of new technology platforms capable of delivering renewed growth, and institutional reforms designed to enable those new platforms. Of course, as investment professionals like to say, past performance is no guarantee of future results. Unless we get both a new K-wave going on the basis of new platform technologies and rework our political order, our politics are likely to remain poisonous. So the question is, what are the prospects for a similar renewal?

On the technology front, a variety of candidate platforms exist for K-wave renewal. In previous K-waves, the key platform technologies had already been around for decades before making the leap to become the defining drivers of growth in their succession. For example, the locomotive was invented in 1804, but railroads only emerged as a K-wave platform for growth in the 1830s–40s; likewise, the automobile was invented in the 1880s, but only emerged as a true K-wave driver after World War II; and computers were invented in the 1940s, but only began to drive our current K-wave in the 1980s. While Robert J. Gordon has recently argued that there are no more great productivity gains to be had from new technologies, it seems premature to write off the productivity-enhancing potential of emergent technologies like additive manufacturing, CRISPR-enabled biotechnology and precision medicine, autonomous robots and artificial intelligence, or combinations of all of these.⁷

It is on the political and institutional side that things are more uncertain or, more accurately, riskier. One possibility is that we may achieve institutional reforms that enable the economic benefits of the productivity gains from these emergent technologies to be much more broadly distributed. Creating an effective Polanyian “second movement” would require re-regulation of banking, curbing the effects of money in politics, new modes of governing technology development, more steeply progressive taxation and the proper enforcement of it, and new sorts of welfare mechanisms, including possibly a guaranteed basic income—the latter an idea then termed a negative income tax that Daniel Patrick Moynihan and Richard Nixon took seriously back in the early 1970s and with potential for bipartisan support. Some mix of this sort would create a new social-political compact designed to ensure that everyone can participate in and benefit from the productivity gains we hope will emerge from new technologies.

Alas, such an elite-driven “progressive” outcome is not at all certain. For, as in the 1890s, so today there exists a reactionary populist alternative that seeks to recapture a gauzy utopian past, replete with the social hierarchies and exclusions of that time. In the 1890s the aim of the People’s Party, led by an insurgent populist politician, was to return America’s farming economy to the form it had had before railroads and financiers strangled yeomen farmers by revolutionizing agricultural markets. Today, that nostalgia involves the dream of turning back the post-Fordist clock to the 1950s and early 1960s, before the changes of the 1970s, including changes associated with the new social liberation movements that began to flower during those years.

As with any deeply political question, the outcome cannot be foreseen. Much will depend on the sorts of leaders we are blessed (or cursed) with in the coming decade. While there are reasons for optimism with regard to potential new technologies capable of spurring a sixth K-wave, what is certain is that unless we reconfigure our institutions, these technologies won’t be something the United States can effectively exploit to produce broad-based gains. Ultimately, both the technological breakthroughs themselves and the institutional reconfiguration are underdetermined and contingent. We must get our brains to see these aspects of the subject together, for there is no such thing as economics hermitically sealed off from the other social sciences, including political science. We have befouled and splintered into semi-coherent shards the very name of the thing that matters: There is only political economy—before, now, and in our future.