This is a small part of an ebook I am almost finished writing which will come out in January 2017. Suppose for a minute that 90% of all production is done by machines (or cheap “offshore” labor). This is not realistic, obviously, because many jobs can’t be done by machines and must be done locally, but let’s just ponder this for a minute to get a qualitative intuition of what is happening. This would render most people useless and “should” cause real wages to adjust downward until production by workers in the country becomes interesting again. But suppose this “adjustment process” does not happen or happens extremely slowly.
How would the aggregate income be allocated throughout the population in such a context? Logically, the owners of the machines “should” get the income, right? Just like the owner of a “star dog” in a TV series gets the income of the dog’s “performances.”
That means that holders of capital would get most of the income and the rest of the population would live off scraps or get transfers from these owners of capital, either directly (being their family etc.) or in a forced way: The State would tax the capital income and “transfer” it to the rest of the population… but again, we run into a problem: how would the State transfer to others? In the form of direct payments? In the form of “free” government services with a big public service? If there were no transfers and no jobs, who would the corporations sell their stuff to? People would have no income! If the State "transferred" too much, how much capital would the country lose? How would that impact the aggregate income of the country in the long run? What about the living standards of ordinary people?
The allocative problem is huge in such a context, and it encompasses issues from taxation to economics to philosophy and the role and power of the State, along with freedom and security considerations. In Latin America, income and wealth are extremely unequally distributed and there is considerably more criminality and insecurity in Latin America than most other parts of the world, except other highly unequal and poor countries in Africa. I don’t want to draw easy and simplistic conclusions, but surely there is at least some connection. Watch the Brazilian TV series “3%” and ponder these questions about inequality, meritocracy, freedom, and the State.
I am not saying I have an answer – I don’t. But when the proportion of the population in employment decreases in the long run and the income concentrates ever more in the top income brackets due to a natural market process, there are obviously complexities that arise that need to be seriously analyzed and debated or you end up with social unrest and dislocation. This may be an extreme and theoretical example, but this is essentially the process that has been happening in the USA, especially since the turn of the millenium.
The growing divide between the "top 10%" and the rest in terms of jobs and incomes is pushing some countries and regions closer to their breaking points and in great need or clarity and nuance in policies and politics. The solutions (if any) are not all that clear to me, as they may prove either counterproductive or simply useless.