by Robert B. Reich

What's going on?

Shares are up because corporate profits are up, and profits are up largely because companies have figured out how to do more with less.

One of the most striking legacies of the Great Recession has been the decline of full-time employment -- as companies have substituted software or outsourced jobs abroad (courtesy of the Internet, making outsourcing more efficient than ever), or shifted them to contract workers also linked via Internet and software.

That's why most of the gains from the productivity revolution are going to the owners of capital. Meanwhile, typical workers are either unemployed or underemployed, or else getting wages and benefits whose real value continues to drop. The portion of total income going to capital rather than labor is the highest since the 1920s.

Increasingly, the world belongs to those collecting capital gains. They're the ones who demanded and got massive tax cuts in 2001 and 2003 on the false promise that the gains would "trickle down" to everyone else in the form of more jobs and better wages.

They're now advocating austerity economics on the false premise that cuts in public spending -- including education, infrastructure and safety nets -- will generate more "confidence" and "certainty" among lenders and investors, and also lead to more jobs and better wages.

None of this is sustainable, economically or socially.

It's not sustainable economically because when most of the gains from productivity growth go to people at the top, the vast middle class doesn't have the purchasing power to buy the goods and services an ever-more productive economy can generate. The result is chronically inadequate demand for goods and services. That's meant anemic growth punctuated by recessions.

It's not sustainable socially because high unemployment and widening inequality results in rising frustration over the inability of most people to get ahead.

Austerity economics in Europe is fanning the flames, as public budgets are slashed on the false crucible of fiscal responsibility.

In the United States, an anemic recovery and plunging home prices are taking a toll. A large portion of the public believes the game is rigged and no longer trusts that the major institutions of society -- big business, Wall Street or government -- are on their side.

In Europe and America, 30 percent to 50 percent of recent college graduates are unemployed or underemployed.

Inequality is also widening in China, where the scandal surrounding Bo Xilai and his family is serving as a public morality tale about great wealth and official corruption. Students in Chile are in revolt over soaring tuition and other perceived social injustices.

It's a combustible concoction wherever it occurs: Increasing productivity, widening inequality and rising unemployment create tinderbox societies.

History tells us public anger and frustration can ignite in two very different ways. One is toward reforms that more broadly share the productivity gains. The other is toward demagogues who turn people against one another.

Demagogues use fear and frustration to advance themselves and their own narrow political agendas -- scapegoating immigrants, foreigners, ethnic minorities, labor unions, government workers, the poor, the rich, and "enemies within" such as communists, terrorists or other conspirators.

Be warned: The demagogues already are on the loose. In Europe, fringe parties on the right and left are gaining ground. In America, politics has turned especially caustic and polarized. (The right is even back to accusing people it doesn't like of being communists.) No one knows where China is heading, but reformers and ideologues are battling some of it out in public.

The real economy isn't the stock market. It's jobs and wages -- and the standard of living of most people. Unless the gains of the productivity revolution are more broadly shared, the world's tinderbox societies will ignite in divisiveness.

The Tinderbox Societies