Is something truly new afoot?

 

Luddites have been with us from the start and always been proven wrong. New types of jobs invariably emerged to make up for those lost through technology, and our standard of living climbed ever higher. No surprise, really. Markets, providing they’re relatively unhindered, are tailor-made to take care of coordination problems of this sort.

Question is, are we justified in expecting a similar outcome today or is something qualitatively different unfolding?

For markets to work, the income flowing to households must be sufficient to enable them to consume the final fruits of the productive process while also saving enough to fund the investment necessary for its continued growth. As automation and robotics move up (and for that matter down) the value chain, and more and more jobs simply vanish, it’s becoming easier by the day to imagine that income flow progressively drying up.

In the early 20th century, farm jobs became mechanized and there was less need for farm labor, and some decades later manufacturing jobs became mechanized and there was less need for factory labor. Now business processes—many in the service sector—are becoming “mechanized” and fewer people are needed, and this is exerting systematic downward pressure on jobs. We  don’t have paralegals in the numbers we used to. Or draftsmen, telephone operators, typists, or bookkeeping people. A lot of that work is now done digitally. We do have police and teachers and doctors; where there’s a need for human judgment and human  interaction, we still have that. But the  primary cause of all of the downsizing we’ve had since the mid-1990s is that a lot of human jobs are disappearing into the second economy. Not to reappear. (W. Brian Arthur – The Second Economy)

If that’s so, the distributional machinery of capitalism could falter. Not only might great swathes of people find themselves relegated to observer and supplicant status, but demand might also come to perennially lag supply.

The results wouldn’t be all bad; real prices for all manner of goods and services ought to fall, perhaps quite sharply, as has already happened with electronics in recent decades. Anyone still employed would therefore in all likelihood fare rather well and those in charge of driving the transformation supremely so. The fear is for the rest, the growing multitude whose talents would no longer answer to any realistic market need. What’s to become of them? Are they to be carried by society out of fellow feeling? If so, what demands may in time be made in return and how are they to gain, or retain, self-respect?

One of the difficulties is that these changes, profound though they are, mostly take place in the shadows. Individual manifestations may be obvious but the sheer scale of the underlying shift is for the most part invisible and our collective perceptions will almost certainly lag behind the unfolding reality. We’re also likely, therefore, to look for explanations in the wrong places and impose policies that simply won’t work. Like, for example, continuing to artificially boost demand through monetary and fiscal measures when what’s needed is to let the markets respond to this transformation organically while concentrating government efforts on cushioning the inevitable individual casualties. And, perhaps, providing constructive social avenues for the expression of all those talents and energies the market no longer needs.

I’ve always had great faith in our capacity for spontaneous self-organisation, and also therefore in markets. Perhaps we (and they) are capable of sorting through this novel challenge as well, quite possibly in ways presently unimagined. Still, it’s hard to escape the uneasy feeling that something truly new in human affairs may be afoot.

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Paul Frijters
Paul Frijters
8 years ago

its an interesting topic. Within normal economic thinking, the ‘ceiling’ of the productive worth of a human and thus the income he can maximally command in the longer run is the costs of a machine that can do the same thing. In many areas that cost has become much lower than the inherent costs in raising a human, displacing humans more or less from those areas. What if that cost becomes very low for all activities a human can do? Not a happy thought at all. One indeed starts to hope technological barriers will ‘save’ humanity.

Paul Frijters
Paul Frijters
8 years ago
Reply to  Ingolf Eide

send me an email. I have a paper on this written a while ago that I haven’t bothered sending to a journal simply because i wouldnt know what journal to send it to.

crocodile
crocodile
8 years ago

OK, opposing view. With each technological step a groups of workers become redundant. However, this creates opportunities for others as new jobs appear.

As an example, consider that once upon a time the humble horse was our chief mode of land transport. The advent of the motor vehicle eventually displaced all the farriers, coach builders and stable hands. It also created opportunities for steel workers to build the machines, engineers to design them, tradesmen to service them, chemists to create the fuel, service stations and miners to extract the raw materials.

No reason why it shouldn’t continue.

desipis
8 years ago
Reply to  crocodile

However, this creates opportunities for others as new jobs appear.

Each time this occurs, the skill level required to continue employment is raised. This results in a portion of the population who could have worked in the previous labour market lacking the skills or capability to continue employment in the new technologically advanced labour market. Eventually (if not already) a significant portion of the population will be unable to produce competitive output in any industry relative to the machines.

It also created opportunities for steel workers to build the machines, engineers to design them, tradesmen to service them, chemists to create the fuel, service stations and miners to extract the raw materials.

What happens when the machines become so advanced they can design, build and maintain the new versions of themselves including mine their own materials?

crocodile
crocodile
8 years ago
Reply to  desipis

Creating machines that have thought processes is still a quantum leap. At the moment they are still restricted to the program that is loaded into them. More and cheaper memory can make the programs more complex but independant thought is still a pipe dream. When that day comes mankind would probably have advanced so far that a solution to the above problem may well have been solved.

derrida derider
derrida derider
8 years ago

This is certainly an argument for “skill biased technological change” (in the jargon) driving increased wage inequality. But there is no reason to think that it must manifest as actual unemployment.

It’s a continuation of the Baumol effect. As humans could ever more effortlessly make material goods to satisfy their needs, they put a bigger and bigger proportion of their effort into providing services to each other. As we find it ever more effortless to provide some particular services to each other we will put more and more of our effrot into those services we can’t yet provide effortlessly.

If you’re optimistic like Keynes you’ll think we will end up putting all our effort into doing the one thing we will never do effortlessly – living an aesthetically good life. But that really does depend on the distributional effects, which as a macroeconomist and member of the ruling elite never greatly interested Keynes.

My point is that it doesn’t really help much to think of this is in macroeconomic (aggrgate income/investment) frameworok – its about distributional effects of returns to particular forms of work.

Steve Jones
Steve Jones
8 years ago

Perhaps the economy is self-limiting to some degree. Machines to create things that people buy won’t be created if there is no one to buy them.

Another thing that is happening is that the relative price of land near employment that is valued shoots up and economic activity becomes a contest to obtain this land through any activity that is valued by others.

Compare the relative cost of a decent car against house prices in Australia over the past 40 years to see something dramatic happening.

Tel
Tel
8 years ago

For markets to work, the income flowing to households must be sufficient to enable them to consume the final fruits of the productive process while also saving enough to fund the investment necessary for its continued growth.

No, for markets to work, people merely need the ability to voluntarily exchange goods and services between themselves. Nothing more than that. If people can voluntarily exchange then there is a market, when they choose to do so it demonstrates they are making a gain by the exchange (in their own subjective opinion of course).

If that’s so, the distributional machinery of capitalism could falter.

How much distributional machinery of capitalism is there still left on Earth? It’s a serious question, name one industry where, say, less than 50% of the money isn’t either commandeered by government or indirectly reallocated into regulatory compliance.

Typical income tax is around 20% or gross earnings, then super is 10% then GST is 10% then there’s corporate tax on that. Then there’s worker’s comp (in effect a corporate contribution to Medicare), and that’s just the basics. I’m talking about Australia of course, but (at least so they tell me) we are a low tax country.

The results wouldn’t be all bad; real prices for all manner of goods and services ought to fall, perhaps quite sharply, as has already happened with electronics in recent decades.

If prices of all goods fall across the board, that’s a monetary issue, nothing to do with technology. We have Reserve Banks now to fix that, they just print more money and tip it into the whole. If you print enough, eventually prices have to rise again.

It the relative price of say, electronics vs commodities shifts, then that might well be something to do with technology, or perhaps just a growing population, or a shortage of oil, a shortage of land, a shortage of water, or a bunch of other stuff.

Tel
Tel
8 years ago
Reply to  Ingolf Eide

Surely the distributional machinery is still relevant despite government imposts. Most of the income governments tax originates in the private sector, and their spending priorities in the end help shape the distributional matrix.

I can’t answer that, nor have I ever seen someone propose a workable methodology to describe how to go about answering it. People who support various government interventions (quite a lot of people) do tend to behave as if they believe those interventions will have an effect, if private industry can quickly and easily route around a government edict then why bother writing new laws at all?

People who oppose various government interventions also behave as if they believe the interventions will have an effect. Looking at cities like Detroit, and comparing with cities like Singapore, you have to think to yourself there’s a difference. Something other than total accident caused Detroit to go from king of the manufacturing world in 1960 (and highest per-capita income) down to an industrial wasteland, while Singapore has gone the other direction.

I said “real prices” so as to sideline monetary issues. As for the reference to price drops in electronics, that was simply by way of illustrating the potential impacts of the processes under discussion. In recent decades, their greatest impact has almost certainly been in that sector.

Hmmm, “real prices” in terms of what exactly? Every price is relative to something, so if you want to exclude money from pricing you are left with only the relative shift between one lot of goods and another lot of goods. It’s not possible for everything to go down relative to everything else.

Electronics have gone down in price relative to gold, silver, oil, meat, etc. But at the same time all of those commodities have gone up in price relative to electronics. Is this a “real price” rise then?

Tel
Tel
8 years ago
Reply to  Tel

I’ll jump to the bottom and widen the column.

Tel
Tel
8 years ago

In terms of relative prices, your mention of productivity gains suggests that what you are thinking of is the relative price of labour, as compared with goods and services. High productivity implies that goods and services fall in price relative to income. That’s presuming all other things being equal, but in the USA at least all things are not equal because less percentage of the population are working, and of course mechanization devalues unskilled grunt labour.

As others have pointed out, certain people are marginalized by this process, and for perspective, everyone should keep in mind that people are marginalized by any rapid change, be that technological, religious, legal, social, and/or political. Come to think of it, there tend to be people who feel ripped off by the status quo in a stagnent economy as well.

Tel
Tel
8 years ago

Getting to the issue of how much free market capitalism is still operational, maybe I should try a different tack. Consider the economy (and I think we agree on this) as a coordination problem. From this perspective, if government involvement in the economy is to make a difference, it must change the structure of this economic coordination in some way. That is to say, decisions that once were made by a free market mechanism are now made by government department, the same resource cannot be deployed both ways, so out of 100% of economic coordination decisions, it is necessary that a greater percentage of decisions made by one party implies a lesser percent made by every other. I’m talking only about those decisions that have a real effect, so if government passes some regulation and the free market is able to compensate for that then in effect those two factors merely cancel out and we go full circle.

Presuming I haven’t lost anyone, let’s extend this to consider an economic coordination problem in a changing world. By implication, some of the things that were successful yesterday will not be succesdful tomorrow (that is the nature of change) but until someone tries it, we don’t know what will be successful. Now small business, and individuals have the ability to try a lot of new things quickly, whereas government cannot (or at least, on the whole government tends to struggle with new things). Getting back to that percentage of economic coordination decisions that are in the hands of government, those decisions will generally tend to be anchored regardless of a changing environment. The guy who slowly made his way up to department head by always pushing button number 3 fully intends to keep pushing the very same button right through to retirement.