‘The instrument of labour, when it takes the form of a machine, immediately becomes a competitor of the workman himself. … That portion of the working-class, thus by machinery rendered superfluous, i.e., no longer immediately necessary for the self-expansion of capital, either goes to the wall in the unequal contest of the old handicrafts and manufactures with machinery, or else floods all the more easily accessible branches of industry, swamps the labour-market, and sinks the price of labour-power below its value’ Karl Marx, Capital, 1887 (first English edition).
Since Marx wrote that, real wages have increased by massive amounts in industrialized countries. Authors of some books I have read recently suggest, however, that Marx’s predictions could end up being right in the end. Gregg Easterbrook warns that we should not take too much comfort from the fact that Marx’s predictions of gloom have not yet come true (‘Sonic Boom’, p 153; discussed here) and Jacques Attali suggests that tomorrows West will resemble today’s Africa (‘A brief history of the future’, discussed here).
In attempting to think our way around this question an obvious place to start is with the effects of technological progress on the demand for labour. This approach makes sense if labour can be assumed to be more or less homogeneous, that aggregate capital stock can be measured appropriately, that most income from capital tends to accrue to people with high incomes and that technological change is the only factor influencing income distribution. I’m actually not sure that any of those assumptions stand up to scrutiny, but let us keep the discussion as simple as possible to begin with.
As Marx observed, new technology often involves capital-intensive processes displacing labour-intensive processes, e.g. the use of power looms to replace hand looms in the textile industry at the beginning of the industrial revolution and, more recently, increased use of robot technology in car manufacture replacing labour-intensive assembly lines. This kind of technological change tends to increase the ratio of capital to labour. However, introduction of new technology often occurs through the introduction of superior capital equipment that replaces existing capital (or more efficient sources of energy, financing innovations, business practices etc) without necessarily increasing the ratio of capital to labour. Most importantly, new technology makes possible an increase in national product, or real national income, and with increased demand for factors of production, including labour.
The net effect of those factors on future demand for labour will depend partly on whether, on balance, the new technology is a closer substitute for labour than for existing capital equipment (and other factors of production). Further development of electronics and robotics, in particular, can be expected to displace a lot more manual and mental labour, but my guess is that before too long new technology will largely involve superior robots replacing inferior robots, leaving demand for human labour relatively unaffected. There are some parts of the economy where new technology is unlikely to have much effect at all on the ratio of capital to labour, e.g. symphony orchestras. (That example has, unfortunately, been cited before by someone else, but I can’t remember who.)
Another important influence on the future demand for labour will be whether average incomes are likely to result in a changing pattern of consumer spending toward more on labour-intensive or more capital-intensive goods and services. My guess is that ‘real’ experience (of foreign travel etc.) will trump ‘virtual’ experience and that people will prefer to interact with other humans rather than robots to obtain services such as restaurant meals.
So, I think there are limits to the extent that technological progress will result in substitution of capital for labour. When we take into account the fact that labour is not homogeneous, that investment in human capital and investment in physical capital can be substitutes or complements, and that people embody new technology in the skills they acquire it is not even obvious that it is particularly helpful to think in terms of aggregate categories such as labour and capital. It is probably more meaningful to consider demand for particular categories of labour e.g. unskilled labour. Perhaps it is reasonable to predict that demand for unskilled labour will continue to shrink, but even that is problematic if we define ‘unskilled’ in terms of lack of formal qualifications and overlook the possibility that inter-personal skills – often acquired without formal training – will become increasingly important.
The idea that there is a class of people who obtain their income from selling their labour (workers) and another class of people who obtain their income from ownership of capital (the idle rich) seems likely to become increasingly irrelevant. As working people invest for their retirement they will be increasingly buying shares in the robots that will earn the income they previously earned for themselves.
Technological progress is not the only factor influencing income distribution. Factors affecting the supply of labour, e.g. immigration, could have effects on wage rates in some countries that are as important as the effect of technological progress. Then there are the effects of globalization both in providing international competition for labour-intensive industries and, increasingly, new sources of innovation and competition for technology-intensive sectors of industrialized countries.
Finally, the taxing and spending policies of governments modify the effects of technological progress on income redistribution. If Marx turns out to have been right about technological progress, it seems likely that governments in democratic countries will come under increasing pressure to intervene further in income distribution to ensure that all groups have an opportunity to benefit from the fruits of technological progress.
However, my personal view is that history will probably continue to judge Marx to have been largely wrong about the effects of technological progress on income distribution.
The transition from the Industrial Age to the Information Age is resulting in a sea change between protection and extortion. As the world gets increasingly complex the result is a diminishing ability to extort while at the same time tools of protection are getting cheaper and more powerful. The arbitrary walls are coming down.
I was sitting in trial today observing Bill Rounds, co-author with me of How To Vanish.com, as he was questioning a witness. This particular case is an example of complex business litigation that has been up and down the appellate ladder many times. The subject matter is fairly esoteric and even worse the law is unsettled. While unrelated to the case, the plaintiff is a world renown surgeon.
During questioning by Bill’s opposing counsel a funny scene happened. Bill stood up and the judge remarked, “Sustained.” The court reporter stopped and asked, “Was there an objection?” The judge replied, “No, but Mr. Rounds stood up and the coming objection is sustained.”
Those 5-8 seconds in the court transcript are but the faintest traces of an incredibly complex thinking process that the two attorneys and judge understood and applied which was backed by hundreds of pages of code and cases. Yet, I am almost sure that neither the surgeon nor the jury even knew there was a virtual ping-pong match being played.
But for the attorneys and judge the surgeon’s work is equally incomprehensible. And the work of engineers, architects, computer scientists, etc. are equally indecipherable to those outside the circle. Such is the modern world that is multiplying in complexity.
Everywhere complexity is increasing from the tadpole in the pond to the manmade computer operating system. But manmade complexity that is beneficial for humanity takes work. Bridges do not design and build themselves. As humanity has progressed so likewise has the economy from hunting and gathering to plows and silos to railroads, satellites and spaceships.
But all this time there have been malefactors and nefarious individuals that seek to destroy and wield violence like a dagger focused on the economy’s heart seeking coercion instead of consent. After all, the power to destroy and inflict pain, while immoral, is power nonetheless. A power wielded by those sadists who enjoy terrorizing innocents.
PROTECTION AND EXTORTION
The irony of government is that it attempts to provide protection through extortion. And like the blackmailer or extortioner the government’s ability to tax depends on the same vulnerabilities as extortion or the Godfather’s offer that can not be refused. As the Industrial Age progressed so likewise the nation-state rose because the assets created were larger and thus the need for protection was greater. After all, the capitalists either paid off those who could leverage violence against them for extortion or paid a military force capable of defending with brute force any attempted shakedown.
But the relentless advance of technology is blunting the sharp edge of violence’s dagger. Protection is being made easier to provide while extortion is being made more difficult to carry out profitably.
Why is this? A basic mathematical law: multiplying is easier than dividing. A simple example is that 3*3*7*11*13 is much easier to solve than reducing 9,009 to its prime components.
Or another example would be encryption. I like the open-source Truecrypt and in June 2003 the US National Security Agency reviewed and analyzed the design and strength of AES-256 encryption finding it sufficient to protect classified information up to the Top Secret level.
In effect, with this free tool I can spend ten seconds encrypting a text file that can take years of focused processing power to decrypt. And just for fun perhaps it only reads “Haha if someone wasted the resources to decrypt this!” But why transmit sensitive personal or business information without such protections? After all, recently 30,000 Hotmail passwords were compromised in a security breach and posted on the Internet. An ounce of prevention using free encryption software can be worth a pound of cure repairing a stolen identity.
PROTECTION IN THE INFORMATION AGE
During the Industrial Age the leverage violence could exert was much greater and is being greatly reduced in the Information Age. Thus the scale is tipping in favor of protection and away from extortion with its attendant allocation of scarce resources through bureaucracy. The digital infrastructure is allowing the previously unseen but highly complex range of systems to be perceived; Facebook is a prime example.
Then that perception is being harnessed in extremely productive ways through multiplication; as a result the economy is following economic law and moving away from inflexible command and control systems towards spontaneous adaptive mechanisms. But government systems still dragoon resources from higher-value complex uses to lower-value primitive uses. As Frederic Lane wrote on page 383-384 of Venice, A Maritime Republic:
Every economic enterprise needs and pays for protection, protection against the destruction or armed seizure of its capital and the forceful disruption of its labor. In highly organized societies the production of this utility, protection, is one of the functions of a special association or enterprise called government. Indeed, one of the most distinctive characteristics of government is their attempt to create law and order by using force themselves and by controlling through various means the use of force by others.
From machines to microchips, factory to laptop, mass production to small teams or even the lone entrepreneur the gigantic institutions of the Industrial Age are being reduced to smaller and smaller parts. As the Information Age advances the risk of violence decreases because as the scale of an operation declines so likewise does its potential for sabotage or blackmail and the increased location independence afforded by the Internet multiplies the inherent safety an asset or individual enjoys. Despite Sulter’s proclamation at 2:08, “I want this country to realize that we stand on the edge of oblivion. I want everyone to remember *why* they need us!” But we, humanity, do not need them even if they think they can clean up some oil.
For those who rely on coercion instead of consent the transition to the Information Age is being particularly harsh to their immoral business models. They are now opposing both natural and economic law. The financial elite and political elite of America and Europe are now beginning to infight. This is resulting in the State losing legitimacy in the eyes of the masses.
While the time frame is likely far into the future, first the European Union will collapse and later the United States. But this is not uncharted territory but instead a trend of the nation-state collapsing under its own weight which started with the Berlin Wall and Russia. To avoid being collateral damage I elucidated several tips in chapter six of The Great Credit Contraction.
My next book, which I have co-authored with Bill Rounds, is currently with the publisher and hopefully will be available within a couple months. It will magnify the suggestions from chapter six and I think many will find it tremendously useful. As an old Chinese proverb says, “Of all the thirty-six ways to get out of trouble, the best way is – leave.”
Q1 2010 earnings season is in full swing and businesses continue their flurry of better than expected reports to start the new year.
Bank sector earnings continued strong with Morgan Stanley reporting strong profits. The New York-based investment firm posted a first-quarter profit of $1.78 billion compared with a loss of $177 million a year ago. Sales more than tripled to $9.08 billion.
Coffee profits were steaming in Q1 for Starbucks. The firm reported on Wednesday that quarterly profit rose more than eight-fold, as more customers visited its U.S. locations — and on average spent more on each visit. “I think the trends we’re seeing in the business are real and sustainable,” CFO Troy Alstead told The Associated Press.
Netflix continued its winning ways Wednesday, reporting first-quarter financial results that handily beat expectations. The company’s net income grew 44% to $32.3 million on revenue that rose 25% to $493.7 million. Netflix ended the quarter with nearly 14 million subscribers — up 35% compared with a year ago — and said it expects to end the year with as many as 17.3 million, up from its previous estimate of 16.3 million.
And it is not just Intel, that is enjoying a surge in semiconductor chip demand. Hynix, the world’s second-largest producer of computer memory chips posted a net profit of 822 billion won ($742 million) in the three months ended March 31, sharply reversing from a net loss of 1.18 trillion won a year earlier.
The the montra in this earnings season is clear. Companies are consistently demonstrating that the economic conditions driving their businesses are improving, and that their forecast data points to an ongoing theme of accelerated growth in 2010.
In my last post I gave several reasons why I think the ‘good society’ is a useful concept. There is another reason. The concept of a ‘good society’ may help us to think more clearly about progress.
What is the problem with progress? I am just about old enough to remember the 1950s when the most persuasive point used in favour of any change in Australia seemed to be: “You can’t stand in the way of progress”. A lot of good things were done in the name of progress but other things, particularly uneconomic public investment in dam building etc. gave progress a bad name. More recently the concept of progress has been confused by well-meaning people who have combined national accounting concepts with idiosyncratic values to produce meaningless indicators of “genuine progress”. Further confusion results from the tendency for people who still cling to long-discredited collectivist political views to be described as progressives.
The CMIE Consumer Pyramids data shows that in all their income categories, more than 50% of households have a mobile phone. It is only in their bottom category `Lower Middle Income – II’ that only 37.5% of households have mobile phones. From `Higher Middle Income – III’ upwards, the incidence is above 80%. If you had asked anyone in 1999 or 1989 whether this could be done by 2009, the answer would have been in the negative.
With broadband Internet, in contrast, India has not got such breakthroughs.
The September 2009 issue of Finance & Development has a story on the impact of mobile phones for development. In India, there is a lot of merit in using new technologies and players to break with the comfortable stagnation that’s enveloped finance.
The Economist has a beautiful section on mobile phones and development: on Chinese progress on network hardware, broadband, on the impact on development, a retrospective, looking forward, and an enthralling piece on the cost reductions by firms in developing countries. Now all we need is for Indian finance to go the way of Indian telecom (and airlines).
Anand Giridharadas, writing in New York Times, describes new developments in distance education. India is the place in the world which would be the biggest beneficiary from distance education, given the combination of lots of young people and a dismal education system. This does require broadband to go the way mobile phones have. I often joke that the task of an economics undergraduate education in India should be to get a person to the point where he or she can read my blog (and cynics respond saying that most of the teachers of economics in India can’t parse my blog).
Anne Eisenberg has an article in New York Times about researchers at UCLA trying to use cell phones to do medical diagnosis. Given the ubiquity of cell phones in India, these could be useful lines of attack for us.
I recently came to a rather obvious, yet remarkable insight. The 20th century was a truly unique and remarkable moment in human history. There is not a single aspect of human civilization that changed less during the 20th than in any of the centuries that came before. Population, economic output, life expectancies, oil consumption, meat consumption and international travel are just a few of the countless factors that changed more between 1900 and 2000 than in any other prior hundred years.
Expectations for the future are with few exceptions rooted in this period of explosive change. Some scholars have traced a variety of trends back into the more distant past, but these works are largely viewed as curiosities on the fringe of economic and social thought. For better or worse most of us are happy to assume the order of things that emerged after the Second World War will hold steady throughout ours and our children’s lives.
Economic growth has been both the great cause and great consequence of the recent pasts explosive change. By rapidly expanding the total available wealth, this expansion has allowed the general population to enjoy unheard of prosperity, without threatening the comfort of the elites.
Growth can be broken into two pieces; basically more people consuming more stuff. Population growth has obviously been the major driver of the first component of growth. From 1900 to 2000 the number of people on the planet rose nearly 4- fold to approximately 6 billion. Just as dramatic was the increase in the number people actively engaged in the globalized economy.
For all the wonders of the Pax-Britannica, world trade really only impacted a small percentage of humanity, in Europe North America and a handful of aristocrats scattered around the rest of the world. Today, only a small number of subsistence farmers are cut off from globalization.
If population growth were the primary driver of economic expansion, we would be living in Malthus’s world. The miracle of the 20th century was the dramatic rise in living standards that accompanied population growth. I don’t have time to recount all the ways in which living standards have improved since 1900. Look around you, the growth is obvious.
Is the 20th century repeatable? In 2100 will our heirs see 2000 through the same eyes that we see 1900? Our entire understanding of the future depends on the answer to this question. It is clear, that attempts to preserve the rate of growth for the next hundred years will smash into the physical limitations of the planet.
Technology is frequently cited as the magical solution to square this circle. Yet, there has never been a major innovation that has shrunk humanities lust for resources.
Adapting to a world of limited growth will be the profound challenge of the next hundred years. The impacts will be both positive and negative, but will shake the very core beliefs of society. This post is the first in a series that I will publish laying out the implications of a limited growth world on our expectations.
In 1993, before the World Wide Web and before the commercial Internet, AT&T ran a set of television advertisements. They are visible on Youtube. At first blush, a lot of it sounded wide eyed and futuristic. But to people who were in the field then, everything in the ad was reasonable and incremental; merely a matter of scaling up what had been figured out. It was a great time to be alive, those early days of the Net. To AT&T iPhone customers of today in the US, almost everything in the ad is now reality.
A more gloomy version of the ad was floating around:
This was a post on rec.humor.funny on 20 April 1994. Everything in this dystopic vision came out true by 2009 too, other than the last one.
President Obama has made the advancement of renewable energy sources (RES-e in greenspeak) an integral part of both his environmental and economic policies, and Texas billionaire T. Boone Pickens has enough belief in its potential to invest heavily in wind power. But as thirty plus years of research spending and ineffective regulations have proven, that’s not going to be enough to move this horse into the mainstream of residential usage, which has been the driving force in European wind and solar power generation. At least three drivers must come together to accomplish that feat in the United States.
Adopt feed-in tariffs to create demand. It’s not enough for people to want alternative energy; it must be economically viable, as well. No matter an individual’s level of belief in clean energy, global warming, or carbon footprint reduction, as long as entry costs remain prohibitive, most small investors such as homeowners will stay out of the market. Only by offering financial incentives to surmount those entry costs will governments, local or federal, entice homeowners into investing in their own solar panels or rooftop wind turbines, which will create long-term demand, increase production over time, and lower the entry costs naturally.
Accomplishing this goal in Europe, particularly Germany and Spain, has been the feed-in tariff, which mandates payments for homeowners who generate sufficient electricity from their RES-e systems to sell it back to the power companies. Using this system, in Germany between 2000 and 2007, the installed capacity of RES-e more than doubled, including within residential areas, meeting the 2010 goal (12.5% of electricity derived from alternative sources) three years ahead of schedule. At the same time, the entry cost of such systems fell 20% and 10,000 manufacturing and maintenance jobs were created, giving the RES-e industry viability and sustainability.
Aesthetics must be recognized as a luxury item. With homeowners associations (HOAs) wielding the power to refuse urban and suburban residents the ability to utilize solar panels, solar water heaters, or light-colored roofing materials for aesthetic reasons, RES-e production won’t extend into the most heavily populated parts of the nation, which is where the energy is most needed. The same holds true for local governments, which often block adoption of RES-e by refusing to issue building permits for such projects or by charging such high fees to issue permits that again the entry cost is raised beyond the small investor’s reach.
If RES-e production is going to survive and thrive, this trend must be reversed, and state laws and subsequently state courts are increasingly becoming battlegrounds between aesthetics and science. Currently eight states have enacted laws giving homeowners teeth against HOAs and local governments, while four more are considering them. Perhaps most well known is California’s “solar rights” law, which bars restrictions against solar panels and water-heating systems by HOAs and other public entities on the basis of appearances.
Additionally, similar bills have been introduced in both houses of Congress to move homeowners’ RES-e rights to the federal level. Although these bills received little support to date, the new administration’s drive toward green power could change that rapidly.
Not a luxury is the electrical transmission grid. Already aging, subject to brownouts and blackouts in some regions, and in desperate need of upgrades, the grid that stretches across the U.S. and Canada will control the rate of advance for RES-e systems.
Many transmission nodes within the grid require additional depth to handle the increased workload from the exponentially rising numbers of electrical devices—computers, entertainment systems, kitchen appliances, heating and cooling systems, even plug-in cars—in high population areas. In addition, the electrical inputs into the grid must be balanced against the demand load, with additional power needed during peak hours. Under the current system of generating electricity via a few hydrocarbon-based generation plants, grid managers can balance their loads relatively easily; but when a cityful of solar panels or rooftop turbines kick in, this task becomes much more difficult.
Without strengthening this necessary infrastructure, and without finding a means of balancing these inputs against demand loads, RES-e could cause more problems than it solves. The cost of grid upgrades, meanwhile, could eat a significant share of the new administration’s recently proposed economic stimulus plan.
There’s no easy solution to driving such a fundamental change within the world’s largest economy, particularly through established political fiefdoms and vested interests. Nobody should expect the process to be smooth or error-free; but then, neither is economics.