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Automation
and Capitalism in the 21st Century
Economics both prescribes and describes rational behavior within the market system. Rational behavior results in what the economist called “a marvelous machine,” churning out an optimized cornucopia of goods and services, given exogenous factors such as the social order, consumer preferences and technological progress - the last two changing rapidly.
But,
the graph below indicates, something is not optimal. The economic recoveries
from the troughs of economic activity in four of the recent major economic
downturns starting in the 1930s have grown increasingly
anemic.
Courtesy:
Crestmont Research
People
have advanced a number of reasons for low economic growth:
1)
High tax rates. This idea is likely valid only at the extreme. In 1929, the top
U.S. federal marginal tax rate on income was 29%. In the years 1932-1935 that
rate was raised to 63%.1 Yet the four year recovery from the trough
in 1933 averaged 9.4% /year to 1937. High marginal tax rates did not inhibit the
production of wealth. Government programs such as the WPA promoted economic
growth and did something useful.
2)
Excessive government regulation. The Great Depression of the 1930s was caused by
the collapse of the unregulated banking system. Between 1929 and 1933, 40% of
all banks went bankrupt.2 In 1933, the Banking Act (Glass-Steagall)
separated the commercial banks and the (always risky) securities firms,
compartmentalizing the financial system and therefore greatly reducing bank
failures.3 The Act also established the Federal Deposit Insurance
Corporation, reducing the risk of bank runs.
3)
Perverse managerial incentives. Berle and Means (1932) explored the implications
of a shareholder system where ownership (guaranteeing economic efficiency) is
divorced from management. But the U.S. economy grew at its fastest rate between
1950-1970 (3.59%/yr. real), when U.S. business was at its most managerial and
unchallenged throughout the world.4
4)
Economic inequality. Using detailed data, Thomas Piketty’s “Capital in the
21st Century” (2014) shows, with the exception of the years
1911-1950, the war years and aftermath, the concentration of wealth in major
European economies has been high or growing because the real rate of return on
capital> real economic growth. But this
graph shows that in the Gilded Age of the latter 19th century,
the economic growth of the West soared due to technological and sociological
changes that drove labor from subsistence agriculture to the cities and the
industrial mass-production system that required capital concentration. In the
modern era, wealth concentration is less likely class-based and more likely
earned by a rotating economic elite.
The
historical record does not confirm that any of these single reasons impeded
economic growth. A better explanation for growth is technological change. Jeremy
Rifkin (2014) writes, “In 1769 James Watt invented the modern steam engine
powered by coal. The cotton industry became the first to deploy the new
technology…Steam power rose from 4 million horsepower in 1850 to about 18.5
million horsepower in 1870.”5 Stanford Historian Ian Morris (2010)
suggests that energy capture has been the most responsible for societies’ social
development and technological progress.6
Markets
are very flexible. By separating capital assets from their medieval social
roots, they enabled entrepreneurs to combine and assemble the new ideas to
create the disruptive change that is accelerating to this very day. Technology
is the major building block. The major driver of great economic change will
increasingly be automation. Automation and the export of jobs have the same
domestic effects; both result in a loss of high value-added U.S. jobs and
declining wages for those remaining.7 The
motivation of both is the minimization of cost and therefore an increase in
productivity which can be defined as GNP/labor hours. A positive instance of
this is the increased productivity of American agriculture, which in 1929
employed 23% of the labor force versus 2.5% today, freeing people to do other
things.8
But
the Great Recession of 2008 can be described as the culmination of a long
process of secular U.S. economic change in a globalizing world that resulted in
automation and the dismantling of industrial plants and the export of jobs from
the U.S. in the 1990s - then the assumption of unsustainable debt in the 2000s
as Americans tried to maintain their living standards by taking out home equity
loans, flipping assets and investing in complicated securities promising
slightly higher yields.
The
present effect of capitalism’s perpetual drive to increase productivity, and
thus the return on equity, is increased automation in many sectors of the
economy, which frees people to do what? Some in Silicon Valley are increasingly
concerned with what people will do in the future. The authors we cite: Erik
Brynjolfsson (2014), Martin Ford (2009) and Jeremy Rifkin (2014) all agree with
the following:
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“As
technology progresses, the computational capability of a computer will
roughly double every two years.”
Ford (2009) on Moore’s Law
|
|
“As
Moore’s Law works over time.…It also allows
(computers) to do things that previously seemed out of reach.
Brynjolfsson (2014)
|
But
it can be asked whether the high social costs of automation and offshoring will
benefit anyone, even the shareholders of U.S. companies in the long-run. A
system of increasingly efficient mass production requires a corresponding mass
consumption. But mass consumption requires well-paying jobs. This is the market
contradiction at the heart of 21st century capitalism that Karl Marx wrote about
in the 19th. Competitive economic forces favored increasingly capital
investment, rather than labor, causing the progressive impoverishment of the
proletariat, leading to revolution.
Conventional
economic argument contends this contradiction is impossible. The economy will
continue to generate jobs within the capabilities of the average worker. But
Steve Rattner, who was the lead advisor on the 2009 auto bailout writes, “All
told, wages for blue-collar automotive industry workers have dropped by 10
percent, after adjusting for inflation, since the recession ended in June
2009…These dispiriting wage trends are a central reason for the slow economic
recovery; without sustained income growth, consumers can’t spend…the United
States has gained just 568,000 manufacturing positions since January 2010 – a
small fraction of the nearly six million lost between 2000 and 2009....In a
flattened world, there will always be another China.”9
Jeremy
Rifkin is a consultant and lecturer at Wharton. In “The Zero Marginal Cost
Society” (2014) he writes, “Automation, robotics, and artificial intelligence
are eliminating human labor as quickly in the white-collar and service
industries as in the manufacturing and logistics sectors. Secretaries, file
clerks, telephone operators, travel agents…and countless other white collar
service jobs have all but disappeared in the past 25 years as automation has
driven the marginal cost of labor to near zero.
…I
suspect that the great automation debate may be about to take flight…the new
innovations in the use of Big Data, the increasing sophistication of algorithms,
and advances in AI are, for the first time, crawling up the skill ladder and
affecting professional work itself, long considered immune from the forces of
automation and the advances of technology displacement. Computers are being
programmed to recognize patterns, advance hypotheses, self-program responses,
implement solutions, and…translate complex metaphors from one language to
another in real time with accuracy approaching that of the best translators in
the world.”10
Current
and proposed administration programs address the problem of improving the
manufacturing base and the economy’s ability to generate wealth by increasing
workforce skills and spending on R&D. Another major problem will be the
economic problem of distribution which, of course, is an intensely political
question. The authors disagree how automation will play out:
·
Erik
Brynjolfsson is the director of the MIT Center for Digital Business. In “The
Second Machine Age” (2014), he suggests how people can remain valuable knowledge
workers by improving, “...the skills of ideation, large-frame pattern
recognition, and complex communication instead of just the three Rs…. As we have
fewer constraints on what we can do, it is then inevitable that our values will matter more than ever.” He
suggests, "Use taxes, regulation, contests, grand challenges, or other
incentives to try to direct technical change toward machines that augment human
ability rather than substitute for it, toward new goods and services and away
from labor savings." 11
·
Martin
Ford founded a Silicon Valley software firm and holds an MBA. “The Lights in the
Tunnel” (2009) draws out automation’s market implications. He writes,
“Historically, technology and the market economy have worked together to make us
all more wealthy. Will this always be true? ...The reality is that the free
market economy, as we understand it today, simply cannot work without a viable
labor market. Jobs are the primary mechanism through which income- and
therefore, purchasing power – is distributed to people who consume everything
the economy produces. If at some point, machines are likely to permanently take
over a great deal of the work now performed by human beings, then that will be a
threat to the very foundation of our economic system.”
Also
a former computer designer, he writes, “For centuries, machines have
continuously become more sophisticated, and as a result, the productivity – and
therefore the wages – of the average worker have increased. It stands to reason
that if this process continues indefinitely at some point the machines will
become autonomous, and the worker will no longer add value….The AI (artificial
intelligence) applications that will likely displace knowledge workers…will
simply be workhorse programs that make the routine decisions and perform the
tasks and analysis that are currently the responsibility of highly paid workers
sitting in cubicles all over the world. AI capability may start out by being
built into the productivity applications used by workers, but over time, it will
evolve to the point that these applications can perform much of the work
autonomously…The result will be substantial job losses for knowledge
workers…”12
“Without
(the) critical mass of viable consumers, economic decline is mathematically
inescapable. There is really no way to envision how the private sector can solve
this problem. There is simply no real alternative except for government to
provide some type of income mechanism for consumers…I believe that in time, this
will have to be accepted as a basic function of government.”13 He is
saying if the market cannot take care of this problem, the government must.
·
Jeremy
Rifkin (2014) suggests that present trends in automation will result in
energy-efficient, lateral economic development and new social organizations; but
the market system will not send the right signals. We restate the economics in
investment terms. If you allow for human capital: such as education, training,
and health, then at general equilibrium, the profit on each additional unit of
investment in labor, land and capital should equal the rate of interest.
In
The General Theory, Keynes (1935), wrote that at a static equilibrium the
marginal returns of all investments will be equal. That is:
E(r) = I1
= I2 =
I3 = the current
rate of interest
P1 P2
P3
= the marginal efficiency of
capital
where: E(r) = The expected
return of an investment.
I(n) = The yearly profit of
one more unit of that type of investment.
P(n) = The price of the
investment.
But if
automation drives the incomes of workers in a certain industry, I1 to
zero, then they have been effectively excluded from the capitalist
economy.
This
is what Rifkin says. High-paying jobs will be restricted to those who work in
the capital-intensive areas of the economy, rather than in fields whose marginal
cost (or marginal revenue) is zero. Recall that economics is the study of how to
manage scarcity. If advanced technology widely facilitates the production and
distribution of intellectual products at zero marginal cost, the economic model
for these goods simply blows up, as it has in newspaper publishing and the music
industries.14 As automated capital becomes an increasingly important
factor of production, other social arrangements will likely have to be made to
supply demand, valuing and remunerating the social value of what many people
will do.
For
instance, new drugs have high intellectual content and upfront development
costs, but are produced at a low marginal cost. To overcome this economics,
society protects (or maybe overprotects) drug manufacturers with patents so they
will continue to innovate.
The
present economic system will distribute mainly to these who have the jobs,
routine middle-level jobs being eliminated. An equally powerful counter-trend is
worldwide economic growth that exceeds the carrying capacity of the planet.
Although the WSJ may cite specific instances where technology has unlocked new
resources, the main problem facing all societies is the thermodynamics of
climate change from which there is no escape. As the result of the melting
polar ice caps, the mean level of the ocean is rising; the ocean’s increased
energy capture is starting to cause extreme weather around the world and
exacerbating existing political problems in the developing
one.15
We
have cited increasing automation as a major economic trend. Where this differs
from straight-line science fiction speculation is that we are discussing the
real world. How automation will play out in the U.S. depends
on:
1) Increasing environmental
constraints.
2)
Changing
consumer life styles, which are increasingly social and less resource
intensive.
3)
Government
policies on economic distribution, infrastructure and scientific research.
Specifically in a review
of Piketty’s book, Harvard professor and former presidential advisor Larry
Summers lists, beyond taxation: 1) More vigorous enforcement of anti-monopoly
laws 2) Reduction in excess protection for intellectual property 3)
Encouragement of profit-sharing schemes 4) Government pension investment in
higher-risk projects 5) Strengthening of collective bargaining 6) Improvements
in corporate governance - and finally most important – 7) Strengthening of
financial regulation to more fully eliminate subsidies (like government
guarantees) to (market-related) financial activity 8) An easing of land-use
regulations in major metropolitan areas.
4)
The effect of government distribution
policies on the trade deficit, which everyone assumes the U.S. will be able to
finance indefinitely. A movement in the direction of a balanced merchandise
trade would develop U.S. production skills, keeping it from becoming like Saudi
Arabia.
5) Future business
investments.
This
essay has suggested that an economy characterized by increased automation will
not serve human purposes, if left to blind market forces. To discuss two
equality issues:
Since
businesses are organized to accomplish tasks, they are of necessity rather
hierarchical. But in the future supply side equality, and the growth of new
businesses, might increase what Rifkin (2014) calls, “The Collaborative
Commons.”
1)
Technological
networks enable the massive growth of lateral information and therefore
localized production.
2)
Ecological
considerations point to the development of decentralized energy sources, most
obviously increasingly competitive solar energy.
3)
Globalization
brings the creative diversity of port cities to the entire world.
A
future pattern of economic development, Rifkin suggests
in the 3/16/14 NYT, might combine highly efficient and centralized capitalism
with decentralized non profits (arranged by interest and locality). This kind of
federated network architecture raises interesting social issues. The
political analog is the (usual) dynamic balance in the United States between the
federal and local governments.
The
major argument against distributional inequality, the undue concentration of
wealth, is political. The substantial concentration of wealth that Thomas
Piketty documents, and that automation further promises, will challenge the
democratic political system. The Enlightenment of the 18th century
introduced the idea that society exists for the benefit of all its members.
Automation and climate change challenge this value.
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Being able to adapt our behavior to challenges is as good a definition of intelligence as
any I know.
Neil deGrasse Tyson, Cosmos, Episode 11
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This
article by Henry M. Paulson Jr., former secretary of the Treasury, describes
in detail the consequences of not acting on climate change. The planet Venus, by
the way, has a surface temperature of around 872 degrees farenheit due to a
runaway CO2 greenhouse effect.
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We have presented
the salient facts related to two major issues: economic policy and climate
change: 1) Automation, and now to a lesser extent, offshoring are reducing the
demand side of the economic equation. 2) Global warming is raising measured sea
levels.
Given the systematic
reforms necessary to remedy these facts, why doesn't everyone recognize them,
pull together and solve these problems? * A 7/5/14 NYT article
suggests why political problems can be difficult. The article begins by asking,
"Do Americans understand the scientific consensus about issues like climate
change and evolution?" It turns out that 46% of Republicans say that there is no
solid evidence of global warming, compared with 11% of Democrats. Sheer
ignorance? Not so. On the issue of evolution Yale Law School professor, Dan
Kahan, finds, "...the divide over belief in evolution between more or less
religious people is wider among people who otherwise show familiarity with math
and science, which suggests that the problem isn't a lack of information.
When he instead
tested whether respondents knew the theory of evolution, omitting mention of
belief (our note), there was virtually no difference between more or less
religous people with high scientific familiarity....With science as with
politics, identity often trumps the facts....The deeper problem is that citizens
participate in public life precisely because they believe the issues at stake
relate to their values and ideals especially when political parties (political
entrepreneurs) and other identity-based groups get involved-an outcome that is
inevitable on high-profile (and polarizing) issues."
For Republicans on the far Right, the technical problem of global warming is obviously tied to the political issue of smaller government, and ultimately tied to the political issue of Freedom and other factors.
This is heady stuff.
"In Praise of Reason (2012)," the philosopher, Michael Lynch, writes that people
have their own reasons for believing as they do. But decisions in a functioning
democracy requires convincing others. This requires a "common currency of
reason." "That common currency is grounded in the naturalness and practical
rationality of the principles that are constitutive of public reason** ...There
are reasons that we can abstract from our immediate preferences. These reasons
hold up whether we are Christians or atheists, Republicans or Democrats."
"What the above...shows,
in other words, is that there are reasons to trust certain methods over others
even if those methods run counter to your own world view and the robust
preferences that come with it (well said). The ground for these reasons is
nothing more than rational self-interest...your best bet, from your own
perspective, is to trust those principles and methods that have the most
practical value..."
We now consider
reasons related to the facts. Our reasons for doing something about global
warming are simple: 1) The measured levels of the oceans are rising . 2) Global
warming from the greenhouse effect is the cause. (It's not sunspots.) 3) Global
warming will lead to bad consequences, some of which are already occuring. Our
reason for not supporting gun advocates is simple: Carrying a weapon in public
places erroneously assumes that others are likely out to do harm.
* Why don't the
Iraqis get together and save themselves?
** What is
"practical rationality?" It assumes there is no magic bullet. It merely assumes,
as is the fact, that different people see things differently; but they can be
practical. Practical reason assumes, and we embellish somewhat:
1) A person is able
to give reasons related to the immediate facts for their own actions;
not, as Isaiah Berlin wrote, "(operating) wildly, in the dark."
2) That the person
thinks about his own wide self-interest to form a conception of the good.
3) That he engages
in a critical reflection of his own life.
Democracy, that is
the rule of the people, assumes that people can have rational discourse and find
the best way to proceed. If everyone simply followed orders, there would be no
need for democracy.
The ability to use reason widely and with some consistency distinguishes modern societies from more traditional ones. Lynch (2012, p. 2) writes, "The thought that everything is arbitrary (or predefined) undermines a key principle of a civil society, that we owe our fellow citizens explanations for what we do. Civil societies are not necessarily polite or homogeneous; but they are societies that value reason-giving, inquiry, questioning, and hashing out one's differences with others. In so doing, they take strenuously the idea that there are better or worse ways of doing...things. If you give up on the idea that there are standards of this sort, you give up on the idea that giving reasons has any real point. Deliberation becomes a game played for the joy of manipulation and the increase of power. Skepticism about reason undermines our commitment to civil society..."
_
N.B. Richard Legum is a philosopher, whose Internet discussions of truth and belief are very clear. Consider the following: 1) Truth is true regardless of who believes it.* 2) A true belief can be rational depending upon the evidence (reasons) one has. Thus, it is possible to hold a true irrational belief, if the supporting evidence is distorted by opinion, untrue or incomplete. 3) A true rational belief depends upon the totality of the evidence. The U.S., as a society, faces some very important issues: automation, climate change, immigration, foreign policy and the role of government - and arranging the means to pay for these. We would listen very carefully to the solutions proposed by our legislators and note whether they cite supporting evidence that is true and complete as possible.**
* From the Wikipedia: "The correspondence theory of truth states that the truth or falsity of a statement is determined only by how it relates to the world and whether it accurately describes...that world. The theory is opposed to the coherence theory of truth, which (is ideological and) holds that the truth or falsity of a statement is determined by its relations to other statements rather than its relation to the world." A mathematical system is an example of the latter.
** A simple list of competing wants doesn't add up. Take a simpler political issue, infrastructure repair. The 8/5/14 Washington Post reports, "A new Associated poll finds that six in 10 Americans agree that the economic benefits of good highways, railroads and airports outweigh the cost to taxpayers. At the same time, though, a majority (58 percent) oppose raising federal gas taxes to pay for their repair."
The Federalist Papers (1787-1788), authored by Hamilton, Madison and Jay, were persuasive documents, describing the structure and rationale of an U.S. government designed, above all, to avoid tyrannies of any sort. In Federalist #51, the solutions to avoiding "the tyranny of the majority" were pluralism in society, and the "balance of powers" within the government. "In a single republic, all the power surrendered by the people, is suited to the administration of a single government; and usurptions are guarded against by a division of the government into distinct and separate departments....The different governments will controul each other; at the same time that each will be controuled by itself....In the extended republic of the United States, and among the great variety of interests, parties and sects which it embraces, a coalition of a majority of the whole society could seldom take place on any other principles than those of justice and the general good..."
The Federalist papers describes the structure of a reasoned government, "...it is the reason of the public alone that ought to controul and regulate the government." (Federalist, #49). Madison did not specify why the laws of such a government should likewise be reasoned.
Michael Lynch's book illustrates that a practical, problem-solving attitude is necessary for U.S. democracy and the government to act, an attitude that enabled the U.S. to meet the challenges posed by the problematic Articles of Confederation (1777), two World Wars and the Great Depression. There will obviously be many more challenges in the future.