1.12.15

MARX, OR WALRAS?

That's the insider's way of contemplating opposed views of the effect of mechanization on the life of ordinary people.  Marx, of course, is the chronicler of technical progress making possible the production of stuff in such abundance that the workers would have insufficient buying power to buy it, because the private owners of the means of production accumulate wealth out of the difference between the prices of the products they sell and the subsistence wages they pay.  Walras, a more obscure political economist, thought systematically about the implications of excess supply of some goods (with prices, the aggregate value of excess demand is zero), and that raises the possibility of the capitalists sharing some of the surplus value with the workers in the form of lower product prices or higher wages.  Let me draw you a picture.


Note, that's in equilibrium, or out of equilibrium, but in a world that feels very much out of equilibrium, or one in which it appears that the equilibrium, thanks to returns to human capital and to smart machinery, feels more like Marx or Dickens than like the Treaty of Detroit.  And out there, somewhere, are works such as Tyler Cowen's Average is Over, raising those ominous possibilities.

I have that book in the stack of books to review, which is going to take a different post.  But I was struck, while I was reading the passage about the opportunities for personal trainers in the new dispensation, that Mr Cowen was writing about test preparation, at the same time that 60 Minutes was reporting on a man who was getting rich and famous running a quarterback academy.  For middle schoolers.

Let's stay on the message.  Consider Michael Barone envisioning a particularly nasty out-of-equilibrium Edgeworth Box.
Our most liberal areas (New York, the Bay Area) have the greatest income disparities. Drive down Middlefield Road in Silicon Valley and in one mile you go from $4 million walled mansions to what looks like rural Mexico.

Brookings's William Galston, writing in the Wall Street Journal, feels "justified revulsion" at this. He accuses Cowen of "moral indifference." I would accuse him of focusing too narrowly on economics.

People get satisfaction out of more than just earning money. They get satisfaction out of what American Enterprise Institute president Arthur Brooks calls earned success.

Earned success can come from high earnings or from simply doing a job well. It can come from raising children and meeting family obligations.
But here's Mr Barone's prognostication.
Cowen predicts the masses won't revolt. They will have comfortable lives and good entertainment -- bread and circuses.

I suspect he's right. America in the 1920s had more inequality than today and there was no revolution.

Inequality was then reduced by three unpredicted developments, two of them unwelcome.

The Depression of the 1930s reduced high and middle incomes. World War II ended unemployment and raised wages.

Wages rose in postwar America because labor was scarce (the 1930s birth dearth) and foreign competition imperceptible.

Those conditions ended around 1970. Inequality rose. Perhaps that's the default mode.

Galston wants to reduce inequality. I say we should do more to strengthen social capital so that everyone can earn success.
Yes, although restoring the social capital is not going to be easy.  Social capital of the form Mr Barone is thinking has been deconstructed and demeaned for years. That puts him in the position of fretting that neither he nor William Galston know how to get to where they want to go.  (Particularly if those quarterback academies for middle schoolers do their job.)

And Pope Francis has weighed in, sounding more like Marx or Dickens.  "In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule."

At Network World, Patrick Thibodeau suggests that the smart machines will create a human environment of high unemployment, unrest, and tumult, as envisioned by a research firm called Gartner.
From 2020 to 2030, "you are going to see the first human-free enterprise -- nobody is involved in it, it's all software, communicating and negotiating with one another," said Diane Morello, a Gartner analyst, who has looked at how smart machines will reshape employment.

Morello said companies increasingly will recognize that smart machines are part of the workforce. "Human beings are not the only workforce," she said.
That's straight out of Marx's "Machinery and Modern Industry." And yet, Walras and the aggregate value of excess demand in or out of equilibrium is present.
If technology cuts the workforce leading to a reduced consumer spending, who then buys the goods from increasingly automated companies? There wasn't a clear answer to that problem, said Morello. "Somebody is going to have to pay for the services," she said.

Smart machines may also help people adapt and learn new skills, but the challenges will require broad public policy engagement, according to Gartner analysts.

"It's definitely easy to see a dystopian future," said Nick Hansen, senior analyst for Discipline Growth Investors, but he is more optimistic. "The thing I keep coming back to is, there is always something humans want from other humans."

While the first phase of the revolution may benefit the robber barons, or in this case the Silicon Valley titans, Hansen said, "eventually there is a huge economic potential that actually dwarfs the initial potential" as people figure out how "to tap into all these unused resources" or people idled by changes.
Not to mention that the robber barons will themselves be reduced to penury without customers.

The aggregate value of excess demand must be zero, in or out of equilibrium.

And the late adopters might land at a better place on the institutional learning curve for not having the early growing pains of the industrialized world.
So, while developed countries are worrying about the breakdown of the blue social model based on mass manufacturing jobs and lifetime employment, the real story is that developing countries may never get to the blue model. Automation and global competition mean than manufacturing jobs and their wages aren’t going to grow enough to support a middle class in China and other countries as they did in the US, Europe and Japan.

If this is true, the implications are enormous: social stability in countries like China could be much more tenuous than many think, and developing countries may have a much harder time reaching the levels of affluence found in the advanced world. Since we’ve never seen a global industrial revolution before, much less one that is taking place at the same time as a global information revolution, nobody really knows how it will all shake out.
But it could still go badly.  Here's "Inequality Is a Choice" by Joseph Stiglitz, who during his hitch with the World Bank got to see all kinds of gated communities.
I see us entering a world divided not just between the haves and have-nots, but also between those countries that do nothing about it, and those that do. Some countries will be successful in creating shared prosperity — the only kind of prosperity that I believe is truly sustainable. Others will let inequality run amok. In these divided societies, the rich will hunker in gated communities, almost completely separated from the poor, whose lives will be almost unfathomable to them, and vice versa. I’ve visited societies that seem to have chosen this path. They are not places in which most of us would want to live, whether in their cloistered enclaves or their desperate shantytowns.
The dynamic by which inequality runs amok is as envisioned by Marx, and yet it's unlikely that the rich in such cloistered enclaves are going to stay rich, absent consumers to buy their stuff, or to keep living in such places.  And entrepreneurial alertness, argues Boston University law professor James Bessen (via Newmark's Door) is going to recognize in those displaced persons a source of productive and relatively cheap labor that is also a source of customers.
We're likely to see the information revolution follow a similar course. So far, the gains have mostly flowed to the most talented and entrepreneurial workers. But as these technologies mature, we're likely to see increasing demand for moderately-skilled labor that complements the capabilities of computers.

To be sure, the new machines will be smarter, performing more tasks involving logic and inference than older technologies. But intelligent machines per se are not new. Some of the earliest machines used in the Industrial Revolution had “smart” features, for example, stopping a loom if a thread broke or changing the speed of a spinning machine as yarn was wound. Machines have become progressively smarter, and this changes the nature of the tasks needed to complement the machines. But there are plenty of examples of middle-income jobs today where humans work with relatively smart machines.
In fact, the Luddite protest against automation in the mills was a protest that the modern machinery was making it possible for schoolgirls to spin and weave, crafts that used to require skilled operatives.  And the Treaty of Detroit came about because modern machinery made it possible for farm boys to bolt cars together, something that was similary custom work of a high order.

The aggregate value of excess demand must be zero, in or out of equilibrium.
Writing in Das Kapital in 1867, Karl Marx looked at the growing gap between poor factory workers and the wealthy owners of capital and concluded that the Industrial Revolution would progressively immiserate the working classes. In fact, the opposite was true; the Industrial Revolution was on the cusp of creating the modern middle class.

Today, Cowen is making a similar mistake. He sees a growing gap between the cognitive elite and everyone else, and concludes that these trends will accelerate in the next few decades. But history suggests a more optimistic possibility: as information technology matures, the economy will create a growing number of opportunities for moderately-skilled workers to develop skills that complement intelligent machines. Once that happens, today's extreme income disparities will begin to moderate, and the plight of America's middle class will stop looking so bleak.
Kevin Drum is not so sanguine.
What happens to human labor when machines are smart enough that they need virtually no human guidance at all?

Bessen simply ignores this possibility. Apparently he thinks that future machines will get a little bit smarter, but will remain just dumb enough that they'll continue to need constant attention from an army of folks who graduated from high school with a C+ average. But if that turns out to be the case, there's really no interesting conversation to be had. The future will be pretty much like the present. Why even bother talking about it?

But the evidence suggests, rather, that we're on the cusp of big changes. Machines in the future will be a lot smarter than current machines, and they won't need constant attention from much of anyone. If you want to engage with this debate, you need to present a cogent argument that either (a) machines will never get all that smart, or (b) even if they do, there will still be a substantial role for average humans to play. Bessen does neither.
Mr Drum's opening sentence echoes an old conversation a union leader had with an automobile executive who was showing off the latest engine-block-boring machines that ended with the union leader noting the machines don't buy cars.  I couldn't find that quote, but custom cars for the masses, anyone?

The aggregate value of excess demand is zero, in and out of equilibrium.

And if Professor Bessen had an enterprise in mind that could offer gainful employment to average humans, he'd likely be pursuing it, as, if successful, ownership of the enterprise would pay off far better than being on a law faculty does.

But entrepreneurship is messy, and out of equilibrium can persist for a long time.  Thus there's no guarantee that Walras, or Marx, gets the last word.

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