Monday, June 30, 2014

Automation, Labor and Capital

Here is a new thesis on the old relationship between Labor and Capital:  technology is causing them to fuse.  Do you buy it?

Erik Brynjolfsson et. al. have written in Foreign Affairs:
Machines are substituting for more types of human labor than ever before. As they replicate themselves, they are also creating more capital. This means that the real winners of the future will not be the providers of cheap labor or the owners of ordinary capital, both of whom will be increasingly squeezed by automation. Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.

The crux of it seems to be that automation may turn out to be as fungible as money.
If digital technologies create cheap substitutes for a growing set of jobs, then it is not a good time to be a laborer. But if digital technologies also increasingly substitute for capital, then all owners of capital should not expect to earn outsized returns, either.
He concludes that people with ideas who are motivated to create, solve problems and innovate will become the key to creating wealth.
Digital technologies increasingly make both ordinary labor and ordinary capital commodities, and so a greater share of the rewards from ideas will go to the creators, innovators, and entrepreneurs. People with ideas, not workers or investors, will be the scarcest resource.
I'm not sure I'm convinced yet... but it's an interesting idea.
What do you think?

By the way, the social and political implications of his work does not escape him.  In fact, from my conversations with him they appear to be his primary motivation to understand, describe, measure, and then predict what is actually happening in the global economy.

Should the digital revolution continue to be as powerful in the future as it has been in recent years, the structure of the modern economy and the role of work itself may need to be rethought. As a group, our descendants may work fewer hours and live better -- but both the work and the rewards could be spread even more unequally, with a variety of unpleasant consequences. Creating sustainable, equitable, and inclusive growth will require more than business as usual. The place to start is with a proper understanding of just how fast and far things are evolving.


Unknown said...

Idea capital.

stefanoq said...

Exactly, John. His point in this essay is about the RELATIVE return on labor, capital or "idea capital" as you call it. However, he's also observing that the disequilibrium produced by the disruptive effects of automation is creating a more fundamental threat to capitalism: without DEMAND, there are no returns at all on labor, capital or ideas.

This is not a new idea. In fact, the central concept of a business cycle is based on cycles of growth and collapse driven by fluctuation in demand. Surplus capacity is a PROBLEM for capitalism. Industrialists like Henry Ford -- who wanted to make returns on capital investments -- were very conscious that salaries they were paying their laborers were in fact creating a middle class and a market for their industrial output. Without those mass salaries, there would be no mass demand for their mass production.

Schumpeter described how capitalism has avoided the "crisis" of surplus capacity, repeatedly extending it's potential for growth, through war and a process of "creative destruction" we now know as entrepreneurial disruption. But he failed to see the importance of creating demand for the new output. We know that the engine of growth ends when the massive middle of our society experiences falling wages for 40 years, exhausts their savings and then capacity for debt.

What will the next generation of idea capital, financial capital and labor do to create demand?

This is the central thesis of Reich's new film, "Inequality for All" as well.

Julian Friedland said...

The place to start is not by soothsaying but by doing what mskes a difference here and now.

stefanoq said...

This is a test comment.

stefanoq said...

Here are some more thoughts on the subject excerpted from multiple emails I have received.

The thesis is not that technology is a substitute for capital in the sense that capital is no longer important. It is as important as it has ever been. As is labor. His point is that because technology makes labor more productive or replace is, and because technology can be repurposed AFTER it has been developed and deployed, and because it and accumulates over time, it has become a FORM of labor AND capital.

We know how technology can compete with labor and reduce wages for many kinds of work. He's pointing out that it can also reduce returns on capital. If you think about software, for example, especially open source, there are BILLIONS of dollars that can move as easily as cash around the world and be allocated to solve any problem.

Capital accumulates. There is no shortage. There is clearly no shortage of labor either. Technology is also plentiful and software is portable and free. The problem is surplus capacity, ironically enough, and insufficient demand. Our problem is that labor, capital AND technology all need a place to go. So what the world needs now is ideas and entrepreneurs.

This insight, although true, IMO, does not help solve the problem of demand, however. Capital does not move to fund ideas until there is perceived demand. And labor cannot earn income. Money does not flow. And this is why we have an economy with plenty of resources and no growth.