Posts Tagged ‘labor’

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I’ve been writing for some years now about the emergence of new technologies, especially automation and robotics, and their potential contribution to raising already-high levels of inequality even further.

The problem is not, as I have tried to make clear, technology per se but the way it is designed and utilized within existing economic institutions. In other words, the central question is: who will own the robots?

If capital owns the robots, even if their development and use increases labor productivity, the returns mostly go to capital and the workers (those who are left, in addition to those who have been displaced) are the ones who lose out.

But you don’t have to believe me. That’s the conclusion of a recent piece published in Finance & Development, the research journal of the International Monetary Fund.

The authors, Andrew Berg, Edward F. Buffie, and Luis-Felipe Zanna, designed an economic model in which they assume robots are a particular sort of physical capital, one that is a close substitute for human workers.* They also consider three versions of the model: one in which robots are almost perfect substitutes for human labor; another in which robots and human labor are close but not perfect substitutes (i.e., “people bring a spark of creativity or a critical human touch” that cannot, at least for the foreseeable future, be replaced by robots); and a third in which they distinguish between “skilled” and “unskilled” workers.

In all three cases, output per person rises—but so does inequality. As the authors explain for the first version:

If we assume that robots are almost perfect substitutes for human labor, the good news is that output per person rises. The bad news is that inequality worsens, for several reasons. First, robots increase the supply of total effective (workers plus robots) labor, which drives down wages in a market-driven economy. Second, because it is now profitable to invest in robots, there is a shift away from investment in traditional capital, such as buildings and conventional machinery. This further lowers the demand for those who work with that traditional capital.

But this is just the beginning. Both the good and bad news intensify over time. As the stock of robots increases, so does the return on traditional capital (warehouses are more useful with robot shelf stockers). Eventually, therefore, traditional investment picks up too. This in turn keeps robots productive, even as the stock of robots continues to grow. Over time, the two types of capital grow together until they increasingly dominate the entire economy. All this traditional and robot capital, with diminishing help from labor, produces more and more output. And robots are not expected to consume, just produce (though the science fiction literature is ambiguous about this!). So there is more and more output to be shared among actual people.

However, wages fall, not just in relative terms but absolutely, even as output grows.

This may sound odd, or even paradoxical. Some economists talk about the fallacy of technology fearmongers’ failure to realize that markets will clear: demand will rise to meet the higher supply of goods produced by the better technology, and workers will find new jobs. There is no such fallacy here: in our simple model economy, we assume away unemployment and other complications: wages adjust to clear the labor market.

So how can we explain the fall in wages coinciding with the growing output? To put it another way, who buys all the higher output? The owners of capital do. In the short run, higher investment more than counterbalances any temporary decline in consumption. In the long run, the share of capital owners in the growing pie—and their consumption spending—is itself growing. With falling wages and rising capital stocks, (human) labor become a smaller and smaller part of the economy. (In the limiting case of perfect substitutability, the wage share goes to zero.) Thomas Piketty has reminded us that the capital share is a basic determinant of income distribution. Capital is already much more unevenly distributed than income in all countries. The introduction of robots would drive up the capital share indefinitely, so the income distribution would tend to grow ever more uneven.

The only difference in the second case (in which robots and human labor are close but not perfect substitutes) is that wages eventually rise (after, say, 20 years, when the productivity effect outweighs the substitution effect)—but by then it’s too late (as capital continues to have a higher share of income, although not as much as in the first case). And, in the third case, the growing gap between labor and capital (as in the other models) is exacerbated by growing inequality between skilled and unskilled workers.

In all three versions of the model, then, most of the income goes to owners of capital (and, in the third version, to skilled workers who cannot easily be replaced by robots). The rest get low wages and a shrinking share of the economic pie.

And the authors’ conclusion?

We have implicitly assumed so far that income from capital remains highly unequally distributed. But the increase in overall output per person implies that everyone could be better off if income from capital is redistributed. The advantages of a basic income financed by capital taxation become obvious. Of course, globalization and technological innovation have made it, if anything, easier for capital to flee taxation in recent decades. Our analysis thus adds urgency to the question “Who will own the robots?”

The assumption about the unequal distribution of capital income is, in fact, the appropriate one for the existing set of economic institutions. As the authors understand, the only way to change their dystopian prognosis is to fundamentally change the distribution of capital income.

And, if we’re going to be honest, the only way to do that is to eliminate the private ownership of the robots and the rest of capital.

 

*The model is also based on the presumption that all markets, including the labor market, clear, that is, they assume away unemployment and other such “complications,” which turns out to give those who deny the negative effects of robots and automation their strongest possible case.

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Greg Ip would like us to believe that, right now, in labor versus capital, labor is winning.

Really?!

That’s certainly not the case if we actually look at the official data on the wage share of U.S. national income.* As it turns out, the share of income going to workers has fallen from a high of 51.5 percent (in both 1953 and 1970) to a low of 42.2 percent (in 2013), with a slight uptick to 42.9 percent (in 2015).

Clearly, even with recent increases in real wages, labor has not been winning in its war with capital.

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So, how does Ip get his result, showing very little trend in labor’s share of national income? Well, by changing the facts. First, he subtracts capital depreciation from national income (and calls that, incorrectly, net national income).**

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OK, let’s do that—and much the same result as at the top of the post emerges: a long-term decline in the wage share (from 69 percent in 1982 to a low of 60 percent in 2012-14).

That means Ip’s surprising (and ultimately deceptive) result actually relies on his second modification: taking out rental income. Clearly here he is on shakier ground: rental income is mostly another form of the return on capital, distributed not to “households,” but to the owners of most of the buildings and land (both residential and corporate) in the U.S. economy. It’s just another distribution of the surplus to those at the top, which is a key component of both national income and capital’s share.

So, no, labor’s share is not back to where it was prior to the crash of 2007-08. And even if it’s moving in that direction, it’s well below its postwar peaks.

Capital is still winning its war against labor.

 

*And, remember, my preference is to subtract CEO and other 1-percent “wages” (and add them to capital’s share) to get the real wage share.

**By rights, he should subtract all capital expenditures (not just depreciation) to obtain net national income, that is, new value added. Then, we’d be left with the three components of the infamous Trinity Formula—wages, profit, and rent—all of which are created by the labor of the working-class.

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It is interesting that, on the surface (but, as I explain below, only on the surface), neither major political party on either side of the pond seems to be making the claim they’re the “party of business.” Not the Conservative and Labor Parties in the United Kingdom, or the Republican and Democratic Parties in the United States.

Here’s Chris Dillow on the situation across the pond:

What I mean is that back then, the Tories were emphatically on the side of business, exemplified by Thatcher’s union-bashing and talk of “management’s right to manage”. In the 90s Labour – first under John Smith and then under Blair – devoted immense effort to trying to get business onside via the prawn cocktail offensive.

Elections then were won and lost by chasing the business vote.

Things have changed. In taking the UK out of the EU against the wishes of most major companies, the Tories can no longer claim to be the party of business. And Theresa May’s talk of getting “tough on irresponsible behaviour in big business” and of “unscrupulous bosses” suggests little desire to become so.

You might think this presents Labour with an open goal. It would be easy to present policies such as a national investment bank, more infrastructure spending and anti-austerity as being pro-business.

But there seems little desire to do this.

Something similar is going on in the United States. Neither major party political candidates embraced business during the nominating campaigns or their conventions.

In fact, in his acceptance speech, Donald Trump lambasted big business for supporting his opponent:

Big business, elite media and major donors are lining up behind the campaign of my opponent because they know she will keep our rigged system in place. They are throwing money at her because they have total control over everything she does. She is their puppet, and they pull the strings.

While, last Thursday, Hillary Clinton vowed to overturn Citizens United and challenge key corporate decisions:

That’s why we need to appoint Supreme Court justices who will get money out of politics and expand voting rights, not restrict them. And if necessary we’ll pass a constitutional amendment to overturn Citizens United!

I believe American corporations that have gotten so much from our country should be just as patriotic in return. Many of them are. But too many aren’t. It’s wrong to take tax breaks with one hand and give out pink slips with the other.

Both parties, it seems, are trying to court voters who are fed up with business as usual.

But, as I see it, that’s only what’s happening on the surface. None of the four parties is making a claim to be the “party of business” because, below the surface, all four are the parties of business.

What I mean by that is that the common sense of all four parties is the promise to promote faster economic growth and create more jobs and, in the absence of alternatives (such as direct government employment or worker-owned enterprises), that means creating a business-friendly economic and social environment.

Now, the parties may differ about how to create such an environment (e.g., in the United States, lowering individual and corporate income taxes versus using nonprofit foundation contacts to arrange business investments). But they agree on the goal: it’s up to the government to create the conditions for private corporations to use their profits to foster economic growth and job creation.

The result is that, in the current climate—with flat or falling incomes and grotesque levels of inequality—none of the parties wants to openly declare itself the “party of business.” But, they don’t have to, because they are already—all four of them—the parties of business.

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Every economic theory includes—or, at least, is haunted by—the distinction between productive and unproductive labor. The distinction serves as the basis of all their major claims, from the most basic theory of value to the conception of who deserves what within capitalism.

The distinction began with the French Physiocrats, especially François Quesnay, who in his 1758 Tableau Économique made a distinction between the “Productive” Class (which consisted of agricultural producers) and two other groups: the “Proprietary” class (which consisted of only landowners) and the “Sterile” class (which was made up of artisans and merchants). The idea was that all new value was created only by agricultural producers, not by industry or commerce.

It was then picked up by Adam Smith, who criticized the Physiocrats for overlooking the important contribution of manufacturing to the wealth of nations. While Smith broadened the concept of productive labor (to include both agriculture and industry), he retained the notion of unproductive labor (especially the “menial servants” he worried industrial capitalists would waste their profits on, thus undermining their “historic mission” to accumulate capital).

Karl Marx, in his critique of Smith, took over the distinction between productive and unproductive labor but then transformed it. For him, labor was productive to the extent that it produced surplus-value; all other labor (e.g., the labor of corporate managers as well as that of personal servants) was considered unproductive labor.*

Neoclassical economists, for their part, sought to abolish the distinction between productive and unproductive labor, based on the idea that any labor (when combined with physical capital and land) that contributes to a nation’s wealth should be considered productive.**

And, of course, there’s John Maynard Keynes, who, after the crash of 1929 and in the midst of the first Great Depression, referred to the “rentier,” the “functionless investor,” who contributed nothing but was still able to capture returns based on the scarcity of capital. Keynes therefore imagined a time when, with the aid of the state, capital would become abundant, which would mean “the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.”

This brief survey of the history of economic thought is just a prelude to Branko Milanovic’s response to Ricardo Hausmann’s invoking of the distinction between productive and unproductive labor (in saying, with reference to Venezuela, “This is the crazy thing about the system. A lot of people are putting in effort [to buy the goods and resell them], and none of that increases the supply of anything. This is perfectly unproductive labor.”):***

That statement made me stop. “Perfectly unproductive labor”? But that “unproductive labor”, as every economist knows, improves the allocation of goods. The goods flow toward those who have greater ability to pay and since we tend to associate greater ability to pay with greater utility, the goods, thanks to bachaqueros’ activities, are better allocated. If one argues that bachaqueros activity is unproductive because it “does not increase the supply of anything” then one should argue that the activity of any trade or intermediation is unproductive because it does not produce new goods, but simple reallocates. The same argument could be used for the entire financial sector, starting with Wall Street. The entire activity of Wall Street has not produced a single pound of flour, a single loaf of bread or a single sofa. But why we believe that financial intermediation is productive is that it allows money to flow from the places where it would be less efficiently used to the places where it would be used more efficiently. Or for that matter from the consumers who cannot pay much to the consumers who can. Exactly the activity done bybachaqueros.

Milanovic is right: if “bachaqueros” are unproductive, why isn’t the labor of the financial sector? Or, more generally, of FIRE (finance, insurance, and real estate)? Or of CEOs and other corporate managers?

That’s exactly the reason neoclassical economists generally don’t make a distinction between productive and unproductive labor. They want to see it all as productive: manufacturing, services, commerce, and finance; factory workers, office workers, and CEOs. The difference, in Hausmann’s case, is he wants to criticize the socialist economic policies of the Venezuelan government. So, the veil falls and even he, against the dictates of his own economic theory, invokes the distinction between productive and unproductive labor.

But once that door is open, who knows what ideas might follow? What happens if we begin to conceive of many kinds of labor and whole groups of economic agents within contemporary capitalism not only as unproductive, but as parasitical and even downright destructive?

 

*But note, because this point is often missed, Marx is not making a distinction between goods and services. Both can and often do involve productive labor.

An actor, for example, or even a clown, according to this definition, is a productive labourer if he works in the service of a capitalist (an entrepreneur) to whom he returns more labour than he receives from him in the form of wages; while a jobbing tailor who comes to the capitalist’s house and patches his trousers for him, producing a mere use-value for him, is an unproductive labourer.  The former’s labour is exchanged with capital, the latter’s with revenue.  The former’s labour produces a surplus-value; in the latter’s, revenue is consumed.

**However, there are forms of labor—such as that performed in households—that are not included in the usual neoclassical-inspired national-income accounts. One can argue, then, that neoclassical economics does retain some notion of unproductive labor.

***Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, currently Professor of the Practice of Economic Development at Harvard University (where he is also Director of the Center for International Development) views Venezuela as “the poster child of the perils of rejecting economic fundamentals”—because the Venezuelan government has had the temerity to attempt to achieve economic and social goals by sidestepping and regulating “the market.”

Vivek Wadhwa begins by quoting a former employee:

“The Soviet Union I left behind was a dictatorship but the workplace was a democracy; America may be free but the workplace is a dictatorship” said Len Erlikh after I hired him at First Boston (now Credit Suisse First Boston) in 1986.

He then goes on to defend corporate “enlightened dictators” and the absence of democracy in the workplace.

I know that dictatorship doesn’t sound nice but it is what business leadership entails. People love to follow strong leaders. They want to be led by people with vision, conviction and good values. They may not agree with everything the leader decides, but as long as ethical lines are not being crossed, employees will follow directions, work hard, and be loyal.

The alternative, of course, is a democratic workplace, where employees participate in making the major decisions in the places where they work. Major decisions such as how production is organized, how much surplus there will be, what should be done with the surplus—including what kinds of managers should be hired, how much power they should have, and so on.

Yes, “The job of manager today is to lead, articulate goals, inspire, motivate, and enable.” And, in a democratic workplace, the job of the other workers is to participate in the process of leading, articulating goals, inspiring, motivating, and enabling themselves and everyone else.

Democratic workplaces have no need for dictators, benevolent or otherwise.