First, I want to stress that I do not believe this is a discussion about a far future, science fiction concept. In my book, I make the point that technology is someday likely to advance to the point where the majority of the routine jobs held by average workers will be automated. That is a lot of jobs—probably most jobs. Two thirds of our population does not have a college degree, and even many college graduates have jobs that can broken down into relatively routine tasks that will be susceptible to software automation algorithms and expert systems. This is something that I think could potentially happen in the next couple of decades.
I am not talking about true machine intelligence. Theoretical physicists would still have jobs. Private sector economists whose jobs consist largely of plugging data into forecasting models and writing formulaic reports might well have to worry.
The point I make in my book is that relentless automation will ultimately result in massive unemployment and extreme and unsustainable income inequality—to the point that mass market production would be numerically undermined because there would simply be two few consumers with viable discretionary incomes. Yes, of course, automation would also make stuff cheaper. Would that make up for the low wages and unemployment? What fraction of total income does the average person spend on manufactured products and services today? You could make shopping at Wal-Mart free, and a great many lower wage workers would still struggle to cover housing and health care costs.
In The Lights in the Tunnel, I argue that we will ultimately have to provide supplementary income to the majority of the population; if we don’t do so, we won’t be able to sustain consumption. That type of scheme, obviously, would have to be supported by some type of taxation, and Hanson, no doubt, finds that highly objectionable.
Dr. Hanson rejects my arguments on the need to support consumers, saying:
Ford’s mass-market theory of production is nothing like standard economic theory. Sure high income inequality might be ethically bad, and threaten political instability, but it does not at all threaten economic collapse – producers can focus on giving the rich what they want, and innovation and growth is just as feasible for elite products as for mass products.
In other words, creative destruction is going to do its thing, and the mass market industries we now have are going to be destroyed and presumably replaced with new industries that focus on producing very high value, customized products targeted at a tiny economic elite—and that’s going to drive the entire economy. That really doesn’t sound like the world I want my children to live in, but leaving that aside, I still wonder if it works in the real world.
It’s very possible that a major breakthrough in an area like machine learning could cause all of this to unfold quite rapidly. Hanson notes this in his paper, saying at one point that machines could go from performing 25% of jobs to 75% within four years. So we are potentially talking about more than half of all the jobs in the economy. Let’s try to imagine an actual scenario:
A major technical breakthrough occurs and is widely publicized. Businesses rapidly deploy the technology and the unemployment rate rises past 15%. Consumer confidence falls to unprecedented levels. Political debates rage on extending unemployment and on revoking the minimum wage. Tax revenues are plunging inline with incomes. As consumer spending falls, businesses either adapt by laying off workers and automating still more jobs, or they fail entirely.
Unemployment climbs to 20%, and the automation of jobs appears relentless. Mortgage defaults are now at an unprecedented level. As job losses mount, at some point, homeowners make a collective and rational calculation: Why keep paying my mortgage? Housing values are plummeting and I’m almost certainly going to lose my job eventually. It’s better to hoard the money; I may never get another job. Besides, if everyone defaults, they can’t evict us all, so there may not even be any consequences. So people stop paying their mortgages, and then, of course, renters quickly see that the same logic applies to them.
How does the financial system and the overall economy survive that in the short run? I may be an economic rube, but I don’t get it. Dr. Hanson says, don’t worry, be happy:
The fraction of production that is given to capital vs. labor depends on the marginal productivity of capital, times the quantity of capital, vs. the marginal productivity of labor, times the quantity of labor. If capital and labor are the only owned factors of production, then if the fraction of income going to labor falls, the fraction of income going to capital must rise. That income flow goes to capital regardless of what assets are used to represent the stock of capital.
Well, ok then. So does that mean all those people will be able to pay their mortgages?
Leaving aside government (which Dr. Hanson surely does not want involved) and exports, production is equal to consumption plus investment, and those are both going to be in free fall, given a scenario like the one above. The primary problem is not with fractions of production—it’s with how much total production is going to occur.
Finally, as Hanson says, “Sure high income inequality might be ethically bad, and [might] threaten political instability.” That’s not something that we can simply dismiss. All of this, if it happens, is going to happen in the real world—where economics cannot be divorced from political and social ramifications. Income Inequality is already at a historically extreme level, and there is little reason to believe the progression won’t continue relentlessly. Bruce Judson has a new book out called It Could Happen Here: America on the Brink, which suggests that the possibility of revolution is not unthinkable if the trend continues. That’s something worth thinking about. No one who has enjoyed any measure of success under our current system would look forward to a world without free markets or where basic property rights were threatened.
Update: Prof. Hanson responded by adding this to his post:
Yes, a sudden unanticipated change would be disruptive, but no disruption does not imply falling production. Ford needs to learn some economics, or listen to some economists.
Well, we’ve been having a pretty good disruption lately. Production has not fallen? Here’s a graph of real v. potential GDP from the Federal Reserve Board of San Francisco. Look’s to me like production fell…
Source: Economist’s View/FRBSF