The Technology Trap (part 4)

August 12, 2019

Previous | Next

In the last section of The Technology Trap, Carl Frey looks toward the future, trying to anticipate further impacts of technology on jobs, and suggesting policy measures to ease the transition for affected workers.

Smarter machines

Artificial intelligence is enabling machines to do even more of what humans used to do. “The fundamental difference is that instead of automating tasks by programming a set of instructions, we can now program computers to ‘learn’ from samples of data or ‘experience.’ When the rules of a task are unknown, we can apply statistics and inductive reasoning to let the machine learn by itself.” When a computer beat the world’s best player of the game Go in 2016, it did it not just by following a fixed set of rules, but by inferring its own rules from a series of trials using a large data set.

The range of tasks that smart machines can perform is broadening to include jobs like driving a truck, answering phone calls, picking up and packing products, taking consumer orders and accepting payments.

Still, there remain things that humans do better:

Even if we assume that algorithms at some point will be able to effectively reproduce human social intelligence in basic texts, many jobs center on personal relationships and complex interpersonal communication. Computer programmers consult with managers or clients to clarify intent, identify problems, and suggest changes. Nurses work with patients, families, or communities to design and implement programs to improve overall health. Fund-raisers identify potential donors and build relationships with them. Family therapists counsel clients on unsatisfactory relationships. Astronomers build research collaborations and present their findings in conferences. These tasks are all way beyond the competence of computers.

In 2013, the author and his Oxford colleague Michael Osborne reported on their detailed analysis of tasks and their estimate of the automation possibilities for 702 occupations covering 97% of the American workforce. They found the greatest risk of automation in the occupational categories of office and administrative support, production, transport and logistics, food preparation, and retail jobs. Overall, they classified 47% of jobs as vulnerable to automation.

Other research has yielded somewhat different percentages. But one general principle that has emerged from such research is that a job’s probability of automation varies inversely with the education it requires and the wages it pays. A study by the President’s Council of Economic Advisers found that “83 percent of workers in occupations that paid less than $20 an hour were at high risk of being replaced, while the corresponding figure for workers in occupations that paid more than $40 per hour was only 4 percent.” That could be good news, as long as we can keep expanding the good jobs and help workers acquire the skills they need to do them.

Unemployment, leisure, or new jobs?

Frey describes a “widespread dystopian belief” that technology will create a future of mass unemployment and low wages. Others envision a utopian future in which technology enables us to produce so much so easily that we can work very little and live lives of affluent leisure. Neither mass unemployment nor lives of leisure are evident in today’s society, and Frey doesn’t expect them. Instead people will have jobs for the foreseeable future, both because there remain things people do better than machines, and because people generally choose to take the benefits of high productivity in the form of more goods and services rather than more leisure.

Although new technologies have been replacing more middle-class jobs than they have been creating, Frey suggests that this may be just a “first-order effect.” He believes that the greatest gains in productivity and job creation are yet to come. That reinforces my belief that whether a new technology turns out to be replacing or enabling depends on how we use it in a social context. Replacing existing jobs may happen first because it’s easier than creating new jobs and upgrading skills, which requires some social reorganization. Frey points out that “it took roughly four decades for electricity to appear in the productivity statistics, after the construction of Thomas Edison’s first power station in 1882….[H]arnessing the mysterious force of electricity required a complete reorganization of the factory.” And of society, I would add, considering the changes required to turn workers and their families into affluent consumers of the products coming off the assembly lines.

Public policy

In the end, Frey remains optimistic about technology, but concerned about the divisions between current winners and losers and their immediate effects on society. Mitigating those effects is the main challenge for public policy. Among his recommendations:

  • Investments in education, especially early childhood education to offset the disadvantages of children from low-income, low-education families; such education pays for itself in better health outcomes, higher productivity and reduced crime
  • Wage insurance, especially for middle-aged workers who lose good jobs
  • Expanded tax credits to supplement low wages
  • Easing of licensing requirements that make it too difficult to move into new occupations
  • Vouchers to pay for moving to areas with better job opportunities
  • More affordable housing in thriving communities, supported by an easing of zoning restrictions like minimum lot sizes

I see a role for government not only in helping disadvantaged workers, but in creating economic demand for the good jobs they need. If the manufacturing sector is no longer expanding, and if the low-wage service sector is most vulnerable to the next wave of automation, then that leaves the skilled services as the most likely frontier of job creation. But skilled services like education, health care, counseling, mental health services and quality child care are also what people need to enhance their human capital and qualify for good jobs. Public investment in those services pays off in two ways–better jobs and more qualified workers to do them. It also strengthens democracy because successful workers are more politically active and less alienated.

Why public investment rather than private investment? Because the families most in need of such services often cannot afford them. And because employers have only limited incentive to develop the human capital of their own workers. Employers own the machines they buy, but not the workers they hire. The workers can take their enhanced human capital and go to work for someone else. For that reason, human capital is a public good that cannot be entirely privatized. A healthy, well-educated population is good for all of us. So, of course, are other public goods like a solid infrastructure and renewable energy.

But can the country afford new investments in health or education? If the government seems tapped out, it’s not because the country is poorer than it used to be, but because the wealth and income are so unevenly distributed, and those who have them support such low taxes on themselves. From the Reagan administration on, the tax cuts were supposed to stimulate the economy from the top down, by making more money available for private investment. The results have been disappointing, with slower economic growth than in the mid-twentieth century, when taxes were higher. Now we should consider the possibility that we can grow the economy faster with high domestic spending than with low taxes, if the spending is concentrated on human capital development and needed public goods. In order to make human services affordable for consumers and for the taxpayers, they need to be cost-effective. Providers will need to apply new technologies not to replace labor–which would defeat the purpose of creating jobs–but to enable labor to serve clients as efficiently as possible. In the predominantly service economy, a productivity revolution in skilled services is the key to fulfilling the positive potential of information technology.

Advocates of new government spending have their work cut out for them to mobilize public support. They need to convince the less educated half of the population that they will receive more benefits than costs, since their incomes are too low to be targeted for tax increases. If they can also convince the more educated middle class to vote in the public interest, they can achieve a democratic majority. As Frey says, “Redistributive taxing and spending depend on whether the middle-income voters feel an affinity with people with lower incomes.”

Although my interpretations and policy preferences differ from Frey’s in a few respects, I found this book enormously helpful in thinking through the relationship between technology and employment. I highly recommend it.


The Technology Trap (part 3)

August 11, 2019

Previous | Next

Having described an era in which the middle class expanded and more good jobs were created than destroyed, Frey turns to what he calls the “Great Reversal” in the period since 1980. In recent decades, new technologies have done more to replace workers than enable them, resulting in a shrinking middle class.

The computer revolution

The main difference between the age of automation and the previous era of mechanization is that the automated machine can replace the machine operator. “The great reversal…is in large part a consequence of computers making the skills of machine-tending workers obsolete.”

The most routine forms of work are most easily automated, and that includes some white-collar jobs like mortgage underwriter. Many jobs that paid enough to put their workers into the middle class are routine enough to be reduced to a computer program.

Many other kinds of jobs, however, are harder to automate:

[T]here are many tasks humans are able to perform intuitively but that are hard to automate because we struggle to define rules that describe them. For activities that demand creative thinking, problem solving, judgment, and common sense, we understand the skills only tacitly.

For many of the more creative jobs, computers complement human skills but don’t replace them.

Furthermore, humans have perceptual and manipulative abilities that allow even an unskilled worker to do things that machines have trouble with, such as “distinguishing a pot that is dirty and needs to be cleaned from a pot holding a plant.”

Consider the impact of computer technology on three types of workers:

  1. A highly educated professional uses computer software to become even more productive
  2. A semi-skilled machine operator is replaced by a robot
  3. An unskilled cleaning service worker still has a job, but it’s a low-wage job

That, in a nutshell, is why middle-skill jobs are the ones disappearing, and the middle class has been shrinking. Men have been hit the hardest, since they are most likely to hold the kind of semi-skilled manufacturing jobs that are no longer needed.

Although new technologies have created some entirely new jobs, such as computer programmers, Frey finds that more middle-class jobs have been lost than gained. “Technological change has become more worker replacing in recent years.”

The impact on incomes

Wage inequality has been increasing, and educational qualifications matter more than ever. Inflation-adjusted wages for college educated workers have been rising, especially for women, while wages for workers with high school degrees or less have been falling, especially for men. Frey quotes Erik Brynjolfsson and Andrew McAfee:

There’s never been a better time to be a worker with special skills or the right education, because these people can use technology to create and capture value. However, there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.

While the logical thing for future workers to do is acquire as much education as possible, college education is much more expensive–and becoming more so recently–than secondary education.

During this period, wage growth in general has fallen behind productivity growth, and the share of national income going to labor rather than capital has fallen from around 64% to around 58%.

To me, many of these facts seem to cry out for explanations that go beyond the technology itself to the social context in which we are applying it. Since Frey is focused mainly on the American context, he does not discuss how countries like Finland or Sweden are computerizing at least as fast as we are while maintaining more educational opportunity and economic equality. See, for example, Iversen and Soskice’s Democracy and Prosperity, especially post 3.

Social divisions

Displaced workers tend to be concentrated in certain places, especially economically depressed manufacturing cities. These are often far removed from the places where educated people congregate and create new hi-tech enterprises. As Enrico Moretti said in The New Geography of Jobs:

America’s new economic map shows growing differences, not just between people but between communities. A handful of cities with the “right” industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the “wrong” industries and a limited human capital base, are stuck with dead-end jobs and low average wages.

Communities with large job losses also experience declining marriage rates, rising rates of birth outside of marriage, and rising mortality from suicide and substance abuse. The unemployment rate may remain fairly low, either because downwardly mobile workers settle for jobs in low-wage services, or because they drop out of the labor force and stop being counted.

The downwardly mobile are often the politically alienated as well, feeling that neither political party is responsive to their problems. The Democratic Party was once considered the party of labor, but today it represents many constituencies–people of color, women, the LGBTQ community and environmentalists. Frey notes that Rust Belt states teeming with industrial robots tipped the 2016 election to Trump and the Republicans. I would add, however, that rather than appeal to displaced workers as a class, which would be awkward for the party that still favors capital over labor, Trump Republicans often appeal to them as white males, thus gaining their votes without doing much to address their underlying problems. Job losses in manufacturing have hit black workers hard too, but you don’t see Trump holding rallies in their communities!

The economy still grows as technology marches on, although slower than in the previous era and with far less equally distributed benefits. Frey’s concern is that those who are not benefiting will somehow impede the process, by supporting special taxes on robots or tariffs on foreign goods. Frey’s ideas for having technological progress with more widely shared benefits will be the subject of the final post.

Continued


The Technology Trap (part 2)

August 10, 2019

Previous | Next

Carl Benedikt Frey uses the distinction between labor-replacing and labor-enabling technologies to explain why industrialization can have quite different short-term effects on jobs, wages, and the demand for labor. The Second Industrial Revolution did more than the first to raise labor demand, create good jobs, and increase labor’s share of national income. Here I will take a closer look at that process for the United States in the twentieth century.

New technologies

Based on the research of Michelle Alexopoulos and Jon Cohen, Frey identifies electricity and the internal combustion engine as the most important general-purpose technologies of the Second Industrial Revolution. Both originated in the late nineteenth century but were widely applied in the twentieth. Both were essential to what became the country’s largest industry by 1940, automobile production.

A distinct “American system” of manufacturing was substantially boosting productivity by the 1920s. The model-T Ford was the first product to be assembled without any hand labor for fitting pieces together, since machine tools could now produce completely standardized and interchangeable parts. Another innovation was “unit drive”–machines with their own electric motors–which “allowed factory workflows to be reconfigured to accommodate assembly line techniques, as machinery could now be arranged according to the natural sequence of manufacturing operations.”

Electricity also enabled the production of new home appliances, “such as the iron (first introduced in the market in 1893), vacuum cleaner (1907), washing machine (1907), toaster (1909), refrigerator (1916), dishwasher (1929), and dryer (1938).” These time-savers made it easier for women to enter the labor force, earning money with which to buy more of the products being made.

The internal combustion engine revolutionized transportation, as the share of households with cars went from 2.3% in 1910 to 89.8% in 1930. The share of farms with tractors went from 3.6% in 1920 to 80% in 1960. The Federal Aid Highway Act of 1956 created better highways for cars and trucks to travel. Economists have attributed over a quarter of the increase in productivity between 1950 and 1970 to spending on highways.

Frey summarizes:

America’s great inventions of the period 1909–49 were predominantly of the enabling sort. Some jobs were clearly destroyed as new ones appeared, but overall, new technologies boosted job opportunities enormously. Indeed, gigantic new industries emerged, producing automobiles, aircraft, tractors, electrical machinery, telephones, household appliances, and so on, which created an abundance of new jobs. Vacancies rose and unemployment fell as the mysterious force of technology progressed.

Wages and working conditions

In general, wages rose along with productivity from 1870 to 1980. Since this hasn’t been true throughout history–and especially not lately–we have to say that rising productivity is helpful but not sufficient to produce wage increases. Frey suggests that concerns about worker turnover were one motive for employers to raise wages. “[T]he assembly line could be slowed if an experienced worker quit and was replaced by someone who could not initially keep pace.” Keeping labor peace in the face of worker organization and agitation was another motive.

A democratic society can also legislate on behalf of workers, especially if middle-class voters identify with their concerns. That was more the case during the Great Depression, when New Deal legislation supported worker interests. The National Labor Relations Act of 1935 guaranteed the right to organize and bargain with management, and the Fair Labor Standards Act of 1938 defined the standard work week as 40 hours and required employers to pay overtime for additional hours.

New technologies also created safer and less physically demanding workplaces. “Machines meant the end of the most hazardous, dirty, and backbreaking jobs,” and disabling injuries were cut in half. “Belts, gears, and shafts [of the pre-electric factory] were the main sources of factory accidents, posing a constant danger to workers’ fingers, arms, and lives.”

The “Great Leveling”

In retrospect, the twentieth century up until about 1980 is noted not only for its greater prosperity, but its reduction in economic inequality. Inequality had increased between the American Revolution and the Civil War, as artisan jobs had been lost to factories, large fortunes were being amassed, and large wage gaps had opened up between the most successful urban workers and the masses of poor people both on the farms and in the cities. The late nineteenth century is, of course, known as the “Gilded Age” for its conspicuous consumption by wealthy capitalists.

The twentieth century was different:

As Americans in the middle and at the lower end of the income distribution became the prime beneficiaries of progress, inequality went into reverse. Along with every other industrialized nation, America saw the share of income accruing to people at the top, fall.

Here, explanations differ. Thomas Piketty has argued that the general trend of capitalism is toward greater inequality, and it takes some unusual shock to the system to interrupt that process. As summarized by Frey:

In Piketty’s world, there are no forces within capitalism that serve to drive inequality down. From time to time, however, macroeconomic or political shocks may disrupt the normal equilibrium. Two world wars and the Great Depression served to destroy the riches of the wealthy.

Without denying that such shocks have played a role, Frey does see forces within capitalism to generate equality, the first of which is investment in labor-enabling technologies. That creates the potential to empower and enrich workers. A high rate of unionization is helpful for realizing that potential. Beyond that, workers must be able to keep up with the skill demands of new technologies.

“The leading explanation for the great leveling comes from pioneering work by Jan Tinbergen that conceptualized patterns of inequality as a race between technology and education….” The enabling technologies of the twentieth century favored more skilled workers. Jobs like mechanic or electrician paid well, but only for those who had the skills to do them. Semi-skilled assembly-line work could also pay pretty well, for workers with the discipline, stamina and dexterity to keep up. That could have created a wide gap between a skilled few and the unskilled many, except for the fact that so many workers were acquiring at least the basic skills they needed for an advanced industrial economy.

[E]ven if technological progress favors skilled workers, growing wage inequality does not have to be the result. The return to human capital depends on demand as well as supply. As long as the supply of skilled workers keeps pace with the demand for them, the wage gap between skilled and unskilled workers will not widen. While a number of short-run events and government interventions contributed to the great leveling, the most pervasive force—and certainly the best documented one—behind its long-run egalitarian impact was the upskilling of the American workforce, which depressed the skill premium.

The percentage of young people who completed a high-school education went from 9% to 40% just between 1910 and 1935, and proceeded upward from there.

The combination of enabling technology and a more skilled population created the largest middle class the country had ever seen. But that made the shrinking of the middle class that occurred after 1980 all the more surprising and alarming. Frey calls this the “Great Reversal,” and that is the topic of the next post.

Continued


The Technology Trap

August 9, 2019

Previous | Next

Carl Benedikt Frey. The Technology Trap: Capital, Labor, and Power in the Age of Automation. Princeton: Princeton University Press, 2019

Economic historian Carl Frey deepens our understanding of the current technology revolution by comparing it to previous technology-driven transitions. Although the author is perhaps best known for his estimate that 47% of American jobs are vulnerable to automation, his general view is fairly optimistic. He does not doubt the long-run benefits of the Industrial Revolution, which has doubled per-capita income every 50 years since 1750. He expects similar benefits from the new digital technologies, eventually. But he is concerned about the loss of jobs due to automation and the resistance to change it may generate.

Two sides of technology

For many years, the conventional wisdom in economics was that new technologies create as many jobs as they destroy, and do so fairly quickly. More recent thinking distinguishes two different effects of technology, either of which may dominate.

The extent to which labor-saving technologies will cause dislocation depends on whether they are enabling or replacing. Replacing technologies render jobs and skills redundant. Enabling technologies, in contrast, make people more productive in existing tasks or create entirely new jobs for them.

A classic example of a replacing technology is the early industrial power loom, which replaced the hand loom for weaving cloth and put a lot of weavers out of work. An example of an enabling technology is an X-ray machine, which improves a physician’s ability to diagnose disease.

Which side of technology is more prevalent has implications for labor demand, wages, and the share of national income going to labor as opposed to capital.

If technology replaces labor in existing tasks, wages and the share of national income accruing to labor may fall. If, in contrast, technological change is augmenting labor, it will make workers more productive in existing tasks or create entirely new labor-intensive activities, thereby increasing the demand for labor.

Just because a technology is available does not mean that people will want to adopt it. That depends on how they expect it to impact their income. And since different groups can be affected differently, technological change depends on who stands to gain or lose and the distribution of power among competing interests.

Technology traps

Societies fall into a technology trap when they are unable to implement a potentially useful technology due to social resistance. Frey uses the term mainly in reference to preindustrial societies, although he fears that we could fall into a similar trap today. “One reason economic growth was stagnant for millennia is that the world was caught in a technology trap, in which labor-replacing technology was consistently and vigorously resisted for fear of its destabilizing force.”

During the period that he calls “The Great Stagnation,” the problem was not so much that innovations didn’t appear, but that people lacked the incentive to implement them, especially for purposes of saving labor in economic production. He characterizes the Renaissance as both a cultural movement and “a force of profound technological change,” but a period with “plenty of imagination, but little realization.” One reason why industrialization didn’t occur earlier than it did was that landed elites were living comfortably off cheap labor they controlled, and had no interest in seeing them go to town to work in a factory. In the late eighteenth century, 96% of the world’s population were slaves, serfs, servants, or vassals. Many monarchs also preferred the status quo to the uncertainties of a social upheaval.

The fear among the ruling classes that labor displacement would cause hardship, social unrest, and at worst a challenge to the political status quo meant that worker-replacing technologies frequently were resisted or even banned. This dynamic, in which the politically powerful had more to lose than they could gain from progress, kept the Western world in a technology trap where technologies that threatened people’s skills were forcefully resisted.

Who gained from industrialization?

When the Industrial Revolution did begin in Britain, it was in someone’s interest to make it happen.

The hegemony of landed wealth was challenged by the mobile fortunes of merchants, who came to form a new industrial class with growing political influence. The mechanized factory was deemed critical to Britain’s competitive position in trade and thus to merchants’ fortunes, which its government would do nothing to jeopardize.

The position of the merchants was strengthened by profits from the Atlantic trade, which were not as monopolized by royal trading companies as they were in other parts of Europe. Merchants also got some support from a stronger Parliament, after the Civil War and the Glorious Revolution. “In eighteenth-century England, the polity and judiciary, which had previously supported the cause of workers and guilds and opposed replacing technologies, began to side with the innovators.”

At first, industrialization benefited neither the artisans who had been spinning, weaving and sewing in cottage industries, nor the workers in the early textile mills. The main effect of innovations like the spinning jenny and the power loom was to replace skilled artisan labor with something cheaper. The new factory jobs paid less, required less skill, and were done by children about half the time. It took about seventy years, from about 1770 to 1840, before the British working class started to share the benefits from industrialization. But they were helpless to stop the process because of their weak political position. In 1769, Parliament made it a capital crime to destroy machinery, as some protesters had been doing.

The situation during the “Second Industrial Revolution,” when the United States emerged as the leading industrial power, was very different. Here Frey says that the new technologies, especially electric power and the internal combustion engine, “were predominantly of the enabling sort.” They raised worker productivity and created new jobs more than they replaced workers. He cites the work of another economic historian:

Alexander Field has argued that productivity growth in the period 1919–73 can be thought of as “a tale of two transitions.” The first involved the redesign of the factory to take advantage of the virtues of electricity, whereas the second constituted a shift toward the horseless age, as motorized vehicles revolutionized transportation and distribution.

In this case, the benefits did come to be shared with the workers in the form of higher wages, shorter hours, safer workplaces, and earlier retirement. Although the workers’ struggles to organize were often violent, they were focused on winning a better share of the benefits of higher productivity, not on destroying the machines that made it possible.

Technology in social context

One question that I had throughout the book was how economists make the distinction between replacing and enabling in practice. Since Frey uses those terms as adjectives describing technologies, the reader could easily get the impression that the effect of a technology is readily observable as soon as it is introduced. That may be true for some specialized machines, that either clearly do or clearly don’t replace what a worker is currently doing. More generalized technologies with many applications can have mixed effects, replacing some workers while enabling others, as Frey’s discussion of twentieth-century electrical machines makes clear. “Clearly, technology did cause some occupations to vanish–like those of lamplighters, elevator operators, laundresses and so on–yet these jobs employed only a fraction of the workforce relative to the new machine-aided occupations that emerged.”

Another example of mixed effects is the internal combustion engine. On the one hand, it gave the drivers of motor vehicles the power of many horses, enabling them to cover greater distances, move more goods, or plow more fields. It created the occupation of truck driver, which is still the largest single occupation in many states. On the other hand, the tractor and other farm machinery dramatically reduced the demand for farm labor.

Now as Frey points out, many of the laborers who left farm work in the twentieth century did so more voluntarily than the displaced artisans of early industrial times. They chose to leave because they could get higher wages in manufacturing. In that case, the same workers were replaced in the agricultural sector after they were enabled in another. Similarly, workers who left domestic service for manufacturing were replaced by electrical appliances. But that raises the question of why labor demand was so high in manufacturing. Was it simply in the nature of assembly-line technology to enhance rather than replace labor?  Wasn’t it also because there was now a mass market for manufactured goods, supported by a system that routinely passed along the benefits of high productivity to consumers (as low prices) and to workers (as high wages). Without expanding markets, wouldn’t assembly-line technology replace many workers and not just empower them?

Another factor affecting whether workers are replaced or enhanced is their skill level. “One reason that the horseless age was not accompanied by a jobless age is that human workers, unlike horses, have the means of acquiring new skills, which allows them to take on tasks outside the realm of machines.” If the effect of a machine depends on what happens outside the realm of machines, then classifying the machine as replacing or enabling is no simple matter.

The conclusion I come to is that whether a technology is replacing or enhancing may not be at all obvious when it is first introduced. It depends on how its applications unfold over the course of many years, in a social context that includes things like corporate policies, markets, labor organization, and access to education.

What seems clear is that very early industrial technologies were more replacing than enabling, and that the potential of technology to empower workers was realized only gradually over the course of industrial history. Harnessing the power of nature with such innovations as the steam engine and electrical machinery had a lot to do with this. But rather than seeing technologies as either inherently replacing or enabling, I would call attention to the continued potential for both, as well as to the many decisions that influenced how technologies were actually used. Was it the assembly line itself that made Henry Ford raise wages and reduce car prices, or was it his vision of a path to a prosperous industry?

A new technology trap?

Frey’s concerns about a new technology trap arise from his observation that new technologies are more like those of the First Industrial Revolution than the Second; they are more replacing than enabling. (But again I ask: Is that a feature of the technology itself or of the social context in which we are using it?)

After reviewing many recent technological developments, including in machine learning, machine vision, sensors, various subfields of AI, and mobile robotics, my conclusion is that while these technologies will spawn new tasks for labor, they are predominantly replacing technologies and will continue to worsen the employment prospects for the already shattered middle class.

Like some other economists, Frey sees a similarity between the plight of workers today and that of early textile workers, whose skills and incomes were more replaced by machinery than enhanced by it. That accounts for a lot of the backlash against automation and global trade, which could impede technological change. “The mere existence of better machines is not sufficient for long run growth.” Growth will depend on “policy choices made in the short run.” At the very least, steps must be taken to ease the transition to a hi-tech society for workers who are experiencing dislocations.

Frey remains a long-run optimist, believing that eventually productivity growth will resume–it’s been sluggish lately despite the new technologies–and that more good jobs will be created involving tasks that are hard to automate. These will usually be the more creative, more skilled areas of human activity. Frey rejects as a “widespread misconception…that automation is coming for the jobs of the skilled.” From my perspective, that means that information technologies may not turn out to be as “predominantly replacing” as it now seems.

I will elaborate on many of these points in upcoming posts.

Continued

 


Democracy and Prosperity (part 4)

July 22, 2019

Previous | Next

Previous posts on Iversen and Soskice’s Democracy and Prosperity have discussed the symbiotic relationship between democracy and capitalism, democratic support for capitalism during the revolution in information and communications technology, and variations among advanced capitalist democracies (ACDs) in their original path to democracy, electoral systems, economic inequality and educational opportunity.

This final post will discuss three challenges facing ACDs today: global financial instability, populism, and artificial intelligence/robotics. The focus will be on the United States as a country with a relatively weak and politically fragmented labor movement; a two-party, majority-rule electoral system; and a recent trend toward high inequality and low social mobility.

Global financial instability

The financial crisis of 2008 occurred around the time that “governments were implementing the broad set of reforms that we have argued created the foundation for the knowledge economy.” That raises the question, “If the reforms were intended to produce prosperity, how did the crisis happen?”

Iversen and Soskice focus on the fact that different democracies responded to the opportunities presented by technological change by promoting different segments of their economies. While Germany and Japan promoted their “high value-added export sectors,” the U.S. and U.K. promoted their “high-risk financial sectors.” In the U.S., loose financial regulations allowed highly leveraged financial institutions (HLFIs) to accumulate high-risk assets such as bundles of shaky mortgages. Americans became global debtors, consuming more than they produced, while exporting countries became global creditors. This could work because creditor nations were willing to accept payment for their goods in dollars and then lend those dollars back to us, often providing “short-term loans to the HLFIs to cover the acquisition of a large proportion of the risky assets–that is, securitized loans–that financed the consumption.” Government fiscal policy sustained the imbalance by running deficits–also partly financed by foreigners–spending more dollars than it took out in taxes. Government too thus enabled Americans to consume more than they produced.

The market value of risky financial assets collapsed once debtors became overextended and started to default, triggering the global financial crisis. Although the global economy has recovered–more or less–from the Great Recession that followed, the fundamental imbalance remains, portending additional instability in the future.

How could the U.S. economy be put on a more solid footing? If all that the government would do is balance the budget by cutting spending, the result might only be lower incomes and economic contraction, without a real increase in national production. Sustainable economic growth may require both more private investment in productivity-enhancing innovations and public investment in education and training. However, such changes may lack the support of capitalists who are already making money accumulating financial assets they think are sound, or those workers who already have good educations and incomes.

Populism

The authors define populism as:

…a set of preferences and beliefs that rejects established parties and elites, that sees established politicians as gaming the system to their own advantage, and that at the same time sees the poor as undeserving of government support. Above all it opposes immigrants, who are always counted among the undeserving…,and it rejects the cosmopolitan outlook associated with the rising cities in favor of the traditional family, conforming sexual orientations, and nationalism.

The authors see the re-emergence of populism as the most important shift in politics of the last forty years. They see growing economic inequality, falling social mobility, and the aftermath of a major economic crisis as especially conducive conditions. They find populist values especially widespread in democracies relatively low on educational opportunity, such as the United States, South Korea, Japan and Italy.

The adherents of populism are usually members of the “old middle classes,…those who have experienced stagnating wages because of skill-biased technological change, outsourcing, or import competition.” Although populism is not simply a backlash against cultural changes like racial integration, feminism, or gay rights, it does have a cultural dimension that is related to economic change. The urban “agglomerations of knowledge” that are at the center of the new economy encourage a “tolerance of diversity and cosmopolitan values.” The industrial work ethic that encouraged simple conformity and submission to authority has given way to a more flexible lifestyle, one that is open to new ideas wherever they come from. But workers who lack the education and income to live in the cities remain in–or move to–smaller towns containing old middle-class enclaves. There they practice “a nativist version of the old social contract, which is based on notions of working hard…, obeying the rules, observing traditional family values, and attachment to the nation.” They may become encapsulated, and feel both economically and culturally devalued outside of those enclaves.

In electoral systems with proportional representation, populists can achieve influence by forming a minority party, just as socialists often do. In a majoritarian system like the U.S., populists need the support of a major party, and they have currently found it in the Republican Party. Iversen and Soskice see populists as a minority even there, and they do not explain why so many Republicans would find common ground with Donald Trump. I think it’s because Republican economic policies are increasingly blamed for growing inequality–their previous presidential candidate ran on trickle-down economics and lost–and they have increasingly appealed to white nativists and Christian conservatives in the hope of saving their Reagan-Bush era majority.

The authors do not regard populism as a serious threat to the technologically advanced economy or the democratic state, for several reasons:

  1. Populist economic resentments are directed less at the advanced economy itself than at poor people and immigrants, who I would say get unfairly blamed for middle-class status anxiety;
  2. Too many people are benefiting from economic and cultural change to give the populists a sustained majority;
  3. “Populism can be readily undermined by public policies designed to open educational opportunities for more people.”

I suspect that mainstream political parties will need to address the legitimate opportunity concerns that are fueling populism, but also repudiate many of its reactionary and undemocratic sentiments. If a major party can remain popular while doing neither of those things, as the Republicans are attempting, then democracy is in more trouble than this book acknowledges.

Artificial intelligence and robotics

The revolution in information and communications technology is only in its early stages. Further transformations of work and economic organization are to be expected, especially in the areas of artificial intelligence and automated mechanical systems.

Many of those who try to anticipate further change are technological optimists but social pessimists. Writers such as Martin Ford (The Rise of the Robotshave a very expansive view of what AI can do, but are very worried about the prospects for human displacement and unemployment. On the other hand, Robert Gordon (The Rise and Fall of American Growth) sees information and communication technologies as only modest contributions to the history of economic change, not transformative enough to make huge difference to human work or productivity.

Iversen and Soskice take an intermediate position. They do think that new technologies can substantially change how work is done, but they stress their potential to complement human labor rather than substitute for it. As they pose the issue, “[I]f AI and robots can replicate the cospecificity of skill clusters by essentially generating de novo the knowledge that otherwise emerges from human inter-action and exchange of ideas, then educated workers and technology would no longer be necessary complements to technology.” What computers do best is implementing algorithms, that is, slavishly following a routine that humans have already come up with. But “a key function of decentralized production networks is to develop new solutions to complex problems in uncertain environments. The objective of innovation is to develop new algorithms, as opposed to merely optimizing old ones.”

Only when and if computers can be taught to think as creatively as humans can we speak of massive substitution rather than complementarity. The authors don’t even rule out a merger of humans and machines into a new species through bioengineering, but such dreams seem a long way off.

In the meantime, workers will increasingly need the education and skills to work with the machines. There will be winners and losers, but ultimately the results will depend on democratic politics, not just technology.

This points to an optimistic conjecture: even as new technology replaces more jobs, the advanced sectors are location-specific and can support policies that ensure broad sharing of the benefits of a more productive economy based on broad, although never all-encompassing, electoral coalitions.

What those coalitions can demand is public investments in human capital to make citizens productive contributors to the knowledge economy. The authors see that as the key to sustaining the mutually beneficial relationship between capitalism and democracy. “What ultimately makes democratic capitalism resilient in the face of technological change and the rise of the populist challenge is the continued expansion of education combined with opportunity in the advanced sectors.”

Even if the number of workers displaced by technology becomes very large, democratic politics could demand a new form of welfare state, not to pay people not to work, but to support them in meaningful forms of work that are not rewarded by the market. Maybe they could stay home and care for their children, and yet share the benefits of a high-productivity, automated society, because society agreed that they deserved to.