My earlier post arguing that robotisation wouldn’t destroy jobs, slash wages or drastically shorten the working week prompted many thoughtful responses. Richard Serlin and others countered, arguing that if automation affects all sectors, then displaced workers may have nowhere to go. Others asked if the sheer scale, speed and scope of robotisation might make it much more disruptive. Or if wages fall, who will be able to buy the extra output? And Noah Smith raised the prospect that robotisation might eventually differ from earlier waves of innovation by replacing rather than complementing human labour. This post attempts to respond to those points, expand on the original post and explain why I’m still relatively relaxed about robots.
Will broad based technological change leave workers with nowhere to work?
My previous post used Krugman’s hot dog parable of technological change, to make the point that if one sector experiences a productivity innovation, labour moves away from that sector to other sectors. That reallocates jobs rather than destroys them. But Richard Serlin, Mårtin Blix and others countered that robotisation affects all sectors, leaving unemployed workers with nowhere to go.
My point about hot dogs was about the relative allocation of labour when a relative productivity shock hits. But economic theory also has something to say about the case when a shock hits all sectors. The easiest way to think about this is to assume just one sector, so there’s nowhere for the displaced labour to go. Since production functions can be quite dry, perhaps a parable might help…
Suppose that firms own nets (capital) which they give to identical fisherman (labour) to go out and get fish (output) from an ocean teeming with seafood. Adding an extra fisherman to a given amount of net yields extra fish, but that extra output declines for each extra fisherman added. In a competitive market, economic theory says the wage for all fisherman is equal to this marginal output. Similarly, if I give extra netting to a fixed amount of fisherman, more fish are caught, but this extra amount gets less each time.
Now there’s a technological innovation— firms come up with better netting. They can now catch the same amount of fish with less labour. The innovation is “labour saving” in that sense, but does it create unemployment? No. Firms use it to catch more fish. And because the marginal productivity of labour is raised, wages go up too, so there’s someone who can afford to buy them. This is the theory supported by the historical data on wages and output that I showed in the previous post.
What if robotisation means everyone gets hit at once?
Another concern raised was around the short term dynamics— what happens if there is a sharp and synchronised shakeout? In the past specific occupations were rendered obsolete on an idiosyncratic basis – water carriers were made redundant by centralised water systems, switchboard operators by the digital telephone exchange etc. Perhaps with robotisation this shorter term pain comes all at once and there is a “big bang” of resource reallocation with widespread synchronised unemployment spells?
But I’m sceptical that automation represents such a shock. Previous economy wide transformational changes didn’t happen in a short space of time. The industrial revolution, although drastic in the broader sweep of human history, took at least 50 years, the so-called “Technological revolution” around 1900 took around 40 years . If an underlying innovation occurs in a single “big bang” like the railways, or electricity, it can take time for the implications to fan out to the wider economy, even if particular industries are affected much quicker.
And on the scale of change, it’s worth remembering that innovations which lead to stratospheric efficiency gains in a particular task, may have much more mundane effects on economy-wide productivity. Consider the effect of the microchip: since the mid 1950s, computing power has increased approximately a trillion fold in line with Moore’s Law, yet US total factor productivity hasn’t even doubled over that same period.
In a world of mass unemployment and/or low wages who will buy all those driverless taxi rides?
In comment threads on Bank Underground and elsewhere, several people argued that impoverished workers couldn’t afford to purchase the extra output that robotisation might make theoretically possible, raising the possibility of a permanent demand deficiency.
But workers aren’t the only people in the economy. Someone or some company must own the robots, and they must do something with the income— spending on the stuff they like, or adding to GDP via investment. Or perhaps they just save it— but then these savings can be reinvested via the financial system, and if the change is truly transformational there should be plenty of opportunities for that investment. That might not happen automatically, but if desired savings are out of whack with desired investment, monetary policy can usually be adjusted to bring the two into line and get the economy to potential output.
What if robots replace rather than complement human labour?
In the past, new technology has complemented rather than replaced human labour. But in a great reply, Noah Smith raised an important point:
“Economic assumptions are right, until they’re not. The future isn’t always like the past. Sometimes it breaks in radical ways…There is no fundamental law of economics that says that technology must always complement human labour.”
Perhaps automation will be qualitatively different from the technological change we have seen up to now because robots will have a cognitive function. Last year Brad de Long argued that, for most tasks, humans have already been replaced as sources of energy and as sources of manipulation by machines by earlier innovations. He suggested the lack of substitutability between labour and capital is because—up to now— humans have been the sole source of intelligence, sensory perception and reasoning. If robots did one day challenge humans’ cognitive monopoly, then perhaps labour might be eclipsed as an input into production in the same way that horses were in the early 20th century.
I find this a theoretically plausible explanation for how technological progress, at some point in the future, might start to displace labour, because it doesn’t commit the lump of labour fallacy, and it’s consistent with previous waves of technological innovation failing to drive down wages or create widespread unemployment.
But the million dollar question is whether this change in substitutability will occur, and if so, how fast. Neither Noah or Brad believes a drastic change is underway right now, or is imminent, and I’m inclined to agree…
Is substitutability between machines and people low, and will it stay that way?
The evidence on wages in the Robot Macroeconomics post suggests that substitutability has been low. But there’s some evidence that the US labour share has declined a bit over the past decade— from about 66% to 60%. That’s consistent with a bit more substitutability- but also with many other explanations. For example, that US labour has been substituted not with machines but with Chinese labour— a process that might reverse as China becomes richer.
But even if there is some replacement of jobs going on, I remain sceptical that this will lead to mass unemployment, slashed wages or more dystopian outcomes.
First up, even if many of today’s jobs can be entirely replaced by machines, technology can also create new roles. If I wrote down a list of “jobs” at the end of the 19th century, when half the US workforce was employed in agriculture, most of them would have either been rendered obsolete by technical change or have a drastic decline in the number of people doing them. But in that time a whole raft of new occupations – electrical engineer, computer programmer, etc – have been created.
Second, within a given organisation the dynamic response can be different to the static one— jobs can and do get reconfigured in response to apparently fatal technological innovations.
Consider bank tellers vs the cash machine (ATM). A great example of a technological innovation entirely replacing human labour for a particular task. This led to a massive fall in the number of bank tellers right? No. Between the 1970 (when American’s first ATM was installed) and 2010 , the number of bank tellers doubled. As James Bessen notes, reducing the number of tellers per branch made it cheaper to run a branch, so banks expanded their branch networks. And the role gradually evolved away from cash handling and more towards relationship banking.
So will robots redefine the economics of technological change?
So I remain unconvinced that we are on the cusp of a sharp break with the past. Substitutability is subtler than lists of tasks or obsolete jobs. And substitutability aside, technological changes tend to have gradual and less dramatic effects at the macro level.
Perhaps in the distant future robots might displace large swathes of human labour. But unless there are rapid advances in medicine or time travel, I fear I won’t be there to see it…
John Lewis works in the Bank’s Research Hub.
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