The Super Bowl of Economics: Capitalism vs. Technology

Flippy

Technology is the odds-on favorite.

In the multi-author collection Does Capitalism Have a Future?, Randall Collins, Emeritus Professor of Sociology at the University of Pennsylvania, observes that capitalism is subject to a “long-term structural weakness,” namely “ the technological displacement of labor by machines.”

Technology eliminating jobs is nothing new. From the end of the 18th Century through the end of the 20th, the Industrial Revolution swept a huge number of manual labor jobs into the dustbin of history. It didn’t happen instantly:  at the turn of the 20th Century, 40% of the USA workforce still worked on the farm. A half century later, that figure was 16%.

I grew up in rural Minnesota, where farm kids did chores before school, town kids baled hay for summer jobs, and everybody watched the weather and asked how the crops were doing. We didn’t know we were a vanishing species. In fact, “learning a trade” so you could “work with your hands” was still a moral and societal virtue. I chose carpentry. It was my first fulltime job after I graduated with a liberal arts degree.

Another half century later, at the start of the 21st Century, less than 2% of the U.S. workforce was still on the farm. In my hometown, our GI fathers beat their swords into plowshares, then my generation moved to the city and melted the plows down into silicon. And now the technological revolution is doing the same thing to mental labor that the Industrial revolution did to manual labor — only it’s doing it way faster, even though most of us aren’t aware that “knowledge workers” are a vanishing species. The following is from The Stupidity Paradox:  The Power and Pitfalls of Functional Stupidity at Work:

“1962… was the year the management thinker Peter Drucker was asked by The New York Times to write about what the economy would look like in 1980. One big change he foresaw was the rise of the new type of employee he called ‘knowledge workers.’

“A few years ago, Steven Sweets and Peter Meiksins decided they wanted to track the changing nature of work in the new knowledge intensive economy. These two US labour sociologists assembled large-scale statistical databases as well as research reports from hundreds of workplaces. What they found surprised them. A new economy full of knowledge workers was nowhere to be found.

“The researchers summarized their unexpected finding this way:  for every well-paid programmer working at a firm like Microsoft, there are three people flipping burgers at a restaurant like McDonald’s. It seems that in the ‘knowledge’ economy, low-level service jobs still dominate.

“A report by the US Bureau of Labor Statistics painted an even bleaker picture. One third of the US workforce was made up of three occupational groups:  office and administrative support, sales and related occupations, and food preparation and related work.”

And now — guess what? — those non-knowledge workers flipping your burgers might not be human. This is from “Robots Will Transform Fast Food” in this month’s The Atlantic:

“According to Michael Chui, a partner at the McKinsey Global Institute, many tasks in the food-service and accommodation industry are exactly the kind that are easily automated. Chui’s latest research estimates that 54 percent of the tasks workers perform in American restaurants and hotels could be automated using currently available technologies—making it the fourth-most-automatable sector in the U.S.

“Robots have arrived in American restaurants and hotels for the same reasons they first arrived on factory floors. The cost of machines, even sophisticated ones, has fallen significantly in recent years, dropping 40 percent since 2005, according to the Boston Consulting Group.

“‘We think we’ve hit the point where labor-wage rates are now making automation of those tasks make a lot more sense,’ Bob Wright, the chief operations officer of Wendy’s, said in a conference call with investors last February, referring to jobs that feature ‘repetitive production tasks.’

“The international chain CaliBurger, for example, will soon install Flippy, a robot that can flip 150 burgers an hour.”

That’s Flippy’s picture at the top of this post. Burger flippers are going the way of farmers — the Flippies of the world are busy eliminating one of the three main occupational groups in the U.S. And again, a lot of us aren’t aware this is going on.

Burger flipping maybe to particularly amenable to automation, but what about other knowledge-based jobs that surely a robot couldn’t do — like, let’s say, writing this column, or managing a corporation, or even… practicing law?

More to come.

Check out Kevin’s latest LinkedIn Pulse article:  Leadership and Life Lessons From an Elite Athlete and a Dying Man.

Capitalism on the Fritz

“In November 2008, as the global financial crash was gathering pace, the 82-year-old British monarch Queen Elizabeth visited the London School of Economics. She was there to open a new building, but she was more interested in the assembled academics. She asked them an innocent but pointed question. Given its extraordinary scale, how as it possible that no one saw it coming?

“The Queen’s question went to the heart of two huge failures. Western capitalism came close to collapsing in 2007-2008 and has still not recovered. And the vast majority of economists had not understood what was happening.”

rethinking capitalismThat’s from the Introduction to Rethinking Capitalism (2016), edited by Michael Jacobs and Mariana Mazzucato.[1] The editors and authors review a catalogue of chronic economic “dysfunction” that they trace to policy-makers’ continued allegiance to neoliberal economic orthodoxy even as it has been breaking down over the past four decades.

Before we get to their dysfunction list, let’s give the other side equal time. First, consider an open letter from Warren Buffett published in Time last week. It begins this way:

“I have good news. First, most American children are going to live far better than their parents did. Second, large gains in the living standards of Americans will continue for many generations to come.”

Mr. Buffett acknowledges that “The market system… has also left many people hopelessly behind,” but assures us that “These devastating side effects can be ameliorated,” observing that “a rich family takes care of all its children, not just those with talents valued by the marketplace.” With this compassionate caveat, he is definitely bullish on America’s economy:

“In the years of growth that certainly lie ahead, I have no doubt that America can both deliver riches to many and a decent life to all. We must not settle for less.”

So, apparently, is our Congress. The new tax law is a virtual pledge of allegiance to the neoliberal economic model. Barring a significant pullback of the law (which seems unlikely), we now have eight years to watch how its assumptions play out.

And now, back to Rethinking Capitalism’s dysfunction’s list (which I’ve seen restated over and over in my research):

  • Production and wages no longer move in tandem — the latter lag behind the former.
  • This has been going on now for several decades,[2] during which living standards (adjusted) for the majority of households have been flat.
  • This is a problem because consumer spending accounts for over 70% of U.S. GDP. What hurts consumers hurts the whole economy.
  • What economic growth there has been is mostly the result of spending fueled by consumer and corporate debt. This is especially true of the post-Great Recession “recovery.”
  • Meanwhile, companies have been increasing production through increased automation — most recently through intelligent machines — which means getting more done with fewer employees.
  • That means the portion of marginal output attributable to human (wage-earner) effort is less, which causes consumer incomes to fall.
  • The job marketplace has responded with new dynamics, featuring a worldwide rise of “non-standard’ work (temporary, part-time, and self-employed).[3]
  • Overall, there has been an increase in the number of lower-paid workers and a rise in intransigent unemployment — especially among young people.
  • Adjusting to these new realities has left traditional wage-earners with feelings of meaninglessness and disempowerment, fueling populist backlash political movements.
  • In the meantime, economic inequality (both wealth and income) has grown to levels not seen since pre-revolution France, the days of the Robber Barons, and the Roaring 20’s.
  • Economic inequality means that the shrinking share of compensation paid out in wages, salaries, bonuses, and benefits has been dramatically skewed toward the top of the earnings scale, with much less (both proportionately and absolutely) going to those at the middle and bottom. [4]
  • Increased wealth doesn’t mean increased consumer spending by the top 20% sufficient to offset lost demand (spending) by the lower 80% of income earners, other than as reflected by consumer debt.
  • Instead, increased wealth at the top end is turned into “rentable” assets — e.g., real estate. intellectual property, and privatized holdings in what used to be the “commons” — which both drives up their value (cost) and the rent derived from them. This creates a “rentier” culture in which lower income earners are increasingly stressed to meet rental rates, and ultimately are driven out of certain markets.
  • Inequality has also created a new working class system, in which a large share of workers are in precarious/uncertain/unsustainable employment and earning circumstances.
  • Inequality has also resulted in limitations on economic opportunity and social mobility — e.g., there is a new kind of “glass floor/glass ceiling” below which the top 20% are unlikely to fall and the bottom 80% are unlikely to rise.
  • In the meantime, the social safety nets that developed during the post-WWII boom (as Buffett’s “rich family” took care of “all its children”) have been largely torn down since the advent of “workfare” in the 80’s and 90’s, leaving those at the bottom and middle more exposed than ever.

The editors of Rethinking Capitalism believe that “These failings are not temporary, they are structural.” That conclusion has led some to believe that people like Warren Buffett are seriously misguided in their continued faith in Western capitalism as a reliable societal institution.

More on that next time.

[1] Michael Jacobs is an environmental economist and political theorist; at the time the book was published, he was a visiting professor at University College of London. Mariana Mazzucato is an economics professor at the University of Sussex.

[2] “In the US, real median household income was barely higher in 2014 than it had been in 1990, though GDP had increased by 78 percent over the same period. Though beginning earlier in the US, this divergence of average incomes from overall economic growth has not become a feature of most advanced economies.”  Rethinking Capitalism

[3] These have accounted for “half the jobs created since the 1990s and 60 per cent since the 2008 crisis.” Rethinking Capitalism

[4] Meanwhile, those at the very top of the income distribution have done exceedingly well… In the US, the incomes of the richest 1 percent rose by 142 per cent between 1980 and 2013 (from an average of $461,910, adjusted for inflation, to $1,119,315) and their share of national income doubled, from 10 to 20 per cent. In the first three years of the recovery after the 2008 crash, an extraordinary 91 per cent of the gains in income went to the richest one-hundredth of the population.” Rethinking Capitalism

Taboo Economics

Last time, University of Connecticut law professor James Kwak challenged us to upgrade our Econ 101 understanding of economics. I’ve spent the past year doing that, and have come across what appears to be the one single issue that will instantly and absolutely shut down all further inquiry. It is the ultimate economics taboo — the quickest way to destroy any hope of further learning or discussion. Taking it head on is like signing up for a an adventure tourism trip into the Labyrinth, live Minotaur included.

No thanks, I’m pretty sure I’ve got something going on that night.

It’s especially taboo if you’re an American — economists around the rest of the world talk about it all the time with a sense of urgency, like it’s something we need to get on right now if we know what’s good for us. More on that in a moment. But first, what is it? In a word,

Inequality

Karn_The_Minotaur_Boss

Uh-oh. I think I just heard the footfalls of a really large, really nasty creature.

Understanding economic inequality is the key to Economics 2017. Trouble is, the topic threatens the very bedrock of a country founded on this premise:

“We hold these truths to be self-evident: that all men are created equal.”

we are the 99%In the USA, “equal” means “anybody can make it here.” It is the land of Horatio Alger. To suggest that public policy — where the study of economics is played out — might include income inequality on its agenda is to throw Alger’s rags-to-riches enthronement of hard work, determination, courage, and honesty under the bus. Questioning those values is un-American by definition — the province of the Occupiers, who we all know finally had to give up and get a real job.

And so it goes.

You think I’m exaggerating? Read this NY Times op-ed piece from earlier this summer, then read these two completely polarized responses. The writer who started the exchange is a Brit who writes for the Brookings Institute and wrote a book entitled Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do about Itwhich pretty much tells you everything you need to know, doesn’t it? About as surprising as finding this lesson plan primer on economic inequality on the PBS website.

And so it goes.

As the NY Times exchange makes clear, the issue isn’t so much economics, it’s the complete, total, utter American rejection of anything resembling a class system — a yoke we threw off with those Declaration of Independence fightin’ words. Which is why, these days, if you’re an European or Asian economist you’ll talk about inequality with a sense of urgency, but if you’re an American you won’t talk about it all — unless you’re a foreign-trained economist teaching at a prestigious U.S. university, which doesn’t really count. See the analysis of the USA vs. the Rest of the World Economic Divide in Why So Few American Economists Are Studying Inequality, The Atlantic, Sept. 13, 2016. (The article’s killer opening line is “In recent years, it’s been European scholars who have written the blockbuster papers on the topic.” “Blockbuster papers”? Seriously? Are we talking about economics here?)

Which is why it takes a Frenchman to write an international blockbuster (there’s that word again) economics book that takes 600 geeky pages to reckon with economic inequality. (Google Thomas Piketty’s Capital in the Twenty-First Century — it’s all over the capital 21st centuryplace.)

I mentioned the book to a friend who’s a hedge fund manager. He’s the most dedicated to the study of economics person I know. His comment? “Piketty didn’t talk about benefits.”

That was it.

We can let the topic of income inequality send us scurrying to the safety of Econ 101, or we can brave the Minotaur. We’ll enter the Labyrinth next time.

By the way, the reputed lefty Brookings Institute and its equally reputed righty arch-rival American Enterprise Institute actually collaborated on a 2015 study called Opportunity, Responsibility, and Security: A Consensus Plan for Reducing Poverty and Restoring the American Dream. And if the BI is given to favoring its own touchy topics, the AEI isn’t afraid to tackle its own controversial counterparts, as I learned while squirming my way through The Inequality Taboo. I’ll just leave it there for now.