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MIT bods' digital economy babblings are tosh. C'mon guys, Economics 101

It's not as if you're meant to know thi- oh, wait

By Tim Worstall, 10 Jun 2015

Worstall on Wednesday We've one of those lovely open letters floating around. Where the Great and the Good, the Wise Thinkers, tell us all how we've got to organise the world to accord with their prejudices about how it should be ordered.

This particular one, an “Open Letter on the Digital Economy” (versions here and here) is about what we've got to do to deal with the terrors of the robots coming for all our jobs.

It's the usual list, of course: more education; build more roads; spend more on basic research; and, of course, given the source of these Wise Thinkers, more money for people to think Wise Thoughts about the terrors of the robots coming to take all our jobs. Ho hum...

Sadly this is all starting from the wrong economic point. There's one very minor one that caught my eye:

The majority of US households have seen little if any income growth for over 20 years, the percentage of national income that’s paid out in wages has declined sharply in the US since 2000...

These are both something of a statistical artifact. The wage share of GDP has indeed fallen (as we've discussed way back here) but the labour share in the US has held up rather better than it has in the UK.

The difference between the two points is that the first relates to the cash in the wage packet; the second is that difference, plus any taxes employers pay on employing people, plus the costs of any benefits. In the US most people get their health care insurance from employment: the cost of insurance has been rising over the decades and so total compensation – that labour share – has been pretty much static with a small recent fall, while the wage share looks as if it's fallen off a cliff.

Yes, OK, this is me being a pedant, but getting the details of the analysis correct is essential if we're to get anywhere close to a solution to our perceived ailments.

However, this I regard as a much more serious error:

The fundamental facts are that we’re living in an ever-more digital and interlinked world, and the benefits of this technological surge have been very uneven.

Previous surges brought with them greatly increased demand for labor and sustained job and wage growth. This time around, the evidence is causing some people to wonder if things are different.

Or, to paraphrase many recent headlines, will robots eat our jobs?

This is to look at the effect of technological change upon jobs in entirely the wrong manner. This is not just the wrong way up, it's arse over tit. It's making the assumption that increasing mechanisaton, the introduction of new production techniques, leads to new jobs – jobs that can be done by those newly displaced workers. And this is simply wrong.

We do not go about saying that those ploughmen became tractor drivers, or the farriers petrol pump attendants and tractor builders. One in ten of them might have done, one in 50 maybe, but that's not the effect of mechanisation in the round.

To use the archetypal economic model for this – the pin factory – we don't say that increased mechanisation led to more jobs making machines for pin factories than were displaced from the non-mechanised pin factories of yore.

Of course we don't: if we did, we'd actually be saying that we haven't reduced the amount of labour needed in the slightest. How the labour of one hundred people is distributed between making pins and making machines to make pins doesn't really matter all that much: we're still using the labour of one hundred people. That isn't, as I say, how it works. We are using less labour to make our pins these days.

That displaced labour hasn't gone off into pin-related items either. It's gone off to do something entirely different, be that teaching yoga, flipping burgers, nursing, or even writing poetry. As a society we're now richer in having both pins and yoga and to the extent that modern poetry is a benefit, we enjoy that too.

This really harks back to a very basic assumption right at the start of economics. Human desires and wants are insatiable, unlimited.

So, if we stop having to use human labour to produce one satiator of one such desire (say, the robots now flip all the burgers) we don't have to find some other fast comestible related thing for that displaced labour to do. They will go off and do something that satiates some other human desire.

So, it's not that the new technologies create jobs at all: we're all entirely fine with the idea that they don't, they destroy jobs instead. Thus, pondering what jobs these new technologies will create is a nonsense because they never will do such a thing.

What really happens is that people are freed to go and do something where the robots haven't taken all the jobs yet.

Sure, this can be decried as angels on pinheads but it's actually rather more important than that. For our Wise Thinkers are telling us that the answer is more education.

It stands to reason in a higher tech world, they say, that with the robots moving up the skill levels, we need to keep the humans ahead of that trailing mechanical army eating all the jobs. But if those robots free people to do something else, then the case for more technical education collapses.

That argument is like saying that because we've got cars we must teach humans to run faster than cars so they've still got something to do.

Nonsense: we want humans to use the cars for their transport needs. As far as jobs are concerned, humans can go and write poetry, teach yoga or whatever. Something entirely different now that mechanisation has satiated that first human desire.

Technological advances don't create jobs: human desires do. Technological advances free labour up to go and satisfy different desires. If we lose sight of that basic truth then we're never going to get our response to said advance correct. ®

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