Rise of the Robots?

Yes, this is already the title of a recent post by Krugman here:

Paul Krugman, “Rise of the Robots,” December 8, 2012

I have to say I feel rather vindicated, since I made similar points over two years ago in this post:

“Automation and Robotics: The Future of Manufacturing?,” September 12, 2010.

Krugman notes that the strong trend towards industrial automation is good news for American manufacturing. Indeed, it is, and we can expect to see some return of manufacturing to the US and Western nations from East Asia and other developing, low wage countries. As Krugman says, robots “mean that labor costs don’t matter much, so you might as well locate in advanced countries with large markets and good infrastructure.” This means that the US should see a fall in its unbalanced trade deficit with other nations.

But what about the possible problems it will cause? Firstly, I want to qualify everything I say below with the clear statement: I do not oppose the trend to automation; I welcome it. Labour saving machinery was the key to the industrial revolution and the many increases in productivity growth we have seen over the past two centuries. The problem is that a new era of mass automation requires macroeconomic policies to deal with its perverse negatives consequences.

The media already reports that some economists think mass automation might not necessarily benefit everyone, but the analysis there is poor because it is based on the fantasy of neoclassical general equilibrium models.

In contrast, Krugman focuses on the implications for income distribution: away from workers to capital. First, the wealthy have a lower marginal propensity to consume (or alternatively a higher marginal propensity to save), and they are likely to buy financial assets on secondary markets with their extra money, not final goods and services.

Secondly, America and many Western nations already have a chronic unemployment problem, which, without proper fiscal expansion, will continue for years. What will happen when that persistent unemployment problem is exacerbated by large-scale structural unemployment owing to mass automation in industry?

Factors (1) and (2) above already strongly suggest a serious aggregate demand shortfall in the future. Keynesian demand management and income distribution are going to be more important than anyone ever dreamed. Government must step in and provide employment programs or funds to employ those who are unemployed and who seek employment. (In fact, structural unemployment induced by technology was already a problem in the 19th century and even as strong a defender of laissez faire as Jean-Baptiste Say – the inventor of Say’s law – advocated public works as a solution to such unemployment. See Appendix 1 below.)

No doubt additional jobs will be created in new private businesses, but it is unlikely to be enough. Free markets do not guarantee full employment, nor does Say’s law work. Employment in tradable goods and services in many countries will probably fall dramatically. Our employment future will probably be mainly in services, education, and most probably in employment programs funded by government or in government-sector jobs. There will probably be a great reduction in the hours that people need to work as well and more leisure.

It might well be that much of the government-funded labour force will be in education (e.g., universities), sciences, research and development, or other services. I suspect a much greater labour force working in basic sciences and applied R&D would mean a much more rapid advancement of science and technology too – a virtuous circle.

As we move down the route of radical automation in the course of this century, equally radical Keynesian demand management will be necessary to maintain demand for goods and services, income equality, and continuing rises in living standards.


Addendum
Some other points that occur to me as an afterthought:

(1) Eventually automation and structural unemployment will affect even services. Artificial intelligence is not far fetched, and it is undoubtedly the way of the future. Already when you ring some companies you can find voice recognition software doing the work of people.

(2) Perhaps we will see a very strong deflation in the prices of many industrial goods, especially those where at present high wages are a major factor input cost.

(3) Some more relevant news and commentary here:

Paul Krugman, “Robots and Robber Barons,” December 9, 2012.

Christopher Matthews, “Can Robots Bring Manufacturing Jobs Back to the U.S.?,” Time.com, September 27, 2012.


Will Knight, “This Robot Could Transform Manufacturing,” MIT Technology Review, September 18, 2012.

Vivek Wadhwa, “The End of Chinese Manufacturing and Rebirth of U.S. Industry,” Forbes.com, 23 July, 2012.

APPENDIX 1: SAY ADVOCATED PUBLIC WORKS AS A SOLUTION TO UNEMPLOYMENT INDUCED BY TECHNOLOGY

In his discussion of the introduction of labour saving machines, Say recognised that this would create short term unemployment, and in a footnote actually advocated public works spending by government:

“Without having recourse to local or temporary restrictions on the use of new methods or machinery which are invasions of the property of the inventors or fabricators a benevolent administration can make prevision for the employment of supplanted or inactive labour in the construction of works of public utility at the public expense as of canals, roads, churches or the like …” (Say 1832: 87).

This must come as a shock to Austrians and libertarians who so frequently cite Say’s law with approval.


BIBLIOGRAPHY

Say, J. B. 1832. A Treatise on Political Economy; or, the Production, Distribution, and Consumption of Wealth (4th edn; trans. C. R. Princep and C. C. Bibble), Grigg & Elliott, Philadelphia