Monday, December 10, 2012

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.

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.?,”, 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,”, 23 July, 2012.


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.


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


  1. This is the 'paradox of productivity'.

    If you replace people with machines, then how do they get the income to buy stuff that the machines produce?

    In aggregate the machines will produce less than is required because they are not getting the demand signal from spending to produce.

    So we have to invent stuff for people to do (ie redefine what is 'work') so they can earn an income and demand resources with it. Otherwise production suffers.

    There is no reason at all to believe that new stuff for people to do will arise spontaneously - any more than there is a reason to believe that the saving market will 'clear' spontaneously at full employment.

    Essentially Capitalism needs breast feeding advisers it is constantly complaining about.

    1. Yes, productive and socially, economically useful work programs are needed.

      And frankly there a lot that could be done - public infrastructure, health care, education, social services, basic research and R&D.

      I suppose in the future - whether in the course of this century or the next - even these things will be increasingly done by machines with artificial intelligence.

      At that point, radical changes need to made: a basic guaranteed income and living standard for everyone who does not have inherited wealth.

      I suppose people will cease to work in the conventional sense.

      You will work, if you wish to, because you genuinely find it rewarding or enjoyable.

    2. "You will work, if you wish to, because you genuinely find it rewarding or enjoyable."

      Interesting that the underlying assumption there is that work is distasteful.

      Work should always be genuinely rewarding and enjoyable. And yes some people do indeed like cleaning drains for a living.

    3. "Work should always be genuinely rewarding and enjoyable. "

      But at the moment it's not true, is it.

      A lot of people dislike their work. A lot people have jobs they find boring or unpleasant, or some work is even dangerous.

      Of course, some people do find enjoyment in work other people dislike. I don't deny that. Each to his own.

      What I am saying is: it's quite possible many people will not have to work at all in the conventional sense (for decent lifestyle and retirement) in the future, perhaps a future closer than we think.

      When I was a younger man, I was somewhat inspired by reading Ray Kurzweil's book "The Age of Spiritual Machines":

      While now I think that many of the predictions and ideas in that book are wildly unlikely, some maybe ridiculous, and that Kurzweil has a poor understanding economics, nevertheless the core ideas are sound: in this century there will be revolutionary changes in technology, production, work and lifestyle, much more profound than the industrial revolution.

      The key technology will be increasingly sophisticated machine intelligence.

      It curious to me that no one has really done a good social democratic study of how new technological changes, with the right macro policies, could be used induce economic changes that would transform society away from what people really dislike about modern capitalism.

    4. From Star Trek: First Contact (1996)

      PICARD: The economics of the future are somewhat different. ...You see, money doesn't exist in the twenty-fourth century.
      LILY: No money! That means you don't get paid.
      PICARD: The acquisition of wealth is no longer the driving force in our lives. ...We work to better ourselves ...and the rest of humanity. Actually we're rather like yourself and Dr Cochrane.

      It unfortunate that so many "successful" people in our society do not have a passion for their work. They only have a passion for wealth and power. And how does this effect the motivation for fraud? [It might be helpful to think of scientific fraud as well as accounting fraud.]

      I have notice that most professionals on Wall Street do not have a career horizon in finance of over five years (at least working for a big bank). This seems true from recent biz school grads to veteran executives. The idea is always to make a ton of money and get out (obviously, many never reach their horizon -- tomorrow never comes).

    5. "Interesting that the underlying assumption there is that work is distasteful."

      YES. Any decent teacher will tell you that a good classroom practice is to give tasks to as many students as possible -- tasks that are discrete and unique to the student chosen, that others will see them doing. Do the attendance, report the number of lunches to the office, whatever. When you hand out these tasks, the problem isn't that nobody wants to do them (the prediction of textbook economics), it's that a bunch of students scramble to be chosen for each job. People work because they want to contribute and be seen as valuable to others and to the community.

    6. I can't believe I'm discussing this, but:

      "PICARD: The economics of the future are somewhat different. ...You see, money doesn't exist in the twenty-fourth century."...

      And yet in other episodes there are references to "replicator tokens" and some such currency as a medium of exchange.

      Seriously, I strongly doubt whether money will ever be abolished in the future. For could you measure relative costs without it?

      It's one of those instances where Mises' economic calculation arguments have some merit.

    7. "Seriously, I strongly doubt whether money will ever be abolished in the future"

      With infinite energy and replicators there is no need for money. You can indicate your demand directly to the machine who can then create it for you.

      And with effectively no scarcity people stop wanting baubles to prove they are better at acquiring things than others.

      Unless you happen to be Ferengi of course, who hoard the only element that cannot be replicated - Latinum.

    8. Yes, I can't believe I posted it because I am not a trekkie.

      I agree that there still are limited resources in the Star Trek world (such as use of the holodeck). I was making a point about values. Many people seem to make the assumption that $100 million annual incomes are required to attract the best corporate executives, as if money is the only motivator and definer of success.

      I believe people should be able to get filthy rich, but it should be through creating companies not looting companies. Growing companies through M&A should NOT count. Tax this looted income at a high rate. Keep l-t cap gains rate at the same level as middle class incomes. That will drive entrepreneurialism. Otherwise, people will just continue try to climb corporate ladder or work on Wall St -- not much risk there (and it rewards the wrong skill set).

      Here's something that not too many people caught. When Romney accepted Donald Trump's endorsement (2/2/2012), Romeny said, "I spent my life in the private sector -- not quite as succuessful as this guy [gesturing toward Donald TRUMP] -- but successful, none the less."

      I guess Romney must believe that Trump is also more successful than another well known person in the private sector: Jesus of Nazareth. Trump will be long forgotten in 2000 years. His ideas, too.

  2. LK,

    I have a bit of a problem for you:
    When Keen talks about Private Sector Deleveraging, does he mean that debt will increase due to debt deflation when the government does not step in, or that deleveraging will happen anyway, and government will manage it?

    1. It depends on the context when he uses that expression.

      Obviously, the US has averted a full scale debt deflation with severe commodity deflation causing the real value of debt to rise.

      So when Keen uses "private sector deleveraging" he's referring to increased debt servicing and repayment - in the current environment - and the effects that has on AD.

    2. So it has avoided that commodity deflation through government spending, right?

      But if there was no spending, the value of private sector debt should have increased due to debt deflation, right?

    3. Deflation has been avoided by measures to stop financial sector collapse, and monetary and fiscal intervention, yes.

      In the absence of these, there would have been a strong debt deflation like 1929-1933.

      However, when Keen uses "debt deflation" he is probably thinking of a weaker kind, caused by deflating asset prices.

  3. As i am a bit of an Izabella Kaminska fanboy hopefully you have reading some of the amazing stuff shes been writing over at the FT.

  4. This brought to mind the contreversy about dependecies ratios and the future problems it will provide in the provision and paying for social care.

    It also started me wondering about the practical differences between structural and demand deficient employment given that the deficiency is putting in place financial resources to get people to into work.

    Finally it provided food for thought about how the potential for this technology to change human life for the better can be choked off by financial considerations.

    The comments by readers remind what a massive game changer oil has been:turning the depletion of this capital stock into a financial flow has been hugely significant.