Authors: Erik Brynjolfsson,Andrew McAfee
These points have merit, but we are not convinced that people at the lower ranges of the spread are doing OK. For one thing, some critical items that they (and everyone else) would like to purchase are getting much more expensive over time. This phenomenon is well summarized in research by Jared Bernstein, who compared increases in median family income between 1990 and 2008 with changes in the cost of housing, health care, and college. He found that while family income grew by around 20 percent during that time, prices for housing and college grew by about 50 percent, and health care by more than 150 percent.
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Since American real median incomes have been falling in recent years, these comparisons would be even more unfavorable if repeated over later time periods than 1990 to 2008.
However American households are spending their money, many of them are left without a financial cushion. The economists Annamaria Lusardi, Daniel J. Schneider, and Peter Tufano conducted a 2011 study asking people about “their capacity to come up with $2,000 in 30 days.” Their findings are troubling. They concluded that, “Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans. . . . [In other words, we] find that nearly half of Americans are financially fragile. . . . [A] sizable fraction of seemingly ‘middle class’ Americans . . . judge themselves to be financially fragile.”
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Other data—about poverty rates, access to health care, the number of people who want full-time jobs but can only find part-time work, and so on—confirm the impression that while the economic bounty from technology is real, it is not sufficient to compensate for huge increases in spread. And those increases are not purely a consequence of the Great Recession, nor a recent or transient phenomenon.
That many Americans face stagnant and falling incomes is bad enough, but it is now combined with decreasing social mobility—an ever lower chance that children born at the bottom end of the spread will escape their circumstances and move upward throughout their lives and careers. Recent research makes it clear that the American Dream of upward mobility, which was real in earlier generations, is greatly diminished today. To take just one example, a 2013 study of U.S. tax returns from 1987 to 2009 conducted by economists Jason DeBacker, Bradley Heim, and their colleagues found that the thirty-five thousand households they studied tended to stay in roughly the same order of richest to poorest year after year, with little reshuffling, even as the differences in household income grew over time.
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More recently, sociologist Robert Putnam has illustrated how for Americans in cities like Port Clinton, Ohio (his hometown), economic conditions and prospects have worsened in recent decades for the children of parents with only high school educations even as they’ve improved for college-educated families. This is exactly what we’d expect to see as skill-biased technical change accelerates.
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Many Americans believe that they still live in the land of opportunity—the country that offers the greatest chance of economic advancement. But this is no longer the case. As
The Economist
sums it up, “Back in its Horatio Alger days, America was more fluid than Europe. Now it is not. Using one-generation measures of social mobility—how much a father’s relative income influences that of his adult son—America does half as well as Nordic countries, and about the same as Britain and Italy, Europe’s least-mobile places.”
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So the spread is not only large, but also self-perpetuating. Too often, people at the bottom and middle stay where they are over their careers, and families stay locked in across generations. This is not healthy for an economy or society.
It would be even unhealthier if the spread were to diminish the bounty—if inequality and its consequences somehow impeded technological progress, keeping us from enjoying all the potential benefits of the new machine age. Although a common argument is that high levels of inequality can motivate people to work harder, boosting overall economic growth, the inequality can also dampen growth. In 2012 economist Daron Acemoglu and political scientist James Robinson published
Why Nations Fail
, a sweeping account of hundreds of years of history aimed at uncovering, as the book’s subtitle puts it, “the origins of power, prosperity, and poverty.” According to Acemoglu and Robinson, the true origins are not geography, natural resources, or culture. Instead, they’re institutions like democracy, property rights, and the rule of law; inclusive ones bring prosperity, and extractive ones—ones that bend the economy and the rules of the game to the service of entrenched elite—bring poverty. The authors make a compelling case, and when they turn their attention to America’s current condition, they offer important insights and cautions:
Prosperity depends on innovation, and we waste our innovative potential if we do not provide a level playing field for all: we don’t know where the next Microsoft, Google, or Facebook will come from, and if the person who will make this happen goes to a failing school and cannot get into a good university, the chances that it will become a reality are much diminished. . . .
The U.S. generated so much innovation and economic growth for the last two hundred years because, by and large, it rewarded innovation and investment. This did not happen in a vacuum; it was supported by a particular set of political arrangements—inclusive political institutions—which prevented an elite or another narrow group from monopolizing political power and using it for their own benefit and at the expense of society.
So here is the concern: economic inequality will lead to greater political inequality, and those who are further empowered politically will use this to gain greater economic advantage, stacking the cards in their favor and increasing economic inequality still further—a quintessential vicious circle. And we may be in the midst of it.
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Their analysis hits on a final reason to be concerned about the large and growing inequality of recent years: it could lead to the creation of extractive institutions that would slow our journey into the second machine age. We think this would be something more than a shame; it would be closer to a tragedy. We also believe, based on the work of Acemoglu and Robinson and others, that it is a plausible scenario. Instead of being confident that the bounty from technology will more than compensate for the spread it generates, we are instead concerned about something close to the reverse: that the spread could actually reduce the bounty in years to come.
Technological Unemployment
We’ve seen that the overall pie of the economy is growing, but some people, even a majority of them, can be made worse off by advances in technology. As demand falls for labor, particularly relatively unskilled labor, wages fall. But can technology actually lead to unemployment?
We’re not the first people to ask these questions. In fact, they’ve been debated vigorously, even violently, for at least two hundred years. Between 1811 and 1817, a group of English textile workers whose jobs were threatened by the automated looms of the first Industrial Revolution rallied around a perhaps mythical, Robin Hood–like figure named Ned Ludd and attacked mills and machinery before being suppressed by the British government.
Economists and other scholars saw in the Luddite movement an early example of a broad and important new pattern: large-scale automation entering the workplace and affecting people’s wage and employment prospects. Researchers soon fell into two camps. The first and largest argued that while technological progress and other factors definitely cause some workers to lose their jobs, the fundamentally creative nature of capitalism creates other, usually better, opportunities for them. Unemployment, therefore, is only temporary and not a serious problem. John Bates Clark (after whom the medal for the best economist under the age of forty is named) wrote in 1915 that “In the actual [economy], which is highly dynamic, such a supply of unemployed labor is always at hand, and it is neither possible [nor] normal that it should be altogether absent. The well-being of workers requires that progress should go on, and it cannot do so without causing temporary displacement of laborers.”
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The following year, the political scientist William Leiserson took this argument further. He described unemployment as something close to a mirage: “the army of the unemployed is no more unemployed than are firemen who wait in fire-houses for the alarm to sound, or the reserve police force ready to meet the next call.”
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The creative forces of capitalism, in short, required a supply of ready labor, which came from people displaced by previous instances of technological progress.
John Maynard Keynes was less confident that things would always work out so well for workers. His 1930 essay “Economic Possibilities for our Grandchildren,” while mostly optimistic, nicely articulated the position of the second camp—that automation could in fact put people out of work permanently, especially if more and more things kept getting automated. His essay looked past the immediate hard times of the Great Depression and offered a prediction: “We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come—namely,
technological unemployment
. This means unemployment due to our discovery of means of economizing the use of labor outrunning the pace at which we can find new uses for labor.”
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The extended joblessness of the Great Depression seemed to confirm Keynes’s ideas, but it eventually eased. Then came World War II and its insatiable demands for labor, both on the battlefield and the home front, and the threat of technological unemployment receded.
After the war ended, the debate about technology’s impact on the labor force resumed and took on new life once computers appeared. A commission of scientists and social theorists sent an open letter to President Lyndon Johnson in 1964 arguing that:
A new era of production has begun. Its principles of organization are as different from those of the industrial era as those of the industrial era were different from the agricultural. The cybernation revolution has been brought about by the combination of the computer and the automated self-regulating machine. This results in a system of almost unlimited productive capacity which requires progressively less human labor.
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The Nobel Prize–winning economist Wassily Leontief agreed, stating definitively in 1983 that “the role of humans as the most important factor of production is bound to diminish in the same way that the role of horses in agricultural production was first diminished and then eliminated by the introduction of tractors.”
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Just four years later, however, a panel of economists assembled by the National Academy of Sciences disagreed with Leontief and made a clear, comprehensive, and optimistic statement in their report “Technology and Employment”:
By reducing the costs of production and thereby lowering the price of a particular good in a competitive market, technological change frequently leads to increases in output demand: greater output demand results in increased production, which requires more labor, offsetting the employment effects of reductions in labor requirements per unit of output stemming from technological change. . . . Historically and, we believe, for the foreseeable future, reductions in labor requirements per unit of output resulting from new process technologies have been and will continue to be outweighed by the beneficial employment effects of the expansion in total output that generally occurs.
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This view—that automation and other forms of technological progress in aggregate create more jobs than they destroy—has come to dominate the discipline of economics. To believe otherwise is to succumb to the “Luddite Fallacy.” So in recent years, most of the people arguing that technology is a net job destroyer have not been mainstream economists.
The argument that technology cannot create ongoing structural unemployment, rather than just temporary spells of joblessness during recessions, rests on two pillars: 1) economic theory and 2) two hundred years of historical evidence. But both of these are less solid than they first appear.
First, the theory. There are three economic mechanisms that are candidates for explaining technological unemployment: inelastic demand, rapid change, and severe inequality.
If technology leads to more efficient use of labor, then as the economists on the National Academy of Sciences panel pointed out, this does not automatically lead to reduced demand for labor. Lower costs may lead to lower prices for goods, and in turn, lower prices lead to greater demand for the goods, which can ultimately lead to an increase in demand for labor as well. Whether or not this will actually happen depends on the elasticity of demand, defined as the percentage increase in the quantity demanded for each percentage decline in price.
For some goods and services, such as automobile tires or household lighting, demand has been relatively inelastic and thus insensitive to price declines.
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Cutting the price of artificial light in half did not double the amount of light consumers and businesses demanded, so the total revenues for the lighting industry have fallen as lighting became more efficient. In an great piece of historical sleuthing, economist William Nordhaus documented how technology has reduced the price of light by over a thousand-fold since the days of candles and whale oil lamps, allowing us to expend far less on labor while getting all the light we need.
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Whole sectors of the economy, not just product categories, can face relatively inelastic demand. Over the years agriculture and manufacturing have each experienced falling employment as they became more efficient. The lower prices and improved quality of their outputs did not lead to enough increased demand to offset improvements in productivity.