Economists show the perils and potential of the coming robot revolution

Summary: History shows that we oddly focus on small changes coming while ignoring the larger one, because they are truly revolutionary and hence difficult to see and understand. So it is with the third industrial revolution, the oddest so far — and likely to be the biggest. This post shows that some of our top economists have begun to describe what’s coming. As usual with power, it’s great news if we manage it well and potentially horrific if we don’t.  We time to get ready. {1st of 2 posts today.}

“Robots Are Us: Some Economics of Human Replacement“

By Jeffrey D. Sachs (Prof Economics, Columbia), Laurence J. Kotlikoff (Prof Economic, Boston U), Seth G. Benzell, and Guillermo LaGarda.
29  March 2015.

Abstract

Will smart machines replace humans like the internal combustion engine replaced horses? If so, can putting people out of work, or at least out of good work, also put the economy out of business? Our model says yes. Under the right conditions, more supply produces, over time, less demand as the smart machines undermine their customer base. Highly tailored skill- and generation-specific redistribution policies can keep smart machines from immiserating humanity. But blunt policies, such as mandating open-source technology, can make matters worse.

Opening

Whether it’s bombing our enemies, steering our planes, fielding our calls, rubbing our backs, vacuuming our floors, driving our taxis, or beating us at Jeopardy, it’s hard to think of hitherto human tasks that smart machines can’t do or won’t soon do. Few smart machines look even remotely human. But they all combine brains and brawn, namely sophisticated code and physical capital. And they all have one ultimate creator – us.

Will human replacement – the production by ourselves of ever better substitutes for ourselves – deliver an economic utopia with smart machines satisfying our every material need? Or will our self-induced redundancy leave us earning too little to purchase the products our smart machines can make? Ironically, smart machines are invaluable for considering what they might do to us and when they might do it.

… Our simulated economy – an overlapping generations model – is bare bones. It features two types of workers consuming two goods for two periods. Yet it admits a large range of dynamic outcomes, some of which are quite unpleasant.

Excerpt from body

Code {software} needs to be maintained, retained, and updated. If the cost of doing so declines via, for example, the invention of the silicon chip, the model delivers a tech boom, which raises the demand for new code. The higher compensation received by high-tech workers to produce this new code engenders more national saving and capital formation, reinforcing the boom. But over time, as the stock of legacy code grows, the demand for new code and, thus for high-tech workers, falls.

… The combination of code and capital that produce goods constitutes, in effect, smart machines, aka robots. And these robots contain the stuff of humans – accumulated brain and saving power. Take Junior – the reigning World Computer Chess Champion. Junior can beat every current and, possibly, every future human on the planet. Consequently, his old code has largely put new chess programmers out of business. Once begun, the boom-bust tech cycle can continue if good producers switch technologies `a la Zeira (1998) in response to changes over time in the relative costs of code and capital. But whether or not such Kondratieff waves materialize, tech busts can be tough on high-tech workers. In fact, high-tech workers can start out earning far more than low-tech workers, but end up earning far less.

Furthermore, robots, captured in the model by more code-intensive good production, can leave all future high-tech workers and, potentially, all future lowtech workers worse off. In other words, technological progress can be immiserating.

Conclusion

Will smart machines, which are rapidly replacing workers in a wide range of jobs, produce economic misery or prosperity? Our two-period, OLG model {Overlapping generations model} admits both outcomes. But it does firmly predict three things – a long-run decline in labor share of income (which appears underway in OECD members), tech booms followed by tech-busts, and a growing dependency of current output on past software investment.

The obvious policy for producing a win-win from higher code retention is taxing those workers who benefit from this technological breakthrough and saving the proceeds. This will keep the capital stock from falling and provide a fund to pay workers a basic stipend as their wages decline through time. Other policies for managing the rise of smart machines may backfire. For example, restricting labor supply may reduce total labor income. While this may temporarily raise wages, it will also reduce investment and the long-term capital formation on which long-term wages strongly depend. Another example is mandating that all code be open source. This policy removes one mechanism by which capital is crowded out, but it leads firms to free ride on public code rather than hire new coders. This reduces wages, saving, and, in time, the capital stock.

Our simple model illustrates the range of things that smart machines can do for us and to us. Its central message is disturbing. Absent appropriate fiscal policy that redistributes from winners to losers, smart machines can mean long-term misery for all.

“Robots: Curse or Blessing? A Basic Framework“

Jeffrey D. Sachs, Seth G. Benzell, and Guillermo LaGarda.
National Bureau of Economic Research, April 2015 (Open copy of the PDF).

Abstract

Do robots raise or lower economic well-being? On the one hand, they raise output and bring more goods and services into reach. On the other hand, they eliminate jobs, shift investments away from machines that complement labor, lower wages, and immiserize workers who cannot compete. The net effect of these offsetting forces is unclear.

This paper seeks to clarify how economic outcomes, positive or negative, depend both on specific parameters of the economy and public policy. We find that a rise in robotic productivity is more likely to lower the welfare of young workers and future generations when the saving rate is low, automatable and non-automatable goods are more substitutable in consumption, and when traditional capital is a more important complement to labor. In some parameterizations the relationship of utility to robotic productivity follows a “noisy U” as large innovations are long-run welfare improving even though small innovations are immiserizing.

Policies that redistribute income across generations can ensure that a rise in robotic productivity benefits all generations.

© 2015 by Jeffrey D. Sachs, Seth G. Benzell, and Guillermo LaGarda.

For More Information

Our thanks to the National Bureau of Economic Research (NBER) for access to these papers. Also, here are some recent articles about the new industrial revolution now under way…

1. “The Automation of Management“, Gerald Huff at Medium.
2. “Poker Pros Win Man vs. Machine Showdown“, NBC News.
3. Recommended: “Robots are coming for your job: Amazon, McDonald’s and the next wave of dangerous capitalist disruption” by Martin Ford at Salon — “Our device isn’t meant to make employees more efficient. It’s meant to completely obviate them”
4. “Takeoff in Robotics Will Power the Next Productivity Surge in Manufacturing“, Boston Consulting Group.

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about women and gender issues, and about the 3rd Industrial Revolution — which has begun — especially these…

• Automation hits the professions. Most remain delusionally confident, so far.
• How Robots & Algorithms Are Taking Over.
• Protecting girls from body image problems will be a win for the robots.

See these books to better understand what’s coming…

• The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee.
• Average Is Over: Powering America Beyond the Age of the Great Stagnation by Tyler Cowen.
• Rise of the Robots: Technology and the Threat of a Jobless Future (2015) by Martin Ford.