Archives for posts with tag: globalization

I’ve been struck by how weather forecasters face some of the same types of difficulties  that beset macroeconomics. Both have to rely on “natural experiments” (ie events) as a way to test whether they have an understanding of how the system works. In each case, the systems they work with are extremely complex and chaotic. Weather forecasters make a tremendous effort to continuously assess how well their forecasts perform. They recognize that such forecast verification is crucial for progress to be made. The verification process itself is not trivial. Often the most important predictions are knowing when there is a heightened risk of an extreme event such as a severe storm moving from the ocean over the land. It can be much more valuable to have better (though still probabilistic) awareness of possible extreme events than to have precision for normal weather. Weather forecasters fully recognize that; they use a variety of different types of modeling systems and wide variety of verification approaches. An analogy between weather forecasting and macroeconomic forecasting is not a novel idea and the BIS has made the analogy with severe storm prediction methods to call for more probabilistic forecasting to help spot risks of financial crisis.

There is great controversy over whether or not the 2008 global economic crisis was predicted by heterodox economists employing stock flow consistent models. The mainstream macroeconomists claim that such predictions of imminent crisis were continuously being issued by various mavericks and so (just as a stopped clock is right twice a day) harebrained doomsayers eventually got lucky. There is also controversy over whether macroeconomics is entangled with politics. Some economists profess that they are politically impartial scientific observers and technocrats whilst others say that they (perhaps unwittingly) are party to an inextricably political process. Margret Thatcher famously acknowledged that for her,

Economics are the method; the object is to change the heart and soul.

To my mind both these controversies need to be dealt with head on by a comprehensive and transparent program of continuous verification of macroeconomic approaches. It is not enough to have occasional ad hoc predictions leading to an unresolvable mess of anecdotes as to what approach does or doesn’t provide insight. It is also vital for the public to see how the economic policies being implemented are predicted to influence future outcomes. If an economic policy is being implemented and the widespread prediction is that it is going to greatly increase the risk of economic crisis or depression, then the public deserve to know. Comprehensive public forecasts would throw up an endless stream of material for journalists to discuss and for politicians and their economic advisers to be held to account over.

A verification system would work best if every macroeconomics program hoping for respectability continuously provided a standardized and wide-ranging set of predictions (including probabilistic assessments of tail risks) stretching for various time spans into the future (from weeks to many years) for a wide set of countries. It is crucial that every participant provided forecasts for the wide set of countries or otherwise the data would be too thin to spot whether any branch of macroeconomics had managed to develop predictive power. The predictions would be most valuable if they included metrics that had direct real importance. As well as financial measures such as  household income (and discretionary income level) level and wealth at each decile, inflation, GDP,government debt level and current account deficit; I think it would be useful to include unemployment, labor participation, energy use and child mortality rates.

I think much of the problem with macroeconomics stems from a misplaced reverence for microfounded mathematical models. It is great whenever a phenomenon can be successfully described mathematically but we need to face facts and accept when that is still beyond us. Many fields of science make progress without being at a stage where mathematical modelling can provide much insight. Some people make valiant attempts to mathematically model the development of embryos based on diffusion of proteins and such like. As yet however that approach hasn’t been what has driven the bulk of the advances that have been made in that field. The useful models have largely been crude flow diagrams that provide little more than an expected direction for an outcome. Nevertheless it is much much better to actually know whether something is likely to increase or decrease than to have a fancy model that gives you the wrong answer. What I’m calling for is for macroeconomists to simply do their best to predict what the economy will do. The methodology could be as crude as simply having a check list of “good” and “bad” economic policies. Let’s just see what predictive method works best. Bringing this back around to the comparison with weather forecasting, some of the current controversies in macroeconomics are more akin to arguments as to how gross geography influences climate. Some economists predicted that the fiscal regime in Latvia would cause a depression when others said it was a recipe for prosperity. That dichotomy of opinion is as extreme as if we still hadn’t established whether the weather was cooler near the poles or near the equator.

Economic policies conducted in various parts of the world over the years do seem (with hindsight) to have made profound transformations to how economies have developed. Consider how Singapore has transformed from the poverty it found itself in at independence to having widespread affluence. The financialization and crisis in Iceland was dramatic but the people there didn’t subsequently suffer the real poverty that for instance occurred in Russia in the 1990s. Perhaps the most shocking economic phenomenon has been the persistent extreme poverty of the world’s poorest two billion people. If the globalized capitalist economy is seen as an integrated system that we are all responsible for, then that is a shameful failure causing millions of avoidable deaths. If, in the developed world, we enact some facilitation for capital flight or agricultural tariff adjustment that led to forecasts for increased child mortality rates across Africa, then the public might recoil with a “not in my name” type protest. Comprehensive forecasts could help to expose such issues.

Macroeconomists often make pronouncements about the worthiness or otherwise of various policies such as monetary policies, tax structures, labor regulations or deficit levels. I simply want them to pin themselves down to making formal predictions as to the outcomes from the myriad of natural experiments that our world economy continuously provides us with as events unfold. Some macroeconomists might counter with the view that their subject is about deep theoretical insight rather than petty forecasting. My view is that such insight is as worthwhile as it is useful for informing a predictive understanding.

Related stuff on the web:

WWRP/WGNE Joint Working Group on Forecast Verification Research

Continually improving our forecasts -Met Office

Moving towards probability forecasting -Bank of International Settlements

Economics Education and Unlearning -Post-Crash Economics Society

Who Are These Economists, Anyway? -James K Galbraith 

What does it mean to have “predicted the crisis”? -Noah Smith

Simon Wren-Lewis Defends the Status Quo -Nick Edmonds

 Are macroeconomics methods politically biased?- Noah Smith

Can economists forecast recessions? Some evidence from the Great Recession- Hites Ahir and Prakash Loungani (link added 30May2014)

Macroeconomic model comparisons and forecast competitions -Wieland and Wolters (link added 20Oct2014)

On Macroeconomic Forecasting- Simon Wren-Lewis (link added 01Jan2015)

Forecast errors -Bank of England (link added 01Jan2015 ht Simon Wren-Lewis)

My previous post was linked (thanks !) as “a skeptical take of Open Borders”. I had blundered into the subject and I’m embarrassed to admit I wasn’t even aware of the Open Borders campaign. After checking it out, I’m just as skeptical as ever. Open Borders hopes to address the fact that people in poor countries earn massively less than people in rich countries. Supposedly the answer is for an epic migration of billions of people from the poor countries to the rich countries where they supposedly will then be “more productive” and so poverty will be eliminated.  

It’s so important that we unpick what is meant by terms such as “more productive”. Imagine someone selling street food in Dhaka Bangladesh. It’s delicious, nutritious food, produced extremely efficiently and is sold on a large scale to an appreciative market of consumers with nothing wasted. To my mind it is grossly insulting to describe that as “less productive” than working in yet another New York restaurant where insufficient custom means the food largely ends up down the sluice. Yet, in terms of how much the workers earn, it is “less productive”. It is all down to the fact that diners in New York have massively more money to spend than diners in Dhaka.

To my mind what we really need to face up to is why customers in Dhaka don’t have enough money to spend and so those running a thriving eatery in Dhaka cannot support an affluent lifestyle. That issue is basically what much of this blog is about (see here, here, here). Redirecting flows of money entails no more real disruption than the effort of clicking a computer mouse. And yet Open Borders advocates such as Michael Clements claim that it is preferable have billions of people move to where the money is rather than looking at why the money isn’t going to where the people are.

In principle I share the libertarian ideal of everyone being able to live wherever in the world they fancy. I think the way to go about realising that aim is to first address the issues that create the disparities between rich and poor countries. Once that is (even if only partially) achieved, then the vast bulk of people would no longer have any desire to migrate. A few people would because of personal reasons and for exchange of specialist expertise. However opening borders would then not be opening the floodgates to a torrent of people driven by macroeconomic forces. It is only the prospect of such a torrent that keeps the borders closed now. My total disagreement with the Open Borders campaign is that they advocate opening the borders to a torrent of migration as a first-line response to the disparities between rich and poor countries.

It could be argued that those in the rich world have little capacity to eliminate poverty in foreign countries and so have a greater chance of benefiting the lives of poor people by opening borders to immigration. That argument hinges on the idea that poverty is due to bad governance abroad and that the only answer is for the population to vote with their feet and emigrate. Firstly, I don’t think it is actually true that the rich world is a mere passive observer of poverty abroad. From what I can see, much of the blame for that poverty lies with active policies conducted by the developed world. Furthermore, over the longer term, those malign policies only benefit a minority even in the developed world. We need fair tradereform of the international monetary system away from “US dollar hegemony” towards a more equitable and less distorting system and a realignment of economic policy away from blowing asset bubbles that enrich the rich by enticing in capital flows from the poor world.

Much of the Open Borders logic seems to stem from the idea that market finance already has an inbuilt characteristic that would always lead towards an optimal solution for the world’s problems if only meddling governments were to stand aside. It’s vital that we keep our eyes open to situations where financial forces instead pull into calamitous vicious cycles. Property prices in London, New York or Tokyo would get pushed ever higher if borders were open for mass immigration. That would entice in ever more capital flight from the developing world, exacerbating the impetus for migration. I’m struck by how Michael Clemens seems fully aware of at least one side of this feedback loop as he writes that an expected consequence of epic migration to rich regions would be that “returns to capital rise in the rich region and fall in the poor region”. I’m left wondering whether Michael Clemens does not appreciate that capital flight from poor countries to rich countries does much to generate the disparities that drive the desire for migration in the first place. Perhaps he and other Open Border economists welcome such bubble blowing feedback loops. Financial sector lobbyists, and those in their thrall, aim for financial instability because the gains from expansion can be harvested whilst the losses from crashes get socialized.

It is also not clear to me that open borders would necessarily encourage a beneficial competition between countries to entice and retain their populations. It is vital to recognise that sometimes bad governments will actually seek to usher out the population. Natural resources may be exploited even from a depopulated country. The Scottish Highland Clearances are a classic example of how a country was brutally depopulated to facilitate natural resource exploitation.

related previous posts:

Demographics, migration and fiscal sustainability

Isn’t a financialized economy the goose that lays our golden eggs?

Globalization, Triffin’s dilemma and demurrage crypto currency

Rich people could benefit if everyone else were also rich

related stuff on the web:

A reply to”Direct Economic Democracy” – Paul Crider, Open Borders (added 09Aug2013)

If people could immigrate anywhere, would poverty be eliminated? -Atlantic

Economics and Emigration: Trillion-Dollar Bills on the Sidewalk -Michael A. Clemens

Open Borders

Addressing development’s black hole: Regulating capital flight

Open borders: A morality play by the 1% -macrobusiness (added 26 Feb 2014)

I think the greatest threat to our environment is human poverty. This may seem counter-intuitive since in general each rich person consumes and pollutes far more than each poor person. It has been estimated that it would take five Earths to provide all seven billion of us with a current US lifestyle. An astonishingly low environmental impact is achieved by the poorest . On the face of it, if everyone managed to lift themselves out of poverty, increases in pollution and environmental degradation might be expected to cause an environmental calamity. However if having all seven billion of us living an affluent lifestyle poses an environmental challenge, a more serious environmental challenge is posed by having ten billion people sharing the planet even if two billion of those don’t pollute or degrade the environment much due to poverty. To my mind population growth is the crucial environmental issue and population growth comes from poverty.

Hans Rosling makes a very compelling case that the poorest two billion people are the source of global population growth. People from utterly different cultures all over the world on average have large families when child mortality rates are high and small families when they are low. Over the past few decades there has not been an explosion in the number of poor people because thankfully many poor people do manage to escape poverty. But enough remain poor to maintain a steady source of global population growth. The poorest two billion people today are just as poor as the poorest two billion a few decades ago and just as likely to see their children die and just as likely to have large families. Poor people  are the progenitors of the increased future population of better off people who eat meat, drive cars and water their lawns. If you believe that the world can only support a limited number of affluent people then the answer is to ensure that everyone is affluent.

Obviously if each of us who has the good fortune to be comfortably well off chooses to consume in a way that minimises environmental problems; then that is great. We can spend our money on say dance classes for our children rather than new hardwood flooring or whatever –reduce, reuse, recycle. Environmental concerns do also feed into politics though. Many people want the political system to steer other people towards behaviour that protects the environment.  I think it is crucial that people living in the rich world channel the politics of environmental concern towards ameliorating the extent to which the rich world impoverishes the world’s poorest. I don’t think policy makers in the rich world intentionally impoverish the world’s poorest. It comes as a by-product of efforts to ensure prosperity in the rich world or to protect special interest groups in the rich world. Agricultural tariffs and subsidies are a classic example. They lead to what otherwise would be uneconomic intensification of agriculture in the developed world so as to dump food at a loss in the poor world. There is consequent destitution of people who could otherwise be involved in commercial agriculture in the developing world both for local consumption and for export. In the 1800s the case was successfully made that repealing the English “corn laws” would benefit almost everyone with the exception of those wanting increased rents and mortgages from English farmland. I think the same arguments hold today.

In the USA in particular there is much popular support for protectionist tariffs and subsidies*. The USA is such a large country that it can cope relatively well even if global trade gets shut down. I think it is crucial that we unpick the motivation behind such protectionist views. Much of it seems to stem from the conflict between “labour” and “capital”. The owning class has the most to gain from globalization. The owning class can own whichever companies are most profitable where ever they are based. They can lend money to whoever in the world provides the highest return. Workers on the other hand lose bargaining power. Jobs become outsourced to where ever in the world has the lowest wages for a given level of competency. As I see it the answer is to ensure that everyone belongs to the owning class. Replacing all current taxes with an asset tax and paying a citizens’ dividend would have that effect. If the increased profits that came from offshoring jobs went to everyone rather than just a select owning class then much of the current resentment would evaporate.

What the world needs are advances in efficiency and technology. We need to be able to do more with less. To my mind it makes much more sense for people to be freed up to push new technologies in the developed world. A compelling case can be made that developing countries benefit from “learning by doing”. If a basic manufacturing process can be done well in a developing country then it makes sense for it to be done there, providing jobs there. Hopefully the experience gained will raise capabilities so that all of the world can be at the forefront.  People like working not simply because they want money but because they find it satisfying to create and provide, to master skills and innovate. To truly satisfy that motivation, people need to be doing work where they are really making a difference for the better. The duplication and waste that comes from trade barriers runs counter to that.

Even more than trade barriers, I think policies aimed at encouraging capital flows from the developing world to the developed world have been the overriding influence on world poverty. I’ve examined this in the previous post “Isn’t a financialized economy the goose that lays our golden eggs”. People in the UK are not callously minded towards people in the developing world. I’m sure that the decimation of the real value of the median wage across the developing world that occurred during the 1980-2000 “great moderation” period is not connected in most people’s minds  with the apparently miraculous affordability for global commodities that came in that period for those in the developed world. Ignorance is no excuse though. We need to get real and face up to the consequences of the policies we vote for. Making the UK a perfect piggy bank for capital flight from developing countries does far more damage than can be put right by some charitable donations.

It is striking that the popular sympathy for protectionism as a way to “keep jobs here” is at odds with nurturing capital flight from poorer countries as a way to gain prosperity by sleight of hand. If money were staying in poor countries, causing those countries to develop a prosperous economy of their own, then that would raise wages there. That would avoid the issue of jobs being offshored from the rich world to lower wage countries. Furthermore if the whole world were prosperous, then countries that are currently poor would become potential importers of products made by workers here.

The cost of natural resources does however increase if the whole world can afford them. If what we really want are more jobs in the rich world, then perhaps we should be more sanguine about that. There are lots of potential job opportunities in renewable energy and recycling. To my mind it makes no sense to at the same time put up trade barriers so as to “keep jobs at home” and yet entice capital flight so that we can get all the world’s natural resources and put off the day when we need to recycle and use renewables.

*As an aside, I think protectionism also is a very bad idea because it provides a compelling motivation for imperialism. In the absence of world trade, a country needs to have a large internal market and that means that countries need to be as large as possible.

see also posts:

We choose for renewable energy to make no financial sense.

Rich people could benefit if everyone else were also rich.

Globalization, Triffin’s dilemma and demurrage crypto currency.

Isn’t a financialized economy the goose that lays our golden eggs?

Related stuff on the web:

People and the planet -Royal Society

Stop blaming the poor. Its the wally yatchers who are burning the planet – George Monbiot

populationmatters.org

The mother of invention – Interfluidity

This post is an excerpt from the pdf that I started this blog off with. I’ve posted it because I hope it also makes sense as a stand alone post.

When Margaret Thatcher made her economic policy changes in the 1980s many economists predicted that the UK would be plunged into a vortex of impoverishment. In fact although the deindustrialization they predicted took place it coincided with increased prosperity by many measures. The resulting economic transformation was viewed as such a success that a broad political consensus was formed supporting those “neoliberal” economic policies. The Labour Party became New Labour and embraced financial deregulation and a transfer of taxation away from property and onto consumption. Wealth boomed for the wealthiest and everyone else was swept into greater prosperity along with them. Similar measures were taken in the USA and had similar results.

When reading recollections of those involved in the instigation of the Thatcher economic policies it is clear that the key aim and result was to shift from an economy where wage inflation out-paced asset price inflation to the opposite. The resulting benefit to those who already were wealthy before the transition is obvious. What needs to be understood however is how the country overall became richer on a wave of asset price inflation. How were we able to afford imported goods so much more easily than before? Seemingly by simply bidding up the price of pre-existing (or even purely paper) assets we were able to pay foreigners to do our manufacturing and provide us with natural resources that much of the rest of the world couldn’t afford.

The answer becomes apparent when the financial connections with the rest of the World are drawn into the picture. The UK became the piggy bank of the world. Foreigners were able to join in and further inflate the stock market, bond market and real estate bubble. Across the developing world, the immensely rich elite of those countries sought secure and lucrative ways to hold their wealth. The UK became a repository of choice for this “capital flight” from the developing world. When the UK bought imported goods, the money paid for them was returned back to the UK to bid up the value of our asset markets. In effect, trade became a flow of real goods (and migrant workers) to the UK in return for account statements. All that the UK needed to produce were electronic or paper documents.

To kick off this wave of financial inflow, interest rates were raised significantly above the (high) rate of inflation. This offered a potential bonanza to those buying UK treasury bonds especially if the consumer price inflation rate could be reduced. Limits on bank lending were relaxed and tax breaks were offered to those taking on debt. The government curbed labour union powers and disengaged from efforts to limit unemployment. This quashed wage inflation and so the inflationary impetus of credit expansion was channelled into asset price inflation.

The flip side of this flow of funds to the financialized developed economies was painfully manifested across the “developing” world. In fact, it made a mockery of the term “developing”. From the time of independence in 1960, Nigerian GDP increased 135% during the 1960s and then 283% during the 1970s. By contrast it shrank by 66% in the 1980s. The Nigerian Naira / USD exchange rate went from 0.78 in 1980 to 2.83 in 1985 to 8.94 in 1990 to 102.24 in 2000. With economies drained by capital flight, the developing world was no longer as able to afford global commodities such as oil, coffee, metal ores etc. That caused a slump in commodity prices and consequent further slumps in the economies of commodity exporters and so yet more incentive for capital flight.

Economic depression in the developing world was further fuelled by USD  denominated loans made by UK and US banks to third world governments. A sovereign government has no need for borrowing in a currency other than its own. Any public services such as school teaching, road building or construction of sewerage systems etc. could have been provided using local currency issued by the government to pay local people to do the work with taxes payable in the local currency ensuring the value of the local currency. Countries such as Nigeria had trade surpluses. That provided an ample potential immediate source of foreign currency to fund any imports for government use (such as weapons). The only role for USD denominated loans was for adding to capital flight. Meanwhile the western banks profited from the interest payments on the government debt. Political power in third world countries rested on being able to win over powerful cronies with the prospect of facilitated capital flight and so the dire arrangement became further entrenched.

Since 2000 however the developing world has in many cases resumed development. Hundreds of millions of people in the developing world have escaped poverty over the last decade. This has been applauded as evidence that neo-liberal economic policies have extended their benefits to everyone. Perhaps a more accurate view would be that a stage in the process of financialization has now been fully wrung out and so the choke hold over the developing world’s economies is slipping. In order to attract financial in-flows, the ideal monetary arrangement is to have high interest rates above the rate of consumer price inflation and an expectation that both inflation and interest rates will subsequently fall. The market price of any asset that provides a long term cash flow will tend to rise if interest rates fall. If an asset costing $10 yields $1 per year when interest rates are 10% then (very crudely) a drop in interest rates to 5% will tend to reset the asset price to $20. Bringing interest rates down from >10% to <1% provides a phenomenal impetus to asset markets as has occurred since 1980. However, once it is done, it is done and so wealth managers will start looking elsewhere.

A whole raft of other such policies also harvested a one off boost for asset prices. Curtailing labour union power, shifting taxation from property onto consumption, encouraging private pension saving and facilitating private sector credit expansion all added to the performance of asset holdings. What provides a real bonanza for asset holders is when there is a transition from an unfavourable financial climate to a favourable one. Once that transition has been fully priced in, much of the gain has already occurred -especially when asset values are elevated and so assets don’t provide much of an income stream. Once everything has been done to make an economy as hospitable as possible for global “hot money”, the market will price in that favour and then global “hot money” will look for a new home where the next price rises are going to occur.  This makes attracting capital flows an inherently one off rather than a sustainable way to achieve prosperity. Capital flows may unfold over decades and that may give the impression that they have provided a timeless prosperous equilibrium but ultimately sustainable prosperity depends on the real economy.

It is vital to appreciate that macroeconomic malign effects don’t require any malign intent on anyone’s part. En-mass, people simply endeavouring to manage their finances as best as possible can inadvertently cause massive waste and destruction whilst all the while being entirely oblivious of it. It is analogous to tragic incidents when people get crushed to death in large crowds. No one person is to blame, the crowd surges and crushes without any person in the crowd acting reprehensibly. That is not to say that there is not a responsibility to take crowd control seriously – quite the opposite. Some of the politicians and technocrats at that vanguard of neo-liberalism actually aimed to alleviate poverty. Their reasoning was that if money is pampered then it will spring forth rewards that can be dispensed to good causes. In their view, capital flight supposedly means that global money is continuously being deployed wherever it can earn the most. That is taken to mean that overall global wealth is maximised and so there is more to go round. The key mistake in this is that it conflates claims over real tangible sources of wealth with the underlying real tangible sources of wealth themselves. Whenever that mistake is made, policy makers inevitably fall into the trap of simply facilitating an expansion in the paper claims over wealth whilst losing sight of the underlying reality required to back-up those claims with the real economy. The true responsibility for policy makers is to ensure that the monetary framework is constructed so as to align with the real economy such that what is best for money becomes what is best for the real economy. If left to its own devices, the financial system will wander away from that ideal.  A financial system built by the financial system will direct resources towards expanding the financial overhead borne by the real economy.

There is much hand wringing about jobs being replaced by robots. I actually see it as having the potential to provide enormous benefit. Everyone can see that for the owners of all of the robots, it is great. The owners get to have the benefit of all the work the robots do. I’m also most struck by the fact that there is now no physical reason why everyone couldn’t be in that position. This post is about how automation has the potential to turn “class conflict” on its head by ensuring that no-one need be outside the “owning class”.

I think we need to think about what is the constraint on how “rich” everyone can be.  In previous times, much of the constraint was how much labour everyone could employ. Not everyone could be a mill owner or plantation owner.  It was labour that was limiting.  Each mill owner needed thousands of mill workers. Each plantation owner needed thousands of cotton pickers. But the owning class ALL were rich -however clever or stupid or inept they were. In the near future won’t the robots be the equivalent of the mill workers and the cotton pickers? Won’t other robots be the equivalent of the people who in the 1800s designed the machines and directed the slaves? The only role for people will be that of the owning class –free to do whatever they fancy. In many cases that freedom would probably be put to use in developing even more advanced technology.

Of course we COULD choose to have just a few in the owning class and have everyone else rioting. BUT the owning class would get no benefit at all by keeping itself select. In fact that would make each member of the owning class less rich because the market would be smaller.  Technological innovations have very high development costs relative to the unit cost of the product. A product such as a new medicine or an innovative electronic gadget becomes dramatically cheaper to produce per unit item if the development costs are spread across many more units sold. Imagine if we lived in a world with greater disparities of wealth than we do now. Imagine if the market for the latest medicine or electronic gadget was 1/10000th the current size. Those few who could still afford such items would have to pay massively more to cover the development costs. That dynamic works in the opposite direction too. Imagine if the potential market for the latest product was all seven billion people on earth. Then development costs would be spread so thinly they would hardly be noticed. Capital goods such as the robotic workers themselves also have the same economy of scale. It starts to make financial sense if many factories staffed with robots are to be built but not if just a few.

Clearly having an economy directed towards technological development is critically dependent on having lots of potential customers. When development costs are high relative to on-going production costs, then a large market is a great benefit and when they aren’t, it isn’t. The direction of the economy thus steers towards innovation when everyone can afford the latest technology and away from it when they can’t. There is no sense in having a fancy robot factory if it is just going to be idle due to lack of customers.

To me it looks as though we are at a fork in the road. We can choose to distribute ownership widely (I’ve written a pdf about a suggested route towards sufficiently widespread ownership), develop lucrative innovative technologies and all be served by robots or we can choose to have just a few in the owning class, fail to develop technology, and so become mired in conflict and poverty as resources run out. It is crucial to try and understand why as a society we choose to take the “lose-lose” fork in the road rather than the “win-win” option. Perhaps the urge is to be richer than other people. What matters is relative wealth rather than absolute. It has been suggested that the impetus to gather great wealth is akin to wanting to ensure first place on a metaphorical lifeboat should “something go wrong”. With such a motivation, it doesn’t matter whether everyone is worse off; all that matters is relative positioning. The tragedy is that making that choice ensures that the metaphorical lifeboat will actually be needed. The worse the outlook, the more determined the current owning class will be to maintain positioning at any cost to everyone overall.

The irony is that even on the basis of where each person was positioned along the rank order of wealth, economic democracy need not upset the apple cart. Quite possibly the current richest 1% and the current richest 0.01% would still be the richest 1% and the richest 0.01%. The only difference would be that everyone else would be less far behind. To a large extent the problem isn’t that the wrong people are the rich people; it is simply that the rest of the population are not rich enough. As such this is a clear case of Pareto inefficiency. We have slipped into a rut that is bad for everyone and getting out of it would harm no one. It is often said even by those believing in small government that government should focus on correcting Pareto inefficiencies. The absolutely crucial point to grasp is that true prosperity is not measured in pounds or dollars but in what can be bought with them. Compromising Pareto efficiency in terms of dollars by redistribution will lead to massively improved Pareto efficiency in terms of what technology is available and affordable for the very richest people not to mention the rest of us. Money is only as much use as the goods and services that exist to be bought.

I think the current motivation for imposing austerity is fear of insecurity and of power slipping away. The best way to overcome that is for those pushing for reform to respect the anxieties and property rights of the wealthy and to put at the forefront of arguments that the aim is to benefit EVERYONE and not to empower some new crop of usurping apparatchiks.

More reading on the web:

Robots coming over here, taking our jobs…building our utopias-New Statesman

The End of Labor: How to Protect Workers From the Rise of Robots -Noah Smith

The Robot Will See You Now -Atlantic

Trade -offs between inequality, productivity, and employment- Interfluidity

The Robots Are Going To Take All Our Jobs: Isn’t It Wonderful?- Forbes

Better Than Human: Why Robots Will- And Must- Take Our Jobs- Wired

Time to resurrect the ‘missing variable’? -Izabella Kaminska

On the Road to Zero Growth- Jeremy Grantham

To understand where we’re headed, read this essay written 64 years ago -Andrew McAfee (link added 30May2013)

On Inequality: There’s no such thing as Pareto Improvement -Interfluidity (link added 24Nov2013)

Technological unemployment amidst stagnation –Ashwin Parameswaran (link added 30nov2013)

Debunking Economics Part 3.5: The Real Shape of the Average Cost Curve (link added 28dec2013)