Tag Archives: Work

Economic Singularity Review

The Economic Singularity: Artificial intelligence and the death of capitalism .. This new book from best-selling AI writer Calum Chace argues that within a few decades, most humans will not be able to work for money.

A strong claim! This book mentions me by name 15 times, especially on my review of Martin Ford’s Rise of the Robots, wherein I complain that Ford’s main evidence for saying “this time is different” is all the impressive demos he’s seen lately. Even though this was the main reason given in each previous automation boom for saying “this time is different.” This seems to be Chace’s main evidence as well:

Faster computers, the availability of large data sets, and the persistence of pioneering researchers have finally rendered [deep learning] effective this decade, leading to “all the impressive computing demos” referred to by Robin Hanson in chapter 3.3, along with some early applications. But the major applications are still waiting in the wings, poised to take the stage. ..

It’s time to answer the question: is it really different this time? Will machine intelligence automate most human jobs within the next few decades, and leave a large minority of people – perhaps a majority – unable to gain paid employment? It seems to me that you have to accept that this proposition is at least possible if you admit the following three premises: 1. It is possible to automate the cognitive and manual tasks that we carry out to do our jobs. 2. Machine intelligence is approaching or overtaking our ability to ingest, process and pass on data presented in visual form and in natural language. 3. Machine intelligence is improving at an exponential rate. This rate may or may not slow a little in the coming years, but it will continue to be very fast. No doubt it is still possible to reject one or more of these premises, but for me, the evidence assembled in this chapter makes that hard.

Well of course it is possible for this time to be different. But, um, why can’t these three statements have been true for centuries? It will eventually be possible to automate tasks, and we have been slowly but exponentially “approaching” that future point for centuries. And so we may still have centuries to go. As I recently explained, exponential tech growth is consistent with a relatively constant rate at which jobs are displaced by automation.

Chace makes a specific claim that seems to me quite wrong.

Geoff Hinton – the man whose team won the landmark 2012 ImageNet competition – went further. In May 2015 he said that he expects machines to demonstrate common sense within a decade. .. Facebook has declared its ambition to make Hinton’s prediction come true. To this end, it established a basic research unit in 2013 called Facebook Artificial Intelligence Research (FAIR) with 50 employees, separate from the 100 people in its Applied Machine Learning team. So within a decade, machines are likely to be better than humans at recognising faces and other images, better at understanding and responding to human speech, and may even be possessed of common sense. And they will be getting faster and cheaper all the time. It is hard to believe that this will not have a profound impact on the job market.

I’ll give 50-1 odds against full human level common sense AI with a decade! Chace, I offer my $5,000 against your $100. Also happy to bet on “profound” job market impact, as I mentioned in my review of Ford. Chace, to his credit, sees value in such bets:

The economist Robin Hanson thinks that machines will eventually render most humans unemployed, but that it will not happen for many decades, probably centuries. Despite this scepticism, he proposes an interesting way to watch out for the eventuality: prediction markets. People make their best estimates when they have some skin in the forecasting game. Offering people the opportunity to bet real money on when they see their own jobs or other peoples’ jobs being automated may be an effective way to improve our forecasting.

Finally, Chace repeats Ford’s error in claiming economic collapse if median wages fall:

But as more and more people become unemployed, the consequent fall in demand will overtake the price reductions enabled by greater efficiency. Economic contraction is pretty much inevitable, and it will get so serious that something will have to be done. .. A modern developed society is not sustainable if a majority of its citizens are on the bread line.

Really, an economy can do fine if average demand is high and growing, even if median demand falls. It might be ethically lamentable, and the political system may have problems, but markets can do just fine.

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The Future of Slavery

Bryan Caplan made strong, and to me incredible, claims that econ consensus predicts all ems would be fully slaves with no human personality. As he won’t explain his reasoning, but just says to read the slavery literature, I’ve done a quick lit review, which I now summarize, and then apply quickly to the future in general, and to ems in particular.

The ability to control your pain, actions, and income are distinct property rights. When someone else owns them all, you are said to be a slave, especially if they allocate these rights via something close to a “full control” package. In this package, you have little control over assets or actions. Pain is usually threatened, and often implemented, to force specific disliked but demanded actions. (Pain was used more on children than adults.) Think of rowing for a galley ship, digging up silver in a mine, picking cotton, or advancing on a simple war front line.

A second “mixed control” package allocates these rights by letting you retain control over many action details, only rarely causing pain, and letting you earn a residual income or status. This scenario was more common for domestic slaves, for slaves with better options for sabotage or escape, and for complex jobs where motivation matters more, via worker discretion, responsibility, attentiveness, pleasantness, intelligence, or creativity. By collecting a residual income, slaves might eventually buy their freedom. Free people have often sold this package of rights for short durations in traditional jobs. The main difference is your ease of changing jobs; the harder it is to change jobs, the more like this kind of slave you are.

In a third “debt” package, you must pay off a loan but are otherwise mostly free to choose your own job, location, and living arrangements. The option to impose pain is reserved for rare situations. Closely related is “share cropping” wherein the owner demands a percentage of income earned. Some combination of a fixed payment plus a percentage of income was a common scenario for slaves in southern US cities. This is also the usual way state rulers extort the locals they “own” via taxation. Many people voluntarily choose to go into debt, and sell percentages of their business income, and most legal systems reserve the right to impose pain in rare situations, a situation most people are okay with.

A fourth “ransom” approach sells these rights back to some combination of you and your associates. Often this converts these rights into debt held by someone who is better able to motivate and monitor you.

Many considerations influence the efficiency of these allocations, including costs of monitoring and restraint, losses from theft, rebellion, escape, and sabotage, individual preferences for pain, status, autonomy, and work style, effects of pain, status, and control on motivation and focus, information rents from workers being better aware of work details, complementary investments in training and capital, who knows better and has better incentives to use control rights, and signaling status, productivity, etc. to outsiders.

Historically, even when slaves were common, they were usually a minority of the population. (Beware, the term “slave” is used in different ways.) About 10% in the Roman Empire and US south. Foragers didn’t do slaves at all. About 0.3% of the world is in slavery today, mostly in forms of debt bondage.

The common existence of slavery that wasn’t converted immediately into debt or ransom does suggest that it was sometimes locally efficient as a resource allocation, ignoring larger social externalities, even given substantial costs of monitoring, enforcement, and worse motivation and allocation of skills.

Sometimes during hard times people would sell themselves or their children into slavery; better to be fed than dead. Sometimes slaves were created as collateral for loans, and freed when the loan was paid. Sometimes slavery was the contractual result of a failure to pay loans. Sometimes people sold themselves into slavery for a limited time, as with apprenticeships and indentured servitude.

But historically, slaves were mostly created in war. Drafted soldiers are slave-like. When a winning side didn’t expect to hold the territory, and feared leaving the vanquished to recover then retaliate, their remaining options were death or slavery. But slaves were only valuable when delivered to a useable location. So the worse treatment of slaves has been in transit immediately after capture.

Slave populations usually dwindled until replenished by war, probably because through most of history interest rates were too high to justify the long term investment of raising human children. Domesticated crops and animals grow much quicker. This same short term focus also often induced slave owners to work their slaves to death. A short term focus was often increased by distant ownership, as local manager’ incentives were tied more to immediate production. Workings slaves to death induced more slave revolts.

The US south was unusual in that it grew long-lived slaves from birth. Interest rates were unusually low, peace lasted long, and once US law forbad importing slaves, owners were highly motivated to preserve their big plantation industry. Slaves weren’t converted into debt perhaps because of credit market failures, or more plausibly because the full control approach was especially productive on plantations. (The sex story is overrated, as only 1-2% of slave babies were fathered by white men.)

That is, on plantations slaves plausibly produced more when threatened with pain, even if their utility was lower. The fact that humans can feel strongly disliked pain while living a long productive life and successfully reproducing does suggest that our pain signals are biologically maladaptive. But given how different is the modern world from the one where our pain signals evolved, we should expect this sort of thing sometimes.

Data on US south slave prices tells us what was valued in slaves then. For adults, age was bad, as were slaves from distant places within the US, and slaves that the owner chose to sell, as opposed to being forced to sell. New slaves imported from overseas were no more or less valued. It was good to be male, light-skinned, have artisan skills, and be guaranteed not to be sick or run away.

I didn’t find any data on slaves and docility, though I did find how docility fits into the standard five factor personality framework. Docility is lumped with “submissive, dependent, pliant” as part of “passivity”, which correlates most strongly and positively with neuroticism, but also positively with agreeableness and negatively with openness. In general only the agreeable part suggests more productivity in most jobs today; neurotic people are less productive, and the effect of openness depends more on job type.

What is there to dislike about slavery? The war and theft that cause slavery are clearly lamentable. And the possibility of slavery increases the range of possible inequality, at least if you ignore the dead. But the full control allocation package seems the main reason to dislike slavery. Other packages seem much closer to those resulting from free choices, and when they result from free choices they don’t seem strongly objectionable.

Today slavery, especially full control slavery, is discouraged not only via moral censure and political coordination, but also by stronger nation-states, few wars, better credit markets, increasing wealth, increasing vulnerability to sabotage, more automation, and more complex jobs. The only contrary factors I can think of are easier monitoring and preventing escape. If all these trends continue in the same relative proportions, we should expect a continued decline in slavery.

In the world of my book, The Age of Em, many of these trends continue. Nation-states and credit markets get stronger, and war remains rare. Automation advances, and jobs get even more complex, with motivation and sabotage mattering even more. Monitoring and preventing escape also get easier.

Individual em incomes do fall, which gives a thicker lower tail of outcomes, and in traditional societies that allowed slavery this low tail was often filled with slaves. However, ems can fall via running slower while remaining free, and this option would reduce the fraction that fall into slavery, even if slavery were allowed.

Ems are initially created via destructive scanning of high income human volunteers at the peak of their careers, in a world that forbids slavery. Soon after they are destructive scans of the most promising young children. So these volunteers do not expect to become slaves, and the world around them, being like ours, initially tries to discourage that transition.

However, since a lot changes we can’t offer much assurance that attitudes toward slavery don’t change. Also, labor supply factors matter a lot less; if even one productive em is enslaved, and slavery is allowed, then copies of it could fill a whole slave sector. What matters far more is demand, i.e., what are the more efficient ways to allocate labor? If allowed, there are probably some jobs where full control slavery is more efficient; the em world is big, with many corners. But most jobs are complex, where the full control scenario is inefficient. And the debt or mixed control allocations that are more efficient for typical jobs are probably not substantially more efficient under slavery, as slavery hurts motivation. Debt should be good enough.

So, bottom line, after a quick review of the econ of slavery literature, I still can’t find a rationale for Bryan Caplan’s claim that all ems would be fully slaves. Ancient society never got close to that state of affairs. And I see even less rationale for his claim that they would be so docile and “robot-like” as to not even have human-like personalities. Which is his main reason for saying 80% of my book is wrong. Neither the literatures on choosing employees today, nor that on choosing slaves in the past, put much emphasis on docility. And even if they did, the idea that they’d emphasize it so much as to eliminate human personality, that just sounds crazy.

So Bryan, how about actually giving an argument, instead of waving your hands in the general direction of the literature?

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Caplan Audits Age of Em

When I showed Bryan Caplan an early draft of my book, his main concern was that I didn’t focus enough on humans, as he doesn’t think robots can be conscious. In his first critical post, he focused mainly on language and emphasis issues. But he summarized “the reasoning simply isn’t very rigorous”, and he gave 3 substantive objections:

The idea that the global economy will start doubling on a monthly basis is .. a claim with a near-zero prior probability. ..

Why wouldn’t ems’ creators use the threat of `physical hunger, exhaustion, pain, sickness, grime, hard labor, or sudden unexpected death’ to motivate the ems? .. `torturing’ ems, .. why not?” ..

Why wouldn’t ems largely be copies of the most “robot-like” humans – humble workaholics with minimal personal life, content to selflessly and uncomplainingly serve their employers?

He asked me direct questions on my moral evaluation of ems, so I asked him to estimate my overall book accuracy relative to the standard of academic consensus theories, given my assumptions. Caplan said:

The entire analysis hinges on which people get emulated, and there is absolutely no simple standard academic theory of that. If, as I’ve argued, we would copy the most robot-like people and treat them as slaves, at least 90% of Robin’s details are wrong.

Since I didn’t think how docile are ems matters that much for most of my book, I challenged him to check five random pages. Today, he reports back:

Limiting myself to his chapters on Economics, Organization, and Sociology, [half of the book’s six sections] .. After performing this exercise, I’m more inclined to say Robin’s only 80% wrong. .. My main complaint is that his premises about em motivation are implausible and crucial.

Caplan picked 23 quotes from those pages. (I don’t know how picked; I count ~35 claims.) In one of these (#22) he disputes the proper use of the word “participate”, and in one (#12) he says he can’t judge.

In two more, he seems to just misread the quotes. In #21, I say taxes can’t discourage work by retired humans, and he says but ems work. In #8 I say if most ems are in the few biggest cities, they must also be in the few biggest nations (by population). He says there isn’t time for nations to merge.

If I set aside all these, that leaves 19 evaluations, out of which I count 7 (#1,4,9,13,17,19,20) where he says agree or okay, making me only 63% wrong in his eyes. Now lets go through the 12 disagreements, which fall into five clumps.

In #6, Caplan disagrees with my claim that “well-designed computers can be secure from theft, assault, and disease.” On page 62, I had explained:

Ems may use technologies such as provably secure operating system kernels (Klein et al. 2014), and capability-based secure computing systems, which limit the powers of subsystems (Miller et al. 2003).

In #5, I had cited sources showing that in the past most innovation has come from many small innovations, instead of a few big ones. So I said we should expect that for ems too. Caplan says that should reverse because ems are more homogenous than humans. I have no idea what he is thinking here.

In #3,7, he disagrees with my applying very standard urban econ to ems:

It’s not clear what even counts as urban concentration in the relevant sense. .. Telecommuting hasn’t done much .. why think ems will lead to “much larger” em cities? .. Doesn’t being a virtual being vitiate most of the social reasons to live near others? ..

But em virtual reality makes “telecommuting” a nearly perfect substitute for in-person meetings, at least at close distances. And one page before, I had explained that “fast ems .. can suffer noticeable communication delays with city scale separations.” In addition, many ems (perhaps 20%) do physical tasks, and all are housed in hardware needing physical support.

In #2,23, Caplan disagrees with my estimating that the human fraction of income controlled slowly falls, because he says all ems must always remain absolute slaves; “humans hold 100% of wealth regardless .. ems own nothing.”

Finally, half of his disagreements (#10,11,14,15,16,18) stem from his seeing ems them as quite literally “robot-like”. If not for this, he’d score me as only 31% wrong. According to Caplan, ems are not disturbed by “life events”, only by disappointing their masters. They only group, identify, and organize as commanded, not as they prefer or choose. They have no personality “in a human sense.” They never disagree with each other, and never need to make excuses for anything.

Remember, Caplan and I agree that the key driving factor here is that a competitive em world seeks the most productive (per subjective minute) combinations of humans to scan, mental tweaks and training methods to apply, and work habits and organization to use. So our best data should be the most productive people in the world today, or that we’ve seen in history. Yet the most productive people I know are not remotely “robot-like”, at least in the sense he describes above. Can Caplan name any specific workers, or groups, he knows that fit the bill?

In writing the book I searched for literatures on work productivity, and used many dozens of articles on specific productivity correlates. But I never came across anything remotely claiming “robot-like” workers (or tortured slaves) to be the most productive in modern jobs. Remember that the scoring standard I set was not personal intuition but the consensus of the academic literature. I’ve cited many sources, but Caplan has yet to cite any.

From Caplan, I humbly request some supporting citations. But I think he and I will make only limited progress in this discussion until some other professional economists weigh in. What incantations will summon the better spirits of the Econ blogosphere?

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Alexander on Age of Em

If I ever have an executioner, I want him to be Scott Alexander. Alexander has such a winning way with words that I and his many fans enjoy him even when we disagree. I’d hardly notice my destination as his pleasing patter entranced me while we took the long way around to the gallows.

So I am honored that Alexander wrote a long review of Age of Em (9K words, 6% as long as the book), wherein he not only likes and recommends it, he also accepts pretty much all its claims within its main focus. That is, I present my book as being expert on the topic of what would actually happen if cheap ems were our next huge social change. Where Alexander disagrees is on two auxiliary topics, which I mention but on which I claim less expertise, namely how likely is this key scenario assumption, and how valuable is the resulting civilization I describe.

On the subject of value, Alexander leans forager (i.e., liberal) on the forager vs. farmer scale. He dislikes civilization evolving away from the behaviors and values of our forager ancestors, and today he partly blames this on capitalism. He doesn’t see our increase in numbers, comfort, and lifespan as sufficient compensation. (I think he’d like the book Against Civilization.) He says:

[Nick Land’s Ascended Economy] seems to me the natural end of the economic system. Right now it needs humans only as laborers, investors, and consumers. But robot laborers are potentially more efficient, companies based around algorithmic trading are already pushing out human investors, and most consumers already aren’t individuals – they’re companies and governments and organizations. At each step you can gain efficiency by eliminating humans, until finally humans aren’t involved anywhere. .. The Age of Em is an economy in the early stages of such a transformation. Instead of being able to replace everything with literal robots, it replaces them with humans who have had some aspects of their humanity stripped away. Biological bodies. The desire and ability to have children normally. ..

I envision a spectrum between the current world of humans and Nick Land’s Ascended Economy. Somewhere on the spectrum we have ems who get leisure time. A little further on the spectrum we have ems who don’t get leisure time. But we can go further. .. I expect [greatly reduced sex desire] would happen about ten minutes after the advent of the Age of Em .. Combine that with the stimulant use mentioned above, and you can have people who will never have nor want to have any thought about anything other than working on the precise task at which they are supposed to be working at any given time. ..

I see almost no interesting difference between an em world with full use of these tweaks and an Ascended Economy world. Yes, there are things that look vaguely human in outline laboring in the one and not the other, but it’s not like there will be different thought processes or different results. I’m not even sure what it would mean for the ems to be conscious in a world like this – they’re not doing anything interesting with the consciousness. .. If we get ems after all, I expect them to be lobotomized and drugged until they become effectively inhuman, cogs in the Ascended Economy that would no more fall in love than an automobile would eat hay and whinny.

Alexander seems to strongly endorse the usual forager value of leisure over work, so much so that he can’t see people focused on their work as human, conscious, or of any moral value. Creatures only seem valuable to him to the extent that they have sex, leisure time, minds wandering away from work, and desires to do things other than work.

This seems ironic because Scott Alexander is one of the most human and productive workers I know. He has a full time job as a psychiatrist, an especially demanding job, and in addition finds time to write frequent long careful analyses of many topics. I find it hard to see where he has that much time for leisure, and doubt he would in fact be substantially more productive overall if he took drugs to make him forget sex, mentally wander less, and focus more on his immediate tasks. He is exactly the sort of person an em economy would want many copies of, pretty much just as he is. Yet if we are to believe him, he only sees value in his brief leisure hours.

I see Alexander as having too little respect for the functionality of human behaviors and mind design. Yes, maximally competitive em-era behaviors and minds won’t be exactly like current ones. But that doesn’t necessarily mean one wants to throw out most existing behaviors and brain modules wholesale and start over from scratch. As these behaviors and modules all arose because they helped our ancestors be more competitive in some prior context, it makes more sense to try to repair, reform, and repurpose them.

For example, the robust productivity gains observed from workers who take breaks don’t seem to depend much on worker motivation. Breaks aren’t just about motivation; they are a deeply entrenched part of being productive. Similarly, wandering minds may take away from the current immediate task, but they help one to search for hidden problems and opportunities. Also, workers today who focus on just doing immediate tasks often lose out to others who attend more to building and managing social relations, as well as office politics. Love and sex can be very helpful in forming and maintaining relations.

Of course I’m not trying to offer any long term assurances, and it is quite reasonable to worry about what we will lose along with what we will gain. But since today most of the people we most respect and celebrate tend to be workaholics, I just can’t buy the claim that most of us today can’t find value in similarly productive and work-focused ems. And I just can’t see thoughtless workers being the most productive in the early em era of my book.

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Lognormal Jobs

I often meet people who think that because computer tech is improving exponentially, its social impact must also be exponential. So as soon as we see any substantial social impact, watch out, because a tsunami is about to hit. But it is quite plausible to have exponential tech gains translate into only linear social impact. All we need is a lognormal distribution, as in this diagram:

LogNormalJobs

Imagine that each kind of jobs that humans do requires a particular level of computing power in order for computers to replace humans on that job. And imagine that these job power levels are distributed lognormally.

In this case an exponential growth in computing power will translate into a linear rate at which computers displace humans on jobs. Of course jobs may clump along this log-computing-power axis, giving rise to bursts and lulls in the rate at which computers displace jobs. But over the long run we could see a relatively steady rate of job displacement even with exponential tech gains. Which I’d say is roughly what we do see.

Added 3am: Many things are distributed lognormally.

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Excess Turbulence?

To help me imagine how different future cultures might be, I’ve been trying to learn about typical lives of our distant ancestors. One excellent source is Montaillou: The Promised Land of Error by Emmanuel Le Roy Ladurie in 1978. Around 1300 Jacquest Fournier, who eventually became pope but was then a bishop, led an Inquisition against heretics in the small town of Montaillou in southern France, population 200. He transcribed several years worth of interviews of them, revealing great detail about ordinary life there. One tidbit:

Instability was the hallmark of a shepard’s life, as of the lives of all rural workers in Occitania: ‘Every year’, says Oliveier de Serres in his book on agriculture, ‘change your farm hands, make a clean sweep. Those that come after will put all the more heart into their work.’ The people we are concerned with did not feel this instability as some kind of oppression or alienation. On the contrary, the migrant shepard changed his master more often than his shirt! (p.114)

I’m told that even in the modern world one tends to hire new ranch hands every year.

In the farming world, people like shepards, loggers, etc. who lived furthest from concentrations of people tended to have the lowest status and be the poorest. Such jobs were almost entirely done by men, and so such men rarely married until they switched careers. All of which makes some sense. But I’m puzzled that such people typically changed jobs every year, moving many miles away to work with very different people. It is hard to understand such behaviors as productivity maximizing ways forced on people living at the edge of subsistence. This seems instead to be one of the few luxuries such men purchased, so that they could feel less bored and enjoy variety.

A related phenomena is the puzzling fact that people tend to get weary of exerting effort, and so need to take breaks and rest periodically. Not only do people need to rest and sleep at the end of a work day, but on the job mental fatigue reduces mental performance by about 0.1% per minute. Since by resting we can recover at a rate of 1% per minute, we need roughly one tenth of our workday to be break time, with the duration between breaks being not much more than an hour or two (Trougakos and Hideg 2009; Alvanchi et al. 2012). This doesn’t seem to be due to any obvious physical wear or depletion; it seems to be all in our mind.

Both of these examples, a preference for variety in work locations and associates, and a preference for periodic work breaks during the day, seem plausible functional behaviors for our forager ancestors, and also for their more distant animal ancestors. But they make less sense today. Maybe our minds have embedded the assumption that these are functional behaviors at such a deep level that we are still better off following them today. Or maybe not.

Added 25Aug: In many animal species, a single male controls a harem of females, and the other males wander between the harems, looking for a chance to tempt females for illicit trysts, or to challenge a weak harem ruler. Maybe young low status human males are expressing very ancient animal behavioral patterns.

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Light On Dark Matter

I posted recently on the question of what makes up the “dark matter” intangible assets that today are most of firm assets. Someone pointed me to a 2009 paper of answers:

IntangibleShares

[C.I. = ] Computerized information is largely composed of the NIPA series for business investment in computer software. …

[Scientific R&D] is designed to capture innovative activity built on a scientific base of knowledge. … Non-scientific R&D includes the revenues of the non-scientific commercial R&D industry … the costs of developing new motion picture films and other forms of entertainment, investments in new designs, and a crude estimate of the spending for new product development by financial services and insurance firms. …

[Brand equity] includes spending on strategic planning, spending on redesigning or reconfiguring existing products in existing markets, investments to retain or gain market share, and investments in brand names. Expenditures for advertising are a large part of the investments in brand equity, but … we estimated that only about 60 percent of total advertising expenditures were for ads that had long-lasting effects. …

Investment in firm-specific human and structural resources … includes the costs of employer-provided worker training and an estimate of management time devoted to enhancing the productivity of the firm. … business investments in firm-specific human and structural resources through strategic planning, adaptation, reorganization, and employee-skill building. (more; HT Brandon Pizzola)

According to this paper, more firm-specific resources is the biggest story, but more product development is also important. More software is third in importance.

Added 15Apr: On reflection, this seems to suggest that the main story is our vast increase in product variety. That explains the huge increase in investments in product development and firm-specific resources, relative to more generic development and resources.

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Firms Now 5/6 Dark Matter!

Scott Sumner:

We all know that the capital-intensive businesses of yesteryear like GM and US steel are an increasingly small share of the US economy. But until I saw this post by Justin Fox I had no idea how dramatic the transformation had been since 1975:

intangibles

Wow. I had no idea as well. As someone who teaches graduate industrial organization, I can tell you this is HUGE. And I’ve been pondering it for the week since Scott posted the above.

Let me restate the key fact. The S&P 500 are five hundred big public firms listed on US exchanges. Imagine that you wanted to create a new firm to compete with one of these big established firms. So you wanted to duplicate that firm’s products, employees, buildings, machines, land, trucks, etc. You’d hire away some key employees and copy their business process, at least as much as you could see and were legally allowed to copy.

Forty years ago the cost to copy such a firm was about 5/6 of the total stock price of that firm. So 1/6 of that stock price represented the value of things you couldn’t easily copy, like patents, customer goodwill, employee goodwill, regulator favoritism, and hard to see features of company methods and culture. Today it costs only 1/6 of the stock price to copy all a firm’s visible items and features that you can legally copy. So today the other 5/6 of the stock price represents the value of all those things you can’t copy.

So in forty years we’ve gone from a world where it was easy to see most of what made the biggest public firms valuable, to a world where most of that value is invisible. From 1/6 dark matter to 5/6 dark matter. What can possibly have changed so much in less than four decades? Some possibilities:

Error – Anytime you focus on the most surprising number you’ve seen in a long time, you gotta wonder if you’ve selected for an error. Maybe they’ve really screwed up this calculation.

Selection – Maybe big firms used to own factories, trucks etc., but now they hire smaller and foreign firms that own those things. So if we looked at all the firms we’d see a much smaller change in intangibles. One check: over half of Wilshire 5000 firm value is also intangible.

Methods – Maybe firms previously used simple generic methods that were easy for outsiders to copy, but today firms are full of specialized methods and culture that outsiders can’t copy because insiders don’t even see or understand them very well. Maybe, but forty years ago firm methods sure seemed plenty varied and complex.

Innovation – Maybe firms are today far more innovative, with products and services that embody more special local insights, and that change faster, preventing others from profiting by copying. But this should increase growth rates, which we don’t see. And product cycles don’t seem to be faster. Total US R&D spending hasn’t changed much as a GDP fraction, though private spending is up by less than a factor of two, and public spending is down.

Patents – Maybe innovation isn’t up, but patent law now favors patent holders more, helping incumbents to better keep out competitors. Patents granted per year in US have risen from 77K in 1975 to 326K in 2014. But Patent law isn’t obviously so much more favorable. Some even say it has weakened a lot in the last fifteen years.

Regulation – Maybe regulation favoring incumbents is far stronger today. But 1975 wasn’t exact a low regulation nirvana. Could regulation really have changed so much?

Employees – Maybe employees used to jump easily from firm to firm, but are now stuck at firms because of health benefits, etc. So firms gain from being able to pay stuck employees due to less competition for them. But in fact average and median employee tenure is down since 1975.

Advertising – Maybe more ads have created more customer loyalty. But ad spending hasn’t changed much as fraction of GDP. Could ads really be that much more effective? And if they were, wouldn’t firms be spending more on them?

Brands – Maybe when we are richer we care more about the identity that products project, and so are willing to pay more for brands with favorable images. And maybe it takes a long time to make a new favorable brand image. But does it really take that long? And brand loyalty seems to actually be down.

Monopoly – Maybe product variety has increased so much that firm products are worse substitutes, giving firms more market power. But I’m not aware that any standard measures of market concentration (such as HHI) have increased a lot over this period.

Alas, I don’t see a clear answer here. The effect that we are trying to explain is so big that we’ll need a huge cause to drive it. Yes it might have several causes, but each will then have to be big. So something really big is going on. And whatever it is, it is big enough to drive many other trends that people have been puzzling over.

Added 5p: This graph gives the figure for every year from ’73 to ’07.

Added 8p: This post shows debt/equity of S&P500 firms increasing from ~28% to ~42% from ’75 to ’15 . This can explain only a small part of the increase in intangible assets. Adding debt to tangibles in the numerator and denominator gives intangibles going from 13% in ’75 to 59% in ’15.

Added 8a 6Apr: Tyler Cowen emphasizes that accountants underestimate the market value of ordinary capital like equipment, but he neither gives (nor points to) an estimate of the typical size of that effect.

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Why Prefer Potential?

Movies that win Oscars seem to gain more viewers as a result. But it also seems that on the whole people are a lot more eager to watch Oscar nominated movies before the Oscar winners are announced. After the show, people think less about movies and more about other things. Which is odd – a burst of info comes out about which movies are good, and in response people get less interested in watching movies. If getting info about movie quality makes people like movies less, that might explain why movie execs were so keen to kill movie prediction markets. But it still leaves us with the basic puzzle: why don’t people like info on movie quality?

Actually, this is part of a much bigger puzzle. Regarding basketball players, leaders, job candidates, comedians, grad school admissions, restaurant reviews and paintings, we actually prefer to choose people described as having the potential to achieve certain things, compared to people who actually achieve those same things:

When people seek to impress others, they often do so by highlighting individual achievements. Despite the intuitive appeal of this strategy, we demonstrate that people often prefer potential rather than achievement when evaluating others. Indeed, compared with references to achievement (e.g., “this person has won an award for his work”), references to potential (e.g., “this person could win an award for his work”) appear to stimulate greater interest and processing, which can translate into more favorable reactions. This tendency creates a phenomenon whereby the potential to be good at something can be preferred over actually being good at that very same thing. We document this preference for potential in laboratory and field experiments, using targets ranging from athletes to comedians to graduate school applicants and measures ranging from salary allocations to online ad clicks to admission decisions. …

Although participants recognized that the individual with achievement was more objectively impressive on paper, they showed a general preference for potential in their hiring decisions and assessments of future success. …

We ruled out a pro-youth bias, an extremity effect, and believability or credibility perceptions as viable alternative accounts for our findings.  (more; HT Tyler)

Weird! These authors even found this effect for paintings themselves, and not just for painters. They do convincingly argue that a proximate cause is interest and deeper reasoning caused by the uncertainty, but I find it hard to see those as ultimate causes. Why are we more interested in reasoning about potential rather than achievement?

Katja Grace suggested one plausible theory to me: we hope or expect to get a better price on things with good potential, relative to good achievement. This can make some sense of our preference for potential in hiring or grad school admissions; the candidates who have actually achieved may demand more in compensation, or be more likely to reject our offer.

It might also make more sense for paintings and basketball, if we were planning to buy the painting or hire the player. But a simple price effect makes less sense if you are not going to buy the painting or hire the player, but just be a fan. This also makes less sense for movies, comedians, restaurants; few of us ever buy these things whole. We instead pay to rent them, and we don’t get better prices there if we buy potential.

The Oscars suggest a related idea: what we want is social credit for anticipating fashion. That is, we want credit for being early in evaluating things highly that others will later evaluate highly. We want to able to brag (indirectly of course) that we saw quality first. Which is plausible. But it suggests that fashion is a surprisingly big part of our lives – desires to be first in fashion drives a lot more of our behavior that we like to admit.

In fact, this seems a good test probe – let’s test this effect in many more areas of life. Areas where potential matters more than achievement are good candidates for areas where fashion matters a lot to us.

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Meaning Via Work Or Play?

Our culture celebrates variety and change. People who move from small towns to big cities often go on and on about how those small towns were hells where nothing happened and the ignorant locals liked it that way. Sophisticated city folks love to visibly embrace change and variety, bragging about their new clothes, gadgets, and exotic vacations.

Some tell themselves that this taste for variety is the natural human state. Yet kids have to be taught to like variety. Kids start out wanting to watch the same movies over and over, not wanting to try out new food dishes, and not wanting to move to new homes or neighborhoods. Also, as anyone trying to push a work reorg can tell you, adults don’t actually like to change their jobs much. And people tend to be pretty stressed on those exotic vacations; what they like is to brag about them before and after.

Similarly, our culture celebrates leisure relative to work. Most of our fiction is set in leisure, and we tell ourselves that kids naturally want to play, and must be forced to work. But in fact foragers don’t push their kids to work; adults wait until kids beg to be allowed to follow adults around and be taught how to do adult jobs. Furthermore, kids today worldwide actually like the meaning and autonomy that comes from mundane work:

[Mexico City’s] Centro Santa Fe mall [is] one of the largest in Latin America. … At one end of the mall is KidZania, a theme park for children that opened fifteen years ago, and has since spread to cities in a dozen other countries, including Tokyo, Kuala Lumpur, Mumbai, and Istanbul. …

KidZania gives children between the ages of four and fourteen the chance to enact the roles of grownups in a lavishly realized, scaled-down world. … Children can work on a car assembly line, or move furniture, or put out a fake fire with real water. … Children receive a check for fifty kidzos upon arriving at KidZania, and can supplement that with the “salary” they earn for participating in an activity. The most popular of them, like training to be a pilot on a simplified flight simulator, are not as remunerative as the less popular, like being a dentist. (You peer inside a dummy’s mouth.) Children can spend their kidzos … at the mini city’s department store, which bears the name of a regional chain and is stocked with covetable trinkets. …

In Mexico, kids tend to spend their kidzos immediately after earning them; in Japan, it is difficult to persuade children to part with their kidzos at all. … “What they love most, on the second or third visit, is their independence. … Even if you go to Disneyland, you are guided—you are supposed to walk a typical way.” (more)

Here are some results from a 2002 paper on work vs. leisure, from a survey of 1942 Israelis in the years 1981 and 1993:

People can be divided by whether work or leisure is more important and central to their lives. Those who see leisure as more central see work as less central and vice versa. Leisure orientation has increased over time, and is more common among women, the young, and the unmarried. High school graduates are more leisure-oriented, compared to those with both more and less education.

Money is just as important to both types, and both feel equally entitled or not to a job. Leisure-oriented people are less satisfied with their job, and they feel less intrinsic rewards from work and more such rewards from leisure. They care more about interpersonal relations at work, they feel less obligated to work to contribute to society, and they work fewer hours.

I recently watched two acclaimed movies, Still Alice and The Wind Rises, about people with strong work orientations. Such characters seemed quite human and sympathetic to me. And The Profit, a reality show about a guy who saves failing small businesses, is my favorite tv show in years.

If, as I suspect, the future will be much more competitive and push more people back to a work orientation, you might lament that to the extent you have strongly internalized modern cultural values. But I don’t think you can plausibly claim that because of this such future folk would be any less human than you, more self-deceived than you, or that they’d see their world as a hell. Beware too easily projecting your values onto others.

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