Take Both Econ, Techies Seriously

Martin Ford, software CEO and author of a new (bad) book on how automation may destroy our economy, is right about one thing:

Among people who work in the field of computer technology, it is fairly routine to speculate about the likelihood that computers will someday approach, or possibly even exceed, human beings in general capability and intelligence. … While technologists are actively thinking about, and writing books about, intelligent machines, the idea that technology will ever truly replace a large fraction of the human workforce and lead to permanent, structural unemployment is, for the majority of economists, almost unthinkable. For mainstream economists, at least in the long run, technological advancement always leads to more prosperity and more jobs.

Yes, techies agree on the long term plausibility of machines doing almost all jobs at a cost below human subsistence wages, thereby gaining almost all income, while economists ignore this scenario.  E.g., Tyler Cowen:

In the longer run … computers will free up lots of human labor — but in the meantime it will have drastic implications for income redistribution, across both individuals and across economic sectors. … Robin Hanson believes we are headed back toward a Malthusian equilibrium; in contrast I believe that machines will never outcompete humans across the board.

Arnold Kling agreed:

I agree that Singularians are far too optimistic about artificial intelligence. It is a variation of the “fatal conceit” problem. Most of human intelligence is tacit knowledge, consisting of elaborate metaphors that are originally acquired from sensory experience. Artificial intelligence is an attempt to arrive at the same point through top-down design. … Computers and robots will be economically significant but not paradigm-shifting.

Economists should listen more to techies on what techs will be feasible at what costs, but techies should also listen more to economists on the social implications of tech costs.  Alas, just as economists prefer to rely on their intuitive folk tech forecasts, techies prefer to rely instead on their intuitive folk economics.  E.g., Martin Ford’s misguided intuitions:

At some point … machines will be able to do the jobs of a large percentage of the “average” people in our population, and these people will not be able to find new jobs. … This tremendous selection of products, and also services, which we now take for granted, is unprecedented in human history. … All these products owe their existence to the mass market. …When a business creates products or services at high volume, it realizes economies of scale, and that, of course, results in lower prices. In addition, however, high volume production also makes it possible for the business to adopt statistical quality control techniques and to improve overall consistency and precision in the production process. …

As jobs are eliminated, … some of this wealth is then transferred to the owners. … The distribution of income [becomes] more concentrated. … The demand for the mass market products that drive our economy depend much more on the number of potential customers than on the wealth of any particular customer. You are not going to be able to sell 40 cell phones to one person, no matter how wealthy they are. … Continuing to save money as automation slowly eliminates some of their remaining workers, this is not enough to make up for the reduction in sales. …

If … a slave (or automation-based) economy is destined to undergo continuing decline, how is it that the slave states were able to maintain stability for so long?  The answer lies in the fact that the South was primarily an export economy. …

Once full automation penetrates the job market to a substantial degree, an economy driven by mass-market production must ultimately go into decline. The reason for this is simply that, when we consider the market as a whole, the people who rely on jobs for their income are the same individuals who buy the products produced. …  Making a few people richer will not make up for losing a large number of potential customers.

Ford’s mass-market theory of production is nothing like standard economic theory.  Sure high income inequality might be ethically bad, and threaten political instability, but it does not at all threaten economic collapse – producers can focus on giving the rich what they want, and innovation and growth is just as feasible for elite products as for mass products.

When I informed Ford than an economist (me) had taken his tech assumption seriously, he was not moved:

My immediate reaction to this is that economic growth at any level—let alone of an order of magnitude beyond what we are accustomed to—is fundamentally incompatible with wages that are falling dramatically for the vast majority of workers. … If wages fall dramatically, then consumption must likewise fall because the majority of personal consumption is supported by wage income. … Hanson … seems to be saying that if consumers have an ownership interest in the economy of the future, then the resulting investment income will be sufficient to make up for the precipitous decline in wages. …

Dr. Hanson seems to be assuming that the stock market (and other productive assets) would increase dramatically in value … The problem I see with this is that, according to modern financial theory, … asset values are defined by investors’ expectations for the future cash flows. … It seems clear to me that, in the midst of across the board job automation and plunging consumer demand, those future cash flows would be looking pretty minimal.

Ford seems to be confusing capital as stock vs. flow.  The fraction of production that is given to capital vs. labor depends on the marginal productivity of capital, times the quantity of capital, vs. the marginal productivity of labor, times the quantity of labor.  If capital and labor are the only owned factors of production, then if the fraction of income going to labor falls, the fraction of income going to capital must rise.  That income flow goes to capital regardless of what assets are used to represent the stock of capital.  Instead of trying to reason about what sets stock prices, it is simpler to imagine firms renting capital from capital owners, paying them according to capital’s marginal productivity.

The standard views of techies about what techs will be feasible might be wrong, and the standard views of economists of how to forecast tech consequences might be wrong.  And it is fine for contrarians to try to persuade specialists they are in error, though contrarians would be wise to at least understand the standard view before trying to overturn it.  But surely what the world needs first and foremost is to see and take seriously the simple combination of the standard views on such important topics.

Added 8a 29Aug: Ford responds by just repeating his claim:

Machines could go from performing 25% of jobs to 75% within four years. … Let’s try to imagine an actual scenario: … Businesses rapidly deploy the technology and the unemployment rate rises. … As consumer spending falls, businesses either adapt by laying off workers and automating still more jobs, or they fail entirely. …. Mortgage defaults are now at an unprecedented level. … How does the financial system and the overall economy survive that in the short run? I may be an economic rube, but I don’t get it. … Production is equal to consumption plus investment, and those are both going to be in free fall, given a scenario like the one above.

Yes, a sudden unanticipated change would be disruptive, but no disruption does not imply falling production.  Ford needs to learn some economics, or listen to some economists.