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                                 Automation and Capitalism in the 21st Century



Economics both prescribes and describes rational behavior within the market system. Rational behavior results in what the economist called “a marvelous machine,” churning out an optimized cornucopia of goods and services, given exogenous factors such as the social order, consumer preferences and technological progress - the last two changing rapidly.


But, the graph below indicates, something is not optimal. The economic recoveries from the troughs of economic activity in four of the recent major economic downturns starting in the 1930s have grown increasingly anemic.


Courtesy: Crestmont Research


 People have advanced a number of reasons for low economic growth:


1) High tax rates. This idea is likely valid only at the extreme. In 1929, the top U.S. federal marginal tax rate on income was 29%. In the years 1932-1935 that rate was raised to 63%.1 Yet the four year recovery from the trough in 1933 averaged 9.4% /year to 1937. High marginal tax rates did not inhibit the production of wealth. Government programs such as the WPA promoted economic growth and did something useful.  


2) Excessive government regulation. The Great Depression of the 1930s was caused by the collapse of the unregulated banking system. Between 1929 and 1933, 40% of all banks went bankrupt.2 In 1933, the Banking Act (Glass-Steagall) separated the commercial banks and the (always risky) securities firms, compartmentalizing the financial system and therefore greatly reducing bank failures.3 The Act also established the Federal Deposit Insurance Corporation, reducing the risk of bank runs.


3) Perverse managerial incentives. Berle and Means (1932) explored the implications of a shareholder system where ownership (guaranteeing economic efficiency) is divorced from management. But the U.S. economy grew at its fastest rate between 1950-1970 (3.59%/yr. real), when U.S. business was at its most managerial and unchallenged throughout the world.4


4) Economic inequality. Using detailed data, Thomas Piketty’s “Capital in the 21st Century” (2014) shows, with the exception of the years 1911-1950, the war years and aftermath, the concentration of wealth in major European economies has been high or growing because the real rate of return on capital> real economic growth. But this graph shows that in the Gilded Age of the latter 19th century, the economic growth of the West soared due to technological and sociological changes that drove labor from subsistence agriculture to the cities and the industrial mass-production system that required capital concentration. In the modern era, wealth concentration is less likely class-based and more likely earned by a rotating economic elite.



The historical record does not confirm that any of these single reasons impeded economic growth. A better explanation for growth is technological change. Jeremy Rifkin (2014) writes, “In 1769 James Watt invented the modern steam engine powered by coal. The cotton industry became the first to deploy the new technology…Steam power rose from 4 million horsepower in 1850 to about 18.5 million horsepower in 1870.”5 Stanford Historian Ian Morris (2010) suggests that energy capture has been the most responsible for societies’ social development and technological progress.6


Markets are very flexible. By separating capital assets from their medieval social roots, they enabled entrepreneurs to combine and assemble the new ideas to create the disruptive change that is accelerating to this very day. Technology is the major building block. The major driver of great economic change will increasingly be automation. Automation and the export of jobs have the same domestic effects; both result in a loss of high value-added U.S. jobs and declining wages for those remaining.7 The motivation of both is the minimization of cost and therefore an increase in productivity which can be defined as GNP/labor hours. A positive instance of this is the increased productivity of American agriculture, which in 1929 employed 23% of the labor force versus 2.5% today, freeing people to do other things.8


But the Great Recession of 2008 can be described as the culmination of a long process of secular U.S. economic change in a globalizing world that resulted in automation and the dismantling of industrial plants and the export of jobs from the U.S. in the 1990s - then the assumption of unsustainable debt in the 2000s as Americans tried to maintain their living standards by taking out home equity loans, flipping assets and investing in complicated securities promising slightly higher yields.


The present effect of capitalism’s perpetual drive to increase productivity, and thus the return on equity, is increased automation in many sectors of the economy, which frees people to do what? Some in Silicon Valley are increasingly concerned with what people will do in the future. The authors we cite: Erik Brynjolfsson (2014), Martin Ford (2009) and Jeremy Rifkin (2014) all agree with the following:



“As technology progresses, the computational capability of a computer will roughly double every two years.”                    

                                                                                                                                                                           Ford (2009) on Moore’s Law






As Moore’s Law works over time.…It also allows (computers) to do things that previously seemed out of reach.

                               Brynjolfsson (2014)


But it can be asked whether the high social costs of automation and offshoring will benefit anyone, even the shareholders of U.S. companies in the long-run. A system of increasingly efficient mass production requires a corresponding mass consumption. But mass consumption requires well-paying jobs. This is the market contradiction at the heart of 21st century capitalism that Karl Marx wrote about in the 19th. Competitive economic forces favored increasingly capital investment, rather than labor, causing the progressive impoverishment of the proletariat, leading to revolution.


Conventional economic argument contends this contradiction is impossible. The economy will continue to generate jobs within the capabilities of the average worker. But Steve Rattner, who was the lead advisor on the 2009 auto bailout writes, “All told, wages for blue-collar automotive industry workers have dropped by 10 percent, after adjusting for inflation, since the recession ended in June 2009…These dispiriting wage trends are a central reason for the slow economic recovery; without sustained income growth, consumers can’t spend…the United States has gained just 568,000 manufacturing positions since January 2010 – a small fraction of the nearly six million lost between 2000 and 2009....In a flattened world, there will always be another China.”9


Jeremy Rifkin is a consultant and lecturer at Wharton. In “The Zero Marginal Cost Society” (2014) he writes, “Automation, robotics, and artificial intelligence are eliminating human labor as quickly in the white-collar and service industries as in the manufacturing and logistics sectors. Secretaries, file clerks, telephone operators, travel agents…and countless other white collar service jobs have all but disappeared in the past 25 years as automation has driven the marginal cost of labor to near zero.


…I suspect that the great automation debate may be about to take flight…the new innovations in the use of Big Data, the increasing sophistication of algorithms, and advances in AI are, for the first time, crawling up the skill ladder and affecting professional work itself, long considered immune from the forces of automation and the advances of technology displacement. Computers are being programmed to recognize patterns, advance hypotheses, self-program responses, implement solutions, and…translate complex metaphors from one language to another in real time with accuracy approaching that of the best translators in the world.”10



Current and proposed administration programs address the problem of improving the manufacturing base and the economy’s ability to generate wealth by increasing workforce skills and spending on R&D. Another major problem will be the economic problem of distribution which, of course, is an intensely political question. The authors disagree how automation will play out:



·         Erik Brynjolfsson is the director of the MIT Center for Digital Business. In “The Second Machine Age” (2014), he suggests how people can remain valuable knowledge workers by improving, “...the skills of ideation, large-frame pattern recognition, and complex communication instead of just the three Rs…. As we have fewer constraints on what we can do, it is then inevitable that our values will matter more than ever.” He suggests, "Use taxes, regulation, contests, grand challenges, or other incentives to try to direct technical change toward machines that augment human ability rather than substitute for it, toward new goods and services and away from labor savings." 11



·         Martin Ford founded a Silicon Valley software firm and holds an MBA. “The Lights in the Tunnel” (2009) draws out automation’s market implications. He writes, “Historically, technology and the market economy have worked together to make us all more wealthy. Will this always be true? ...The reality is that the free market economy, as we understand it today, simply cannot work without a viable labor market. Jobs are the primary mechanism through which income- and therefore, purchasing power – is distributed to people who consume everything the economy produces. If at some point, machines are likely to permanently take over a great deal of the work now performed by human beings, then that will be a threat to the very foundation of our economic system.”


Also a former computer designer, he writes, “For centuries, machines have continuously become more sophisticated, and as a result, the productivity – and therefore the wages – of the average worker have increased. It stands to reason that if this process continues indefinitely at some point the machines will become autonomous, and the worker will no longer add value….The AI (artificial intelligence) applications that will likely displace knowledge workers…will simply be workhorse programs that make the routine decisions and perform the tasks and analysis that are currently the responsibility of highly paid workers sitting in cubicles all over the world. AI capability may start out by being built into the productivity applications used by workers, but over time, it will evolve to the point that these applications can perform much of the work autonomously…The result will be substantial job losses for knowledge workers…”12


“Without (the) critical mass of viable consumers, economic decline is mathematically inescapable. There is really no way to envision how the private sector can solve this problem. There is simply no real alternative except for government to provide some type of income mechanism for consumers…I believe that in time, this will have to be accepted as a basic function of government.”13 He is saying if the market cannot take care of this problem, the government must.



·         Jeremy Rifkin (2014) suggests that present trends in automation will result in energy-efficient, lateral economic development and new social organizations; but the market system will not send the right signals. We restate the economics in investment terms. If you allow for human capital: such as education, training, and health, then at general equilibrium, the profit on each additional unit of investment in labor, land and capital should equal the rate of interest. In The General Theory, Keynes (1935), wrote that at a static equilibrium the marginal returns of all investments will be equal. That is:




     E(r)  =  I1   =  I2   =   I3      =  the  current rate of interest

                  P1      P2        P3     


                                                =  the marginal efficiency of capital    



      where:     E(r) = The expected return of an investment.

                       I(n)  = The yearly profit of one more unit of that type of investment.

                      P(n)  = The price of the investment.


But if automation drives the incomes of workers in a certain industry, I1 to zero, then they have been effectively excluded from the capitalist economy.            


This is what Rifkin says. High-paying jobs will be restricted to those who work in the capital-intensive areas of the economy, rather than in fields whose marginal cost (or marginal revenue) is zero. Recall that economics is the study of how to manage scarcity. If advanced technology widely facilitates the production and distribution of intellectual products at zero marginal cost, the economic model for these goods simply blows up, as it has in newspaper publishing and the music industries.14 As automated capital becomes an increasingly important factor of production, other social arrangements will likely have to be made to supply demand, valuing and remunerating the social value of what many people will do. 


For instance, new drugs have high intellectual content and upfront development costs, but are produced at a low marginal cost. To overcome this economics, society protects (or maybe overprotects) drug manufacturers with patents so they will continue to innovate.  


The present economic system will distribute mainly to these who have the jobs, routine middle-level jobs being eliminated. An equally powerful counter-trend is worldwide economic growth that exceeds the carrying capacity of the planet. Although the WSJ may cite specific instances where technology has unlocked new resources, the main problem facing all societies is the thermodynamics of climate change from which there is no escape. As the result of the melting polar ice caps, the mean level of the ocean is rising; the ocean’s increased energy capture is starting to cause extreme weather around the world and exacerbating existing political problems in the developing one.15


We have cited increasing automation as a major economic trend. Where this differs from straight-line science fiction speculation is that we are discussing the real world. How automation will play out in the U.S. depends on:


      1)  Increasing environmental constraints.


2)      Changing consumer life styles, which are increasingly social and less resource intensive.


3)      Government policies on economic distribution, infrastructure and scientific research. Specifically in a review of Piketty’s book, Harvard professor and former presidential advisor Larry Summers lists, beyond taxation: 1) More vigorous enforcement of anti-monopoly laws 2) Reduction in excess protection for intellectual property 3) Encouragement of profit-sharing schemes 4) Government pension investment in higher-risk projects 5) Strengthening of collective bargaining 6) Improvements in corporate governance - and finally most important – 7) Strengthening of financial regulation to more fully eliminate subsidies (like government guarantees) to (market-related) financial activity 8) An easing of land-use regulations in major metropolitan areas.


4)       The effect of government distribution policies on the trade deficit, which everyone assumes the U.S. will be able to finance indefinitely. A movement in the direction of a balanced merchandise trade would develop U.S. production skills, keeping it from becoming like Saudi Arabia.


       5)  Future business investments.


This essay has suggested that an economy characterized by increased automation will not serve human purposes, if left to blind market forces. To discuss two equality issues:


Since businesses are organized to accomplish tasks, they are of necessity rather hierarchical. But in the future supply side equality, and the growth of new businesses, might increase what Rifkin (2014) calls, “The Collaborative Commons.” 


1)      Technological networks enable the massive growth of lateral information and therefore localized production.


2)      Ecological considerations point to the development of decentralized energy sources, most obviously increasingly competitive solar energy.


3)      Globalization brings the creative diversity of port cities to the entire world.


A future pattern of economic development, Rifkin suggests in the 3/16/14 NYT, might combine highly efficient and centralized capitalism with decentralized non profits (arranged by interest and locality). This kind of federated network architecture raises interesting social issues. The political analog is the (usual) dynamic balance in the United States between the federal and local governments.


The major argument against distributional inequality, the undue concentration of wealth, is political. The substantial concentration of wealth that Thomas Piketty documents, and that automation further promises, will challenge the democratic political system. The Enlightenment of the 18th century introduced the idea that society exists for the benefit of all its members. Automation and climate change challenge this value. 



Being able to adapt our behavior to challenges is as good a definition of intelligence

as any I know.


                                                                Neil deGrasse Tyson, Cosmos, Episode 11




…states must develop the ideas and institutions that allow them to harness the titanic

forces of industrial and informational capitalism.



                                                              Walter Russell Mead, Foreign Affairs, 5/14








This article by Henry M. Paulson Jr., former secretary of the Treasury, describes in detail the consequences of not acting on climate change. The planet Venus, by the way, has a surface temperature of around 872 degrees farenheit due to a runaway CO2 greenhouse effect.




We have presented the salient facts related to two major issues: economic policy and climate change: 1) Automation, and now to a lesser extent, offshoring are reducing the demand side of the economic equation. 2) Global warming is raising measured sea levels.


Given the systematic reforms necessary to remedy these facts, why doesn't everyone recognize them, pull together and solve these problems? * A 7/5/14 NYT article suggests why political problems can be difficult. The article begins by asking, "Do Americans understand the scientific consensus about issues like climate change and evolution?" It turns out that 46% of Republicans say that there is no solid evidence of global warming, compared with 11% of Democrats. Sheer ignorance? Not so. On the issue of evolution Yale Law School professor, Dan Kahan, finds, "...the divide over belief in evolution between more or less religious people is wider among people who otherwise show familiarity with math and science, which suggests that the problem isn't a lack of information.


When he instead tested whether respondents knew the theory of evolution, omitting mention of belief (our note), there was virtually no difference between more or less religous people with high scientific familiarity....With science as with politics, identity often trumps the facts....The deeper problem is that citizens participate in public life precisely because they believe the issues at stake relate to their values and ideals especially when political parties (political entrepreneurs) and other identity-based groups get involved-an outcome that is inevitable on high-profile (and polarizing) issues."


For Republicans on the far Right, the technical problem of global warming is obviously tied to the political issue of smaller government, and ultimately tied to the political issue of Freedom and other factors.


This is heady stuff. "In Praise of Reason (2012)," the philosopher, Michael Lynch, writes that people have their own reasons for believing as they do. But decisions in a functioning democracy requires convincing others. This requires a "common currency of reason." "That common currency is grounded in the naturalness and practical rationality of the principles that are constitutive of public reason** ...There are reasons that we can abstract from our immediate preferences. These reasons hold up whether we are Christians or atheists, Republicans or Democrats."


"What the above...shows, in other words, is that there are reasons to trust certain methods over others even if those methods run counter to your own world view and the robust preferences that come with it (well said). The ground for these reasons is nothing more than rational self-interest...your best bet, from your own perspective, is to trust those principles and methods that have the most practical value..."


We now consider reasons related to the facts. Our reasons for doing something about global warming are simple: 1) The measured levels of the oceans are rising . 2) Global warming from the greenhouse effect is the cause. (It's not sunspots.) 3) Global warming will lead to bad consequences, some of which are already occuring. Our reason for not supporting gun advocates is simple: Carrying a weapon in public places erroneously assumes that others are likely out to do harm.



* Why don't the Iraqis get together and save themselves?


** What is "practical rationality?" It assumes there is no magic bullet. It merely assumes, as is the fact, that different people see things differently; but they can be practical. Practical reason assumes, and we embellish somewhat:


1) A person is able to give reasons related to the immediate facts for their own actions; not, as Isaiah Berlin wrote, "(operating) wildly, in the dark."


2) That the person thinks about his own wide self-interest to form a conception of the good.


3) That he engages in a critical reflection of his own life.


Democracy, that is the rule of the people, assumes that people can have rational discourse and find the best way to proceed. If everyone simply followed orders, there would be no need for democracy.

The ability to use reason widely and with some consistency distinguishes modern societies from more traditional ones. Lynch (2012, p. 2) writes, "The thought that everything is arbitrary (or predefined) undermines a key principle of a civil society, that we owe our fellow citizens explanations for what we do. Civil societies are not necessarily polite or homogeneous; but they are societies that value reason-giving, inquiry, questioning, and hashing out one's differences with others. In so doing, they take strenuously the idea that there are better or worse ways of doing...things. If you give up on the idea that there are standards of this sort, you give up on the idea that giving reasons has any real point. Deliberation becomes a game played for the joy of manipulation and the increase of power. Skepticism about reason undermines our commitment to civil society..."


N.B. Richard Legum is a philosopher, whose Internet discussions of truth and belief are very clear. Consider the following: 1) Truth is true regardless of who believes it.* 2) A true belief can be rational depending upon the evidence (reasons) one has. Thus, it is possible to hold a true irrational belief, if the supporting evidence is distorted by opinion, untrue or incomplete. 3) A true rational belief depends upon the totality of the evidence. The U.S., as a society, faces some very important issues: automation, climate change, immigration, foreign policy and the role of government - and arranging the means to pay for these. We would listen very carefully to the solutions proposed by our legislators and note whether they cite supporting evidence that is true and complete as possible.**

* From the Wikipedia: "The correspondence theory of truth states that the truth or falsity of a statement is determined only by how it relates to the world and whether it accurately describes...that world. The theory is opposed to the coherence theory of truth, which (is ideological and) holds that the truth or falsity of a statement is determined by its relations to other statements rather than its relation to the world." A mathematical system is an example of the latter.

** A simple list of competing wants doesn't add up. Take a simpler political issue, infrastructure repair. The 8/5/14 Washington Post reports, "A new Associated poll finds that six in 10 Americans agree that the economic benefits of good highways, railroads and airports outweigh the cost to taxpayers. At the same time, though, a majority (58 percent) oppose raising federal gas taxes to pay for their repair."


The Federalist Papers (1787-1788), authored by Hamilton, Madison and Jay, were persuasive documents, describing the structure and rationale of an U.S. government designed, above all, to avoid tyrannies of any sort. In Federalist #51, the solutions to avoiding "the tyranny of the majority" were pluralism in society, and the "balance of powers" within the government. "In a single republic, all the power surrendered by the people, is suited to the administration of a single government; and usurptions are guarded against by a division of the government into distinct and separate departments....The different governments will controul each other; at the same time that each will be controuled by itself....In the extended republic of the United States, and among the great variety of interests, parties and sects which it embraces, a coalition of a majority of the whole society could seldom take place on any other principles than those of justice and the general good..."

The Federalist papers describes the structure of a reasoned government, " is the reason of the public alone that ought to controul and regulate the government." (Federalist, #49). Madison did not specify why the laws of such a government should likewise be reasoned.

Michael Lynch's book illustrates that a practical, problem-solving attitude is necessary for U.S. democracy and the government to act, an attitude that enabled the U.S. to meet the challenges posed by the problematic Articles of Confederation (1777), two World Wars and the Great Depression. There will obviously be many more challenges in the future.