Monday, March 13, 2017

Book summary: The Wealth of Humans

Ryan Avent. The Wealth of Humans: Work, Power, and Status in the Twenty-first Century. St. Martin’s Press, 2016.

What follows is my summary of the book's main argument. There's a number of useful reviews on Amazon, including some written by very informed people who disagree with key points of the author's argument. The main objection seems to be that the author overstates the extent to which income inequality is an inevitable by-product of technological change (section 1 of my summary below), and understates the extent to which it is affected by politics/institutional decisions, e.g. infrastructure spending programs that can locally increase labor demand and social conventions to boost wages. 

Executive summary

In most economically free societies, the two mechanisms of wealth-sharing are work (employers shift wealth to employees by paying them) and redistribution (taxes pay for goods and services that may not be redistributed in proportion to how much you paid), and the society has a definition of who is "in" (eligible to participate in both mechanisms). This book asks: What happens to these mechanisms when increasing automation is squeezing the first, and those controlling the wealth are opposed to expanding the reach of the second?

Its overall responses are: (1) while it's true that policy everywhere has tipped to favor wealth concentration, the essential problem is structural; (2) As a result of this fundamental structural problem, most efforts to "create jobs" will run into problems that ultimately doom them; (3) therefore, for better or worse, some form of non-labor-based redistribution will become necessary (eg universal basic income).

1. Productivity-enhancing technology thwarts a balanced labor market 

Henry Ford's innovation was to de-skill individual roles to vastly decrease the cost and increase the per-employee productivity of making cars; precisely because the de-skilled jobs were tedious, he raised wages and coddled his employees to attract labor and reduce turnover, something he could afford to do because of their high productivity. But this scenario comes with 3 problems.

First, the high productivity makes it affordable to pay higher wages, but workers in low-productivity industries such as education and healthcare that suffer from Baumol's "cost disease" (it costs about the same to educate 1 student or care for 1 patient as it ever has) are in the same labor market, so their wages must rise *despite* stagnant productivity, thereby increasing the cost to the consumer of purchasing those goods or services. That is, wealthy companies can afford to pay employees more because of the employees' much higher productivity, so that most income inequality is due to wage gaps *between* firms/sectors rather than within them.

Second, productivity-enhancing de-skilling paves the way for complete automation of those jobs, so the benefit to low-skill workers is short-lived.

Third, since higher productivity leads to a labor glut even before automation takes over, it pushes wages down. This is bad because while the effective price of some goods also falls due to that productivity (cars, cell phones), the effective price of others doesn't, either because supply is scarce (housing) or because they suffer from Baumol's cost disease of stagnant productivity (education, healthcare).

This is an example of how "job creation" systems can end up working against themselves. Future employment opportunities will likely satisfy at most 2 of the following 3 conditions ("employment trilemma"): (1) high productivity and wages, (2) resistant to automation, (3) potential to absorb large amounts of labor. To see the dynamic, consider the solar-panel industry. Increased productivity in manufacturing solar panels has caused them to drop in cost, creating a large market for solar panel installers, a job resistant to automation (meets criteria 2 and 3). But that same increased productivity means most of the cost of acquiring solar is the installation labor, limiting wage growth for installers (fails criterion 1). As another example, consider healthcare. As technology increases the productivity of (or automates) other aspects of care delivery, healthcare jobs will concentrate in non-automatable services requiring few skills besides bedside manner and the willingness to do basic and often unpleasant caregiver tasks. As a third, consider artisanally-produced goods, whose low productivity is part of their appeal (meets 1 and 2). But the market for them is limited to the small subset of people who can afford to buy them (fails 3).

Can education help? Higher educational attainment is still key to high wages, but not to high wage *growth*. The level of education required for that has been climbing higher and higher, putting it beyond the economic (and possibly intellectual) reach of most people, yet those are precisely the credentials needed to participate in the most lucrative parts of the economy. The displaced workers "trickle down" the skill-level chain and depress wages even higher in the wage hierarchy. So improving education, while a good idea, won't help people in poor countries as much as simply moving them into a rich country to work in that economy.

2. Hence, social capital is increasingly key to successful companies…

Since WW2, developed-nation economies have increasingly "dematerialized" to where most of the value in goods being produced was in knowledge-worker contributions, rather than physical manufacturing or the labor therein. (iPhones and cars are built overseas, yet most of their value is in design and software, which aren't outsourced.) Increasingly, the "wealth" of a company is not in its capitalization or even the material output of its employees, but its "culture" -- its way of absorbing, refactoring, and acting on information in a value-added way that is difficult to replicate and produces a product customers want to buy.

(This is also why cities are resurgent -- they permit a dense social/living fabric that promotes evolution of social capital, and the larger/denser the city, the more productive it becomes because of this effect, supporting high levels of specialization and social networks that facilitate labor mobility. The demand results in high housing costs, but NIMBYs oppose building more housing because even though the benefits would be spread over the whole city, the costs would be concentrated in their neighborhood.)

By definition, culture is a group phenomenon, not a set of rules handed down by a boss. Social capital cannot be exported like material goods; all you can do is try to create (or impose) conditions under which it can develop by allowing the free flow of ideas and labor (ie, the people in whose heads social capital lives), as the EU is trying to do within Europe. This is troubling for developing economies whose societies lack social capital.

Hence, China, having spent a fortune to create physical infrastructure to improve worker productivity, has reached diminishing returns: further productivity improvements must now come from "deepening" the workers' social capital, which has been wrecked by decades of cultural mismanagement by a totalitarian regime. Similarly, India's outsourcing boom and China's hyper-rapid industrialization occurred because technology allowed them to temporarily bypass the difficult step of building social capital, by "biting off" chunks of activity taking place in richer economies: India hosting outsourced call centers, or China jumping into a global supply chain established by rich economies and uniquely facilitated by the digital economy, in both cases offering labor at lower cost. But this era is ending: other countries can play the same trick (eg Indonesia as the new China, depressing Chinese wages), automation is coming, and the relative advantage to outsourcing decreases as products become more information-centric. (Though note that while "reshoring" is happening, it's not creating more jobs: Tesla would rather pay a few highly skilled engineers to oversee an automated assembly plant than pay lots of low-skilled factory workers to build something manually and less reliably elsewhere.)

It used to be thought that poor countries were poor because they lacked financial capital, but it's now clear that they can build factories without resulting in good social capital (India, China). Indeed, highly-educated workers in poor countries become more productive when they move to rich countries, suggesting it's the country's social capital that is lacking.

3.   …yet the benefits of social capital don’t accrue to those who create and embody it 

Yet as important as social capital is, when a worker leaves a company, his knowledge of that company's "culture" is generally not useful at a new firm, so he has little leverage (though this is somewhat counterbalanced by the pressure to not have *most* workers quit, which would destroy the culture). Conversely, a chief executive is harder and costlier to replace, so has more leverage as an individual. Herein lies the problem: "social capital" is in the collective heads of individual workers, but its benefits flow disproportionately to the owners of financial capital. A corollary is that the efficiency gains achieved by fluid (ie non-unionized) labor markets haven't been redistributed to the workers whose bargaining power was sacrificed to achieve those efficiencies. Marx predicted that that dynamic was unsustainable, and the society would collapse because either the workers would revolt and upend the government and the social norms it curates, hence destroying the wealth for everyone, or that the wealth-owners would asymptotically reach a point where no further wealth could be generated and harvested so they'd start fighting each other over the fixed amount of wealth, again destroying the society. Piketty notes that the 2 world wars did a lot to disrupt this downward slide because wars, taxation, inflation, and depression destroyed many of the superconcentrated fortunes made in the industrial age, but as noted above, the change was temporary.

The consequence of this structural problem is that some form of non-labor-based redistribution is likely to be the only nonviolent way forward. This path has at least two challenges. One is that the act of doing work has other benefits -- agency, dignity, reinforcement of socially-useful values -- that would be lost; although surveys show that people saddled with extra free time due to weak job markets tend to spend it sleeping or watching TV, ie, at leisure. A second challenge is that such "highly redistributive" societies tend to emerge in ethnically/nationally coherent political units, and motivate the society to draw a tight boundary around itself. E.g. Scandinavian countries have generous welfare states that make them desirable to immigrate into, but as a result the load on the welfare system generated by lots of immigration is tearing at the seams of their welfare economies. That is, we can't expect rich liberal countries to throw open their borders heedlessly when the potential pool of immigrants dwarfs those working to generate the wealth that is redistributed.

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