Wednesday, May 12, 2010

Will history judge Marx to have been right about the effects of technological progress on income distribution?

‘The instrument of labour, when it takes the form of a machine, immediately becomes a competitor of the workman himself. ... That portion of the working-class, thus by machinery rendered superfluous, i.e., no longer immediately necessary for the self-expansion of capital, either goes to the wall in the unequal contest of the old handicrafts and manufactures with machinery, or else floods all the more easily accessible branches of industry, swamps the labour-market, and sinks the price of labour-power below its value’ Karl Marx, Capital, 1887 (first English edition).

Since Marx wrote that, real wages have increased by massive amounts in industrialized countries. Authors of some books I have read recently suggest, however, that Marx’s predictions could end up being right in the end. Gregg Easterbrook warns that we should not take too much comfort from the fact that Marx’s predictions of gloom have not yet come true (‘Sonic Boom’, p 153; discussed here) and Jacques Attali suggests that tomorrows West will resemble today’s Africa (‘A brief history of the future’, discussed here).

In attempting to think our way around this question an obvious place to start is with the effects of technological progress on the demand for labour. This approach makes sense if labour can be assumed to be more or less homogeneous, that aggregate capital stock can be measured appropriately, that most income from capital tends to accrue to people with high incomes and that technological change is the only factor influencing income distribution. I’m actually not sure that any of those assumptions stand up to scrutiny, but let us keep the discussion as simple as possible to begin with.

As Marx observed, new technology often involves capital-intensive processes displacing labour-intensive processes, e.g. the use of power looms to replace hand looms in the textile industry at the beginning of the industrial revolution and, more recently, increased use of robot technology in car manufacture replacing labour-intensive assembly lines. This kind of technological change tends to increase the ratio of capital to labour. However, introduction of new technology often occurs through the introduction of superior capital equipment that replaces existing capital (or more efficient sources of energy, financing innovations, business practices etc) without necessarily increasing the ratio of capital to labour. Most importantly, new technology makes possible an increase in national product, or real national income, and with increased demand for factors of production, including labour.

The net effect of those factors on future demand for labour will depend partly on whether, on balance, the new technology is a closer substitute for labour than for existing capital equipment (and other factors of production). Further development of electronics and robotics, in particular, can be expected to displace a lot more manual and mental labour, but my guess is that before too long new technology will largely involve superior robots replacing inferior robots, leaving demand for human labour relatively unaffected. There are some parts of the economy where new technology is unlikely to have much effect at all on the ratio of capital to labour, e.g. symphony orchestras. (William Baumol made the point in the 1960s that a symphony orchestra does not become more productive by playing faster.)

Another important influence on the future demand for labour will be whether average incomes are likely to result in a changing pattern of consumer spending toward more on labour-intensive or more capital-intensive goods and services. My guess is that ‘real’ experience (of foreign travel etc.) will trump ‘virtual’ experience and that people will prefer to interact with other humans rather than robots to obtain services such as restaurant meals.

So, I think there are limits to the extent that technological progress will result in substitution of capital for labour. When we take into account the fact that labour is not homogeneous, that investment in human capital and investment in physical capital can be substitutes or complements, and that people embody new technology in the skills they acquire it is not even obvious that it is particularly helpful to think in terms of aggregate categories such as labour and capital.

It is probably more meaningful to consider demand for particular categories of labour e.g. unskilled labour. Perhaps it is reasonable to predict that demand for unskilled labour will continue to shrink, but even that is problematic if we define ‘unskilled’ in terms of lack of formal qualifications and overlook the possibility that inter-personal skills - often acquired without formal training - will become increasingly important.

The idea that there is a class of people who obtain their income from selling their labour (workers) and another class of people who obtain their income from ownership of capital (the idle rich) seems likely to become increasingly irrelevant. As working people invest for their retirement they will be increasingly buying shares in the robots that will earn the income they previously earned for themselves.

Technological progress is not the only factor influencing income distribution. Factors affecting the supply of labour, e.g. immigration, could have effects on wage rates in some countries that are as important as the effect of technological progress. Then there are the effects of globalization both in providing international competition for labour-intensive industries and, increasingly, new sources of innovation and competition for technology-intensive sectors of industrialized countries.

Finally, the taxing and spending policies of governments modify the effects of technological progress on income redistribution. If Marx turns out to have been right about technological progress, it seems likely that governments in democratic countries will come under increasing pressure to intervene further in income distribution to ensure that all groups have an opportunity to benefit from the fruits of technological progress.

However, my personal view is that history will probably continue to judge Marx to have been largely wrong about the effects of technological progress on income distribution.
Winton Bates

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