Posts tagged with storytelling

memeengine recently asked a question which has probably been on a lot of newshounds’ minds, as it has been on mine:

  • The picture we are now getting in “the news media" is of rich economies (US & Europe) that have ground to a halt, are not producing jobs, median wages stagnating and lower class wages possibly worse.

    In short even though the GDP growth is continuing, the gains have not been widely shared. (This has been going on for decades but we just talk about it now, which I think is interesting but a topic for another time. Just bear in mind that [a] any statistics you hear in support of an investment are always based on past performance, and [b] we seem to be discussing the past as if it’s the present.)

    So then you have to wonder, what would a capitalist economy look like with very high wages for a small group (like the people who control the robots who make everything) and very low wages for almost everyone (the people who pay for the robots’ services and change the bedsheets of the botmakers)?

I think I have, if not a definitive answer, a useful pespective to share on the question.

  

But first, a detour into theories of economic growth. The first theory I learnt in school was Robert Solow’s equation

Solow growth model

which interprets growth as an increasing function of savings rate (think China) and says that eventually things will peter out.

Since things weren’t petering out in the 50’s when Solow made the theory (and in fact US growth happens in a  constant corridor), Solow added a “cosmological constant”. (It’s called a technological constant but it serves the same role as Einstein's famous fudge factor).

Solow growth model picture

(Is that what’s happened to the USA now? Its period of Solow growth has finally petered out—just like Einstein’s equation, Solow was right all along and shouldn’t have fudged? I bet some of their intelligentsia are asking themselves that.)

There is a bunch of fun mathematics to do with the step functions and plotting K_t versus K_{t+1} but then realising that the K_1955 on the one axis needs to equal the K_1955 on the other axis so the 45° line becomes the stringer board girding the stairs of the step function and … well, you can look up a tutorial on Solow. I’m just sharing that so you have one story of how growth happens in your head, it’s a fairly sensible one, should be valid, and people do think about it.

In summary: savings (sacrifice) creates investment which increases capital which increases productivity which causes growth.

  

Now I’m going to contrast that fable with something I just made up (not to say someone else hasn’t independently also made it up), which I’ll call the Tacking Growth model.

tackingimage

It’s based on this story I read on the Victorian England webpage, where they observe that:

  • In 1800, hardly a man in England wore socks. But in 1900, hardly a man was without them.

That gave me the following idea of growth. What if economic growth proceeds through reductions in price of some random good—not necessarily something people deeply wanted—but then the substitution and income effects take place. Then growth stops again until the next cost reduction.

Newcomen steam engine

Nobody controls which thing will be innovated on next—whether it will be kevlar, steam, FCOJ, weaving technology, turbine manufacturing efficiency, or putting a metal spiral through the leaves of your notebook.

a turbine (I think at a nuclear power plant)

This fits not only with the story of sox in 19th-century England, but of petrol in Oman, limestone in Indiana, processed food in South Dakota, mp3’s in the post-Napster era — all of the well-studied economic cases where the price of something drops and then its usage increases.

The only difference is I’m relying on the income effects of those price drops in individual goods to cause the broad-based measured economic growth. I think this story has a nice sub-i sub-j feel to it, and it argues that not all growth is equivalent.

If the internet becomes cheap and suddenly everyone spends all day on tumblr, well that’s nice and it may be the optimum within the price regime they’re actually living with, but it’s not what people would have wished for 100 years ago. (They would have wished for “pure income” — to have the wealth of the richies from their own time and have the things that rich people had like hot baths, not necessarily futuristic things like VCR’s. How new goods add utility versus improvements to old goods is another topic for another time.)

http://farm4.static.flickr.com/3205/2760292671_abe8574375.jpg

The Tacking Growth story also has an implication for the question I posed at the beginning, which is what does capitalism look like in a rich world with many people making low wages?

I think it looks exactly like this: the poor people have a good standard of living in terms of absolute magnitude, but they have little freedom. With a tight budget constraint (near the origin) obtusely and extremely scalening off in various directions of cheap stuff (sox, packaged food with lots of preservatives, canned food [can o’ corn], modular homes, satellite TV, Budweiser beer, … brand-name oreos, ATV’s and Harleys? Well I didn’t say it makes total sense), the only way to live like a richie is to buy specifically the stuff that is cheap — even if, as measured by eg, your Engel curve, that’s not what you really want.

wildly scalening budget constraint in response to a precipitous price drop in one random good

That undermines the idea of growth-is-good and all-growth-is-the-same because now we’re talking about a “curved” growth path γ through goods space, with consumer responses complicating matters — since their responses change the business environment as Levi’s Jeans suddenly becomes a powerhouse. (Yet another topic for another time could be the transition from custom sewed clothing for everyone to impossible to find pants that fit or get anything repaired because it was all cheaply generated by machine. See my sheaf theory & leontief matrix post.)

what people used to do before the price of internet got so absurdly low

Perhaps consumers smooth a tack-forward-in-this-one-of-1,000,000-possible-dimensions into a more general kind of economic blessing or perhaps they’re just drawn into a weird corner (mixed blessing)—where you have socks coming out your ears, you use socks as rags, socks as lampshades, stitch socks together to make a dress—but what you really want is a bicycle! Or in a more modern context, sub in internet for socks and a trip to Thailand is what you really want.

and, the rich people do much more vacation travelling but still go to Thailand. scalene pricing doesn't matter so much because they have a wide budget, so they're free to do whatever (be closer to their Engel curve).

Now @UnlearningEcon might try to make me eat my shorts because this is so neoclassical and uses a single representative agent and is basically voodoo in many ways. But I just mean it as a sketch, not a full-bodied simulation. It’s also a much easier story to believe in a manufacturing economy than a service economy. Well, let me know if you can do it one better.

  

So I described the Solow model which is one of the usual stories of growth. Did that in order to contrast with the Tacking theory which I think sheds a light on the original question. And that was, what does a world with high productivity, low wages to many and high wages to some, look like?

  • Most obvious is envy. You are going to watch Americans go live like kings in Thailand, Brits go live like kings in Argentina, mansions in the Gran Canarias, chalets in Andorra and beach houses in Tahiti. All of this will be technologically possible but out of reach for you. So you will be aware that it’s possible and that somebody’s doing it and loving it, but not you.
  • Next is opportunity. The more money our robo-programmers make, the more they are going to want to free up their time and have every service done for them. Massage therapists, personal trainers, life coaches, psychotherapists, cleaners, cooks, upscale morticians, model organic farms that you can vacation on, drug dealers, hoteliers, sycophantic investment researchers, and personal assistants all have opportunities to form the perfect life for the robo-programmers, tending to their every need and desire, and get paid for it.Edit: This was an idiotic speculation on my part. I shouldn’t have suggested that contracts to serve the rich would be one-to-one. Plenty of the present-day examples of service-economy jobs split the innovation and the service-work itself. For example jobs at franchises. The rich store inventor came up with the idea of what rich people want, and the sandwich fillers just work there for low wages with no union or no idea of how to find a rich person in the world and get the rich person to pay them. My usage of “robo-programmers” was also cheap and narrow-minded. High labour productivity doesn’t necessarily come from doing productive stuff like producing more goods. It could also be from branding or marketing or dealmaking. Anything that raises revenues or cuts costs. Mitt Romney wasn’t a robo-programmer; he put together funding + buy low + sell high — find some capital that’s not being maxed to its full potential, take it away from those people and put it towards a higher-profit purpose. Not a robo-programmer at all but to the extent that money in the form of profits or GDP is good, he did a good thing and got rewarded for it. Now does he pay a lot for personal trainers and coaches and yoga instructors and personal assistants? I have no idea, and I have no idea if he does, how they convinced him to buy their services. The sad thing is I knew this bullet-point was lazy thinking when I first wrote it but posted it anyway. Service economy, ho!
  • Third is low cost of certain things. The robo-programmers only got rich because they figured out how to run half of the society from their mid-April apartment in Rio! Actually they did part of it on the red-eye from Rio to Mauritius — that’s a killer one, man, it’s better to just work through it and then go party when you get off the flight, and finally crash after you’ve had some fun. Anyway the robo-programmers are creating things for you and everyone else for cheaper than you used to get it before. However anything you want that doesn’t come out of the robo machine (like organic peaches) is going to suck up a lot of your income for something that’s just completely standard (like a fruit). So best to stick with the cheap stuff so that you can afford that vacation in Bristol.
  • Last, let’s think about what happened with the owners of factories or factors of production from mid-century to the modern day. Did they enjoy risk-free returns to capital forever? I don’t think so.

    This is something to research into but I believe a lot of the complicated financial instruments derived in some sense from decreased returns on basic resource production, leading to a demand for segmentation of capital, risks, responsibilities, contractual obligations and rewards. You can still observe that oil & gas is 10% of the world economy but a lot of that goes to paying capital bills (depreciation, from the Solow model) rather than just getting paid & getting laid.

As usual, feel free to call me out or react however in the replies/comments.

 

UPDATE: As is typical with “econ-only” explanations of things, I’ve unwittingly left out culture and threats of violence. Some people use the phrase “class warfare” to describe US President Obama talking about raising taxes on the rich. However, an impolite debate about marginal tax rates is nothing like warfare. Obama is no Robespierre, nor are any US Republicans Ríos Montt.

File:Robespierre exécutant le bourreau.jpghttp://upload.wikimedia.org/wikipedia/commons/0/0f/Shot.jpghttp://upload.wikimedia.org/wikipedia/commons/thumb/2/21/Execution_robespierre%2C_saint_just....jpg/1280px-Execution_robespierre%2C_saint_just....jpghttp://laura579.files.wordpress.com/2010/02/robespierre_guillotined_reign_of_terror_1794.pnghttp://espressostalinist.files.wordpress.com/2011/07/guatamala1exhumation-at-comalapa-a-former-army-base.jpg     

No-one is passing out flyers of Christ holding a submachine gun adorned with Biblical quotations about how the disciples gave up their worldly possessions and shared everything.

The left half of Guatemala’s civil war (16 years of peace, thank heavens, ojalá que siga) handed out pamphlets just like this—and both sides in that war literally did commit warfare—killing families and then killing in retaliation. Setting up patrols and then setting up parapatrols to countermand those patrols. Forcing people to choose sides ("Of course my side is right! if you don’t agree you are with the bad guys and deserve to die!"). And the cause, besides racial tensions between indígena and whites, was an economic gap and lack of economic mobility. O(10^5) deaths ~ 1% of the population.

"Class warfare", like "wage slavery", is a horrible exaggeration that’s offensive to those who have suffered actual war or slavery. But actual war over wage differentials is not unheard of in history. This goes beyond “regular economics-only” analysis into the stories we tell ourselves about ourselves, politics, and game-theoretic moves that people normally forgo.

It may be that such bitter struggles are less common once the poorest are far enough above a meagre subsistence—hungry people have a completely different psychology than non-hungry. Or it may be that the perception <that anyone can move upward in the economic strata through hard work and right action> keeps peace, as those moving forward set their efforts toward non-violent self-advancement: a culture of rising up by work and business, rather than by other means. I don’t know the formula for a peaceful, industrious culture. But, it would be foolish to take that for granted. Rather, peace is something to be grateful for.

I’m not saying that anywhere in the OECD is approaching a brink of civil war—it doesn’t seem like it and let’s hope not—but things in my fictional robo-programmer society could be much worse if “only economic” causes led to “beyond economic” action.