Machines are labor, but they don’t buy gifts
CNBC has a video on youtube about the concern over machines replacing people. They actually touch upon many relevant aspects of the issue… high unemployment, increasing corporate profits, productivity of machines, rising real GDP, stagnating median household incomes, low minimum wages and even social instability.
Replacing people with machines, like paying lower real wages, is a fallacy of composition It can be more profitable for an individual business to replace people with machines and pay less wages, but if more and more businesses do this, people overall will have less income and less purchasing power to buy the finished goods of production.
Production seeks demand. Demand depends on people getting paid for producing. So even though there may be a balanced trade off in production as utilization of capital rises and utilization of labor falls, production will be progressively limited by weaker demand.
The United States has a demand-constrained economy. The fact that some people are being replaced by machines is only part of the story. We will explore the subject of macro-economic demand here on Angry Bear blog in future posts.
TheBankNews. The Great Divide Economics of Wall Street. Youtube.com. 7/22/2013. https://www.youtube.com/watch?v=v9uUdCHCqHE
now i get it…this was succinct and clear, while an earlier post was nearly impenitrible..
I agree with you, I think, about effective demand… though I hate to use the word because it is not clear to me that we mean the same thing by it.
In any case if you are using it to argue against innovation and “labor saving” machinery, I think you are taking a bad tack. The problem is not that the machines don’t buy anything. The problem is that the displaced labor does not share in the profits, or that the displaced labor has no where to go… the economy does not grow as promised due to the increased efficiencies.
I think the answer is to recover from consumption-cancer and learn to live like human beings. Less toys, more time.
And that problem is more a political one than an economic one. It’s not that owners are useless, it’s that they get all the money. They certainly deserve a share of it, but the power that comes with it leads to their getting a much bigger share than is good for either them, the country (taken as a whole), or “us” (taken as individuals).
Read the last two paragraphs again. This is where Edward is going plus explaining why recessions happen when they do.
Ed, you may find this post useful:
The Luddite Fallacy Fallacy
O.K. I read the final two paragraphs again. Now tell me what you (they) mean.
[I sort of have the idea that recessions happen when the people who control money get afraid to lend it… usually because their previous “sure thing” just came up against some real world facts… not excluding the possibility that “consumers” have already bought as much as they want of the latest hot item. I am pretty sure it’s more complicated than that, but so is “effective demand.”]
Scott Nelson, A Nation of Deadbeats, tells a pretty convincing story about recessions and debt. No doubt he is overlooking something. We always do.
When a machine out lives its usefulness and is replaced by a better machine, the old machine ends up on the trash heap. When labor is replaced by a machine, companies tend to send the laborer to the unemployment trash heap. People are not machines and should be treated the same way.
“Prisoner’s dilemma” Every company sees only it’s direct personal good, all parties end up poorer than if they did what was better for society.
You said so many good things in that post you link to, like this part, “Left to itself, the market will provide many with a sub-subsistence level of compensation.”
The answer you give points to a steady-state economy where labor receives more of the income from output. That describes a mature economy. There would still be innovation and labor saving machines in a steady-state, because labor share would be healthy. Basically, you have to have healthy labor share to have healthy demand whether production is done by machines or humans. We simply need the power to purchase whatever is produced.
You mention how a recession starts… This is off topic but here is my take on how recessions happen…
As an economy expands after a recession, certain businesses develop that can only be profitable in an expanding economy. They are inherently inefficient, but they roll over their inefficiency in economic growth. These businesses would not be sustainable in a steady-state economy. They depend on growth, and die in stagnation. It’s not that these businesses are ponzi-scheme types. It’s that marginally they would not be profitable without economic expansion.
So when the economy hits the effective demand limit, which is the LRAS curve, output growth stops. The inefficient businesses are the first to react by contracting to cut costs and relying on inventories in an attempt to survive. The process affects efficient and inherently stable businesses. Eventually, the process snow-balls into a recession.
I do not see a way to eliminate expansion-dependent businesses. But in theory, if labor share is set correctly, these types of businesses are less likely to develop. And economic downturns would not be as long-lasting and fierce.
I meant to say, “should NOT be treated the same way”.
The issue for society is not that machines are replacing people for labor it’s that society has allowed the redefinition of what jobs will be living wages, middle class scale paying jobs. The redefining has been one that is based on what works for a capitalist (one who earns their money from money) when the labor movement and New Deal were defining jobs on what worked for society, the nations citizenry.
The blue collar job was the minimum job that paid the floor wage to entrance to the middle class. It was a job that required the least education for the most people. That was high school/tech ed and apprenticeship. It included retail. College for everyone to enter the middle class is just not practical for society unless society is going to treat the 4 years of college as we treated high school.
Along with this is the consolidation of retail, the other 1/2 of the means to enter the middle class. Other than your own restaurant or flower shop or such, general merchandize retailing is pretty much closed to those looking to do the business ownership sector of the American Dream.
I do not think we disagree in any important way. But you led with “machines don’t buy gifts,” and the problem is not “machines” but the share of income that goes to labor, and this is a matter of political power.
As for the businesses marginal in an expansion but not in a steady state… i think that is a good point. But some of those businesses are based on pumping the expansion (selling stocks), and some of them are worthwhile enough businesses but not for the faint of heart. And I am fairly sure that most money is made on the movement toward the new equilibrium rather than during the “steady state.” I think even economics predicts that at equilibrium everything is going to be sold for the lowest possible price, including labor and owners income.
Does your labor share measure only apply to non-supervisory workers or to all workers ? The reason I ask is that we could see a rise in labor share resulting from corps shifting to more compensation of execs in salary as opposed to options and other non-wage comp. This would likely have little effect on demand compared to the same rise in labor share that would go to typical workers.
I am going to bet Edward suggests Direct Labor in building a product which appears to have been stiffed in the last few decades and in agreements as of late.
You are hitting one of the nails right on the head, when you say, “The redefining has been one that is based on what works for a capitalist (one who earns their money from money) when the labor movement and New Deal were defining jobs on what worked for society, the nations citizenry.”
The New Deal was focused on the social cost of labor, and getting wages at that level. We have turned wages into what is best for the private costs of capital, and not the social costs.
You hit the nail on the head too when you say, “the problem is not “machines” but the share of income that goes to labor…” Even if machines produce a lot, they can produce more if more of the income from their production goes to labor. There are plenty of jobs that machines cannot do. It’s all a matter of what % of overall production is directed toward consumers in the way of income. That encompasses manufacturing, services, export industries, government services, etc. to Total real output.
Labor share applies to all workers. Remember the big jump up in labor share 4th quarter 2012? That was due to people taking income before the tax change. Those were not ordinary workers.
If you take profits out of a business, you take it out of the retained earnings section of the balance sheet. You are converting it from capital income to labor income. As labor share goes down even as execs take out income, this tells you that retained earnings are still increasing in corporations.
Now, what if all of a sudden, the execs took out massive amounts of income from retained earnings in one quarter. What would happen to effective demand? It would increase for that one quarter. What happens to effective demand in future quarters? Well, let’s look… They may invest it and turn it back into capital income. They may spend it, real GDP would rise. But labor share would still return back to its original point. So you would have a glut of income move through the economy, and the glut would divide between capital and labor income again. So you see the economy perk up and then it settles back down again.
We saw this glut move through economy from 4th quarter 2012 to 2nd quarter 2013. The economy picked up, real estate went up, lumber prices soared, unemployment ticked down, capital utilization picked up… then around April-May, the economy slowed back down. Labor share fell after 4th quarter 2012.
What is the point? If execs take out income in one big shot like in 4th quarter 2012, the effect is temporary. However, if labor share is raised by a rise in real wages for workers, then the effect is longer lasting. Effective demand will not fall in subsequent quarters and we would be able to pull out of this trap we are in.
“Those were not ordinary workers.
I am not sure I agree with your analysis of those who have capital gains in the form of dividends or the sell off of stock as ordinary Labor. Such a sale is rarefied air for 95% of the the Household Incomes making <$200,000 annually who hold small amounts of stocks outside of their 401ks which is also untouchable to anyone under 55-1/2. You do delineate the difference here: “If execs take out income in one big shot like in 4th quarter 2012, the effect is temporary.”
Perhaps it is just the wording I am taking issue with in your statement. For example, if labor share is raised by a rise in real payroll wages for workers, then the effect is longer lasting. Many execs take their earnings in something other than payroll wages as the taxes are less.
I’m not quite sure if you get the drift of my question , but if you do , then I think you’re mistaken about the outcome:
“If you take profits out of a business, you take it out of the retained earnings section of the balance sheet. You are converting it from capital income to labor income.”
When profits are taken out and paid as dividends , that’s not part of the labor share of income by any definition I know of. Nor is the capital gains income from the sale of shares inflated in price by share repurchases financed with those same retained earnings. Both of these types of incomes form a large share of total incomes of the rich.
Millionaires and billionaires have a low marginal propensity to consume , no matter whether they receive incomes in the form of wages or as returns on capital – full stop. If you don’t accept this fact , we can’t make any progress in this discussion.
Today , because demand is deficient , nobody ,individuals rich or poor , businesses small or large , has a high propensity to “truly” invest. Money is being stuffed in safe assets , tax havens , or speculative bets because investment in new productive capacity makes no sense if you can’t imagine where the demand will come from.
If you accept these premises, then you have to recognize that movement of the national share of income of the very rich away from returns on capital ( dividends and/or capital gains, and options that will generate both in the future) , and instead towards wages and salaries , will by definition raise the “labor share of income” in your formula , and presumably will also mechanically increase the value of “effective demand”. However , for the reasons I’ve outlined , on-the-ground demand will change little , if any , and will certainly rise less than it would if that income share had instead gone to average wage-earners.
I can see the compensation consultants advising corporate execs right now : ” Hey , this Lambert guy could cause us some problems. We better shift your compensation so that more of it shows up in labor share. That’ll throw him off course for a while. “
You are right. But what caused “labor” income to jump up at the end of 2012? Where did that income come from? It has to come from the balance sheet of a business. Not paid as dividends, but as personal income.
Of course, the rich have lower marginal propensities to consume. I totally agree with you that there is no propensity to invest due to deficient demand. You are right that raising labor share will raise effective demand.
Then you mixed up two definitions of demand. “On the ground” demand is aggregate demand expressed in purchases. Those purchases are expressed demand. Real GDP equals expressed demand with an inventory adjustment. But… effective demand is not expressed demand. It is a measure of the ultimate demand limit upon output… in other words, effective demand is the limit upon expressed demand with no inflation.
Let’s go back to Keynes, He said there is a demand curve above output that eventually crosses output. The point where they cross is effective demand. He noted that this demand was greater than output… greater than expressed demand on the ground. This other measure of demand is effective demand.
Do you have an example of how true capital income can falsely appear as labor income?
I didn’t mean for my term “on-the-ground demand” to mean expressed demand. I probably should have called it “on-the-ground effective demand” to make it analogous to your term. What I’m saying is that a labor share in which the top 1% receives , say , 50% of total labor income will have very much lower MPC , or “propensity to contribute to demand” , than one where the top 1% receives only 10% of total labor incomes. A growing labor share alone does not tell you anything about any redistributions within the labor share that could distort the meaning of your effective demand metric.
You’ve observed a relationship that seems to hold true going back several decades. However , during that time we’ve seen increasing concentration of income at the top. We could have expected to see a big drop in consumption , given the lower MPC of those at the top , but we haven’t really. Why? Because over the last few decades savings have gone down , debt has gone up , and transfer payments have gone up , all of which had the effect of masking the drop in income share going to the masses , as well as preventing a big drop in consumption.
My concern is that the relationship you’ve derived has seemed to be stable because of these distortions , and we’re at the point now where more debt , more savings drawdowns , and more gov’t transfers are not going to have the same effect going forward. A few percentage points increase in labor share will not have the same real effect now as it did in the past when we had these booster mecahnisms , even less so if the top 1% are capturing the bulk of that increased labor share. If one person received all of the labor share of income , you’d still have some figure for effective demand , but would it serve any useful purpose ?
On your last question : No , I don’t. What I presume is that corporations could simply decide to pay execs proportionately more in wages and less through the mechanism of capital gains and dividends that flow from share ownership – current and future.
Don’t take my comments to mean that I think raising labor share is unimportant. I think it would help a lot and we should push for it. It’s just that I think the problem runs deeper than that.
I want to know where you are going with this. If you see the problem deeper. let’s go. The idea is to get to the heart of economics. This idea of effective demand is already giving us an advantage that others don’t have.
I hear what you are saying… there are factors that can seemingly distort labor share over the years, but as real GDP gets close to effective demand those factors get straightened out.
BTW, let’s take your example of one person making all the labor share to see if we get a useful figure. let’s do the math on that…
Real output = 1,000
labor share = 80%
Capacity utilization = 5%
Unemployment = 99%
Effective dem = 1,000 * 80%/(5% * 1%)
Effective dem = 1,600,000
We have a figure for effective demand which is huge. Does it serve any useful purpose? oh yes… There is potentially huge demand out there waiting to be developed. Sky is the limit for a business expansion. We can see how unproductive just one person receiving labor income would be.
I really don’t have any ideas about how to improve your model , and in the end it may not need any improvements. You may have got it right from the start. I certainly admire you for all the work you’ve done on it and on your efforts to generate discussion and debate. I couldn’t do what you’ve done – not even close.
My own feeling is that the structural flaws in our economy are pretty obvious , much like the example I posed to you above. A glance at some basic data and some back-of-the-envelope calculations are all you need to get a sense of the big picture. I mentioned the other day how FDR sucessfully restructured our economy , and I doubt that models had much to do with it. It’s not for lack of models that we don’t do what we should do. Models that have been around for years are shut out of the mainstream debate because they generate results that the mainstream finds unpleasant. This won’t change without a fight , and the fight will be like the one between David and Goliath , but I’d put my money on Goliath this time.
Given time I think something has to give , and our problems will become too obvious to ignore. At least I hope so.
Who knows , though ? I mean , I’m sure there are rich people out there who’d pay people to clean their driveways with a Q-tip , at the right price. Maybe there will be low-paying jobs galore that we can’t even imagine today. People will go from working 40 , to 60 , to 80 , to 100 hrs a week to maintain their standard of living. Multiply times two for couples , and even more for families with kids that can work , and you can generate plenty of demand. I wouldn’t do that to maintain my standard of living , but I’m probably not your typical American.
We were founded as a slave nation , so maybe we’re just coming full-circle , and all is exactly as it was meant to be.
There is power in your words. You are angry as I am. And we are involved in fighting for a better economy. That is the message of my work… to show an economic model finally that proves the adverse effects of low wages.
Slaves… low wages. Lots of work. Being degraded… Feeling like a slave. You just mention the word slave, and you open up a can of fire ants and worms. There are so many people of all shapes and sizes now who feel abused by the economy.
keep talking. you are certainly on the right track.
perhaps edward is putting it in terms the economists can understand.
but i think marko is right, the dynamics are “obvious” but no one wants to talk about it because it points in a direction the bosses don’t want to go.
so keep talking. but try to get to the point where folks can understand what you are saying.
How about this.
1. The economy is driven by demand.
2. Demand is driven by the masses (the workers) having money in their pockets rather than the money being in the hands of the few (the executives).
3. Wages need to increase for the masses,not the few.
4. The cost is lower profits and wages for the few.
5. The benefit is a better economy and better living conditions for the masses.
Take it a step farther:
5. The benefit is a better economy and better living conditions for everyone, including the few (or at least their children)
yes…. This is what happens when wages are guided by the social costs of labor instead of the private costs of business.
People are healthier … business is healthier and more stable through the years too.
Machines are labor, but they don’t buy gifts –
but they do transfer contained labor value and are generally a constant capital hence, yes, they cannot buy gifts [and are distinct from circulating capital [even though there is a circulating constant capital category]