Relevant and even prescient commentary on news, politics and the economy.

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.

Source

TheBankNews. The Great Divide Economics of Wall Street. Youtube.com. 7/22/2013. https://www.youtube.com/watch?v=v9uUdCHCqHE

 

 

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Paul Krugman on verge of an illumination

Today Paul Krugman wrote a piece (and a blog post) about China’s high level of investment in the face of low domestic consumption. It is obvious to me that he is making headway in understanding the importance of low labor share of income.

Remember low labor share means high capital share. Capital income is dedicated to increasing the means of production, whereas labor income is primarily dedicated to purchasing the finished production. Paul Krugman refers to this directly…

“What immediately jumps out at you when you compare China with almost any other economy, aside from its rapid growth, is the lopsided balance between consumption and investment. All successful economies devote part of their current income to investment rather than consumption, so as to expand their future ability to consume. China, however, seems to invest only to expand its future ability to invest even more.”

“Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing” — the jargon phrase of the moment. Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does; consumer spending must rise dramatically to take its place.” (emphasis added)

For me, he is describing the growth model of effective demand, where an economy in its early stages puts more income into capital investment and then over time must shift income to labor to purchase the production of the earlier investment. The result is an increasing standard of living. Yet, he is also describing the problem with the US economy where labor share of income has backtracked to a lower level below previous normal levels. We too have created a lop-sided balance between consumption and investment in the form of labor and capital incomes.

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