I remain utterly baffled with how poorly otherwise highly educated individuals grasp the most basic principles of economics. Scholars persistently, repeatedly, habitually mistakenly think that economics is about things. It is not. Economics is about value.
The latest occasion for my befuddlement are the works of Israeli historian Yuval Noah Harami. I am now finishing the third of Harami’s trilogy, not a small feat for a severe dyslexic, given the length of each of Harami’s volumes. (I only read books that I have really good reason to believe are significant.) Central to Harami’s dystopic narrative — he also has a positive narrative — is an economic analysis that is as bad, or perhaps worse, than the worst Silicon Valley techno-optimist analysis. It is astonishingly bad. In his defense, it is an analysis that is disturbingly common, although not among economists, to be sure.
If you have followed this blog for any time at all, then you will be familiar with Adam Smith’s story about the fire engine boy.
In the first fire-engines, a boy was constantly employed to open and shut alternately the communication between the boiler and the cylinder, according as the piston either ascended or descended. One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve, which opened this communication, to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his play-fellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labour.
A Smith, Wealth of Nations, Book 1, Chapter 1 ¶8.
And, just like that, the founder of classical economics reverts to mercantilism. Mercantilism, because the efficiencies generated by the fire engine boy’s innovation, while contributing to the wealth of the nation, far from leaving him “at liberty to divert himself with his play-fellows,” instead leave him out of work and in search of another job. Mercantilism, because the marginal product of his innovation is not any thing, but is value. Mercantilism, because this marginal product does not accrue to the fire engine boy at all, but to investors in the fire engine venture.
In Smith’s defense, his error was repeated by classical economists on up to the 1850s when, among others, Karl Marx showed that the driving impulse behind economic activity in capitalist societies was not any thing, but relative, abstract, universal, homogeneous value.
Consider, for example, GWF Hegel’s equivalent to the Smith’s story about the fire engine boy, told forty-five years later. With Smith, Hegel also notes that the division of labor gives rise to efficiencies; that, as manual tasks are reduced to their simplest components, these tasks lend themselves to mechanization, “until finally man is able to step aside and install machines in his place” (Philosophy of Right §198).
But, clearly, this would only hold true were workers, producers and consumers trading in things, whose volume increases relative to the time (capital, labor, resources) devoted to them. However, the production function does not measure things. It measures a ratio: MPL = ΔQ/ΔL (or ΔK). So fundamental was this principle to neoclassical economic theory, that, at roughly the same time, it poured from the pages not simply of Karl Marx (Grundriße, 1858), but also of William Stanley Jevons (1862), Leon Walras (1874), and John Maynard Keynes’ professor Alfred Marshall (1890). Here, for example, is Jevons: “Value in exchange expresses nothing but a ratio, and the term should not be used in any other sense. To speak simply of the value of an ounce of gold is as absurd as to speak of the ratio of the number seventeen” (78). Walras’ Elements of Pure Economics is a lengthy, dense, tightly argued, demonstration of the multivariate, abstract, universal character of value. For, as Marshall showed, “the value of a thing, though it tends to equal its normal (money) cost of production, does not coincide with it at any particular time, save by accident” (Book V, Chapter 7, §5). Which is to say, the value of all things, including no thing, is relative neither to the cost of the specific labor expended in its composition, nor to the costs of the materials out of which it is composed, but, rather, is relative to the value of the whole. “We must go to the margin to study the action of those forces which govern the value of the whole” (Book V, Chapter 8, §5).
Innovation may lower the costs of production. It may render labor on that specific good obsolete. And it may, therefore, reduce the disposable income of the specific workforce that formerly had produced that specific good without the assistance of that innovation. But, now, let us assume that that redundant workforce also composes the consumers of that good. So, for example, prior to the innovation total costs of production of a good might have been $10. Now they are $5. And let us suppose that the workforce, composed of ten workers, is now reduced to five. Where, without the workforce reduction, ten workers were ready to spend $100, $10 each, purchasing the good in aggregate, they are now ready to spend only $50 in aggregate, which is still $10 each. Which means no marginal gain arises for investors from the innovation. Which means that the investors, in hindsight, should not (and probably would not) adopt the innovation. They would adopt the innovation only if reducing the cost of production increases the market of consumers up to or beyond the $100 the original ten workers were prepared to spend. But, again, if this additional $50 is at the expense of some other sector, then the aggregate market value remains stagnant. Only where innovation generates an increase in “the value of the whole” will an innovation generate aggregate growth.
What Harari imagines is a cascade of innovations that (1) deprives markets of consumers/workers and thus reduces aggregate marginal gains; or (2) relies solely upon investors themselves to consume the products they produce equal to or greater than their aggregate market value; or (3) steadily reduces the value of labor to a point where its value in production is equal to or greater than the marginal returns realized by the innovation.
This is not a speculative problem. In California’s Central Valley, farmers are in a race with human and mechanized pickers in which the value of human pickers must be forced ever lower in order to maintain their value relative to automated pickers. The poverty of the Central Valley is equal to this marginal decline in aggregate wages, which is equal to the spread of minimum wage, no benefit non-agricultural employment in the Valley. But, that is not all. This race between humans and machines finds its way into urban centers in the form of the $2 apple or peach. (A living wage for human pickers would (a) force growers to adopt mechanized pickers; or (b) raise the price of the apple to $10 per apple. In either case, markets would be depressed.) Only under the condition that innovation increases the “value of the whole” will it be adopted.
But let us suppose that the value of human labor is isolated from the right to a quality life. That is to say, let us suppose that the marginal product is distributed socially up to a predetermined level. This is actually how social democracies work. The social distribution of this marginal product places downward pressure across the board on the marginal returns investors might enjoy. In this case, innovation might take the form of leisure time. The more the innovation, the more leisure time. Moreover, if the value of the admittedly reduced marginal product is still measured abstractly, we could say that its socially distributed portion is measured both (a) as a fraction of the total abstract marginal product; and (b) in terms of the goods — health, education, leisure, housing, art, music, nature — it purchases; things that might still be abstract, but that are isolated from the abstract value of the whole.
In this case, making the human population redundant, rather than a cruel judgment, might instead be cast as release from the compulsion to work for a living.
For nearly 2.4M years, human beings worked out of necessity, but not out of compulsion. Yes. Human beings must change the world they find around them to make it usable, up to the margin. But, where value is abstract, humans have no reasonable way to measure when they have sufficient value. Is $50K enough? Is $200K? Is $1.5M? Is $1B? How much is enough?
If I were to translate this into personal pairs of shoes, most of us would say that two, or five, or maybe 20 pairs of shoes are enough. The problem with abstract value, however, is that it knows no ceiling. And, this, precisely is where Harari also becomes a mercantilist. He reverts to thinking about value as some thing. But, where there is no upward limit, neither is there a limit on employment, even if that employment is simply digging up bottles of cash buried precisely in order to be dug up (the example John Maynard Keynes uses in his General Theory), so deeply ingrained is the compulsion to work. In other words, we are working not out of necessity, but out of compulsion.
Technological innovation, under capitalism, cannot lead to unemployment. That is the bad news.