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When macroeconomic mismanagement makes Luddites “right”
Marcelo Rinesi   Mar 28, 2013   Ethical Technology  

Technological improvements have negative short terms in the overall economy surprisingly, and depressingly, often. The cause? Fiscal and economic mismanagement of a sadly-too-common kind.

A 2004 paper from Basu et al looked at what happens to output and investment when technology improves in a way that makes inputs more productive (in other words, when we figure out a way to do more with the same resources), focusing on the U.S. economy during the second half of the XXth century. They found that, in the short term, a sector doesn’t react to technological improvements by increasing output, but rather by reducing both investment and input use. As Matthew Yglesias points out, this bears out the prototypical Luddite narrative of machines (new technologies) leading to unemployment by letting businesses produce the same amount of goods and services (same output) using less people (resources). It’s only in the long term that investment and employment catch up with their previous levels.

However, this is not an unavoidable effect of technological change, or, by and large, of skill mismatches, but rather a side effect of monetary and fiscal mismanagement. In the short term, a fantastically good Cashier Robot and a widespread banking crisis have the same impact on businesses’ planning processes: they figure out their current workforce is oversized related to future demand (either because each employee is now more productive, or because there’ll be less demand), and they let go of people, slash hiring, delay investments, etc. Of course, all of these actions lower demand for other products and services, which in turn amplifies the original shortfall. Government revenues logically fall as well, which under debt-adverse policy preferences, leads to further falls in the demand of labor and products, and so on and so forth. It’s only later on that the benefits of the Cashier Robots impact the general economy, which will start growing back from a lower baseline.

Now consider what happens when fiscal and monetary policy pays attention to employment as much as inflation. The development of Cashier Robots still leads to retail businesses letting go of people, but due to generous unemployment benefits and government services, businesses don’t foresee or detect any immediate fall in demand. Cashier Robots being cheap and flexible, retail prices fall (or, equivalently, every client gets a free personal shopping assistant), increasing living standards society-wide, and as demand for Cashier Robots remains robust, the industry becomes stronger and the technology improves further, helping sustain a virtuous cycle.

This isn’t, of course, a cost-free process. Governments might have to take some extra debt in order to finance this safety net. BUt note that governments are precisely the organizations best placed to make this investment, because their revenues grow as the economy grows as a whole, and the same technological development that led to higher unemployment portends a larger and richer economy later, which means the government will have more resources to deal with the extra debt. In the same way, higher inflation, which can come as a side effect of systematically low lending rates (although much less frequently that proponents of “hard money” seem to fear) is within limits an eminently manageable side effect, and the rate of inflation will fall back as investment catches up — something it won’t do if there’ll be nobody employed and able to purchase things.

Both the United States and Europe (at different scales and with slightly different political features causing it) are mismanaging the economic impact of the latest bout of financial shenanigans; this is entirely compatible with the way they have mismanaged similar ones in the past, as well as, as Basu et al’s paper shows, the impact of recent technological improvements, and bodes ill for the short-term impact of the technological improvements we can already see in our near and mid-term future. The immediate cost of this mismanagement, in terms of human welfare lost, will be huge, and the long-term cost can be even higher. It is only through improved technologies (in the widest sense of the term) that the human species has improved our standard of living, but technological development depends on research that itself depends, directly or indirectly, on public support. Every time the impact of a new technology with the potential to make us all better is mismanaged and causes unnecessary suffering, society’s trust in the potential for good of science and technology takes a hit. Both for the immediate well-being of its citizens, and for the longer-term perspectives of improvement of future generations, it’s part of every government’s task to minimize the negative short-term impact of technologies, without losing their longer-term benefits.

Marcelo Rinesi is the IEET's Chief Technology Officer, and former Assistant Director. He is also a freelance Data Intelligence Analyst.


Important topic.
Many factors lead to economic distortion: high cost of litigation is one, merely for starters.

The article is right, but I would like to point out that if automation
advances steadily, the effect is an unending series of crises, and
there is no reason to think that full employment will ever return.
The US government (like many others) serves the banksters,
not the public.

Thus, I refuse to use the cashier robots now appearing in drug stores
and supermarkets.  Instead, I shout a call for other customers to
refuse: “If you use those machines, you are putting Americans out of
work!”  States and maybe cities could ban these machines, and I think
it would be wise to do so.

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