The Lights in the Tunnel

One other book I've finished recently is Martin Ford's The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future. The book itself is an interesting story. Ford is a venture capitalist and software entrepreneur in Silicon Valley. He self-published this book in 2009, because, he says, developments which were plainly obvious and actively discussed in his circles in Silicon Valley seemed to be invisible in economics and policy circles. And even technology people are mostly thinking about how to get their immediate next product to market.

Now the book is getting serious attention in at least some economic circles, including respectful mention in the e-book by two prominent MIT researchers I was talking about recently.

Ford argues that the "Luddite fallacy" in economics - that technology ultimately destroys jobs - is itself wrong. Just because it has been true for 200 years, as technological advance always created more jobs than it destroyed, does not mean that will be true in the future.

One of the main reasons, he says, is technology is improving at an exponential rate. There is no reason to expect that is going to change in the near future.

Exponential growth has the property that it can appear to take a long time to get going by the standards of later growth. If you keep doubling a quantity, 2, 4, 8, growth is very rapid - but almost invisible by the standards of 20 or 30 moves later, when it is growing by a billion or several trillion each move.

Unfortunately, the purveyors of econometrics labor under the delusion that they are economists, when in fact they are historians. Statistics is well suited to measuring things which are relatively constant or which are changing gradually.

So if like a good econometrician you look back and study recent history, you may see virtually no sign of an exponential trend which will burst into almost overwheming prominence before long.

All the immense changes wrought by technology so far are just a small precursor, if advances keep going at their current rate. That's a matter of basic math.

And that means the labor market as we know it is in deep trouble, he says.

The reality is that the free market economy, as we understand it today, simply cannot work without a viable labor market. Jobs are the primary mechanism through which income—and, therefore, purchasing power—is distributed to the people who consume everything the economy produces. If at some point, machines are likely to permanently take over a great deal of the work now performed by human beings, then that will be a threat to the very foundation of our economic system.

Offshoring and outsourcing are just temporary distractions.

The point I am making here is that offshoring is really a precursor of automation. Offshoring is what you do when you have some technology, but not enough to fully automate a job. ... Offshoring is the small wave that distracts you. Automation is the big one further out that you don’t see coming.

Some of the traditional ideas about coping with change - more education puts you in a better position, or knowledge workers are the workers of the future - are also wrong, he says. Indeed, many high-skilled jobs, like radiologists, are much more likely to be automated.

Not only are their jobs potentially easier to automate than other job types because no investment in mechanical equipment is required; but also, the financial incentive for getting rid of the job is significantly higher. As a result, we can expect that, in the future, automation will fall heavily on knowledge workers and in particular on highly paid workers. In cases where technology is not yet sufficient to automate the job, offshoring is likely to be pursued as a interim solution.

Artificial intelligence and non-desktop technology like robotics are likely to be the next boom areas, he says. If the military can plan to use drones in highly uncertain and difficult wartime environments like Afghanistan, more use of robots to restock store shelves is easy. Down the line, nanotechnology is likely to deliver even more fundamental change.

At some point before long, he says, production is not going to be the problem. Consumption is. Production can get so capital intensive that a tipping point is reached and falling prices for consumer goods no longer deliver enough disposable income to other workers to raise consumption in general.

It may not be next year, or the next few years, but before long the basic job that we have known for several hundred years will be over. Structural unemployment could affect a majority of the population. At that point,

We need a mechanism that can get a reliable income stream into the hands of consumers. This of course, is a proposition that will be very difficult for most of us to accept; the idea that we must work for a living is one of our most basic core values.

What happens when technology reaches the point where most human labor is no longer essential? At that point, we will have to undergo a quantum shift in our value system. In order to preserve the free market system, we will have to come to the realization that while work (at least for most people) may no longer be essential, broad-based consumption is essential.

Is this realistic? There is no doubt that technological change has always delivered more jobs in the past. But I think we do have to confront seriously the possibility that it may not do so in the future. I found the Brynjolffson and McAfee book (linked above) very persuasive in that regard. Prices may not fall so low that it is profitable for some entrepreneur to reemploy the structurally unemployed at a livable wage.

We'd have to think about more fundamental change in society. And Ford has some interesting. if sketchy ideas about that, which I will talk about in the next post.

The different world of the left

We were out socially last night and talking to some academics. They were talking about affect theory, Hart and Negri's Empire, Althusser, the Frankfurt School. It is such a different intellectual world. It is almost a little sad how people can have such different mental landscapes without more cross-fertilization.

But that is part of the more general problem. I think there are few things in the culture or the social sciences that are genuinely completely new. There is always likely to be a sub-industry of people who work on it, and an intellectual lineage that stretches back, sometimes tenuously, for generations or centuries or millenia.

So just as in technology, much progress comes from recombination and synthesis. People talk of interdisciplinary communication all the time. But it is difficult.

Besides critical theory, the academics were also saying the tax rates aren't fair. And in particulars or details I agree with that (although tax simplification is much more important, and focusing on just high marginal rates is crazy).

. But it is again such a deep-rooted idea, that taxes should go higher to support more public services, which is mostly unexamined. People really aren't exposed to the arguments of the other side, or even some of the details.

I don't think people think through public issues, so much as say what their friends or social circles think. Indeed, I think the political science studies of voting behavior say as much.

It reminds me of the famous quote by Pauline Kael, who was a critic at The New Yorker when Nixon won the election and active in Upper West Side circles. She was dumbfounded. How could that possibly be, she asked. No one I knew voted for him.

A good quote in The Economist

From a special report section on euro problems, encouragingly entitled "Staring into the abyss". I love the Schumpeter quote.

WHEN BRITAIN ABANDONED the gold standard in 1931, it was not only forsaking a system for managing the currency but also acknowledging that it could no longer bear the mantle of empire. When America broke the dollar’s peg with gold in 1971, it ushered in a decline that continued until Paul Volcker re-established confidence in the currency in the early 1980s. As Joseph Schumpeter, the great Austrian economist, once wrote: “The monetary system of a people reflects everything that the nation wants, does, suffers, is.”

Risk-taking and virtue

I've been thinking more about how we see the world if we use the older Aristotelian tradition of the virtues, following on my discussion of After Virtue below.

Why should anyone care? Is this not quite an abstract philosophical question remote from an economy beset by debt, unemployment, and the rancid remains of a vast financial crash?

We should care because it affects the incentives we live by and the kind of rules our lives follow, the kind of behavior we encourage and respect and therefore the kind of economy and society we have.

Something has gone terribly wrong with our incentives. And that is why going back to our fundamental assumptions about what we admire and encourage is a good idea.

Let's take a concrete example. The right and the business community often argues we need to reward risk-taking - for example, starting a business or investing in a risky venture. Or trading CDOs or swaptions.

But it does not have to be purely a matter of monetary incentives to take risks, or monetary compensation for successful outcomes.

Risk-taking is in many ways a version of one of the older virtues - courage. And it lies, like other virtues, between two vices. There is rashness or speculative excess on the one hand. And there is being too conservative, too cautious and unwilling to have any skin in the game on the other.

In McIntyre's scheme, the general virtue, like courage or honesty, is exercised in a specific practice - being an entrepreneur or investor, say - and embedded in institutions which provide external rewards.

The economic issue is getting people to take the right degree of risk. And it is that which the bonus incentives in the banks obscured. (It is more than just a principal-agent problem, in technical economic terms as well.)

So you get ought to get respect and a reward for exercising the virtue, not just - or even primarily - the monetary reward.

It makes risk-taking a matter of character and judgment, not just probability and math. That is also attractive.

Many of the explanations for the financial crisis come down to excessive incentives to take risks. So a different way to look at risk behavior matters, beyond just the expected payoff, value-at-risk or hedging strategy. Risk is not probability ( a theme I will return to later.)

Money and Virtue

One of our problems is virtue is invisible to money. The worst cowardly vicious thief can still be rich. Money is value-neutral. That is one of its advantages in a liberal society. Money can be a means to any end.

And that is why many groups - the great religions, the older professions and academia, the arts and sciences, aristocracy and military castes - have always been suspicious of money. It did not usually prove any worth, even if they still liked to have it.

Indeed, it could often undercut other values. Traditional societies tend to corrode quite quickly in the face of the vigor, energy and flexibility of monetary, commercial societies.

Merchants were looked down upon by the priestly and aristocratic castes of traditional societies. In India, for example, Brahmins and Kshatriyas looked down upon the Vaisya merchant castes, and all looked down upon the laboring Shudra castes.

These days we are very suspicious of distinctions of respect or status, or any incentives which are not monetary. Older ideas like honor or duty have faded away. And maybe often that is a good thing. Nationalism or ethnic identity sometimes rears its head.

But we have few incentives other than money - and perhaps celebrity and political power - to motivate people in broader society. Maybe that is where a lot of the problem lies.

It's another coffee shop question.

What should our incentives be?

"The Financial Folly of Fairness"

Megan McCardle fears governments often can't reconcile what is necessary to solvle an economic problem with what people will tolerate. She writes in her Atlantic blog:

We feel, very deeply, that financial and economic efficiency should mirror our intuitive sense of justice. And probably it does, mostly, when you're living in a hunter gatherer tribe. But in a complex world where mistakes are easy and detecting them is not, I just don't think this holds true. [..]

As anyone who has ever spoken to a five year old knows, the sense of fairness is one of the most primal and intractable cognitive instincts we have. In the best of times, it takes years to change public opinion about what is fair. These are not the best of times, and we do not have years.

Once again, so many of our difficulties come from the fact we no longer have a common sense of what is fair, or a common set of values which can call for working for the common good.
We have often have minutes instead of years to make key decisions. Especially when financial crises decisions have to be made under stress and mmense time pressure, when you are exhausted and running out of time on a crisis weekend before the Asian markets open on Sunday evening.

It gets even harder when you have to transfer resources to other countries. I was watching CNBC out of the corner of my eye yesterday afternoon, and saw Rick Santelli warning that any increase in US commitments to the IMF to help Europe would ignite a political firestorm at home.

Fed help for European banks could also be very difficult.

This is really not good.

Not La Dolce Vita

LCH raised margin requirements on BTPs this morning, and so Italian debt yields are zooming higher. We are well through the crucial 7% level and approaching 7.3%

This is very ugly. No-one has a good plan for how this turns out.

Concluding "After Virtue"

I'm concluding a discussion of Alisdair McIntyre's book After Virtue: A Study in Moral Theory, Third Edition.

So, summing up:

The virtues therefore are to be understood as those dispositions which will not only sustain practices and enable us to achieve the goods internal to practices, but will also sustain us in the relevant kind of quest for the good , by enabling us to overcome the harms, dangers, temptations and distractions which we encounter, and which will furnish us with increasing self-knowledge and increasing knowledge of the good.

..

the good life for man is the life spent seeking for the good life for man, and the virtues necessary for the seeking are those which will enable us to understand what more and what else the good life for man is. (p219)

Communities and traditions do have their contexts and particularities.

The notion of escaping from it into a realm of entirely universal maxims which belong to man as such , whether in its eighteenth century Kantian form or in the presentation of some modern analytical philosophies, is an illusion and an illusion with painful consequences. (p221)

Such particularity does not have to be conservative. There can be constant argument about what a tradition is, in the same way as there can be constant arguments about what good medicine is. But they are still rational arguments over facts, not just feelings or incommensurable principles.

And so what is the ultimate conclusion which is relevant to some of my previous posts for example, the Rawls/not-Rawls issue, the great debate in contemporary liberal theory between egalitarian welfare liberalism and libertarianism?

.. there is something important, if negative, which Rawl's account shares with Nozick's. Neither of them makes any reference to desert in their account of justice, nor could they consistently do so. .. the notion of desert is at home only in a community whose primary bond is a shared understanding both of the good for man and the good for that community and where individuals identify their primary interests with reference to those goods. ..

.. it is a consequence of this that their views exclude any account of human community in which the notion of desert in relation to the common tasks of that community in pursuing shared goods could provide the basis for judgments about virtue and injustice.
(p251)

In a neutral liberal state, the "nature of political obligation becomes systemically unclear."

So why do I find all this so transformative and attractive?

• we can't make sense of where to take the economy next without some sense of common purpose, some sense of telos. The neutral state and neutral monetary transactions block that. We need to move beyond being unable to talk about the ends we want, because otherwise we cannot set up the economy to pursue them. We just get the lowest common denominator of empty, abstract, neutrality.
• I've argued it's essential to have some means to control misbehavior and deviance and decide who deserves what - otherwise we will never persuade the broad middle of society to move to something new.
• the McIntyre/Aristotelian view provides a much fuller account of what motivates people and what gives meaning to life. Exercising discipline and persistence to grow and flourish in new skills, to take risks and achieve ends - that is a much more convincing account than following universal maxims.
• in fact, as we move beyond needing more stuff - more basic goods and basic services - what we perhaps want and need most is a sense of purpose to motivate and delight us. Purpose and intrinsic motivation is in many ways the ultimate luxury good for producing happiness.
• McIntye's account breaks some of the logjams which have led to an inability to decide about who deserves what in society - which are increasingly gumming up the whole system, as in discussions of taxation, or undermining the welfare state, as notions of rights or "fairness" prevent any reasonable discussion of who has earned what.
• it locks into the sense of story, of narrative, of drama which has fascinated people since we told stories around campfires on the savannah in the dawn of the world. If our elite theory has forgotten the virtues, the larger culture hasn't. It is the same force which thrills us with a good movie or a convincing novel.

If we don't have an account of who deserves what, we are left with the default: non-negotiable rights, non-changeable social structure, and an exclusive reliance on market allocation by many people because we don't trust politicians or courts to allocate justly or fairly.

With the standard broadly liberal view that has dominated politics and academia for half a century, we end up deciding things by shouting louder for our preferred incommensurate rules, not by reason.

And so it is no wonder the political system loses legitimacy. It no longer serves the ends people want, just the neutral framework.

It is not government by the people, for the people, of the people. It is a universalistic abstraction which serves impersonal rules, and has nothing to say - by design - about what makes people happy or flourishing. It may be "fair" but it is uninspiring and unjust. It may transfer income to the poor, but their lives on sink estates are boring and bland and chaotic. Social structures break down. Culture deteriorates.

We need something which links to human flourishing, not to homo economicus, nor the ghost behind the veil of ignorance. And McIntyre's account is a refreshing rebuttal to the views that have got us stuck.

Who would have thought that the way to move forward into the accelerating technological kaleidoscope of the 21st century was to look back to a philosopher who lived in the fifth century BC.

I'll have to actually read The Nicomachean Ethics (Penguin Classics) before long.