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The wastefulness of automation

By Frances Coppola

Chris Dillow observes that “one function of the welfare state is to ensure that capital gets a big supply of labour, by making eligibity for unemployment benefit conditional upon seeking work.” And despite noting that when jobs are scarce, paying some to “lie fallow” so others can work might be a good thing, he concludes that “this is certainly not in the interests of capitalists, who want a large labour supply - a desire which is buttressed by the morality of reciprocal altruism and the work ethic.” (emphasis mine). Basic Income, therefore, is not going to happen because capitalist interests, claiming the moral high ground, will ensure that it never gains political traction.

But what if capitalists DON’T want a large labour supply? What if automation means that what capitalists really want is a very small, highly skilled workforce to control the robots that do all the work? What if paying people enough to live on simply is not cost-effective compared to the running costs of robots?  In short, what if the costs of automated production fall to virtually zero? 

I don’t think I am dreaming this. I’ve noted previously that forcing down labour costs is one of the ways in which firms avoid the up-front costs of automation. But as automation becomes cheaper, and the efficiency gains from automation become larger, we may reach a situation where employing the majority of people at wages on which they can afford to live simply is not worthwhile. Robots can produce far more for far less. 

This creates an interesting problem. The efficiency gains from automating production tend to create an abundance of products, which forces down prices. This sounds like a good thing: if goods and services are cheap and abundant, people can have whatever they want, can’t they? Well, not if they are unemployed and have no unearned income.  It is all too easy to foresee a nightmare future in which people who have been supplanted by robots scratch out a living from subsistence farming on motorway verges (all other land being farmed by robots), while lorries carrying products they cannot afford to buy flash past on the way to the stores that only those lucky enough to have jobs frequent. 

But it wouldn’t actually be like that. If only a small number of people can afford to buy the products produced by all these robots, then unless there is a vibrant export market for those products – which requires the majority of people in other countries to be doing rather better than merely surviving on a basic subsistence income – producers have a real problem. They would normally expect increasing efficiencies of production to push up profits, either because demand for products would be sufficient to maintain prices while production costs are falling, or because lower production costs feeding through into lower prices gave them a competitive advantage. But the efficiencies of production created by automating - including, eventually, the low-skill jobs that at the moment are too expensive to automate – may actually result in the destruction of profits. The fact is that robots are brilliant at supply, but they don’t create demand. Only humans create demand – and if the majority of humans are so poor that they can only afford basic essentials, the economy will be constrained by lack of demand, not lack of supply. There would be no scarcity of products, at least to start with….but there would be scarcity of the means to obtain them. 

What does a demand-constrained economy look like? Firstly, it is deflationary for everything except basic essentials. Perversely, prices of energy, housing and basic foodstuffs may actually rise, because people will prioritise those over all other spending. But prices of non-essential goods will crash to zero, and profits will evaporate like the morning mist. At that point – when even the very low maintenance costs of robots are too high – businesses will cease production.  So although the economy is generally deflationary, headline inflation could actually rise as producers  of essential goods hike prices (because they can) and other goods and services disappear. 

Secondly, a demand-constrained economy is sluggish. People who are struggling to survive don’t do anything that isn’t essential: they don’t go shopping except when they absolutely have to, they don’t go out for meals or other entertainment, they don’t go on holiday, they may not even visit friends or relatives much if transport is expensive, they don’t maintain their houses and they don’t buy treats for their kids.  And they are tired. The physical and mental energy required just to ensure that bills are paid on time is considerable: constant worry makes creativity impossible for many people. If the majority of people are living like this, then the country is not a happy place. Few people can enjoy life in a society where the sheer challenge of surviving is so great that people even lack the energy to protest.

And thirdly, a demand-constrained economy is an unattractive place for businesses. Businesses want to make profits. If profits are impossible because no-one has any money, businesses will not want to locate themselves there, unless they plan to export their entire production. They will go to more vibrant economies where people have money to spend and the energy to pursue interests and hobbies.

So it seems that when an economy is facing deflationary pressures because jobs are disappearing, people’s real incomes are falling and efficient production is causing excessive supply that cannot be mopped up by domestic or external demand, it might be wise for governments to support demand by putting a floor under real incomes at some level above basic subsistence.

Supporting real incomes when wages are being forced down typically involves in-work benefits: supporting real incomes when unemployment is rising involves unemployment benefits. The present welfare programmes were established on the principle that only a minority of workers would need this sort of support. But the reality has turned out differently. It is not clear whether the decline of real wages over much of the last twenty years has been caused by the existence of in-work benefits, or whether in-work benefits have (unwittingly) been created to offset the decline of real wages. What is clear is that we are already well down the road towards income support for the majority, not the few, with increasing reliance on in-work benefits as the median income falls, and a minimum wage to prevent employers (with the collusion of workers who expect to be subsidised) bidding down wages to the floor. But our current income support system is a mess. It’s an unholy mixture of pensions, benefits and tax breaks, inconsistently designed and arbitrarily applied, riddled with exploitable loopholes for those who know how to play the system, and harmful sanctions for those who don’t understand the rules. And government is now making ill-considered changes to it because of its increasing cost.  

Looking ahead, the only way in which such extensive outright subsidy of wages can be sustained in the longer term is through heavy taxation of profits and wealth – which rather undermines the purpose of forcing down labour costs, from capitalists’ point of view. 

But the short-sighted strategy of forcing down wages to prop up profits is not the only problem. As Tomas Hirst notes, traditional “middle class” skilled production and office jobs are disappearing, but there is relative growth of low-skill, low-pay jobs, mostly insecure, part-time and short-term. These jobs are increasing because the cost of employing people to do them is lower than the cost (at present) of automating them. If the future is that the majority of people will do unskilled, insecure jobs for very low wages, then this amounts to a shocking waste of human capital. And if the more distant future is that even these jobs will eventually be automated, and working for a living will become the privilege of a few, then it is an even bigger waste.We have the most educated workforce in history, but the majority of them will have no opportunity to use their skills in satisfying and well-remunerated work. 

The obvious counter to this is that people have other opportunities to use their skills, through voluntary work and hobbies. But the problem is that people who are struggling to make ends meet focus only on survival – many of them working long hours or doing multiple jobs for little pay. People who have no disposable income don’t do hobbies, because doing hobbies requires money. People who barely have enough work to meet essential living costs and don’t qualify for state benefits don’t do voluntary work, unless it has a real prospect of leading to paid work. For people on very low incomes, survival is the primary consideration. This is the lowest level in Maslow’s hierarchy of needs: when you have to do any job – however lowly – in order to eat, self-actualisation (doing things that make the best use of one’s abilities and interests), or doing things that improve one’s social standing and benefit society as a whole can only be a distant dream. Is this really what we want for the majority of people?

Without financial support to enable people to do things that use their skills and talents, hysteresis – the decline in quality of human capital when skills are not maintained – is a real threat. And the work ethic to which Chris alluded encourages this. Better to work in a drudge job for dreadful pay than live off the earnings of others. Better to accept any job, however unsuited to your abilities, than be supported by the state while seeking the right job. Better to be “responsible”, and provide for your family, than do the job you love and have been expensively trained to do. This attitude is all too prevalent, but it is fundamentally flawed. It is not good for the economy for people to be pushed into jobs that are unsuitable for them. Yes, it gets them off the unemployment statistics, for a while – but it doesn’t necessarily get them off benefits, as I’ve mentioned already. And perhaps more importantly, it doesn’t make good use of THEM. A labour market that is skewed towards unskilled jobs when the workforce is more highly skilled and educated is malfunctioning. People who are in the wrong jobs are less productive than they should be: therefore, when most of the workforce is in the wrong job, we inevitably have an economy that is less productive than it should be. But if the “right” jobs are disappearing from the private sector because of automation, what then? Human beings are part of the natural resource base of the economy. Are we to become like Shire horses, decorative relics of a past age? Or could the disappearance of production jobs and – even – many service jobs create an opportunity for human beings to invent new and exciting things to do? 

It may be that even with full automation of production and robots replacing many service jobs, there will always be productive and socially useful things for human beings to do. But while we insist that everyone must work to meet basic living expenses when the labour market is bifurcating into a small number of high-skill, highly paid jobs and a much larger number of unskilled, poorly paid and insecure jobs, we are preventing people from inventing new things to do and new ways of working, and dooming ourselves to a low-growth, low-income future. It seems to me that providing people with a reasonable income while they find or create for themselves the right job (not just any job), or to enable them to do creative and/or socially useful things that are currently unpaid, or to study and develop new skills, might be a good investment for the future, improving the productivity of human capital which over the longer term benefits the economy. And it would also provide a useful counter to the tendency of firms to force down wages and design work badly when profits are under pressure. If workers can afford to refuse to do poorly paid drudge jobs, firms will have to offer something better. 

If the future of production and services really does lie in automation, though, it raises questions about the future of work for the majority. I mentioned earlier that working for a living could become a privilege to which people aspire. But if most people are paid not to work, while a small number of people own and operate the machines, how will capitalism survive? After all, as Bertrand Russell points out, we are used to having a small leisure class supported by a large working class….but this would be a complete reversal of that state of affairs.  There would be a very small working class and a much larger leisure class. If the owners and operators of the machines kept for themselves all the proceeds from robot production, the state could not for long provide enough income to the rest to enable them to buy the goods and services produced by the elite….but if most of the elite’s money were taken from them by the state to provide incomes for the leisure class so that they could buy goods and services, why would the elite bother to produce anything? It seems to me that fully automated production and a world in which few people work for a living is not in the interests of capitalism or of capitalists. So maybe Chris is right. Maybe capitalists DO need a large labour force. Their survival depends on it. 

Frances Coppola

About 

Frances Coppola, a former banker, is a writer, singer and twitterer extraordinaire. Coppola Comment is her main blog, which started out as a place where she could ramble on about anything that interested her. These days the posts on the site are entirely about matters financial and economic. She does not talk about her personal life or beliefs unless they are relevant to a financial or economic matter. Frances is politically non-aligned and economically neutral (She does not regard herself as "belonging" to any particular school of economics). And she does not give investment advice.

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