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Market Twilight

Last week, I began to discuss the question whether Francis Fukuyama’s hypothesis about convergence to liberal democracy and capitalism is at least partially right. While the countries of the world have not been moving towards democracy in the last 25 years, he could still be right that the future belongs to the markets. This week, however, I will argue that this is not the case.


CAPITALISM OF THE PAST: WARM AND COZY

In the works of libertarians like Ayn Rand and David Friedman, one can find a deep-rooted conviction that the outcomes of markets are not only efficient but also morally desirable. This contention is not as preposterous as one might think.

In a market, those are doing well who have to offer something other people desire. Typically, the object of desire may be ordinary capital or (qualified) labor. Let us focus on the latter, because most people make their living by selling their labor. The abilities to write computer programs, conduct orchestras, and to teach mathematics, to name just a few, are demanded by other people, and thus generate income to those who have them. But also solid skills like cooking, carpentry etc. are demanded by others and lead to income.

Markets only yield unsatisfactory results for those who have nothing to offer, for example because they are old or heavily handicapped. In pure capitalism (i.e. without government, as envisioned by David Friedman) only handicapped and old people would have a hard time, as their well-being would depend solely on the altruism of others.

For those who have to offer something in a market, the competition is typically multi-dimensional and therefore not so harsh. Humans can engage in “product differentiation”: as a university instructor, I do not compete with the taxi driver who brings me to my office, as I am not offering taxi services and he is not teaching students. And if there are too many people competing with me in the market for university instructors, I may consider to offer something else, e.g. become a journalist. The taxi driver, on the other hand, may also react to competitive pressure. He can upgrade his qualification and get a driving license also for trucks, he can learn English and become a tourist guide, or he can just offer his manpower in one of the many construction projects going on in the country. So, even though capitalism is based on the principle of competition, everyone is just competing with a relatively small group of people, and the actual competitive pressure is rather cozy.

Even nicer is the fact that one can do a lot to decrease competitive pressure. One possibility is to accumulate human capital – the higher one’s qualification, the less competition one has to face. While I could become a taxi driver (if I would have a driving license), most taxi drivers would have to upgrade their human capital for being capable of teaching students. So, my qualification reduces the competition.

To sum up, the competitiveness of most people is determined by skills, resourcefulness, and diligence, and the market rewards talent and efforts. A just and justifiable system, and the libertarians seem to have got it right!


THE END OF LABOR

In contrast, consider a situation in which 90% of the population were severely handicapped or very old. All of these people would have nothing to offer to others, and the market outcome would be unattractive from a moral point of view. The 10% of the population who were competitive would arguably live reasonably well, but the remainder would starve.

In their 2011 book “Race against the Machine”, economists Erik Brynjolfsson and Andrew McAfee argue that we are now at a point where “technological unemployment” becomes a reality. The idea that technical progress could cause net unemployment is very old (at least 250 years) but always turned out to be wrong. Whenever machines made a profession obsolete, new demand was created elsewhere to absorb the supply of human labor. Humans could always deal relatively well with the competition of other humans. In future, however, their main competitors will be machines. Brynjolfsson and McAfee predict that many humans will lose all of their competitiveness.

According to Moore’s Law, computing power available in a given amount of space doubles approximately every 2 years. This exponential growth could be observed since 1965. Brynjolfsson and McAfee argue that with exponential growth of computing power, in future there will be little left that machines cannot do. There are plenty of examples. A few years ago, it was considered impossible that computers would be able to independently drive cars. Now, companies like Google let a car drive without human intervention for thousands of kilometers under normal traffic conditions. Experts assume that in the 2020s driverless vehicles will gradually replace cars driven by humans. Arguably, in 20 years from now taxi driving will be no option anymore to make a living.

What impressed me most about my new smartphone is the speech recognition. I can speak quickly and fluently and the phone transforms my words into written language, almost without mistake. A bit more of that, and we do not need secretaries anymore.

Some months ago, a computer program passed the Touring Test, i.e. it was communicating in a way that was indistinguishable from human communication. A bit more of that, and we do not need shop sellers, consultants, and medical doctors anymore. With enough computing power, there is almost no kind of labor that is safe from being replaced by machines.

Brynjolfsson and McAfee revive the old argument (going back to Ricardo) that there is nothing in a market which prevents wages to fall below subsistence level, i.e. the level needed for a worker to sustain his and his family’s living.

An even stronger point, however, is that machines are not only replacing human labor, but usually offer something which is better. The self-driving cars may soon drive better than human drivers, the electronic secretaries may make less mistakes, and the computer doctor may make the right diagnosis more often than its human counterpart. Today, horses are not only obsolete because their labor value is below what is needed for their subsistence (as argued by Brynjolfsson and McAfee, using this example), but also because steam engines and combustion motors are much more versatilely employable. Horses were used to pull ships, walking on paths next to channels. Today, the strongest ship engines have more than 100,000 horsepower, but it is impossible to let 100,000 living horses pull a ship. Even if the cost of living horses were close to 0, the demand for horses would be much lower than it was 150 years ago.

If now, in an exponential process, more and more humans have nothing to offer anymore – regardless of their talents, resourcefulness, and diligence –, then markets will not produce outcomes anymore that are morally acceptable. The basis of the libertarian view on markets is shaken!


WHAT IS THE WAY OUT?

In the 20th century, there was a huge debate between socialist economists and the so-called Austrian School about the question which system (capitalism or socialism) would finally prevail. In the debate evolving around the so-called Calculation Problem, Oskar Lange, a Polish socialist economist, claimed that socialism could never perform worse than capitalism, because a planned economy could simply emulate a market and yield the same results. Hence, a socialist economy would be at least as good as a capitalist one, but maybe better. His Austrian opponents (Mises, von Hayek and others) proved in response to Lange that there was simply not enough computing power to emulate a market economy. What the price system does in a decentralized and heuristic way could not be implemented as a plan.

One of the major problems why socialism failed was the lack of computing power. But the problem of future markets is the abundance of computing power. Isn’t this a striking coincidence?

The economic planning of the Soviet Union was extremely crude. The Gosplan authority set up 5-year plans which were usually outdated from the very beginning. A modern version would be different. It would be adjusted in real time. Whenever somebody would buy a coffee, that would be reported online to the central computer. The production plan would be adjusted instantaneously. Stocks would be very slim (as it is common already in today’s production), and many things would be produced on-demand. If there was an unforeseen event, e.g. an accident in a production plant, the plan would be adjusted immediately.

Even if there would be many problems with such a system, when markets become dysfunctional it might be considered the lesser evil. As democracy does not depend on free markets (see the first part of the article), such a system could possibly be implemented in a democratic way.

My guess is that Marx’s vision of the future will turn out to be more accurate than Fukuyama’s.

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Guest - Eric Livny on Tuesday, 21 October 2014 19:17

Interesting stuff, but I did not quite understand how computer-assisted planning will help humans in their race against the machine. Are you saying that THE PLAN would include artificial employment of otherwise unemployable humans as one of its targets? Digging holes and filling them up?

In the end, with or without planning, machines will probably take over all the manufacturing work as well as lots of simple services such as selling and delivering stuff, driving people around, etc. Perhaps even teaching could be automated! The scariest thought is that future wars will be fought by machines...

Humans will surely keep 1) the creative jobs: R&D, writing, arts and design, etc., and 2) jobs that require a warm human touch - foot massage services, yoga classes, sexual therapy, healing ad fortune telling, psychological counseling, entertaining (singing and dancing), toast making and storytelling, etc. etc.

In short, the future belongs to the creative and warm Georgian people. The great manufacturing nations - China and Japan, Switzerland and Germany - will have to go through massive retraining programs...

Interesting stuff, but I did not quite understand how computer-assisted planning will help humans in their race against the machine. Are you saying that THE PLAN would include artificial employment of otherwise unemployable humans as one of its targets? Digging holes and filling them up? In the end, with or without planning, machines will probably take over all the manufacturing work as well as lots of simple services such as selling and delivering stuff, driving people around, etc. Perhaps even teaching could be automated! The scariest thought is that future wars will be fought by machines... Humans will surely keep 1) the creative jobs: R&D, writing, arts and design, etc., and 2) jobs that require a warm human touch - foot massage services, yoga classes, sexual therapy, healing ad fortune telling, psychological counseling, entertaining (singing and dancing), toast making and storytelling, etc. etc. In short, the future belongs to the creative and warm Georgian people. The great manufacturing nations - China and Japan, Switzerland and Germany - will have to go through massive retraining programs...
Guest - Florian on Tuesday, 21 October 2014 21:29

Eric, thanks a lot for your comment.

Once my techno-communism was implemented, there is no need anymore for humans to race against machines. The incomes humans receive do not depend anymore on their contributions to the production process. Techno-communism is a way to overcome the market outcome which will not be equitable anymore in the future.

As long as some human input is required, there may be bonuses for those who still work, but the lion share of peoples' incomes will be allocated by other criteria, not by their labor inputs.

You write:
"Humans will surely keep 1) the creative jobs: R&D, writing, arts and design, etc., and 2) jobs that require a warm human touch – foot massage services, yoga classes, sexual therapy, healing ad fortune telling, psychological counseling, entertaining (singing and dancing), toast making and storytelling, etc. etc."

I am afraid that much of what you subsume under 1) can be done by computers, in particular in R&D. Recently, we progressed in "proving software": you just need to tell the software which mathematical proposition you want to be proved, and the software generates the proof automatically. If THAT is possible, much of engineering and design can also left to machines in future. We just tell the machines the target parameters of whatever we need, and the machines do the design/engineering. Regarding what you mention under 2), I agree with you. Human "warmth" cannot be provided by computers. Indeed, I think we will enter into a society where humans provide massages and tell stories each other all day long, while all the hard stuff is produced by an automated production process. That would not be so bad in the end :).

Eric, thanks a lot for your comment. Once my techno-communism was implemented, there is no need anymore for humans to race against machines. The incomes humans receive do not depend anymore on their contributions to the production process. Techno-communism is a way to overcome the market outcome which will not be equitable anymore in the future. As long as some human input is required, there may be bonuses for those who still work, but the lion share of peoples' incomes will be allocated by other criteria, not by their labor inputs. You write: "Humans will surely keep 1) the creative jobs: R&D, writing, arts and design, etc., and 2) jobs that require a warm human touch – foot massage services, yoga classes, sexual therapy, healing ad fortune telling, psychological counseling, entertaining (singing and dancing), toast making and storytelling, etc. etc." I am afraid that much of what you subsume under 1) can be done by computers, in particular in R&D. Recently, we progressed in "proving software": you just need to tell the software which mathematical proposition you want to be proved, and the software generates the proof automatically. If THAT is possible, much of engineering and design can also left to machines in future. We just tell the machines the target parameters of whatever we need, and the machines do the design/engineering. Regarding what you mention under 2), I agree with you. Human "warmth" cannot be provided by computers. Indeed, I think we will enter into a society where humans provide massages and tell stories each other all day long, while all the hard stuff is produced by an automated production process. That would not be so bad in the end :).
Guest - Eric Livny on Thursday, 23 October 2014 00:24

Florian, proving a theorem is very different from inventing one :-) I know a lot of creative people with very little problem solving capacity, and even more (given my job) "problem solvers" lacking in the creativity department. Robots can replace the second category, but not the first.

Florian, proving a theorem is very different from inventing one :-) I know a lot of creative people with very little problem solving capacity, and even more (given my job) "problem solvers" lacking in the creativity department. Robots can replace the second category, but not the first.
Guest - Florian on Tuesday, 21 October 2014 22:00
David Friedman chimed in: http://www.finchannel.com/index.php/world/georgian-news/item/39254-market-twilight#comment1685 ... and my reply: http://www.finchannel.com/index.php/world/georgian-news/item/39254-market-twilight#comment1696 ;)
Guest - Simon Appleby on Wednesday, 22 October 2014 16:04

Failure of socialist dictatorships cannot just be attributed to crude planning. Such systems are all built on the presumption that the millions of daily decisions on what a thing is worth cannot be left to the common people, and that a wise, self-perpetuating elite is needed to allocate goods and services according to other criteria. Such elites are never content to maintain their remit only to matters economic, so intrusion into people's reading choices, spiritual affiliations and family relations inevitably follow. Eventually, even the humblest members of the masses start to find this paternalistic arrogance repugnant and begin to rebel, in small ways (black marketeering) or in substantial ways (like the Polish strikes of the 1980's).

Increasing automation of labour in Europe, Japan, Korea and China is unlikely to be a problem in the long term, given the upside-down family trees of most households in those countries. Widespread automation will be needed to support a population of predominantly middle aged and elderly citizens, so few will be the numbers of native-born young workers available in one or two generations. Countries of the FSU face the same demographic issue.

In addition to this, state intervention in the labour market drives businesses to replace labour with automation. For example, the EU is bringing in regulations to prevent farm workers in Europe spending more than 4 hours a day in a tractor cab, ostensibly for worker health reasons. This results in farmers needing 3-4 times as many drivers on regulated wages in the busy season as they would otherwise require. The market for robotic tractors is hence growing substantially in Europe despite the availability of millions of unemployed people who could be trained to drive tractors.

Progressive philosophy suggests that human nature is infinitely malleable, that behaviour can be changed by changing the environment (economic and social), and so people will eventually readily accept intrusions upon their liberty for the common good. Judeo-Christian theology, which underpins both conservative and libertarian philosophy, maintains that human nature is immutable over time (linked to the Fall of Man) and that self-interest is an implacable facet of humanity's fallen nature, only weakly responsive to environmental change. Planned economic systems struggle with this attribute as individual people have widely differing manifestations of self-interest, which may change within an individual's lifetime, and these manifestations are very hard to model, regardless of the computing power available. The propensity for people to violently resist attempts to control them is also a difficult thing to predict, which can dismantle entire economies in very short order.

Failure of socialist dictatorships cannot just be attributed to crude planning. Such systems are all built on the presumption that the millions of daily decisions on what a thing is worth cannot be left to the common people, and that a wise, self-perpetuating elite is needed to allocate goods and services according to other criteria. Such elites are never content to maintain their remit only to matters economic, so intrusion into people's reading choices, spiritual affiliations and family relations inevitably follow. Eventually, even the humblest members of the masses start to find this paternalistic arrogance repugnant and begin to rebel, in small ways (black marketeering) or in substantial ways (like the Polish strikes of the 1980's). Increasing automation of labour in Europe, Japan, Korea and China is unlikely to be a problem in the long term, given the upside-down family trees of most households in those countries. Widespread automation will be needed to support a population of predominantly middle aged and elderly citizens, so few will be the numbers of native-born young workers available in one or two generations. Countries of the FSU face the same demographic issue. In addition to this, state intervention in the labour market drives businesses to replace labour with automation. For example, the EU is bringing in regulations to prevent farm workers in Europe spending more than 4 hours a day in a tractor cab, ostensibly for worker health reasons. This results in farmers needing 3-4 times as many drivers on regulated wages in the busy season as they would otherwise require. The market for robotic tractors is hence growing substantially in Europe despite the availability of millions of unemployed people who could be trained to drive tractors. Progressive philosophy suggests that human nature is infinitely malleable, that behaviour can be changed by changing the environment (economic and social), and so people will eventually readily accept intrusions upon their liberty for the common good. Judeo-Christian theology, which underpins both conservative and libertarian philosophy, maintains that human nature is immutable over time (linked to the Fall of Man) and that self-interest is an implacable facet of humanity's fallen nature, only weakly responsive to environmental change. Planned economic systems struggle with this attribute as individual people have widely differing manifestations of self-interest, which may change within an individual's lifetime, and these manifestations are very hard to model, regardless of the computing power available. The propensity for people to violently resist attempts to control them is also a difficult thing to predict, which can dismantle entire economies in very short order.
Guest - Eric Livny on Thursday, 23 October 2014 00:40

Charles Darwin would have argued that people lacking in creativity or warmth (two human attributes which robots and machines cannot acquire) will simply disappear from the face of Earth. If this happens, instead of techno-communism our (warm and creative) children will be enjoying a stateless, anarcho-capitalist Silicon Valley/Hollywood/Rishikesh environment.

Ironically, this is exactly how Marx described the so-called "third phase of communism". Nothing like its Soviet caricature.

Charles Darwin would have argued that people lacking in creativity or warmth (two human attributes which robots and machines cannot acquire) will simply disappear from the face of Earth. If this happens, instead of techno-communism our (warm and creative) children will be enjoying a stateless, anarcho-capitalist Silicon Valley/Hollywood/Rishikesh environment. Ironically, this is exactly how Marx described the so-called "third phase of communism". Nothing like its Soviet caricature.
Guest - blintu on Thursday, 23 October 2014 00:42

Very interesting post. I didn't know that a computer passed the Turing Test some months ago. So I checked the information and found some parts from the test (http://www.slate.com/articles/technology/bitwise/2014/06/turing_test_reading_university_did_eugene_goostman_finally_make_the_grade.2.html). I wouldn't say artificial intelligence is here yet but maybe we're little closer to it.

I can easily see our world turning to a planned economy, since we already have technology to support the population without paying them by their labor on the free market and enough computational power to make the system work. It well may be that we are transferring to the era where we don't need to worry about providing money to support the living of the family and we will have more time for spending on philosophical questions or just socializing and entertainment. Just like we once transferred from the era where we were struggling to survive - defend ourselves from wild animals and, also, not starve to death - to the era where survival was no longer a concern for the most of people and, as a result (I would say), they developed sciences and arts.

While I would like such a development, I would assume it's not going to be as smooth as that. I would prefer to have a new kind of system instead which would provide some kind of trigger to give incentives to people to advance further. Cause, in my opinion, "techno-communism" could harm those incentives and, thus, lower the speed of development. Of course, one still needs to come up with the system which will be more suitable to the structure of the world with new technologies.

Very interesting post. I didn't know that a computer passed the Turing Test some months ago. So I checked the information and found some parts from the test (http://www.slate.com/articles/technology/bitwise/2014/06/turing_test_reading_university_did_eugene_goostman_finally_make_the_grade.2.html). I wouldn't say artificial intelligence is here yet but maybe we're little closer to it. I can easily see our world turning to a planned economy, since we already have technology to support the population without paying them by their labor on the free market and enough computational power to make the system work. It well may be that we are transferring to the era where we don't need to worry about providing money to support the living of the family and we will have more time for spending on philosophical questions or just socializing and entertainment. Just like we once transferred from the era where we were struggling to survive - defend ourselves from wild animals and, also, not starve to death - to the era where survival was no longer a concern for the most of people and, as a result (I would say), they developed sciences and arts. While I would like such a development, I would assume it's not going to be as smooth as that. I would prefer to have a new kind of system instead which would provide some kind of trigger to give incentives to people to advance further. Cause, in my opinion, "techno-communism" could harm those incentives and, thus, lower the speed of development. Of course, one still needs to come up with the system which will be more suitable to the structure of the world with new technologies.
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