Robots confusing economists


Chatter on the econosphere has been abuzz on robots and income inequality recently, stirred into action by Paul Krugman’s NYT piece last week, and subsequent follow up.

We have Nick Rowe using this talk to support a general equilibrium approach to economics and make the mathematical case here. Previously we have seen Google Chairman Eric Schmidt explain how robots will may result in income inequality. A good summary of the whole blog-versation is here.

Debates like this, which used to take place in coded and mathematical language inside economic journals, are now raging online for all to see. And it reveals the usual shallowness and confusion of economic thought on very critical matters – matters on which the common person assumes economists are experts.

Any economist who sees robots as anything more than another incremental change in the technology embedded in our capital stock is utterly confused. Similar debates raged a century ago when people called their contemporary robots ‘machines’. But it is these very machines, the modern incarnations we might call robots, that are the methods by which we increase our productive capacity.


Detailed productivity analysis shows that it is primarily capital deepening, or the investment in a larger stock of capital, that leads to improved productivity. New technology is the residual, or error term, after we account for our increased stock of capital – including machines and robots. Growth is a process of capital investment.

And as far as the arguments about income inequality arising from robots replacing skilled jobs, well that’s just nonsense. Income inequality rises when productive capacity increases because the nation’s (or world’s) fixed assets of land and resources, are already privately owned, and the value of these assets is a mere reflection of the productive capacity of the economy that reside within. The more concentrated this ownership, the greater the rise in inequality when there is high growth in productive capacity, as a smaller group captures the now larger pie of economic rent being created.

That almost every economist misses this crucial concept of rent reveals a lot about the state of economic theory, and its relevance to the big policy questions in the real world.


Confusion amongst economists about technology stems from the type of optimal control problems typically used to model the economy, where capital and labour exhibit diminishing returns to scale and are compensated at their marginal productivity. Because of the assumption of decreasing returns to scale, these models show that at year infinity no growth can occur without something else happening. If the model has a constant term then a change in that constant is the only thing that can cause growth. Let’s call that change “technology”. Why? Because someone in the 1980s threw an idea out there and it stuck.

Why anyone thought we were at the end of time and that we need to invoke a change in the constant to explain economic growth is beyond me.

I mean think about it. Say technology is actually the knowledge of how to make things. Let’s send someone with lots of technology and human capital (the knowledge to make and use technology) to an uninhabited island, and call him Robinson Crusoe (a favourite story economists tell their students and children). What on Earth is Crusoe going to do with all that “technology”? Clearly he would need to start at the basics, maybe carve a shovel from some timber with sharp rocks, then use that shovel to dig some trenches to divert and store water. Amazingly, he produces capital (shovel) by means of capital (rocks) and the process of growth in his productive capacity ensues.


I don’t want to get too carried away with yet another rant about the relevance of mainstream economic theory, but this video sums it up nicely.

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