“Who will own the robots?”

from David Ruccio

I’ve been writing for some years now about the emergence of new technologies, especially automation and robotics, and their potential contribution to raising already-high levels of inequality even further.

The problem is not, as I have tried to make clear, technology per se but the way it is designed and utilized within existing economic institutions. In other words, the central question is: who will own the robots?

If capital owns the robots, even if their development and use increases labor productivity, the returns mostly go to capital and the workers (those who are left, in addition to those who have been displaced) are the ones who lose out.

But you don’t have to believe me. That’s the conclusion of a recent piece published in Finance & Development, the research journal of the International Monetary Fund.

The authors, Andrew Berg, Edward F. Buffie, and Luis-Felipe Zanna, designed an economic model in which they assume robots are a particular sort of physical capital, one that is a close substitute for human workers.* They also consider three versions of the model: one in which robots are almost perfect substitutes for human labor; another in which robots and human labor are close but not perfect substitutes (i.e., “people bring a spark of creativity or a critical human touch” that cannot, at least for the foreseeable future, be replaced by robots); and a third in which they distinguish between “skilled” and “unskilled” workers.

In all three cases, output per person rises—but so does inequality. As the authors explain for the first version:

If we assume that robots are almost perfect substitutes for human labor, the good news is that output per person rises. The bad news is that inequality worsens, for several reasons. First, robots increase the supply of total effective (workers plus robots) labor, which drives down wages in a market-driven economy. Second, because it is now profitable to invest in robots, there is a shift away from investment in traditional capital, such as buildings and conventional machinery. This further lowers the demand for those who work with that traditional capital.

But this is just the beginning. Both the good and bad news intensify over time. As the stock of robots increases, so does the return on traditional capital (warehouses are more useful with robot shelf stockers). Eventually, therefore, traditional investment picks up too. This in turn keeps robots productive, even as the stock of robots continues to grow. Over time, the two types of capital grow together until they increasingly dominate the entire economy. All this traditional and robot capital, with diminishing help from labor, produces more and more output. And robots are not expected to consume, just produce (though the science fiction literature is ambiguous about this!). So there is more and more output to be shared among actual people.

However, wages fall, not just in relative terms but absolutely, even as output grows.

This may sound odd, or even paradoxical. Some economists talk about the fallacy of technology fearmongers’ failure to realize that markets will clear: demand will rise to meet the higher supply of goods produced by the better technology, and workers will find new jobs. There is no such fallacy here: in our simple model economy, we assume away unemployment and other complications: wages adjust to clear the labor market.

So how can we explain the fall in wages coinciding with the growing output? To put it another way, who buys all the higher output? The owners of capital do. In the short run, higher investment more than counterbalances any temporary decline in consumption. In the long run, the share of capital owners in the growing pie—and their consumption spending—is itself growing. With falling wages and rising capital stocks, (human) labor become a smaller and smaller part of the economy. (In the limiting case of perfect substitutability, the wage share goes to zero.) Thomas Piketty has reminded us that the capital share is a basic determinant of income distribution. Capital is already much more unevenly distributed than income in all countries. The introduction of robots would drive up the capital share indefinitely, so the income distribution would tend to grow ever more uneven.

The only difference in the second case (in which robots and human labor are close but not perfect substitutes) is that wages eventually rise (after, say, 20 years, when the productivity effect outweighs the substitution effect)—but by then it’s too late (as capital continues to have a higher share of income, although not as much as in the first case). And, in the third case, the growing gap between labor and capital (as in the other models) is exacerbated by growing inequality between skilled and unskilled workers.

In all three versions of the model, then, most of the income goes to owners of capital (and, in the third version, to skilled workers who cannot easily be replaced by robots). The rest get low wages and a shrinking share of the economic pie.

And the authors’ conclusion?

We have implicitly assumed so far that income from capital remains highly unequally distributed. But the increase in overall output per person implies that everyone could be better off if income from capital is redistributed. The advantages of a basic income financed by capital taxation become obvious. Of course, globalization and technological innovation have made it, if anything, easier for capital to flee taxation in recent decades. Our analysis thus adds urgency to the question “Who will own the robots?”

The assumption about the unequal distribution of capital income is, in fact, the appropriate one for the existing set of economic institutions. As the authors understand, the only way to change their dystopian prognosis is to fundamentally change the distribution of capital income.

And, if we’re going to be honest, the only way to do that is to eliminate the private ownership of the robots and the rest of capital.

*The model is also based on the presumption that all markets, including the labor market, clear, that is, they assume away unemployment and other such “complications,” which turns out to give those who deny the negative effects of robots and automation their strongest possible case.