Automation and Structural Unemployment: What's Wrong and What Might Be Done?

(Sunday, October 16, 2011, 8:16 p.m.)

Last update: 10/23/11 (I may update this from time to time, since it may become an essay.)

I just finished rereading Martin Ford's "The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future." This is a book I think a lot more people should read because I believe the author has put his finger on what is likely to be a very serious long-term problem with the world economy as technology advances. What follows is something of a summary of Ford's views, but also my own take on both the problem and potential solutions. At this stage in my thinking, I believe Ford is probably dead-on about his statement of the problem, but he presumes that big government solutions are the only viable solutions, which I'm not ready to accept yet. I'd like to lay out at least a sketch of a menu of possible solution mechanisms, but first I'd like to nail down the essence of the problem.

The Problem: Automation Likely to Lead to Structural Unemployment Which Will Cause Breakdown in Economic Exchange

Ford's Argument

Overall, I find Ford's statement of the problem lucid and I cannot see a real flaw in his analysis, even though, as he points out, mainstream economists are likely to doubt his premise. Ford argues that as automation proceeds, unemployment will continue to increase, and in a catastrophically permanent way. Long-term unemployment of the kind he expects, where whole segments of the population find themselves unable to find work for an extended period of time, is what is referred to in economics as structural unemployment.

This will have deleterious effects both on consumers and on producers / businesses. A large percentage of the populace will find themselves unable to find work to give them an income, which will mean they have to rely on charity or accept a much-reduced standard of living. On the other hand, producers / businesses, will be in trouble when these people don't have an income to spend on their products. There are things like cell-phones and television sets that are bought by massive numbers of people. When the greater mass of people suddenly don't have money to spend, these mass market goods will be in less demand and business revenues will drop. Ford argues the mass market will collapse for lack of demand and the standard of living of nearly all of us will be adversely impacted.

Now, the standard line of economic argument is that, no, automation technology actually creates jobs, at least in the long run. This is because automation makes the products cheaper, which then gives consumers more purchasing power. With more money to spend, consumers want to buy more things, including things that require a lot of human labor to produce. So, hiring picks up in the labor-intensive industries and more jobs are created. This is historically what has happened, for example, when textile workers initially lost their jobs through automation.

But, Ford says, what if, in the future, there aren't so many labor-requiring jobs out there to pick up people displaced by automation? What if the things people can buy more of are mainly things that can be produced by automated production, by businesses that don't need to hire new labor to increase productivity? Then, we're in trouble.

One problem that is not hard to understand is that when jobs are automated away, typically the kind of jobs created require more education and a more intellectual skill-set. But not everyone has an aptitude for overly intellectual work; people aren't all the same as far as their intelligence and natural inclination towards intellectual pursuits. Trying to force everyone into that mold is likely to make a lot of people miserable, or even prove to be unrealistic. But jobs that require manual or repetitive labor are likely to be automated soon. Even some high-tech, knowledge worker jobs—like radiology—may be automated away as pattern recognition software gets better. And as machines continue to get smarter—as I'm sure they will—they will become able to do more and more of the kinds of jobs that currently only humans can do. When this happens, there will simply be less demand for human labor, so it will be harder for workers to make an income to allow them to purchase things they need and want.

As Ford points out, both consumers and producers will suffer greatly in this situation and even the productivity of the economy and production is likely to stall because trade is effectively hampered.

The Basis of Our Money Economy and Why it Depends on Labor Income

Let's step back and take another look at the problem, going back to first principles of why we have a money-based economy. Basically, people have a lot of wants and needs. Some of the resources that fulfill these are plentiful—like oxygen in the air—and these don't need to be bought and sold. However, some things—like cars and computers and jars of caviar—are not plentiful and someone has to produce them, so they are more scarce resources. These are the things people trade. The idea of an economy is that each person produces (or gives) something that other people value in order to get something they value and/or need in return. The alternatives to trade are basically either producing everything you need and want yourself, or robbing other people of things they have produced. Both of these options carry distinct disadvantages, practical or moral, respectively. So we trade.

Now, if you go far enough back, people directly traded the goods they produced with one another. This is called barter. The problem with barter trade is that you have to find some special person who has what you want who also wants what you have. Every trade can end up being a match-making quest. That means, you often can't get what you want, even though you have something someone wants, and someone has what you want.

That's where money comes in. Money is basically something everybody agrees has value, so everyone will take it in exchange for something they have of value. Money is not the root of all evil; it is the fix for the serious problems of barter, an enabler of more trade and exchange. You can far more quickly get what you want because of the device of money. You don't have to go through a painful search to find someone who wants your eggs and is willing to give you their pork chops. So, this—leaving out the complications of banks and government—is why our money system works.

But the consequence is that in order to be a consumer, you have to acquire money. And to do that, you have to find something that other people are willing to give you money for. That's the basis for jobs. If you can't find a skill or a good to produce that people want and are willing to give money for, then you go hungry or have to fall back on charity. Or if you're a business / producer, you go out of business. In essence, every person is their own business, their own producer, as well as being a consumer. Everyone has to sell something of value they have to get the money to consume. This is the money economy and how it distributes things of value produced by millions of people and their tools into a society.

So what happens when machines are able to do most of the work in production? You have less demand for human labor. People have to go further afield to dream up and market something—something they can make or some service they can give other people—that other people will want and that will sell. Not everybody is a natural entrepreneur and self-promoter, so this is a hard proposition. And while you are racking your brain trying to find something that other people will give you money for, you are either impoverished or living off charity. And this is true even when you have an excellent work-ethic and every desire to be a productive citizen. This is the dilemma looked at from the consumer prospective.

Now for the producer / business prospective. When businesses don't have the demand support from people that could previously find work, they will end up going out of business and more people will become unemployed making the situation worse. This, despite the fact that the productive capacity in what they did is better than it ever was historically.

So what happened? It seems paradoxical that you have people willing to be productive and you have incredible industrial productive capacity, and yet people are not getting the goods in hand they want and need, and businesses are unable to sell their product! I think the best way to make sense of the paradox is to think back to a situation where everyone was on a barter system. In a money economy, if you are unemployed, if you lack a money income, then you are personally thrown back into a barter economy situation. I can write excellent computer code, but if I cannot find someone who will give me bread and meat for my computer code, I'm in trouble. Under strict barter, you could have a nation of extremely productive people who can't get what they want because they can't find the right buyer. (It's a lot like the problem of finding a mate.) Money is the device that solved this problem, but that means that everybody needs to receive money in order to trade. So, you can have productive people, willing to work, who are not making money because they can't find a market for their skills, even though those skills can or do contribute to society. So it's like the barter problem. You have people with value to offer for exchange, but they cannot find a buyer. It isn't that people have gotten lazy; it is that there are now trade barriers to this exchange of value because there are barriers to people's acquisition of money.

What is a Good Money Supply?

This gives some clue as to why reductions in money supply or credit hurt the economy. Too little money means more people are forced back into a barter system (or extreme isolationist self-reliance: growing one's own food, etc.) to survive. Exchange of value is impeded by the lack of the lubricant of money. When the economy tanked in 2008, one major factor, as many people know, was that people were consuming on borrowed money, and so when the banks tightened credit, they could no longer afford to buy as much. (This is not to say that I think it is wise to live off borrowed money; I'm just stating the immediate cause of the drop of consumer spending.)

Reductions in the money supply may lead to a fall in prices (deflation). Why this would happen is that effectively you have less money in circulation than you have things of value to be traded. So each piece of money ends up backed by more real wealth. Sounds good, maybe, but the fall in prices does not compensate most people for the pain of mass unemployment. You have less money being spent and more people stuck bartering or living off charity. Not a good situation.

On the other hand, what about increases of the money supply? I just said that the problem is barriers to people's acquisition of money. So why not just print more money and give it to the people that are unemployed? Then, they can spend the money to get what they want and need and businesses can continue to stay in business, since people can now afford to buy their products.

The problem with this naive solution is that it leads to inflation, rising prices. Why? Basically, because when you increase the amount of money in circulation, then the value of each piece of money ends up being less. Think of it this way. Let's say the real wealth you have in your tiny nation consists of 10 loaves of bread, and the money supply in your world is $10. Each dollar is backed by the value of 1 loaf of bread. Now, if I print 10 more dollars, I double my money supply, to $20. But the real wealth, the number of loaves of bread is still 10. Now, each dollar is really only worth half of a loaf of bread which means that the price of a loaf of bread, in time, goes up from $1 to $2. Minting new coins or printing new currency doesn't actually create the things that are valuable. It just gives some people tickets to purchase the value that is already existent.

High inflation is a bad thing, and not just because rising prices are annoying. Inflation discourages saving for your future because if you put $4 under your mattress and it's worth 4 loaves of bread today, then if someone increases the money supply to $20, then later that same money under your mattress will only buy you 2 loaves of bread. The people who printed the extra $10 have effectively robbed you of 2 loaves of bread, half of your wealth in this hypothetical world.

What you want, ideally, is for the pieces of money in circulation to keep the same value or have a progressively increasing value (mild deflation). But you also need that money supply to be circulated to a wide cross-section of consumers, so that there is enough consumer demand (desire plus capability to exchange something of value for what they desire). If money supply is too concentrated in the hands of a very few rich people, then too few people are able to afford mass-market items like cars and cell-phones and boxes of cereal for the producing industries to be profitable, so you would end up with these businesses shutting down and their employees joining the ranks of the unemployed.

In a money economy, the basic problem is getting money in the hands of people who are producing something of value, so that they can exchange it for other things of value that they want and need. If productive people are blocked from a money income, their productivity is discouraged and they are forced into a desperate situation. Meanwhile, producers lose the business of these people.

On the other hand, if unproductive people are given money, then you have a situation of a freeloader: value is being given in exchange for no value or less value. This results in a loss of productivity for the society as a whole, and it rewards people who do not produce, which generally is an immoral thing to do. Giving of value to support those unable or unwilling to give value back is what charity is about. Charity is not, to my current way of thinking, immoral, provided it is not coerced out of the giver. Charity freely given can be healthy or unhealthy to the receiver, depending on their situation, whether they have the capacity to be productive or not.

But to summarize this whole discussion of money supply, a good money supply is one where the widest distribution of productive people receive money income, and the value of the money tokens stays the same or increases, rather than decreasing. This way, consumers have the option of either buying what they want or saving the money for future consumption and having the security of their savings not being devalued.

Ford's Problem Stated as a Money Supply / Distribution Problem

So, now let's get back to the problem of automation. Generally, the job market works to solve the problem of how to distribute the money supply to people (and businesses) who are productive. Workers who have skills of value get money that allows them to buy goods and services. Producers who have valuable services and goods are rewarded with a profit and their workers receive income which allows them to be consumers.

But the problem is that, aside from barter or charity, jobs are the only source that a person has for money income to allow them to be consumers. If Ford is wrong and there continues to be a vibrant job-market, then there is no problem to solve except the retraining of displaced workers into new jobs that are in demand. But Ford is arguing—and for me, convincingly—that jobs are going to evaporate as less human labor goes into products and services.

So, to rephrase the problem Martin Ford is bringing up: People who are willing to work and have value to contribute may find themselves unable to trade their value and skills for what they want because of the difficulty in finding a money source through a job. On the other hand, businesses who sell lots of products will have less buyers because there will be a lot of these people unable to buy their products. So the problem is basically that individuals who are potential workers and consumers are unable to get enough money to buy what they want for themselves and give the value their money is backed by to the producers that sell them their products. As with the barter problem, the value is there to be traded, but its exchange is hampered.

So, the ultimate problem can be stated as: People with potential and willingness to be productive are not receiving money, and businesses / producers in the mass market lose them as customers, so their productivity is wasted. In essence, exchange of value is blocked because of money circulation problems. Money circulation to consumers is blocked because labor is being replaced with automation. Both consumers and producers are stuck in a barter economy situation because the money supply is maldistributed by market forces, siphoned away from workers and mass-market consumers into owners of capital who own the highly automated businesses. These owners may be able to be consumers, but unless everybody can become like these owners and have their own productive automated business, there will be fewer consumers to support the demand of the mass-market.

Potential Solutions

So what needs to be done? In the larger perspective of the society, the fundamental problem is that exchange of value is blocked and needs to be facilitated. That either means (a) improving the flow of money in the system we have; or (b) coming up with facilitators for exchange outside the current money system. I believe both classes of solution are viable and they need not be tried at the exclusion of one another. You can still barter as well as buy and sell with money in our society. I see no reason why a large society can't peacefully use several media and mechanisms of exhange of value.

Exchange Mechanisms Outside the Current Money Economy

The focus of this blog/essay was intended to be on mechanisms for adjusting money flow in our current system, but it may be worth briefly commenting on alternatives outside the current system. To me, it seems the set of solutions outside the current money system fall into two classes: (a) making barter easier; and (b) coming up with an alternate currency.

I do not know if there are Internet barter sites, sites that are like eBay, but facilitate barter trade rather than auction monetary trade. If there are not, perhaps there would be a demand for sites that do this in a secure way, just as there is a demand for dating sites to match two people together or job sites for matching employers and employees.

Another interesting, though less convenient option, might be to bring back the face-to-face market, where everybody can get together, maybe at a convention center, set up kiosks of their goods for sale, and wander the floor in search of buyers. In the days before supermarkets and department stores, this is how people traded. The trade engaged in could be monetary as well as barter. If setting up a real marketplace at a convention center or a local church or bookstore or park is too inconvenient, maybe a virtual alternative could be provided on the Internet where you could have a "virtual bazaar" with trades conducted by avatars (online representations of the buyers and sellers) and the traded goods are shipped through the postal system.

Regarding alternate currencies, one option I learned about recently is an idea called time banking. Essentially, records are kept of a person's time spent giving a service to other people. The "time dollar," which corresponds to an hour of labor, is the fundamental unit of exchange. So, for example, Alice might spent an hour babysitting Bob's toddler in exchange for Bob spending an hour fixing Alice's car. A time bank would provide a means of record-keeping for time-value given by each person, allowing a time-based currency to be used to exchange the services provided by everyone in the time bank pool. There are some issues, I think, with such a system that may need to be worked out: Is a neurosurgeon's hour of surgery really equal in value to an hour of housekeeping or babysitting? But the fundamental idea of there being currency backed by human effort/time seems right to me. Time is our most precious resource and any value we give to other people comes from the time we spend, either directly or indirectly, in their service.

Trying to Fix Money Flow in the Current System

But if we set aside alternate trading mechanisms and currencies for the time being and try to work within the current system, the fundamental answer becomes that money needs to end up in the hands of people who are doing things that are productive but are unable to acquire the compensation for the value they are creating. Jobs serve that purpose, but if jobs become so scarce that people are unable to find them or get people interested in their skills, then it seems like some corrective mechanisms need to be added to the system.

To state a (money) solution specification in its most general form: Money needs to be transferred from some individuals or organizations that have it to people who are productive, or potentially productive, but without monetary compensation. Note that this does not specify whether that transfer is coerced or whether it is an exchange made of free will. I would hope that the solution adopted would be non-coercive. Traditional jobs fulfill exactly this role, and they are essentially non-coercive, agreed-on exchanges. But if Ford is right and traditional jobs are a dying breed, then we need some surrogate transfer / trade mechanism, something that Ford calls virtual jobs. In a virtual job, a person is being paid for doing something productive or valuable, so there is a genuine exchange of value, but the traditional relationship of employer / employee is lacking. If the government pays a person to pursue a college degree, this might be an example of a virtual job. A person is making themselves more potentially valuable to society (and to themselves) and they are receiving compensation for this, but clearly this is not a traditional job.

So, there are essentially two classes of solution to the problem of automation and structural unemployment: (a) more traditional jobs may be developed / conceived, and (b) virtual jobs may be created. Of course, these options are not mutually exclusive. Making new traditional jobs means educating both the holders of wealth who have the money and potential workers who needs the money but have skills to offer, educating both on the common interest that might join them. It's like match-making for two people that can't find a mate. On the other hand, creation of virtual jobs is a little closer to charity or high-risk investment. The standards are somewhat looser for the giving of money, but the potential payoffs are still there, either for the society or for the investor. To my mind, a virtual job occupies the grey area between traditional jobs and charity.

I would lean towards trying to find a traditional jobs solution. Ford would probably favor a virtual jobs solution, supported by big government. Let's look in more detail at both options.

New Traditional Job Creation

Improvements Needed in Match-making for Existing Jobs

As someone who has had the dubious pleasure of job-hunting in 2009 and early 2010—at time of writing, I am currently employed as a postdoctoral researcher—it is my impression that institutional support in our society for the unemployed seeking work is rather poor. You can do Internet searches on potential employers, which is a good thing. There are online career sites like Monster and Dice that post current job openings and offer career advice. There are government job services where you go in and basically do Internet searches from there. There are also recruiters for companies who may contact you or some "headhunters" you can go to, but basically you are an impersonal piece of meat to them and they don't really know enough about your skills to help you find a position where the company and you would both benefit.

The basic problem is the same as the problem which a lot people—myself included—have regarding the problem of finding a mate. Two entities need to be matched whose needs and characters are harmonious and compatible. You have particular skills and experience that make you potentially valuable, and there are probably companies out there somewhere that have use for your skills and would offer you decent compensation in return. But there's the problem of the employee and employer finding each other. And when automation removes much of the demand for employees, the problem becomes finding a way to educate potential employers about ways in which an employee might contribute that they hadn't thought of.

When you are out of a job, the standard line is to network with people, look at the Internet for opportunities, and send out lots of resumes to potential employers. These are all viable solutions, but I think there really ought to be people you can go to professionally who will really make it their job to matchmake for you career-wise. If you're in psychological distress, you can go to a psychologist. If you are unemployed, there ought to be people you can go to who will really work with you as an individual, like social case-workers. They will learn about your individual skills, coach you as needed, and also try to really find a match for you in the workplace. If such people exist, it seems like they are too few or their existence is not well enough known.

When jobs are as scarce as they are, it seems incredible to me that there is so poor an institution set up for helping people find existing jobs. Maybe it's good to be self-reliant in searching for work, but if a person who is otherwise productive is not a good searcher, then they may go a lot longer without finding a job and society is robbed of their productivity while this happens.

Promotion and Match-making for New Job Creation

Beyond the need for better match-making for existing job openings, there is, I think, a need for creative and visionary efforts to find ways of getting potential employers and employees together in jobs that have not yet been created. "Headhunters" and recruiters that could envision the kind of jobs that might be created to bring together particular employers and employees might be more valuable than those that just try to match candidates with existing job openings. The same skills might be useful in some human resources employees within a corporation. Generally, managers are too busy running existing projects to spend time worrying about the kinds of jobs they might create to hire new employees.

Though I am being sketchy on the suggestions, I think that it would be useful if someone or some institution were able to step up and creatively suggest opportunities for businesses and their potential employees to link up in new ventures that required creation of new positions.

In addition to interacting with corporations, maybe these "headhunters" could also try to find opportunities for people to get connected with the patronage of wealthy individuals. Someone who has a great idea for scientific research or for a film or book might sit down with one of these "headhunters" and formulate a grant proposal to submit to wealthy individuals and/or corporations, and then help in formulating the contract between them if the patron is and potential employee are happy with the arrangement.

Virtual Job Creation

Big Government

Ford puts forth one suggestion, which is a big government solution. Without going into the details, the essence is that government levies a tax on corporations that is designed to capture money that was originally paid out as wages. This money is then given by the government to people with incentive strings attached. They are paid for educating themselves, doing community service, generally for doing something that is potentially valuable but for which they would have a hard time finding a formal job. They are not disallowed from finding a traditional job, but the default income stream provides a safety net while encouraging them to do something productive.

There are a lot of potential problems with this: lots of potential for abuse both by politicians and by the recipients of this kind of incentivized welfare system. But I would not argue such a system would be morally wrong if indeed the money ended up in the hands of productive people and not in the hands of people who are blatant freeloaders. The main problems would be verification that the recipients were being honest in their efforts, and the difficulty of setting the right standards for what a good incentive and what kinds of activities can be legitimately funded. (One could imagine politicians paying people to do things that support their selfish interests.)

I suppose big government is the most obvious place to turn to because it is an organization that sits on a pile of money acquired through taxation and is, in theory anyway, receptive to democratic influence. But I would argue that there are other private options, too, that shouldn't be discounted.

Corporate and Private Foundations and Individuals

Corporations and wealthy individuals could set up foundations and receive grant proposals which they could then respond to with grants. Basically, this is what venture capital is all about, but imagine venture capital which shades over into charity. Wealthy individuals and corporations have the capacity for charitable giving or strict profit-expecting venture capital investments, or anything between. The money doesn't have to come from public taxation.

I guess the hard question here, though, is why wealthy individuals and corporations would be motivated to charitable giving or towards taking investment risks with their money in a venture capital type of investment. Compassion would be one motivation, but there are some good selfish reasons, too, I think, for them being freer with their wealth. There are investment returns for some things, of course. But they are also putting value in the hands of consumers so that demand for their products remains and the mass market system that is in place continues to operate and is not ground to a halt by structural unemployment. It benefits the wealthy that sit on a lot of value to spend some of that value to keep the society they thrive in in good order, rather than having angry mobs eager for revolution and to loot them at first opportunity.

I am not wealthy myself, but I would not be surprised if wealthy individuals often do not have adequate imagination on how to invest their wealth, ways in which they might best contribute to society as well as the monetary returns on their investment. If such an institution does not already exist, it would seem like there could be a market for investment advisors with a wider scope of vision than simple monetary returns. People working in this capacity could play a role in the creation of virtual jobs, and naturally the wealthy individuals themselves could create such virtual jobs if it were made convenient for them.

Other Sources of Support

So we have big government, corporations, and wealthy individuals as potential sources of funds for potential consumers. But there are still other societal options. The family, nuclear or extended, could take responsibility for keeping other family members afloat. There may also be cooperatives of friends of varying fortunes, ready to come to each other's aid. There are traditional charitable organizations, both religious and secular. There may even be things as far-flung as Internet social support groups.

In short, there is plenty of room for imagination and creative thinking about the problem of getting money into the hands of the willing and productive, but unfortunate. The number of potential systems and social institutions seems infinite. The difficulty, of course, is making any one of these options viable, so that there is no abuse by either the recipient or the provider of the funds.

The Future: Decline of the Money Economic System

Ultimately, as production becomes more and more automated, so that just about everything is made by machines, and energy technology improves, then there should be no more scarcity of anything but maybe living space. At that point, a money system would far more superfluous. Trade and money are there to allow the exchange of scarce goods. If you can just go to a food-replicator machine, a la Star Trek, there's probably no need to buy or sell food. Whatever is made no longer scarce will fall out of the market; whatever remains scarce, or becomes more so, will continue to be traded. One day, I think the need to buy food in order to eat will be removed from our concerns. There will still be society and production, but people will be more artistic and intellectual and social in their aims. Life will be more amorphous and people will have to deal with all of the problems that come from too much leisure, but they will be freed from some very onerous burdens of existence and have the opportunity to live in a way that the cultural elites have lived through the ages, but without having to enslave or exploit other people to do so.

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