Sunday, January 16, 2011

What will happen to labor?

Mark Thoma reproduces an exchange about whether Adam Smith was wrong when he wrote that increasing specialization would result in higher standards of living for all. The basic argument is that as work becomes increasingly specialized (as in an assembly line where each station does one specialized operation) the work required of any laborer will become less and less sophisticated. This means that any worker can be replaced by any other, which in turn means that labor rates will decline to the lowest level sufficient for survival. Technology only makes this worse since the more that work is automated, the less need there is for workers.

One of the responses was that if there are very few workers, there will be very few consumers. So the benefit derived from producing more for less is reduced. But I think there is another answer.

Let's assume that 10% of the population has a good job and that the other 90% are either living on substance wages or are unemployed. Let's ignore the social instability that will cause and just look at the economics. The question I would ask is what would the 10% do with all the money they are earning? Money by itself is of no value unless you can buy something with it. But once the 10% have satisfied their basic needs and their immediate desires, they still have money. So what do they do with it? The only answer I can think of is that they hire some of the unemployed to do more for them or to make more for them.

Working as someone's servant is not the best job. But working as an entertainer is often quite lucrative. And working in an industry that produces non-necessary but desirable goods (like a fancy car) can also provide a good living. The basic point is that unless the rich do nothing with their money, they will spend a lot of it. (They can't invest it all if the economy has too little demand because most people are too poor to buy things.)

This sounds like a trickle down theory of economics: let the rich get rich, and the rest will follow. I'm not a big fan of that theory, but it seems to have something going for it.

I guess the question becomes whether wealth will eventually even itself out. In a country with an aristocracy and a peasantry, what leads to the rise of a middle class? What prevents the rich and powerful from becoming even more rich and powerful and taking everything? As I said, in the big picture if they take everything, there will be no one left to sell things to. But where will it settle out? What determines what the Gini coefficient for a society looks like? But even that is not the best measure of overall well-being in a society. For example, according to Wikipedia, most modern European countries have relatively low Gini coefficients—which means less inequality. But so do Albania, Belarus, and Kazakhstan. The US Gini coefficient is about the same as that of Cameroons, Uruguay, Uganda, and the Philippines.

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