# Hyper-competition

Dec13 JDN 2459197

This phenomenon has been particularly salient for me the last few months, but I think it’s a common experience for most people in my generation: Getting a job takes an awful lot of work.

Over the past six months, I’ve applied to over 70 different positions and so far gone through 4 interviews (2 by video, 2 by phone). I’ve done about 10 hours of test work. That so far has gotten me no offers, though I have yet to hear from 50 employers. Ahead of me I probably have about another 10 interviews, then perhaps 4 of what would have been flyouts and in-person presentations but instead will be “comprehensive interviews” and presentations conducted online, likely several more hours of test work, and then finally, maybe, if I’m lucky, I’ll get a good offer or two. If I’m unlucky, I won’t, and I’ll have to stick around for another year and do all this over again next year.

Aside from the limitations imposed by the pandemic, this is basically standard practice for PhD graduates. And this is only the most extreme end of a continuum of intensive job search efforts, for which even applying to be a cashier at Target requires a formal application, references, and a personality test.

This wasn’t how things used to be. Just a couple of generations ago, low-wage employers would more or less hire you on the spot, with perhaps a resume or a cursory interview. More prestigious employers would almost always require a CV with references and an interview, but it more or less stopped there. I discussed in an earlier post how much of the difference actually seems to come from our chronic labor surplus.

Is all of this extra effort worthwhile? Are we actually fitting people to better jobs this way? Even if the matches are better, are they enough better to justify all this effort?

It is a commonly-held notion among economists that competition in markets is good, that it increases efficiency and improves outcomes. I think that this is often, perhaps usually, the case. But the labor market has become so intensely competitive, particularly for high-paying positions, that the costs of this competitive effort likely outweigh the benefits.

How could this happen? Shouldn’t the free market correct for such an imbalance? Not necessarily. Here is a simple formal model of how this sort of intensive competition can result in significant waste.

Note that this post is about a formal mathematical model, so it’s going to use a lot of algebra. If you are uninterested in such things, you can read the next two paragraphs and then skip to the conclusions at the end.

The overall argument is straightforward: If candidates are similar in skill level, a complicated application process can make sense from a firm’s perspective, but be harmful from society’s perspective, due to the great cost to the applicants. This can happen because the difficult application process imposes an externality on the workers who don’t get the job.

All right, here is where the algebra begins.

I’ve included each equation as both formatted text and LaTeX.

Consider a competition between two applicants, X and Z.

They are each asked to complete a series of tasks in an application process. The amount of effort X puts into the application is x, and the amount of effort Z puts into the application is z. Let’s say each additional bit of effort has a fixed cost, normalized to 1.

Let’s say that their skills are similar, but not identical; this seems quite realistic. X has skill level hx, and Z has skill level hz.

Getting hired has a payoff for each worker of V. This includes all the expected benefits of the salary, benefits, and working conditions. I’ll assume that these are essentially the same for both workers, which also seems realistic.

The benefit to the employer is proportional to the worker’s skill, so letting h be the skill level of the actually hired worker, the benefit of hiring that worker is hY. The reason they are requiring this application process is precisely because they want to get the worker with the highest h. Let’s say that this application process has a cost to implement, c.

Who will get hired? Well, presumably whoever does better on the application. The skill level will amplify the quality of their output, let’s say proportionally to the effort they put in; so X’s expected quality will be hxx and Z’s expected output will be hzz.

Let’s also say there’s a certain amount of error in the process; maybe the more-qualified candidate will sleep badly the day of the interview, or make a glaring and embarrassing typo on their CV. And quite likely the quality of application output isn’t perfectly correlated with the quality of actual output once hired. To capture all this, let’s say that having more skill and putting in more effort only increases your probability of getting the job, rather than actually guaranteeing it.

In particular, let’s say that the probability of X getting hired is P[X] = hxx/(hxx + hzz).

$P[X] = \frac{h_x}{h_x x + h_z z}$

This results in a contest function, a type of model that I’ve discussed in some earlier posts in a rather different context.

The expected payoff for worker X is:

E[Ux] = hxx/(hxx + hzz) V – x

$E[U_x] = \frac{h_x x}{h_x x + h_z z} V – x$

Maximizing this with respect to the choice of effort x (which is all that X can control at this point) yields:

hxhzz V = (hxx + hzz)2

$h_x h_z x V = (h_x x + h_z z)^2$

A similar maximization for worker Z yields:

hxhzx V = (hxx + hzz)2

$h_x h_z z V = (h_x x + h_z z)^2$

It follows that x=z, i.e. X and Z will exert equal efforts in Nash equilibrium. Their probability of success will then be contingent entirely on their skill levels:

P[X] = hx/(hx + hz).

$P[X] = \frac{h_x}{h_x + h_y}$

Substituting that back in, we can solve for the actual amount of effort:

hxhzx V = (hx + hz)2x2

$h_x h_z x V = (h_x + h_z)^2 x^2$

x = hxhzV/(hx + hz)2

$x = \frac{h_x h_z}{h_x + h_z} V$

Now let’s see what that gives for the expected payoffs of the firm and the workers. This is worker X’s expected payoff:

E[Ux] = hx/(hx + hz) V – hxhzV/(hx + hz)2 = (hx/(hx + hz))2 V

$E[U_x] = \frac{h_x}{h_x + h_z} V – \frac{h_x h_z}{(h_x + h_z)^2} V = \left( \frac{h_x}{h_x + h_z}\right)^2 V$

Worker Z’s expected payoff is the same, with hx and hz exchanged:

E[Uz] = (hz/(hx + hz))2 V

$E[U_z] = \left( \frac{h_z}{h_x + h_z}\right)^2 V$

What about the firm? Their expected payoff is the the probability of hiring X, times the value of hiring X, plus the probability of hiring Z, times the value of hiring Z, all minus the cost c:

E[Uf] = hx/(hx + hz) hx Y + hz/(hx + hz) hz Y – c= (hx2 + hz2)/(hx + hz) Y – c

$E[U_f] = \frac{h_x}{h_x + h_z} h_x Y + \frac{h_z}{h_x + h_z} h_z Y – c = \frac{h_x^2 + h_z^2}{h_x + h_z} Y – c$

To see whether the application process was worthwhile, let’s compare against the alternative of simply flipping a coin and hiring X or Z at random. The probability of getting hired is then 1/2 for each candidate.

Expected payoffs for X and Z are now equal:

E[Ux] = E[Uz] = V/2

$E[U_x] = E[U_z] = \frac{V}{2}$

The expected payoff for the firm can be computed the same as before, but now without the cost c:

E[Uf] = 1/2 hx Y + 1/2 hz Y = (hx + hz)/2 Y

$E[U_f] = \frac{1}{2} h_x Y + \frac{1}{2} h_z Y = \frac{h_x + h_z}{2} Y$

This has a very simple interpretation: The expected value to the firm is just the average quality of the two workers, times the overall value of the job.

Which of these two outcomes is better? Well, that depends on the parameters, of course. But in particular, it depends on the difference between hx and hz.

Consider two extremes: In one case, the two workers are indistinguishable, and hx = hz = h. In that case, the payoffs for the hiring process reduce to the following:

E[Ux] = E[Uz] = V/4

$E[U_x] = E[U_z] = \frac{V}{4}$

E[Uf] = h Y – c

$E[U_f] = h Y – c$

Compare this against the payoffs for hiring randomly:

E[Ux] = E[Uz] = V/2

$E[U_x] = E[U_z] = \frac{V}{2}$

E[Uf] = h Y

$E[U_f] = h Y$

Both the workers and the firm are strictly better off if the firm just hires at random. This makes sense, since the workers have identical skill levels.

Now consider the other extreme, where one worker is far better than the other; in fact, one is nearly worthless, so hz ~ 0. (I can’t do exactly zero because I’d be dividing by zero, but let’s say one is 100 times better or something.)

In that case, the payoffs for the hiring process reduce to the following:

E[Ux] = V

E[Uz] = 0

$E[U_x] = V$

$E[U_z] = 0$

X will definitely get the job, so X is much better off.

E[Uf] = hx Y – c

$E[U_f] = h_x Y – c$

If the firm had hired randomly, this would have happened instead:

E[Ux] = E[Uz] = V/2

$E[U_x] = E[U_z] = \frac{V}{2}$

E[Uf] = hY/2

$E[U_f] = \frac{h}{2} Y$

As long as c < hY/2, both the firm and the higher-skill worker are better off in this scenario. (The lower-skill worker is worse off, but that’s not surprising.) The total expected benefit for everyone is also higher in this scenario.

Thus, the difference in skill level between the applicants is vital. If candidates are very different in skill level, in a way that the application process can accurately measure, then a long and costly application process can be beneficial, not only for the firm but also for society as a whole.

In these extreme examples, it was either not worth it for the firm, or worth it for everyone. But there is an intermediate case worth looking at, where the long and costly process can be worth it for the firm, but not for society as a whole. I will call this case hyper-competition—a system that is so competitive it makes society overall worse off.

This inefficient result occurs precisely when:
c < (hx2 + hz2)/(hx + hz) Y – (hx + hz)/2 Y < c + (hx/(hx + hz))2 V + (hz/(hx + hz))2 V

$c < \frac{h_x^2 + h_z^2}{h_x + h_z} Y – \frac{h_x + h_z}{2} Y < c + \left( \frac{h_x}{h_x + h_z}\right)^2 V + \left( \frac{h_z}{h_x + h_z}\right)^2 V$

This simplifies to:

c < (hx – hz)2/(2hx + 2hz) Y < c + (hx2 + hz2)/(hx + hz)2 V

$c < \frac{(h_x – h_z)^2}{2 (h_x + h_z)} Y < c + \frac{(h_x^2 + h_z^2)}{(h_x+h_z)^2} V$

If c is small, then we are interested in the case where:

(hx – hz)2 Y/2 < (hx2 + hz2)/(hx + hz) V

$\frac{(h_x – h_z)^2}{2} Y < \frac{h_x^2 + h_z^2}{h_x + h_z} V$

This is true precisely when the difference hx – hz is small compared to the overall size of hx or hz—that is, precisely when candidates are highly skilled but similar. This is pretty clearly the typical case in the real world. If the candidates were obviously different, you wouldn’t need a competitive process.

For instance, suppose that hx = 10 and hz = 8, while V = 180, Y = 20 and c = 1.

Then, if we hire randomly, these are the expected payoffs:

E[Uf] = (hx + hz)/2 Y = 180

E[Ux] = E[Uz] = V/2 = 90

If we use the complicated hiring process, these are the expected payoffs:

E[Ux] = (hx/(hx + hz))2 V = 55.5

E[Uz] = (hz/(hx + hz))2 V = 35.5

E[Uf] = (hx2 + hz2)/(hx + hz) Y – c = 181

The firm gets a net benefit of 1, quite small; while the workers face a far larger total expected loss of 90. And these candidates aren’t that similar: One is 25% better than the other. Yet because the effort expended in applying was so large, even this improvement in quality wasn’t worth it from society’s perspective.

This conclude’s the algebra for today, if you’ve been skipping it.

In this model I’ve only considered the case of exactly two applicants, but this can be generalized to more applicants, and the effect only gets stronger: Seemingly-large differences in each worker’s skill level can be outweighed by the massive cost of making so many people work so hard to apply and get nothing to show for it.

Thus, hyper-competition can exist despite apparently large differences in skill. Indeed, it is precisely the typical real-world scenario with many applicants who are similar that we expect to see the greatest inefficiencies. In the absence of intervention, we should expect markets to get this wrong.

Of course, we don’t actually want employers to hire randomly, right? We want people who are actually qualified for their jobs. Yes, of course; but you can probably assess that with nothing more than a resume and maybe a short interview. Most employers are not actually trying to find qualified candidates; they are trying to sift through a long list of qualified candidates to find the one that they think is best qualified. And my suspicion is that most of them honestly don’t have good methods of determining that.

This means that it could be an improvement for society to simply ban long hiring processes like these—indeed, perhaps ban job interviews altogether, as I can hardly think of a more efficient mechanism for allowing employers to discriminate based on race, gender, age, or disability than a job interview. Just collect a resume from each applicant, remove the ones that are unqualified, and then roll a die to decide which one you hire.

This would probably make the fit of workers to their jobs somewhat worse than the current system. But most jobs are learned primarily through experience anyway, so once someone has been in a job for a few years it may not matter much who was hired originally. And whatever cost we might pay in less efficient job matches could be made up several times over by the much faster, cheaper, easier, and less stressful process of applying for jobs.

Indeed, think for a moment of how much worse it feels being turned down for a job after a lengthy and costly application process that is designed to assess your merit (but may or may not actually do so particularly well), as opposed to simply finding out that you lost a high-stakes die roll. Employers could even send out letters saying one of two things: “You were rejected as unqualifed for this position.” versus “You were qualified, but you did not have the highest die roll.” Applying for jobs already feels like a crapshoot; maybe it should literally be one.

People would still have to apply for a lot of jobs—actually, they’d probably end up applying for more, because the lower cost of applying would attract more applicants. But since the cost is so much lower, it would still almost certainly be easier to do a job search than it is in the current system. In fact, it could largely be automated: simply post your resume on a central server and the system matches you with employers’ requirements and then randomly generates offers. Employers and prospective employees could fill out a series of forms just once indicating what they were looking for, and then the system could do the rest.

What I find most interesting about this policy idea is that it is in an important sense anti-meritocratic. We are in fact reducing the rewards for high levels of skill—at least a little bit—in order to improve society overall and especially for those with less skill. This is exactly the kind of policy proposal that I had hoped to see from a book like The Meritocracy Trap, but never found there. Perhaps it’s too radical? But the book was all about how we need fundamental, radical change—and then its actual suggestions were simple, obvious, and almost uncontroversial.

Note that this simplified process would not eliminate the incentives to get major, verifiable qualifications like college degrees or years of work experience. In fact, it would focus the incentives so that only those things matter, instead of whatever idiosyncratic or even capricious preferences HR agents might have. There would be no more talk of “culture fit” or “feeling right for the job”, just: “What is their highest degree? How many years have they worked in this industry?” I suppose this is credentialism, but in a world of asymmetric information, I think credentialism may be our only viable alternative to nepotism.

Of course, it’s too late for me. But perhaps future generations may benefit from this wisdom.

# The Race to the Bottom is not inevitable

Jul 19 JDN 2459050

The race to the bottom is a common result of competition, between firms, between states, or even between countries. One firm finds a way to cut corners and reduce costs, then lowers their price to undercut others; then soon every firm is cutting those same corners. Or one country decides to weaken their regulations in order to attraction more business; then soon every other country has to weaken their regulations as well.

Let’s first consider individual firms. Suppose that you run a business, and you are an upstanding, ethical person. You want to treat your employees, your customers, and your community well. You have high labor standards, you exceed the requirements of environmental regulations, and you make a high-quality product at a reasonable price for a moderate profit.

Then, a competitor appears. The owner of this company is not so ethical. They exploit their workers, perhaps even stealing their wages. They flaunt environmental regulations. They make shoddy products. All of this allows them to make their products for a lower price than yours.

Suppose that most customers can’t tell the difference between your product and theirs. What will happen? They will stop buying yours, because it’s more expensive. What do you do then?

You could simply go out of business. But that doesn’t really solve anything. Probably you’ll be forced to lower your standards. You’ll treat your workers worse, pollute more, reduce product quality. You may not do so as much as the other company, but you’ll have to do it some in order to get the price down low enough to still compete. And your profits will be lower than theirs as a result.

Far better would be for the government to step in and punish that other business for breaking the rules—or if what they’re doing is technically legal, change the rules so that it’s not anymore. Then you could continue to produce high-quality products with fair labor standards and good environmental sustainability.

But there are some problems with this. First, consider this from the point of view of a regulator, who is being lobbied by both companies. Your company asks for higher standards to improve product quality while protecting workers and the environment. But theirs claims that these higher standards will push them out of business. Who will they believe?

In fact, it may be worse than that: Suppose we’ve already settled into an equilibrium where all the firms have low standards. In that case, all the lobbyists will be saying that regulations need to be kept weak, lest the whole industry fail.

But in fact there’s no reason to think that stricter regulations would actually destroy the whole industry. Firm owners are used to thinking in terms of fixed competitors: They act in response to what competitors do. And in many cases it’s actually true that if just one firm tried to raise their standards, they would be outcompeted and go out of business. This does not mean that if all firms were forced to raise their standards, the industry would collapse. In fact, it’s much more likely that stricter regulations would only moderately reduce output and profits, if imposed consistently across the whole industry.

To see why, let’s consider a very simple model, a Bertrand competition game. There are two firms, A and B. Each can either use process H, producing a product of high quality with high labor standards and good sustainability, or use process L, producing a product of low quality with low labor standards and poor sustainability. Process H costs $100 per unit, process L costs$50 per unit. Customers can’t tell the difference, so they will buy whichever product is offered at the lowest price. Let’s say you are in charge of firm A. You choose which process to use, and set your price. At the same time, firm B chooses a process and sets their price.

Suppose choose to use process H. The lowest possible price you could charge to still make a profit would be a price of $101 (ignoring cents; let’s say customers also ignore them, which might be true!). But firm B could choose process L, and then set a price of$100. They can charge just one dollar less than you charge for their product, but their cost is only $50, so now they are making a large profit—and you get nothing. So you are forced to lower your standards, in order to match their price. You could try to undercut them at a price of$100, but in the long run that’s a bad idea, since eventually you’ll both be driven to charging a price of 51 and making only a very small profit. And there’s a way to stop them from undercutting you, which is to offer a price-matching guarantee; you can tell your customers that if they see a lower price from firm B than what you’re offering, you’ll match it for them. Then firm B has no incentive to try to undercut you, and you can maintain a stable equilibrium at a price of $100. You have been forced to used process L even though you know it is worse, because any attempt to unilaterally deviate from that industry norm would result in your company going bankrupt. But now suppose the government comes in and mandates that all firms use process H, and they really enforce this rule so that no firm wants to try to break it. Then you’d want to raise the price, but you wouldn’t necessarily have to raise it all that much. Even$101 would be enough to ensure some profit, and you could even maintain your current profits by raising the price up to $150. In reality the result would probably be somewhere in between those two, depending on the elasticity of demand; so perhaps you end up charging$125 and make half the profit you did before.

Even though the new regulation raised costs all the way up to the current price, they did not result in collapsing the industry; because the rule was enforced uniformly, all firms were able to raise their standards and also raise their prices. This is what we should typically expect to happen; so any time someone claims that a new regulation will “destroy the industry” we should be very skeptical of that claim. (It’s not impossible; for instance, a regulation mandating that all fast food workers be paid $200 per hour would surely collapse the fast food industry. But it’s very unlikely that anyone would seriously propose a regulation like that.) So as long as you have a strong government in place, you can escape the race to the bottom. But then we must consider international competition: What if other countries have weaker regulations, and so firms want to move their production to those other countries? Well, a small country may actually be forced to lower their standards in order to compete. I’m not sure there’s much that Taiwan or Singapore could do to enforce higher labor standards. If Taiwan decided to tighten all their labor regulations, firms might just move their production to Indonesia or Vietnam. Then again, monthly incomes in Taiwan, once adjusted for currency exchange rates, are considerably higher than those in Vietnam. Indeed, wages in Taiwan aren’t much lower than wages in the US. So apparently Taiwan has some power to control their own labor standards—perhaps due to their highly educated population and strong industrial infrastructure. However, a large country like the US or China absolutely has more power than that. If the US wants to enforce stricter labor standards, they can simply impose tariffs on countries that don’t. Actually there are many free-trade rules in place precisely to reduce that power, because it can be easily abused in the service of protectionism. Perhaps these rules go too far; while I agree with the concern about protectionism, I definitely think we should be doing more to enforce penalties for forced labor, for instance. But this is not the result of too little international governance—if anything it is the result of too much. Our free trade agreements are astonishingly binding, even on the most powerful countries (China has successfully sued the United States under WTO rules!). I wish only that our human rights charters were anywhere near as well enforced. This means that the race to the bottom is not the inevitable result of competition between firms or even between countries. When it occurs, it is the result of particular policy regimes nationally or internationally. We can make better rules. The first step may be to stop listening to the people who say that any change will “destroy the industry” because they are unable (or unwilling?) to understand how uniformly-imposed rules differ from unilateral deviations from industry norms. # “Harder-working” countries are not richer July 28 JDN 2458693 American culture is obsessed with work. We define ourselves by our professions. We are one of only a handful of countries in the world that don’t guarantee vacations for their workers. Over 50 million Americans suffer from chronic sleep deprivation, mostly due to work. Then again, we are also an extremely rich country; perhaps our obsession with work is what made us so rich? Well… not really. Take a look at this graph, which I compiled from OECD data: The X-axis shows the average number of hours per worker per year. I think this is the best measure of a country’s “work obsession”, as it includes both length of work week, proportion of full-time work, and amount of vacation time. The At 1,786 hours per worker per year, the US is not actually the highest: That title goes to Mexico, at an astonishing 2,148 hours per worker per year. The lowest is Germany at only 1,363 hours per worker per year. Converted into standard 40-hour work weeks, this means that on average Americans work 44 weeks per year, Germans work on average 34 weeks per year, and Mexicans work 54 weeks per year—that is, they work more than full-time every week of the year. The Y-axis shows GDP per worker per year. I calculated this by multiplying GDP per work hour (a standard measure of labor productivity) by average number of work hours per worker per year. At first glance, these figures may seem too large; for instance they are$114,000 in the US and $154,000 in Ireland. But keep in mind that this is per worker, not per person; the usual GDP per capita figure divides by everyone in the population, while this is only dividing by the number of people who are actively working. Unemployed people are not included, and neither are children or retired people. There is an obvious negative trend line here. While Ireland is an outlier with exceptionally high labor productivity, the general pattern is clear: the countries with the most GDP per worker actually work the fewest hours. Once again #ScandinaviaIsBetter: Norway and Denmark are near the bottom for work hours and near the top for GDP per worker. The countries that work the most hours, like Mexico and Costa Rica, have the lowest GDP per worker. This is actually quite remarkable. We would expect that productivity per hour decreases as work hours increase; that’s not surprising at all. But productivity per worker decreasing means that these extra hours are actually resulting in less total output. We are so overworked, overstressed, and underslept that we actually produce less than our counterparts in Germany or Denmark who spend less time working. Where we would expect the graph of output as a function of hours to look like the blue line below, it actually looks more like the orange line: Rather than merely increasing at a decreasing rate, output per worker actually decreases as we put in more hours—and does so over most of the range in which countries actually work. It wouldn’t be so surprising if this sort of effect occurred above say 2000 hours per year, when you start running out of time to do anything else; but in fact it seems to be happening somewhere around 1400 hours per year, which is less than most countries work. Only a handful of countries—mostly Scandinavian—actually seem to be working the right amount; everyone else is working too much and producing less as a result. And note that this is not restricted to white-collar or creative jobs where we would expect sleep deprivation and stress to have a particularly high impact. This includes all jobs. Our obsession with work is actually making us poorer! # For labor day, thoughts on socialism Planned Post 255: Sep 9 JDN 2458371 This week includes Labor Day, the holiday where we are perhaps best justified in taking the whole day off from work and doing nothing. Labor Day is sort of the moderate social democratic counterpart to the explicitly socialist holiday May Day. The right wing in this country has done everything in their power to expand the definition of “socialism”, which is probably why most young people now have positive views of socialism. There was a time when FDR was seen as an alternative to socialism; but now I’m pretty sure he’d just be called a socialist. Because of this, I am honestly not sure whether I should be considered a socialist. I definitely believe in the social democratic welfare state epitomized by Scandinavia, but I definitely don’t believe in total collectivization of all means of production. I am increasingly convinced that shareholder capitalism is a terrible system (the renowned science fiction author Charles Stross actually gave an excellent talk on this subject), but I would not want to abandon free markets. The best answer might be worker-owned cooperatives. The empirical data is actually quite consistent in showing worker co-ops to be as efficient if not more efficient than conventional corporations, and by construction their pay systems produce less inequality than corporations. Indeed, I think there is reason to believe that a worker co-op is a much more natural outcome for free markets under a level playing field than a conventional corporation, and the main reason we have corporations is actually that capitalism arose out of (and in response to) feudalism. Think about it: Why should most things be owned by the top 1%? (Okay, not quite “most”: to be fair, the top 1% only owns 40% of all US net wealth.) Why is 80% of the value of the stock market held by the top 10% of the population? Most things aren’t done by the top 1%. There are a handful of individuals (namely, scientists who make seminal breakthroughs: Charles Darwin, Marie Curie, Albert Einstein, Rosalind Franklin, Alan Turing, Jonas Salk) who are so super-productive that they might conceivably deserve billionaire-level compensation—but they are almost never the ones who are actually billionaires. If markets were really distributing capital to those who would use it most productively, there’s no reason to think that inequality would be so self-sustaining—much less self-enhancing as it currently seems to be. But when you realize that capitalism emerged out of a system where the top 1% (or less) already owned most things, and did so by a combination of “divine right” ideology and direct, explicit violence, this inequality becomes a lot less baffling. We never had a free market on a level playing field. The closest we’ve ever gotten has always been through social-democratic reforms (like the New Deal and Scandinavia). How does this result in corporations? Well, when all the wealth is held by a small fraction of individuals, how do you start a business? You have to borrow money from the people who have it. Borrowing makes you beholden to your creditors, and puts you at great risk if your venture fails (especially back in the days when there were debtor’s prisons—and we’re starting to go back that direction!). Equity provides an alternative: In exchange for giving them the downside risk if your venture fails, you also give your creditors—now shareholders—the upside risk if your venture succeeds. But at the end of the day when your business has succeeded, where did most of the profits go? Into the hands of the people who already had money to begin with, who did nothing to actually contribute to society. The world would be better off if those people had never existed and their wealth had simply been shared with everyone else. Compare this to what would happen if we all started with similar levels of wealth. (How much would each of us have? Total US wealth of about$44 trillion, spread among a population of 328 million, is about $130,000 each. I don’t know about you, but I think I could do quite a bit with that.) When starting a business, you wouldn’t go heavily into debt or sign away ownership of your company to some billionaire; you’d gather a group of dedicated partners, each of whom would contribute money and effort into building the business. As you added on new workers, it would make sense to pool their assets, and give them a share of the company as well. The natural structure for your business would be not a shareholder corporation, but a worker-owned cooperative. I think on some level the super-rich actually understand this. If you look closely at the sort of policies they fight for, they really aren’t capitalist. They don’t believe in free, unfettered markets where competition reigns. They believe in monopoly, lobbying, corruption, nepotism, and above all, low taxes. (There’s actually nothing in the basic principles of capitalism that says taxes should be low. Taxes should be as high as they need to be to cover public goods—no higher, and no lower.) They don’t want to provide nationalized healthcare, not because they believe that private healthcare competition is more efficient (no one who looks at the data for even a few minutes can honestly believe that—US healthcare is by far the most expensive in the world), but because they know that it would give their employees too much freedom to quit and work elsewhere. Donald Trump doesn’t want a world where any college kid with a brilliant idea and a lot of luck can overthrow his empire; he wants a world where everyone owes him and his family personal favors that he can call in to humiliate them and exert his power. That’s not capitalism—it’s feudalism. Crowdfunding also provides an interesting alternative; we might even call it the customer-owned cooperative. Kickstarter and Patreon provide a very interesting new economic model—still entirely within the realm of free markets—where customers directly fund production and interact with producers to decide what will be produced. This might turn out to be even more efficient—and notice that it would run a lot more smoothly if we had all started with a level playing field. Establishing such a playing field, of course, requires a large amount of redistribution of wealth. Is this socialism? If you insist. But I think it’s more accurate to describe it as reparations for feudalism (not to mention colonialism). We aren’t redistributing what was fairly earned in free markets; we are redistributing what was stolen, so that from now on, wealth can be fairly earned in free markets. # Unpaid work and the double burden Apr 16, JDN 2457860 When we say the word “work”, what leaps to mind is usually paid work in the formal sector—the work people do for employers. When you “go to work” each morning, you are going to do your paid work in the formal sector. But a large quantity of the world’s labor does not take this form. First, there is the informal sectorwork done for cash “under the table”, where there is no formal employment structure and often no reporting or payment of taxes. Many economists estimate that the majority of the world’s workers are employed in the informal sector. The ILO found that informal employment comprises as much as 70% of employment in some countries. However, it depends how you count: A lot of self-employment could be considered either formal or informal. If you base it on whether you do any work outside an employer-employee relationship, informal sector work is highly prevalent around the world. If you base it on not reporting to the government to avoid taxes, informal sector work is less common. If it must be your primary source of income, whether or not you pay taxes, informal sector work is uncommon. And if you only include informal sector work when it is your primary income source and not reported to the government, informal sector work is relatively rare and largely restricted to underdeveloped countries. But that’s not really my focus for today, because you at least get paid in the informal sector. Nor am I talking about forced laborthat is, slavery, essentially—which is a serious human rights violation that sadly still goes on in many countries. No, the unpaid work I want to talk about today is work that people willingly do for free. I’m also excluding internships and student work, where (at least in theory) the idea is that instead of getting paid you are doing the work in order to acquire skills and experience that will be valuable to you later on. I’m talking about work that you do for its own sake. Such work can be divided into three major categories. First there is vocation—the artist who would paint even if she never sold a single canvas; the author who is compelled to write day and night and would give the books away for free. Vocation is work that you do for fun, or because it is fulfilling. It doesn’t even feel like “work” in quite the same sense. For me, writing and research are vocation, at least in part; even if I had$5 million in stocks I would still do at least some writing and research as part of what gives my life meaning.

Second there is volunteering—the soup kitchen, the animal shelter, the protest march. Volunteering is work done out of altruism, to help other people or work toward some greater public goal. You don’t do it for yourself, you do it for others.

Third, and really my main focus for this post, is domestic labor—vacuuming the rug, mopping the floor, washing the dishes, fixing the broken faucet, changing the baby’s diapers. This is generally not work that anyone finds particularly meaningful or fulfilling, nor is it done out of any great sense of altruism (perhaps toward your own family, but that’s about the extent of it). But you also don’t get paid to do it. You do it because it must be done.

There is also considerable overlap, of course: Many people find meaning in their activism or charitable work, and part of what motivates artists and authors is a desire to change the world.

Vocation is ultimately what I would like to see the world move towards. One of the great promises of a basic income is that it might finally free us from the grind of conventional employment that has gripped us ever since we first managed to escape the limitations of subsistence farming—which in turn gripped us ever since we escaped the desperation of hunter-gatherer survival. The fourth great stage in human prosperity might finally be a world where we can work not for food or for pay, but for meaning. A world of musicians and painters, of authors and playwrights, of sculptors and woodcutters, yes; but also a world of cinematographers and video remixers, of 3D modelers and holographers, of VR designers and video game modders. If you ever fret that no work would be done without the constant pressure of the wage incentive, spend some time on Stack Overflow or the Steam Workshop. People will spend hundreds of person-hours at extremely high-skill tasks—I’m talking AI programming and 3D modeling here—not for money but for fun.

Volunteering is frankly kind of overrated; as the Effective Altruism community will eagerly explain to you any chance they get, it’s usually more efficient for you to give money rather than time, because money is fungible while giving your time only makes sense if your skills are actually the ones that the project needs. If this criticism of so much well-intentioned work sounds petty, note that literally thousands of lives would be saved each year if instead of volunteering people donated an equivalent amount of money so that charities could hire qualified workers instead. Unskilled volunteers and donations of useless goods after a disaster typically cause what aid professionals call the “second disaster”. Still, people do find meaning in volunteering, and there is value in that; and also there are times when you really are the best one to do it, particularly when it comes to local politics.

But what should we do with domestic labor?

Some of it can and will be automated away—the Parable of the Dishwasher with literal dishwashers. But it will be awhile before it all can, and right now it’s still a bit expensive. Maybe instead of vacuuming I should buy a Roomba—but $500 feels like a lot of money right now. Much domestic labor we could hire out to someone else, but we simply choose not to. I could always hire someone to fix my computer, unclog my bathtub, or even mop my floors; I just don’t because it seems too expensive. From the perspective of an economist, it’s actually a bit odd that it seems too expensive. I might have a comparative advantage in fixing my computer—it’s mine, after all, so I know its ins and outs, and while I’m no hotshot Google admin I am a reasonably competent programmer and debugger in my own right. And while for many people auto repair is a household chore, I do actually hire auto mechanics; I don’t even change my own oil, though partly that’s because my little Smart has an extremely compact design that makes it hard to work on. But I surely have no such comparative advantage in cleaning my floors or unclogging my pipes; so why doesn’t it seem worth it to hire someone else to do that? Maybe I’m being irrational; hiring a cleaning service isn’t that expensive after all. I could hire a cleaning service to do my whole apartment for something like$80, and if I scheduled a regular maid it would probably be something like that per month. That’s what I would charge for two hours of tutoring, so maybe it would behoove me to hire a maid and spend that extra time tutoring or studying.

Or maybe it’s this grad student budget of mine; money is pretty tight at the moment, as I go through this strange societal ritual where young adults go through a period of near-poverty, overwhelming workload and constant anxiety not in spite but because we are so intelligent and hard-working. Perhaps if and when I get that $70,000 job as a professional economist my marginal utility of wealth will decrease and I will feel more inclined to hire maid services. There are also transaction costs I save on by doing the work myself. A maid would have to commute here, first of all, reducing the efficiency gains from their comparative advantage in the work; but more than that, there’s a lot of effort I’d have to put in just to prepare for the maid and deal with any problems that might arise. There are scheduling issues, and the work probably wouldn’t get done as quickly unless I were to spend enough to hire a maid on a regular basis. There’s also a psychological cost in comfort and privacy to dealing with a stranger in one’s home, and a small but nontrivial risk that the maid might damage or steal something important. But honestly it might be as simple as social norms (remember: to a first approximation, all human behavior is social norms). Regardless of whether or not it is affordable, it feels strange to hire a maid. That’s the sort of thing only rich, decadent people do. A responsible middle-class adult is supposed to mop their own floors and do their own laundry. Indeed, while hiring a plumber or an auto mechanic feels like paying for a service, hiring a maid crosses a line and feels like hiring a servant. (I honestly always feel a little awkward around the gardeners hired by our housing development for that reason. I’m only paying them indirectly, but there’s still this vague sense that they are somehow subservient—and surely, we are of quite distinct socioeconomic classes. Maybe it would help if I brushed up on my Spanish and got to know them better?) And then there’s the gender factor. Being in a same-sex couple household changes the domestic labor dynamic quite a bit relative to the conventional opposite-sex couple household. Even in ostensibly liberal, feminist, egalitarian households, and even when both partners are employed full-time, it usually ends up being the woman who does most of the housework. This is true in the US; it is true in the UK; it is true in Europe; indeed it’s true in most if not all countries around the world, and, unsurprisingly, it is worst in India, where women spend a whopping five hours per day more on housework than men. (I was not surprised by the fact that Japan and China also do poorly, given their overall gender norms; but I’m a bit shocked at how badly Ireland and Italy do on this front.) And yes, while #ScandinaviaIsBetter, still in Sweden and Norway women spend half an hour to an hour more on housework on an average day than men. Which, of course, supports the social norm theory. Any time you see both an overwhelming global trend against women and considerable cross-country variation within that trend, your first hypothesis should be sexism. Without the cross-country variation, maybe it could be biology—the sex differences in height and upper-body strength, for example, are pretty constant across countries. But women doing half an hour more in Norway but five hours more in India looks an awful lot like sexism. This is called the double burden: To meet the social norms of being responsible middle-class adults, men are merely expected to work full-time at a high-paying job, but women are expected to do both the full effort of maintaining a household and the full effort of working at a full-time job. This is surely an improvement over the time when women were excluded from the formal workforce, not least because of the financial freedom that full-time work affords many women; but it would be very nice if we could also find a way to share some of that domestic burden as well. There has been some trend toward a less unequal share of housework as more women enter the workforce, but it still has a long way to go, even in highly-developed countries. So, we can start by trying to shift the social norm that housework is gendered: Women clean the floors and change the diapers, while men fix the car and paint the walls. Childcare in particular is something that should be done equally by all parents, and while it’s plausible that one person may be better or worse at mopping or painting, it strains credulity to think that it’s always the woman who is better at mopping and the man who is better at painting. Yet perhaps this is a good reason to try to shift away from another social norm as well, the one where only rich people hire maids and maids are servants. Unfortunately, it’s likely that most maids will continue to be women for the foreseeable future—cleaning services are gendered in much the same way that nursing and childcare are gendered. But at least by getting paid to clean, one can fulfill the “job” norm and the “housekeeping” norm in one fell swoop; and then women who are in other professions can carry only one burden instead of two. And if we can begin to think of cleaning services as more like plumbing and auto repair—buying a service, not hiring a servant—this is likely to improve the condition and social status of a great many maids. I doubt we’d ever get to the point where mopping floors is as prestigious as performing neurosurgery, but maybe we can at least get to the point where being a maid is as respectable as being a plumber. Cleaning needs done; it shouldn’t be shameful to be someone who is very good at doing it and gets paid to do so. (That is perhaps the most pernicious aspect of socioeconomic class, this idea that some jobs are “shameful” because they are done by workers with less education or involve more physical labor.) This also makes good sense in terms of economic efficiency: Your comparative advantage is probably not in cleaning services, or if it is then perhaps you should do that as a career. So by selling your labor at whatever you are good at and then buying the services of someone who is especially good at cleaning, you should, at least in theory, be able to get the same cleaning done and maintain the same standard of living for yourself while also accomplishing more at whatever it is you do in your profession and providing income for whomever you hire to do the cleaning. So, should I go hire a cleaning service after all? I don’t know, that still sounds pretty expensive. # Sometimes people have to lose their jobs. This isn’t a bad thing. Oct 8, JDN 2457670 Eleizer Yudkowsky (founder of the excellent blog forum Less Wrong) has a term he likes to use to distinguish his economic policy views from either liberal, conservative, or even libertarian: “econoliterate”, meaning the sort of economic policy ideas one comes up with when one actually knows a good deal about economics. In general I think Yudkowsky overestimates this effect; I’ve known some very knowledgeable economists who disagree quite strongly over economic policy, and often following the conventional political lines of liberal versus conservative: Liberal economists want more progressive taxation and more Keynesian monetary and fiscal policy, while conservative economists want to reduce taxes on capital and remove regulations. Theoretically you can want all these things—as Miles Kimball does—but it’s rare. Conservative economists hate minimum wage, and lean on the theory that says it should be harmful to employment; liberal economists are ambivalent about minimum wage, and lean on the empirical data that shows it has almost no effect on employment. Which is more reliable? The empirical data, obviously—and until more economists start thinking that way, economics is never truly going to be a science as it should be. But there are a few issues where Yudkowsky’s “econoliterate” concept really does seem to make sense, where there is one view held by most people, and another held by economists, regardless of who is liberal or conservative. One such example is free trade, which almost all economists believe in. A recent poll of prominent economists by the University of Chicago found literally zero who agreed with protectionist tariffs. Another example is my topic for today: People losing their jobs. Not unemployment, which both economists and almost everyone else agree is bad; but people losing their jobs. The general consensus among the public seems to be that people losing jobs is always bad, while economists generally consider it a sign of an economy that is run smoothly and efficiently. To be clear, of course losing your job is bad for you; I don’t mean to imply that if you lose your job you shouldn’t be sad or frustrated or anxious about that, particularly not in our current system. Rather, I mean to say that policy which tries to keep people in their jobs is almost always a bad idea. I think the problem is that most people don’t quite grasp that losing your job and not having a job are not the same thing. People not having jobs who want to have jobs—unemployment—is a bad thing. But losing your job doesn’t mean you have to stay unemployed; it could simply mean you get a new job. And indeed, that is what it should mean, if the economy is running properly. Check out this graph, from FRED: The red line shows hires—people getting jobs. The blue line shows separations—people losing jobs or leaving jobs. During a recession (the most recent two are shown on this graph), people don’t actually leave their jobs faster than usual; if anything, slightly less. Instead what happens is that hiring rates drop dramatically. When the economy is doing well (as it is right now, more or less), both hires and separations are at very high rates. Why is this? Well, think about what a job is, really: It’s something that needs done, that no one wants to do for free, so someone pays someone else to do it. Once that thing gets done, what should happen? The job should end. It’s done. The purpose of the job was not to provide for your standard of living; it was to achieve the task at hand. Once it doesn’t need done, why keep doing it? We tend to lose sight of this, for a couple of reasons. First, we don’t have a basic income, and our social welfare system is very minimal; so a job usually is the only way people have to provide for their standard of living, and they come to think of this as the purpose of the job. Second, many jobs don’t really “get done” in any clear sense; individual tasks are completed, but new ones always arise. After every email sent is another received; after every patient treated is another who falls ill. But even that is really only true in the short run. In the long run, almost all jobs do actually get done, in the sense that no one has to do them anymore. The job of cleaning up after horses is done (with rare exceptions). The job of manufacturing vacuum tubes for computers is done. Indeed, the job of being a computer—that used to be a profession, young women toiling away with slide rules—is very much done. There are no court jesters anymore, no town criers, and very few artisans (and even then, they’re really more like hobbyists). There are more writers now than ever, and occasional stenographers, but there are no scribes—no one powerful but illiterate pays others just to write things down, because no one powerful is illiterate (and even few who are not powerful, and fewer all the time). When a job “gets done” in this long-run sense, we usually say that it is obsolete, and again think of this as somehow a bad thing, like we are somehow losing the ability to do something. No, we are gaining the ability to do something better. Jobs don’t become obsolete because we can’t do them anymore; they become obsolete because we don’t need to do them anymore. Instead of computers being a profession that toils with slide rules, they are thinking machines that fit in our pockets; and there are plenty of jobs now for software engineers, web developers, network administrators, hardware designers, and so on as a result. Soon, there will be no coal miners, and very few oil drillers—or at least I hope so, for the sake of our planet’s climate. There will be far fewer auto workers (robots have already done most of that already), but far more construction workers who install rail lines. There will be more nuclear engineers, more photovoltaic researchers, even more miners and roofers, because we need to mine uranium and install solar panels on rooftops. Yet even by saying that I am falling into the trap: I am making it sound like the benefit of new technology is that it opens up more new jobs. Typically it does do that, but that isn’t what it’s for. The purpose of technology is to get things done. Remember my parable of the dishwasher. The goal of our economy is not to make people work; it is to provide people with goods and services. If we could invent a machine today that would do the job of everyone in the world and thereby put us all out of work, most people think that would be terrible—but in fact it would be wonderful. Or at least it could be, if we did it right. See, the problem right now is that while poor people think that the purpose of a job is to provide for their needs, rich people think that the purpose of poor people is to do jobs. If there are no jobs to be done, why bother with them? At that point, they’re just in the way! (Think I’m exaggerating? Why else would anyone put a work requirement on TANF and SNAP? To do that, you must literally think that poor people do not deserve to eat or have homes if they aren’t, right now, working for an employer. You can couch that in cold economic jargon as “maximizing work incentives”, but that’s what you’re doing—you’re threatening people with starvation if they can’t or won’t find jobs.) What would happen if we tried to stop people from losing their jobs? Typically, inefficiency. When you aren’t allowed to lay people off when they are no longer doing useful work, we end up in a situation where a large segment of the population is being paid but isn’t doing useful work—and unlike the situation with a basic income, those people would lose their income, at least temporarily, if they quit and tried to do something more useful. There is still considerable uncertainty within the empirical literature on just how much “employment protection” (laws that make it hard to lay people off) actually creates inefficiency and reduces productivity and employment, so it could be that this effect is small—but even so, likewise it does not seem to have the desired effect of reducing unemployment either. It may be like minimum wage, where the effect just isn’t all that large. But it’s probably not saving people from being unemployed; it may simply be shifting the distribution of unemployment so that people with protected jobs are almost never unemployed and people without it are unemployed much more frequently. (This doesn’t have to be based in law, either; while it is made by custom rather than law, it’s quite clear that tenure for university professors makes tenured professors vastly more secure, but at the cost of making employment tenuous and underpaid for adjuncts.) There are other policies we could make that are better than employment protection, active labor market policies like those in Denmark that would make it easier to find a good job. Yet even then, we’re assuming that everyone needs jobs–and increasingly, that just isn’t true. So, when we invent a new technology that replaces workers, workers are laid off from their jobs—and that is as it should be. What happens next is what we do wrong, and it’s not even anybody in particular; this is something our whole society does wrong: All those displaced workers get nothing. The extra profit from the more efficient production goes entirely to the shareholders of the corporation—and those shareholders are almost entirely members of the top 0.01%. So the poor get poorer and the rich get richer. The real problem here is not that people lose their jobs; it’s that capital ownership is distributed so unequally. And boy, is it ever! Here are some graphs I made of the distribution of net wealth in the US, using from the US Census. Here are the quintiles of the population as a whole: And here are the medians by race: Medians by age: Medians by education: And, perhaps most instructively, here are the quintiles of people who own their homes versus renting (The rent is too damn high!) All that is just within the US, and already they are ranging from the mean net wealth of the lowest quintile of people under 35 (-$45,000, yes negative—student loans) to the mean net wealth of the highest quintile of people with graduate degrees ($3.8 million). All but the top quintile of renters are poorer than all but the bottom quintile of homeowners. And the median Black or Hispanic person has less than one-tenth the wealth of the median White or Asian person. If we look worldwide, wealth inequality is even starker. Based on UN University figures, 40% of world wealth is owned by the top 1%; 70% by the top 5%; and 80% by the top 10%. There is less total wealth in the bottom 80% than in the 80-90% decile alone. According to Oxfam, the richest 85 individuals own as much net wealth as the poorest 3.7 billion. They are the 0.000,001%. If we had an equal distribution of capital ownership, people would be happy when their jobs became obsolete, because it would free them up to do other things (either new jobs, or simply leisure time), while not decreasing their income—because they would be the shareholders receiving those extra profits from higher efficiency. People would be excited to hear about new technologies that might displace their work, especially if those technologies would displace the tedious and difficult parts and leave the creative and fun parts. Losing your job could be the best thing that ever happened to you. The business cycle would still be a problem; we have good reason not to let recessions happen. But stopping the churn of hiring and firing wouldn’t actually make our society better off; it would keep people in jobs where they don’t belong and prevent us from using our time and labor for its best use. Perhaps the reason most people don’t even think of this solution is precisely because of the extreme inequality of capital distribution—and the fact that it has more or less always been this way since the dawn of civilization. It doesn’t seem to even occur to most people that capital income is a thing that exists, because they are so far removed from actually having any amount of capital sufficient to generate meaningful income. Perhaps when a robot takes their job, on some level they imagine that the robot is getting paid, when of course it’s the shareholders of the corporations that made the robot and the corporations that are using the robot in place of workers. Or perhaps they imagine that those shareholders actually did so much hard work they deserve to get paid that money for all the hours they spent. Because pay is for work, isn’t it? The reason you get money is because you’ve earned it by your hard work? No. This is a lie, told to you by the rich and powerful in order to control you. They know full well that income doesn’t just come from wages—most of their income doesn’t come from wages! Yet this is even built into our language; we say “net worth” and “earnings” rather than “net wealth” and “income”. (Parade magazine has a regular segment called “What People Earn”; it should be called “What People Receive”.) Money is not your just reward for your hard work—at least, not always. The reason you get money is that this is a useful means of allocating resources in our society. (Remember, money was created by governments for the purpose of facilitating economic transactions. It is not something that occurs in nature.) Wages are one way to do that, but they are far from the only way; they are not even the only way currently in use. As technology advances, we should expect a larger proportion of our income to go to capital—but what we’ve been doing wrong is setting it up so that only a handful of people actually own any capital. Fix that, and maybe people will finally be able to see that losing your job isn’t such a bad thing; it could even be satisfying, the fulfillment of finally getting something done. # So what can we actually do about sweatshops? JDN 2457489 (The topic of this post was chosen by a vote of my Patreons.) There seem to be two major camps on most political issues: One camp says “This is not a problem, stop worrying about it.” The other says “This is a huge problem, it must be fixed right away, and here’s the easy solution.” Typically neither of these things is true, and the correct answer is actually “This is a huge problem, well worth fixing—but we need to do a lot of work to figure out exactly how.” Sweatshop labor is a very good example of this phenomenon. Camp A is represented here by the American Enterprise Institute, which even goes as far as to defend child labor on the grounds that “we used to do it before”. (Note that we also used to do slavery before. Also protectionism, but of course AEI doesn’t think that was good. Who needs logical consistency when you have ideological purity?) The College Conservative uses ECON 101 to defend sweatshops, perhaps not realizing that economics courses continue past ECON 101. Camp B is represented here by Buycott, telling us to buy “made in the USA” products and boycott all companies that use sweatshops. Other commonly listed strategies include buying used clothes (I mean, there may be some ecological benefits to this, but clearly not all clothes can be used clothes) and “buy union-made” which is next to impossible for most products. Also in this camp is LaborVoices, a Silicon Valley tech company that seems convinced they can somehow solve the problem of sweatshops by means of smartphone apps, because apparently Silicon Valley people believe that smartphones are magical and not, say, one type of product that performs services similar to many other pre-existing products but somewhat more efficiently. (This would also explain how Uber can say with a straight face that they are “revolutionary” when all they actually do is mediate unlicensed taxi services, and Airbnb is “innovative” because it makes it slightly more convenient to rent out rooms in your home.) Of course I am in that third camp, people who realize that sweatshops—and exploitative labor practices in general—are a serious problem, but a very complex and challenging one that does not have any easy, obvious solutions. One thing we absolutely cannot do is return to protectionism or get American consumers to only buy from American companies (a sort of “soft protectionism” by social construction). This would not only be inefficient for us—it would be devastating for people in Third World countries. Sweatshops typically provide substantially better living conditions than the alternatives available to their workers. Yet this does not mean that sweatshops are morally acceptable or should simply be left alone, contrary to the assertions of many economists—most famously Benjamin Powell. Anyone who doubts this must immediately read “Wrongful Beneficence” by Chris Meyers; the mere fact that an act benefits someone –or even everyone—does not prove that the act was morally acceptable. If someone is starving to death and you offer them bread in exchange for doing whatever you want them to do for the next year, you are benefiting them, surely—but what you are doing is morally wrong. And this is basically what sweatshops are; they provide survival in exchange for exploitation. It can be remarkably difficult to even tell which companies are using sweatshops—and this is by design. While in response to public pressure corporations often try to create the image of improving their labor standards, they seem quite averse to actually improving labor standards, and even more averse to establishing systems of enforcement to make those labor standards followed consistently. Almost no sweatshops are directly owned by the retailers whose products they make; instead there is a chain of outsourced vendors and distributors, a chain that creates diffusion of responsibility and plausible deniability. When international labor organizations do get the chance to investigate the labor conditions of factories operated by multinational corporations, they invariably find that regulations are more honored in the breach than the observance. So, what would a long-run solution to sweatshops look like? In a word: Development. The only sustainable solution to oppressive labor conditions is a world where everyone is healthy enough, educated enough, and provided with enough resources that their productivity is at a First World level; furthermore it is a world where workers have enough bargaining power that they are actually paid according to that productivity. (The US has lately been finding out what happens if you do the former but not the latter—the result is that you generate an enormous amount of wealth, but it all ends up in the hands of the top 0.1%. Yet it is quite possible to do the latter, as Denmark has figured out, #ScandinaviaIsBetter.) To achieve this, we need more factories in Third World countries, not fewer—more investment, not less. We need to buy more of China’s exports, hire more factory workers in Bangladesh. But it’s not enough to provide incentives to build factories—we must also provide incentives to give workers at those factories more bargaining power. To see how we can pull this off, I offer a case study of a (qualified) success: Nike. It began with people noticing a problem—activists and investigative journalists documented the abuses in Nike’s factories. They drew public attention, which undermined Nike’s efforts at mass advertising (which was basically their entire business model—their shoes aren’t actually especially good). They tried to clean up their image with obviously biased reports, which triggered a backlash. Finally Nike decides to actually do something about the problem, and actually becomes a founding member of the Fair Labor Association. They establish new labor standards, and they audit regularly to ensure that those standards are being complied with. Today they publish an annual corporate social responsibility report that actually appears to be quite transparent and accurate, showing both the substantial improvements that have been made and the remaining problems. Activist campaigns turned Nike around almost completely. In short, consumer pressure led to private regulation. Many development economists are increasingly convinced that this is what we need—we must put pressure on corporations to regulate themselves. The pressure is a key part of this process; Willem Buiter wasn’t wrong when he quipped that “self-regulation stands in relation to regulation the way self-importance stands in relation to importance and self-righteousness to righteousness.” For any regulation to work, it must have an enforcement mechanism; for private regulation to work, that enforcement mechanism comes from the consumers. Yet even this is not enough, because there are too many incentives for corporations to lie and cheat if they only have to be responsive to consumers. It’s unreasonable to expect every consumer to take the time—let alone have the expertise—to perform extensive research on the supply chain of every corporation they buy a product from. I also think it’s unreasonable to expect most people to engage in community organizing or shareholder activism as Green America suggests, though it certainly wouldn’t hurt if some did. But there are just too many corporations to keep track of! Like it or not, we live in a globalized capitalist economy where you almost certainly buy from a hundred different corporations over the course of a year. Instead we need governments to step up—and the obvious choice is the government of the United States, which remains the world’s economic and military hegemon. We should be pressuring our legislators to make new regulations on international trade that will raise labor standards around the globe. Note that this undermines the most basic argument corporations use against improving their labor standards: “If we raise wages, we won’t be able to compete.” Not if we force everyone to raise wages, around the globe. “If it’s cheaper to build a factory in Indonesia, why shouldn’t we?” It won’t be cheaper, unless Indonesia actually has a real comparative advantage in producing that product. You won’t be able to artificially hold down your expenses by exploiting your workers—you’ll have to actually be more efficient in order to be more profitable, which is how capitalism is supposed to work. There’s another argument we often hear that is more legitimate, which is that raising wages would also force corporations to raise prices. But as I discussed in a previous post on this subject, the amount by which prices would need to rise is remarkably small, and nowhere near large enough to justify panic about dangerous global inflation. Paying 10% or even 20% more for our products is well worth it to reduce the corruption and exploitation that abuses millions of people—a remarkable number of them children—around the globe. Also, it doesn’t take a mathematical savant to realize that if increasing wages by a factor of 10 only increases prices by 20%, workers will in fact be better off. Where would all that extra money come from? Now we come to the real reason why corporations don’t want to raise their labor standards: It would come from profits. Right now profits are extraordinarily large, much larger than they have any right to be in a fair market. It was recently estimated that 74% of billionaire wealth comes from economic rent—that is to say, from deception, exploitation, and market manipulation, rather than actual productivity. (There’s a lot of uncertainty in this estimate; the true figure is probably somewhere between 50% and 90%—it’s almost certainly a majority, and could be the vast majority.) In fact, I really shouldn’t say “money”, which we can just print; what we really want to know is where the extra wealth would come from to give that money value. But by paying workers more, improving their standard of living, and creating more consumer demand, we would in fact dramatically increase the amount of real wealth in the world. So, we need regulations to improve global labor standards. But we must first be clear: What should these regulations say? First, we must rule out protectionist regulations that would give unfair advantages to companies that produce locally. These would only result in economic inefficiency at best, and trade wars throwing millions back into poverty at worst. (Some advantage makes sense to internalize the externalities of shipping, but really that should be created by a carbon tax, not by trade tariffs. It’s a lot more expensive and carbon-intensive to ship from Detroit to LA than from Detroit to Windsor, but the latter is the “international” trade.) Second, we should not naively assume that every country should have the same minimum wage. (I am similarly skeptical of Hillary Clinton’s proposal to include people with severe mental or physical disabilities in the US federal minimum wage; I too am concerned about people with disabilities being exploited, but the fact is many people with severe disabilities really aren’t as productive, and it makes sense for wages to reflect that.) If we’re going to have minimum wages at all—basic income and wage subsidies both make a good deal more sense than a hard price floor; see also my earlier post on minimum wage—they should reflect the productivity and prices of the region. I applaud California and New York for adopting$15 minimum wages, but I’d be a bit skeptical of doing the same in Mississippi, and adamantly opposed to doing so in Bangladesh.

It may not even be reasonable to expect all countries to have the same safety standards; workers who are less skilled and in more dire poverty may rationally be willing to accept more risk to remain employed, rather than laid off because their employer could not afford to meet safety standards and still pay them a sufficient wage. For some safety standards this is ridiculous; making sufficiently many exits with doors that swing outward and maintaining smoke detectors are not expensive things to do. (And yet factories in Bangladesh often fail to meet such basic requirements, which kills hundreds of workers each year.) But other safety standards may be justifiably relaxed; OSHA compliance in the US costs about $70 billion per year, about$200 per person, which many countries simply couldn’t afford. (On the other hand, OSHA saves thousands of lives, does not increase unemployment, and may actually benefit employers when compared with the high cost of private injury lawsuits.) We should have expert economists perform careful cost-benefit analyses of proposed safety regulations to determine which ones are cost-effective at protecting workers and which ones are too expensive to be viable.

While we’re at it, these regulations should include environmental standards, or a global carbon tax that’s used to fund climate change mitigation efforts around the world. Here there isn’t much excuse for not being strict; pollution and environmental degradation harms the poor the most. Yes, we do need to consider the benefits of production that is polluting; but we have plenty of profit incentives for that already. Right now the balance is clearly tipped far too much in favor of more pollution than the optimum rather than less. Even relatively heavy-handed policies like total bans on offshore drilling and mountaintop removal might be in order; in general I’d prefer to tax rather than ban, but these activities are so enormously damaging that if the choice is between a ban and doing nothing, I’ll take the ban. (I’m less convinced of this with regard to fracking; yes, earthquakes and polluted groundwater are bad—but are they Saudi Arabia bad? Because buying more oil from Saudi Arabia is our leading alternative.)

It should go without saying (but unfortunately it doesn’t seem to) that our regulations must include an absolute zero-tolerance policy for forced labor. If we find out that a company is employing forced labor, they should have to not only free every single enslaved worker, but pay each one a million dollars (PPP 2005 chained CPI of course). If they can’t do that and they go bankrupt, good riddance; remind me to play them the world’s saddest song on the world’s tiniest violin. Of course, first we need to find out, which brings me to the most important point.

Above all, these regulations must be enforced. We could start with enforceable multilateral trade agreements, where tariff reductions are tied to human rights and labor standards. This is something the President of the United States could do, right now, as an addendum to the Trans-Pacific Partnership. (What he should have done is made the TPP contingent on this, but it’s too late for that.) Future trade agreements should include these as a matter of course.If countries want to reap the benefits of free trade, they must be held accountable for sharing those benefits equitably with their people.

But ultimately we should not depend upon multilateral agreements between nations—we need truly international standards with global enforcement. We should empower the International Labor Organization to enact sanctions and inspections (right now it mostly enacts suggestions which are promptly and dutifully ignored), and possibly even to arrest executives for trial at the International Criminal Court. We should double if not triple or quadruple their funding—and if member nations will not pay this voluntarily, we should make them—the United Nations should be empowered to collect taxes in support of global development, which should be progressive with per-capita GDP. Coercion, you say? National sovereignty, you say? Millions of starving little girls is my reply.

Right now, the ability of multinational corporations to move between countries to find the ones that let them pay the least have created a race to the floor; it’s time for us to raise that floor.

What can you yourself do, assuming you’re not a head of state? (If you are, I’m honored. Also, any openings on your staff?) Well, you can vote—and you can use that vote to put pressure on your legislators to support these kinds of polices. There are also some other direct actions you can take that I discussed in a previous post; but mainly what we need is policy. Consumer pressure and philanthropy are good, and by all means, don’t stop; but to really achieve global justice we will need nothing short of global governance.

# We do not benefit from economic injustice.

JDN 2457461

Recently I think I figured out why so many middle-class White Americans express so much guilt about global injustice: A lot of people seem to think that we actually benefit from it. Thus, they feel caught between a rock and a hard place; conquering injustice would mean undermining their own already precarious standard of living, while leaving it in place is unconscionable.

The compromise, is apparently to feel really, really guilty about it, constantly tell people to “check their privilege” in this bizarre form of trendy autoflagellation, and then… never really get around to doing anything about the injustice.

(I guess that’s better than the conservative interpretation, which seems to be that since we benefit from this, we should keep doing it, and make sure we elect big, strong leaders who will make that happen.)

So let me tell you in no uncertain words: You do not benefit from this.

If anyone does—and as I’ll get to in a moment, that is not even necessarily true—then it is the billionaires who own the multinational corporations that orchestrate these abuses. Billionaires and billionaires only stand to gain from the exploitation of workers in the US, China, and everywhere else.

How do I know this with such certainty? Allow me to explain.

First of all, it is a common perception that prices of goods would be unattainably high if they were not produced on the backs of sweatshop workers. This perception is mistaken. The primary effect of the exploitation is simply to raise the profits of the corporation; there is a secondary effect of raising the price a moderate amount; and even this would be overwhelmed by the long-run dynamic effect of the increased consumer spending if workers were paid fairly.

Let’s take an iPad, for example. The price of iPads varies around the world in a combination of purchasing power parity and outright price discrimination; but the top model almost never sells for less than $500. The raw material expenditure involved in producing one is about$370—and the labor expenditure? Just $11. Not$110; $11. If it had been$110, the price could still be kept under $500 and turn a profit; it would simply be much smaller. That is, even if prices are really so elastic that Americans would refuse to buy an iPad at any more than$500 that would still mean Apple could still afford to raise the wages they pay (or rather, their subcontractors pay) workers by an order of magnitude. A worker who currently works 50 hours a week for $10 per day could now make$10 per hour. And the price would not have to change; Apple would simply lose profit, which is why they don’t do this. In the absence of pressure to the contrary, corporations will do whatever they can to maximize profits.

Now, in fact, the price probably would go up, because Apple fans are among the most inelastic technology consumers in the world. But suppose it went up to $600, which would mean a 1:1 absorption of these higher labor expenditures into price. Does that really sound like “Americans could never afford this”? A few people right on the edge might decide they couldn’t buy it at that price, but it wouldn’t be very many—indeed, like any well-managed monopoly, Apple knows to stop raising the price at the point where they start losing more revenue than they gain. Similarly, half the price of an iPhone is pure profit for Apple, and only 2% goes into labor. Once again, wages could be raised by an order of magnitude and the price would not need to change. Apple is a particularly obvious example, but it’s quite simple to see why exploitative labor cannot be the source of improved economic efficiency. Paying workers less does not make them do better work. Treating people more harshly does not improve their performance. Quite the opposite: People work much harder when they are treated well. In addition, at the levels of income we’re talking about, small improvements in wages would result in substantial improvements in worker health, further improving performance. Finally, substitution effect dominates income effect at low incomes. At very high incomes, income effect can dominate substitution effect, so higher wages might result in less work—but it is precisely when we’re talking about poor people that it makes the least sense to say they would work less if you paid them more and treated them better. At most, paying higher wages can redistribute existing wealth, if we assume that the total amount of wealth does not increase. So it’s theoretically possible that paying higher wages to sweatshop workers would result in them getting some of the stuff that we currently have (essentially by a price mechanism where the things we want get more expensive, but our own wages don’t go up). But in fact our wages are most likely too low as well—wages in the US have become unlinked from productivity, around the time of Reagan—so there’s reason to think that a more just system would improve our standard of living also. Where would all the extra wealth come from? Well, there’s an awful lot of room at the top. The top 1% in the US own 35% of net wealth, about as much as the bottom 95%. The 400 billionaires of the Forbes list have more wealth than the entire African-American population combined. (We’re double-counting Oprah—but that’s it, she’s the only African-American billionaire in the US.) So even assuming that the total amount of wealth remains constant (which is too conservative, as I’ll get to in a moment), improving global labor standards wouldn’t need to pull any wealth from the middle class; it could get plenty just from the top 0.01%. In surveys, most Americans are willing to pay more for goods in order to improve labor standards—and the amounts that people are willing to pay, while they may seem small (on the order of 10% to 20% more), are in fact clearly enough that they could substantially increase the wages of sweatshop workers. The biggest problem is that corporations are so good at covering their tracks that it’s difficult to know whether you are really supporting higher labor standards. The multiple layers of international subcontractors make things even more complicated; the people who directly decide the wages are not the people who ultimately profit from them, because subcontractors are competitive while the multinationals that control them are monopsonists. But for now I’m not going to deal with the thorny question of how we can actually regulate multinational corporations to stop them from using sweatshops. Right now, I just really want to get everyone on the same page and be absolutely clear about cui bono. If there is a benefit at all, it’s not going to you and me. Why do I keep saying “if”? As so many people will ask me: “Isn’t it obvious that if one person gets less money, someone else must get more?” If you’ve been following my blog at all, you know that the answer is no. On a single transaction, with everything else held constant, that is true. But we’re not talking about a single transaction. We’re talking about a system of global markets. Indeed, we’re not really talking about money at all; we’re talking about wealth. By paying their workers so little that those workers can barely survive, corporations are making it impossible for those workers to go out and buy things of their own. Since the costs of higher wages are concentrated in one corporation while the benefits of higher wages are spread out across society, there is a Tragedy of the Commons where each corporation acting in its own self-interest undermines the consumer base that would have benefited all corporations (not to mention people who don’t own corporations). It does depend on some parameters we haven’t measured very precisely, but under a wide range of plausible values, it works out that literally everyone is worse off under this system than they would have been under a system of fair wages. This is not simply theoretical. We have empirical data about what happened when companies (in the US at least) stopped using an even more extreme form of labor exploitation: slavery. Because we were on the classical gold standard, GDP growth in the US in the 19th century was extremely erratic, jumping up and down as high as 10 lp and as low as -5 lp. But if you try to smooth out this roller-coaster business cycle, you can see that our growth rate did not appear tobe slowed by the ending of slavery: Looking at the level of real per capita GDP (on a log scale) shows a continuous growth trend as if nothing had changed at all: In fact, if you average the growth rates (in log points, averaging makes sense) from 1800 to 1860 as antebellum and from 1865 to 1900 as postbellum, you find that the antebellum growth rate averaged 1.04 lp, while the postbellum growth rate averaged 1.77 lp. Over a period of 50 years, that’s the difference between growing by a factor of 1.7 and growing by a factor of 2.4. Of course, there were a lot of other factors involved besides the end of slavery—but at the very least it seems clear that ending slavery did not reduce economic growth, which it would have if slavery were actually an efficient economic system. This is a different question from whether slaveowners were irrational in continuing to own slaves. Purely on the basis of individual profit, it was most likely rational to own slaves. But the broader effects on the economic system as a whole were strongly negative. I think that part of why the debate on whether slavery is economically inefficient has never been settled is a confusion between these two questions. One side says “Slavery damaged overall economic growth.” The other says “But owning slaves produced a rate of return for investors as high as manufacturing!” Yeah, those… aren’t answering the same question. They are in fact probably both true. Something can be highly profitable for individuals while still being tremendously damaging to society. I don’t mean to imply that sweatshops are as bad as slavery; they are not. (Though there is still slavery in the world, and some sweatshops tread a fine line.) What I’m saying is that showing that sweatshops are profitable (no doubt there) or even that they are better than most of the alternatives for their workers (probably true in most cases) does not show that they are economically efficient. Sweatshops are beneficent exploitationthey make workers better off, but in an obviously unjust way. And they only make workers better off compared to the current alternatives; if they were replaced with industries paying fair wages, workers would obviously be much better off still. And my point is, so would we. While the prices of goods would increase slightly in the short run, in the long run the increased consumer spending by people in Third World countries—which soon would cease to be Third World countries, as happened in Korea and Japan—would result in additional trade with us that would raise our standard of living, not lower it. The only people it is even plausible to think would be harmed are the billionaires who own our multinational corporations; and yet even they might stand to benefit from the improved efficiency of the global economy. No, you do not benefit from sweatshops. So stop feeling guilty, stop worrying so much about “checking your privilege”—and let’s get out there and do something about it. # Will robots take our jobs? JDN 2457451 I briefly discussed this topic before, but I thought it deserved a little more depth. Also, the SF author in me really likes writing this sort of post where I get to speculate about futures that are utopian, dystopian, or (most likely) somewhere in between. The fear is quite widespread, but how realistic is it? Will robots in fact take all our jobs? Most economists do not think so. Robert Solow famously quipped, “You can see the computer age everywhere but in the productivity statistics.” (It never quite seemed to occur to him that this might be a flaw in the way we measure productivity statistics.) By the usual measure of labor productivity, robots do not appear to have had a large impact. Indeed, their impact appears to have been smaller than almost any other major technological innovation. Using BLS data (which was formatted badly and thus a pain to clean, by the way—albeit not as bad as the World Bank data I used on my master’s thesis, which was awful), I made this graph of the growth rate of labor productivity as usually measured: The fluctuations are really jagged due to measurement errors, so I also made an annually smoothed version: Based on this standard measure, productivity has grown more or less steadily during my lifetime, fluctuating with the business cycle around a value of about 3.5% per year (3.4 log points). If anything, the growth rate seems to be slowing down; in recent years it’s been around 1.5% (1.5 lp). This was clearly the time during which robots became ubiquitous—autonomous robots did not emerge until the 1970s and 1980s, and robots became widespread in factories in the 1980s. Then there’s the fact that computing power has been doubling every 1.5 years during this period, which is an annual growth rate of 59% (46 lp). So why hasn’t productivity grown at anywhere near that rate? I think the main problem is that we’re measuring productivity all wrong. We measure it in terms of money instead of in terms of services. Yes, we try to correct for inflation; but we fail to account for the fact that computers have allowed us to perform literally billions of services every day that could not have been performed without them. You can’t adjust that away by plugging into the CPI or the GDP deflator. Think about it: Your computer provides you the services of all the following: 1. A decent typesetter and layout artist 2. A truly spectacular computer (remember, that used to be a profession!) 3. A highly skilled statistician (who takes no initiative—you must tell her what calculations to do) 4. A painting studio 5. A photographer 6. A video camera operator 7. A professional orchestra of the highest quality 8. A decent audio recording studio 9. Thousands of books, articles, and textbooks 10. Ideal seats at every sports stadium in the world And that’s not even counting things like social media and video games that can’t even be readily compared to services that were provided before computers. If you added up the value of all of those jobs, the amount you would have had to pay in order to hire all those people to do all those things for you before computers existed, your computer easily provides you with at least$1 million in professional services every year. Put another way, your computer has taken jobs that would have provided $1 million in wages. You do the work of a hundred people with the help of your computer. This isn’t counted in our productivity statistics precisely because it’s so efficient. If we still had to pay that much for all these services, it would be included in our GDP and then our GDP per worker would properly reflect all this work that is getting done. But then… whom would we be paying? And how would we have enough to pay that? Capitalism isn’t actually set up to handle this sort of dramatic increase in productivity—no system is, really—and thus the market price for work has almost no real relation to the productive capacity of the technology that makes that work possible. Instead it has to do with scarcity of work—if you are the only one in the world who can do something (e.g. write Harry Potter books), you can make an awful lot of money doing that thing, while something that is far more important but can be done by almost anyone (e.g. feed babies) will pay nothing or next to nothing. At best we could say it has to do with marginal productivity, but marginal in the sense of your additional contribution over and above what everyone else could already do—not in the sense of the value actually provided by the work that you are doing. Anyone who thinks that markets automatically reward hard work or “pay you what you’re worth” clearly does not understand how markets function in the real world. So, let’s ask again: Will robots take our jobs? Well, they’ve already taken many jobs already. There isn’t even a clear high-skill/low-skill dichotomy here; robots are just as likely to make pharmacists obsolete as they are truck drivers, just as likely to replace surgeons as they are cashiers. Labor force participation is declining, though slowly: Yet I think this also underestimates the effect of technology. As David Graeber points out, most of the new jobs we’ve been creating seem to be for lack of a better term bullshit jobs—jobs that really don’t seem like they need to be done, other than to provide people with something to do so that we can justify paying them salaries. As he puts it: Again, an objective measure is hard to find, but one easy way to get a sense is to ask: what would happen were this entire class of people to simply disappear? Say what you like about nurses, garbage collectors, or mechanics, it’s obvious that were they to vanish in a puff of smoke, the results would be immediate and catastrophic. A world without teachers or dock-workers would soon be in trouble, and even one without science fiction writers or ska musicians would clearly be a lesser place. It’s not entirely clear how humanity would suffer were all private equity CEOs, lobbyists, PR researchers, actuaries, telemarketers, bailiffs or legal consultants to similarly vanish. (Many suspect it might markedly improve.) The paragon of all bullshit jobs is sales. Sales is a job that simply should not exist. If something is worth buying, you should be able to present it to the market and people should choose to buy it. If there are many choices for a given product, maybe we could have some sort of independent product rating agencies that decide which ones are the best. But sales means trying to convince people to buy your product—you have an absolutely overwhelming conflict of interest that makes your statements to customers so utterly unreliable that they are literally not even information anymore. The vast majority of advertising, marketing, and sales is thus, in a fundamental sense, literally noise. Sales contributes absolutely nothing to our economy, and because we spend so much effort on it and advertising occupies so much of our time and attention, takes a great deal away. But sales is one of our most steadily growing labor sectors; once we figure out how to make things without people, we employ the people in trying to convince customers to buy the new things we’ve made. Sales is also absolutely miserable for many of the people who do it, as I know from personal experience in two different sales jobs that I had to quit before the end of the first week. Fortunately we have not yet reached the point where sales is the fastest growing labor sector. Currently the fastest-growing jobs fall into three categories: Medicine, green energy, and of course computers—but actually mostly medicine. Yet even this is unlikely to last; one of the easiest ways to reduce medical costs would be to replace more and more medical staff with automated systems. A nursing robot may not be quite as pleasant as a real professional nurse—but if by switching to robots the hospital can save several million dollars a year, they’re quite likely to do so. Certain tasks are harder to automate than others—particularly anything requiring creativity and originality is very hard to replace, which is why I believe that in the 2050s or so there will be a Revenge of the Humanities Majors as all the supposedly so stable and forward-thinking STEM jobs disappear and the only jobs that are left are for artists, authors, musicians, game designers and graphic designers. (Also, by that point, very likely holographic designers, VR game designers, and perhaps even neurostim artists.) Being good at math won’t mean anything anymore—frankly it probably shouldn’t right now. No human being, not even great mathematical savants, is anywhere near as good at arithmetic as a pocket calculator. There will still be a place for scientists and mathematicians, but it will be the creative aspects of science and math that persist—design of experiments, development of new theories, mathematical intuition to develop new concepts. The grunt work of cleaning data and churning through statistical models will be fully automated. Most economists appear to believe that we will continue to find tasks for human beings to perform, and this improved productivity will simply raise our overall standard of living. As any ECON 101 textbook will tell you, “scarcity is a fundamental fact of the universe, because human needs are unlimited and resources are finite.” In fact, neither of those claims are true. Human needs are not unlimited; indeed, on Maslow’s hierarchy of needs First World countries have essentially reached the point where we could provide the entire population with the whole pyramid, guaranteed, all the time—if we were willing and able to fundamentally reform our economic system. Resources are not even finite; what constitutes a “resource” depends on technology, as does how accessible or available any given source of resources will be. When we were hunter-gatherers, our only resources were the plants and animals around us. Agriculture turned seeds and arable land into a vital resource. Whale oil used to be a major scarce resource, until we found ways to use petroleum. Petroleum in turn is becoming increasingly irrelevant (and cheap) as solar and wind power mature. Soon the waters of the oceans themselves will be our power source as we refine the deuterium for fusion. Eventually we’ll find we need something for interstellar travel that we used to throw away as garbage (perhaps it will in fact be dilithium!) I suppose that if the universe is finite or if FTL is impossible, we will be bound by what is available in the cosmic horizon… but even that is not finite, as the universe continues to expand! If the universe is open (as it probably is) and one day we can harness the dark energy that seethes through the ever-expanding vacuum, our total energy consumption can grow without bound just as the universe does. Perhaps we could even stave off the heat death of the universe this way—we after all have billions of years to figure out how. If scarcity were indeed this fundamental law that we could rely on, then more jobs would always continue to emerge, producing whatever is next on the list of needs ordered by marginal utility. Life would always get better, but there would always be more work to be done. But in fact, we are basically already at the point where our needs are satiated; we continue to try to make more not because there isn’t enough stuff, but because nobody will let us have it unless we do enough work to convince them that we deserve it. We could continue on this route, making more and more bullshit jobs, pretending that this is work that needs done so that we don’t have to adjust our moral framework which requires that people be constantly working for money in order to deserve to live. It’s quite likely in fact that we will, at least for the foreseeable future. In this future, robots will not take our jobs, because we’ll make up excuses to create more. But that future is more on the dystopian end, in my opinion; there is another way, a better way, the world could be. As technology makes it ever easier to produce as much wealth as we need, we could learn to share that wealth. As robots take our jobs, we could get rid of the idea of jobs as something people must have in order to live. We could build a new economic system: One where we don’t ask ourselves whether children deserve to eat before we feed them, where we don’t expect adults to spend most of their waking hours pushing papers around in order to justify letting them have homes, where we don’t require students to take out loans they’ll need decades to repay before we teach them history and calculus. This second vision is admittedly utopian, and perhaps in the worst way—perhaps there’s simply no way to make human beings actually live like this. Perhaps our brains, evolved for the all-too-real scarcity of the ancient savannah, simply are not plastic enough to live without that scarcity, and so create imaginary scarcity by whatever means they can. It is indeed hard to believe that we can make so fundamental a shift. But for a Homo erectus in 500,000 BP, the idea that our descendants would one day turn rocks into thinking machines that travel to other worlds would be pretty hard to believe too. Will robots take our jobs? Let’s hope so. # Tax incidence revisited, part 2: How taxes affect prices JDN 2457341 One of the most important aspects of taxation is also one of the most counter-intuitive and (relatedly) least-understood: Taxes are not externally applied to pre-existing exchanges of money. Taxes endogenously interact with the system of prices, changing what the prices will be and then taking a portion of the money exchanged. The price of something “before taxes” is not actually the price you would pay for it if there had been no taxes on it. Your “pre-tax income” is not actually the income you would have had if there were no income or payroll taxes. The most obvious case to consider is that of government employees: If there were no taxes, public school teachers could not exist, so the “pre-tax income” of a public school teacher is a meaningless quantity. You don’t “take taxes out” of a government salary; you decide how much money the government employee will actually receive, and then at the same time allocate a certain amount into other budgets based on the tax code—a certain amount into the state general fund, a certain amount into the Social Security Trust Fund, and so on. These two actions could in principle be done completely separately; instead of saying that a teacher has a “pre-tax salary” of$50,000 and is taxed 20%, you could simply say that the teacher receives $40,000 and pay$10,000 into the appropriate other budgets.

In fact, when there is a conflict of international jurisdiction this is sometimes literally what we do. Employees of the World Bank are given immunity from all income and payroll taxes (effectively, diplomatic immunity, though this is not usually how we use the term) based on international law, except for US citizens, who have their taxes paid for them by the World Bank. As a result, all World Bank salaries are quoted “after-tax”, that is, the actual amount of money employees will receive in their paychecks. As a result, a $120,000 salary at the World Bank is considerably higher than a$120,000 salary at Goldman Sachs; the latter would only (“only”) pay about $96,000 in real terms. For private-sector salaries, it’s not as obvious, but it’s still true. There is actually someone who pays that “before-tax” salary—namely, the employer. “Pre-tax” salaries are actually a measure of labor expenditure (sometimes erroneously called “labor costs”, even by economists—but a true labor cost is the amount of effort, discomfort, stress, and opportunity cost involved in doing labor; it’s an amount of utility, not an amount of money). The salary “before tax” is the amount of money that the employer has to come up with in order to pay their payroll. It is a real amount of money being exchanged, divided between the employee and the government. The key thing to realize is that salaries are not set in a vacuum. There are various economic (and political) pressures which drive employers to set different salaries. In the real world, there are all sorts of pressures that affect salaries: labor unions, regulations, racist and sexist biases, nepotism, psychological heuristics, employees with different levels of bargaining skill, employers with different concepts of fairness or levels of generosity, corporate boards concerned about public relations, shareholder activism, and so on. But even if we abstract away from all that for a moment and just look at the fundamental economics, assuming that salaries are set at the price the market will bear, that price depends upon the tax system. This is because taxes effectively drive a wedge between supply and demand. Indeed, on a graph, it actually looks like a wedge, as you’ll see in a moment. Let’s pretend that we’re in a perfectly competitive market. Everyone is completely rational, we all have perfect information, and nobody has any power to manipulate the market. We’ll even assume that we are dealing with hourly wages and we can freely choose the number of hours worked. (This is silly, of course; but removing this complexity helps to clarify the concept and doesn’t change the basic result that prices depend upon taxes.) We’ll have a supply curve, which is a graph of the minimum price the worker is willing to accept for each hour in order to work a given number of hours. We generally assume that the supply curve slopes upward, meaning that people are willing to work more hours if you offer them a higher wage for each hour. The idea is that it gets progressively harder to find the time—it eats into more and more important alternative activities. (This is in fact a gross oversimplification, but it’ll do for now. In the real world, labor is the one thing for which the supply curve frequently bends backward.) We’ll also have a demand curve, which is a graph of the maximum price the employer is willing to pay for each hour, if the employee works that many hours. We generally assume that the demand curve slopes downward, meaning that the employer is willing to pay less for each hour if the employee works more hours. The reason is that most activities have diminishing marginal returns, so each extra hour of work generally produces less output than the previous hour, and is therefore not worth paying as much for. (This too is an oversimplification, as I discussed previously in my post on the Law of Demand.) Put these two together, and in a competitive market the price will be set at the point at which supply is equal to demand, so that the very last hour of work was worth exactly what the employer paid for it. That last hour is just barely worth it to the employer, and just barely worth it to the worker; any additional time would either be too expensive for the employer or not lucrative enough for the worker. But for all the previous hours, the value to the employer is higher than the wage, and the cost to the worker is lower than the wage. As a result, both the employer and the worker benefit. But now, suppose we implement a tax. For concreteness, suppose the previous market-clearing wage was$20 per hour, the worker was working 40 hours, and the tax is 20%. If the employer still offers a wage of $20 for 40 hours of work, the worker is no longer going to accept it, because they will only receive$16 per hour after taxes, and $16 isn’t enough for them to be willing to work 40 hours. The worker could ask for a pre-tax wage of$25 so that the after-tax wage would be $20, but then the employer will balk, because$25 per hour is too expensive for 40 hours of work.

In order to restore the balance (and when we say “equilibrium”, that’s really all we mean—balance), the employer will need to offer a higher pre-tax wage, which means they will demand fewer hours of work. The worker will then be willing to accept a lower after-tax wage for those reduced hours.

In effect, there are now two prices at work: A supply price, the after-tax wage that the worker receives, which must be at or above the supply curve; and a demand price, the pre-tax wage that the employer pays, which must be at or below the demand curve. The difference between those two prices is the tax.

In this case, I’ve set it up so that the pre-tax wage is $22.50, the after-tax wage is$18, and the amount of the tax is $4.50 or 20% of$22.50. In order for both the employer and the worker to accept those prices, the amount of hours worked has been reduced to 35.

As a result of the tax, the wage that we’ve been calling “pre-tax” is actually higher than the wage that the worker would have received if the tax had not existed. This is a general phenomenon; it’s almost always true that your “pre-tax” wage or salary overestimates what you would have actually gotten if the tax had not existed. In one extreme case, it might actually be the same; in another extreme case, your after-tax wage is what you would have received and the “pre-tax” wage rises high enough to account for the entirety of the tax revenue. It’s not really “pre-tax” at all; it’s the after-tax demand price.

Because of this, it’s fundamentally wrongheaded for people to complain that taxes are “taking your hard-earned money”. In all but the most exceptional cases, that “pre-tax” salary that’s being deducted from would never have existed. It’s more of an accounting construct than anything else, or like I said before a measure of labor expenditure. It is generally true that your after-tax salary is lower than the salary you would have gotten without the tax, but the difference is generally much smaller than the amount of the tax that you see deducted. In this case, the worker would see $4.50 per hour deducted from their wage, but in fact they are only down$2 per hour from where they would have been without the tax. And of course, none of this includes the benefits of the tax, which in many cases actually far exceed the costs; if we extended the example, it wouldn’t be hard to devise a scenario in which the worker who had their wage income reduced received an even larger benefit in the form of some public good such as national defense or infrastructure.