WHERE IS THE MONEY GOING?



What can explain this shift? One hypothesis is: China. The recent entry of China into the global trading system basically doubled the labor force available to multinational companies. When labor becomes more plentiful, the return to labor goes down. In a world flooded with cheap Chinese labor, capital becomes relatively scarce, and its share of income goes up. As China develops, this effect should go away, as China builds up its own capital stock. This is probably already happening.

But there is another, more sinister explanation for the change. In past times, technological change always augmented the abilities of human beings. A worker with a machine saw was much more productive than a worker with a hand saw. The fears of "Luddites," who tried to prevent the spread of technology out of fear of losing their jobs, proved unfounded. But that was then, and this is now. Recent technological advances in the area of computers and automation have begun to do some higher cognitive tasks - think of robots building cars, stocking groceries, doing your taxes.



Once human cognition is replaced, what else have we got? For the ultimate extreme example, imagine a robot that costs $5 to manufacture and can do everything you do, only better. You would be as obsolete as a horse.

Now, humans will never be completely replaced, like horses were. Horses have no property rights or reproductive rights, nor the intelligence to enter into contracts. There will always be something for humans to do for money. But it is quite possible that workers' share of what society produces will continue to go down and down, as our economy becomes more and more capital-intensive. This possibility is increasingly the subject of discussion among economists. Erik Brynjolfsson has written a book about it, and economists like Paul Krugman and Tyler Cowen are talking about it more and more (for those of you who are interested, here is a huge collection of links, courtesy of blogger Izabella Kaminska). In the academic literature, the theory goes by the name of "capital-biased technological change."

The big question is: What do we do if and when our old mechanisms for coping with inequality break down? If the "endowment of human capital" with which people are born gets less and less valuable, we'll get closer and closer to that Econ 101 example of a world in which the capital owners get everything. A society with cheap robot labor would be an incredibly prosperous one, but we will need to find some way for the vast majority of human beings to share in that prosperity, or we risk the kinds of dystopian outcomes that now exist only in science fiction.

REDISTRIBUTION AGAINST THE MACHINE



How do we fairly distribute income and wealth in the age of the robots?

The standard answer is to do more income redistribution through the typical government channels - Earned Income Tax Credit, welfare, etc. That might work as a stopgap, but if things become more severe, we'll run into a lot of political problems if we lean too heavily on those tools. In a world where capital earns most of the income, we will have to get more creative.