Thursday, November 10, 2011

Deus ex machina in economics

Deus ex machina refers to a plot device in plays or stories, where a sudden solution emerges seemingly out of the sky to solve particularly perplexing problem in the story’s events. For the economic story and unemployment problem, the “machina” part becomes quite literal. When in doubt, blame machines and technology.

Back in the roaring 2000s, Mankiw posted this brief explanation of technology and inequality:

“1. There is little doubt that U.S. income inequality has been increasing for the past three decades. (The trend in world inequality is very different.) Most economists who study the topic attribute the trend primarily to changes in technology that reward skilled workers relative to unskilled workers. Education and other skills are more valuable now than they were in the past.”

That certainly fits in swimmingly with the standard neoclassical recipe- preferences, factor endowments, and technology- but should we really be blaming our income inequality and high unemployment on schools and machines? Exactly how does this work?

On Mankiw’s blog, he recently added some comments on his “it’s education, stupid” stance mentioned in our last post, with some words from economist Erik Brynjolfsson. Stagnation via technology is the premise of a new e-book by Brynjolfsson and Andrew McAfee entitled “Race Against the Machine”.  The authors claim that the digital age, with increasingly sophisticated computer usage and expansion in communications tools, has had a distinctly different effect on the economy than other periods of technical change. Instead of creating more jobs than it destroys, the digital form of mechanization has given us a net decrease in jobs by taking over much of the work. Maybe more importantly, the benefits of increased productivity are more likely to be unevenly distributed in favor of those “superstars” which the technology favors.

While Brynjolfsson and McAffee still pick focus on workers' skills not keeping pace with technology, the second part of their premise actually offers a much more in depth story as to exactly why technology may enhance inequality. Turns out, the authors claim that our social institutions that govern things like distribution of wealth have not kept up with these rapid changes in technology. Although the authors pick up the "blame the victim" rhetoric, I would argue against their claim that workers' skills are not keeping up with technical change, since of course, educational institutions and human capital investment are socially determined just like any other social institution. That means that ameliorating supposed skills mismatch through education doesn't work unless you radically alter the educational system itself, to something equitable and attainable. (In fact, education too may exacerbate inequality.)

Building on part of their argument then, it’s not education, technology, or inefficient workers; it’s inefficient and outdated institutions that have led to the divergence in income levels over the past several decades. 

The most introductory and famous example of sticky, inefficient institutions can be found in Paul David’s famous paper noting the presence of inefficient institutions, showing how the standard QWERTY keyboard layout caught on despite being slower than other options. So maybe institutionalized inequality, perpetuated in part by the logic and rhetoric of mainstream neoclassical economics, is a part of our inefficient and clunky distribution system that allows technology to exacerbate wealth and income inequality. 

In the story of unemployment then, machines and even education can no longer be our economic scapegoats. Instead, we should recognize it’s the social institutions that constitute our economy that should be of real concern. Let's start going to the root of the problem.

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