Economy Kushay's Matter Bank

[AK] How Advancement in Technology Worsens Inequality

This note will discuss three theories (and it’s rebuttals) explaining why some people are getting richer and some people are getting poorer because of advancements in technology.

1. Automation

As technology advances, more manual jobs are going to be replaced by artificial intelligence and robots, which are much less capital intensive than human labor. These robots and AIs which are mostly the private property of capitalists will deprive working class people of their desperately needed jobs. And since not everyone has the access to education in engineering and informatics, wealth will be more concentrated on the already wealthy.

More specifically, automation will result in the “hollowing of the middle class”. Jobs like manufacturing, clerical work which provides middle class pay is replaced by robots, but high-pay jobs such as data analysts, engineers etc. is helped WITH the existence of robots, and low-paying jobs like being a janitor, waiter etc. which is really hard to automate would still exist.

The evidence used to prove this point is a graph that shows that while productivity (the economic output given a number of hours) still rises, while employment lowers. In the past the two lines tend to get close to each other but beginning in 2000 it began to diverge.

Critics to this point argues that the current phenomenon is merely temporary as the workforce adjusts their skills. For example, 41% of US workforce is in agriculture in 1900 while only 2% of them are left in 2000. The overall job growth in the century, however, remains positive. Moreover, they also criticize the graph by saying that you cannot isolate automation as the only factor behind this phenomenon. Things like global financial crisis, trading events, etc. might also take a part in it.

2. Supermanager theory

Proposed by Thomas Piketty in his book “Capital in the Twenty-First Century”, the supermanager theory attributes rising equality to the unjustifiably high wages for the people he call ‘supermanagers’ (corporate executive, etc.). He argues that because of “pay-setting institutions and corporate governance” in the status quo, it is very hard to find in the data any link between pay and performance.

Another central point of his book is the simple statement r > g, where r is the average return on capital and g is the economic growth rate. When the rate of return on capital exceeds the growth rate, then the money that rich people make from their wealth piles up while wages rise more slowly if at all.

The implications of this should be frightening for anyone who believes in a merit-based system. It means we are in danger of entering into an era that is socially and politically dominated by those with vast amounts of inherited wealth. In which people’s lives and fates are determined by their inheritance and not their talents or professional achievements.

3. Superstar theory

Coined by Erik Brynjolfsson, is the idea that is the technology-driven economy greatly favors a small group of successful individuals by amplifying their talent and luck, and dramatically increasing their rewards.

Brynjolfsson argues that these people are benefiting from a winner-take-all effect. For example, breakthroughs as motion pictures, radio, and TV had greatly broadened the audiences—and hence the rewards—for those in show business and sports.

Thirty years later, Brynjolfsson sees a similar effect for high-tech entrepreneurs, whose ideas and products can be widely distributed and produced thanks to software and other digital technologies. Why hire a local tax consultant when you can use a cheap, state-of-the-art program that is constantly being updated and refined? Likewise, why buy a second-best program or app? The ability to copy software and distribute digital products anywhere means customers will buy the top one. Why use a search engine that is almost as good as Google?

Such economic logic now rules a growing share of the marketplace; it is, according to Brynjolfsson, an increasingly important reason why a few entrepreneurs, including the founders of such startups as Instagram, are growing rich at a staggering rate. The biggest economic winners will not be those owning conventional capital but, instead, those with the ideas behind innovative new products and successful business models.

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