A MARXIST REBELLION?
Given the outpouring of electoral angst in the most recent political cycle in America, much has been made of the economic decline of great swaths of the American workforce. While economic activity in aggregate is fairly robust, the distribution of economic gains has been uneven. Further, economic output has recently not grown as rapidly as it has historically, leading to a disparity between outcomes and expectations. This has given rise to an endemic sense of discontentment in much of the country, particularly in the Trump leaning states of the industrial heartland.
Academia posits various theories regarding the growth & distribution characteristics of the American economy. This literature is supplemented by populist explanations on both sides of the political aisle. Certainly, the political rhetoric is seldom grounded in theory, and is often at odds with it. Nevertheless, it appears that the populist interpretations have prevailed of late. To briefly enumerate: an influx of migrant labor, unfair trade practices, corporate cost cutting, pseudo climate change science, and automation, have variously been cited.
Of these, one factor, automation, appears to us to be the most salient. And this is what we wish to devote the rest of this discussion to. However, automation is not a recent phenomenon. It has been a recurring protagonist in economic theory going all the way back to Adam Smith at the dawn of Britain’s great industrial revolution, with the introduction of the spinning jenny and the steam engine. Karl Marx, as it to be expected, was the most prescient observer of the antagonism between machine and man. We quote from his many volumes on Capital:
“The division of labor develops this labor-power in a one-sided way, by reducing it to the highly particularized skill of handling a special tool. When it becomes the job of the machine to handle this tool, the use-value of the worker’s labor-power vanishes, and with it its exchange-value. The worker becomes unsaleable, like paper money thrown out of currency by legal enactment. The section of the working class thus rendered superfluous by machinery, i.e. converted into a part of the population no longer directly necessary for the self-valorization of capital, either goes under in the unequal context between the old handicraft and manufacturing production and the new machine production, or else floods all the more easily accessible branches of industry, swamps the labor-market, and makes the prices of labor-power fall below its value…When machinery seizes on an industry by degrees, it produces chronic misery among the workers who compete with it. Where the transition is rapid, the effect is acute and is felt by great masses of people.”
BY THE BOOTSTRAPS
Marx is correct in his assessment of the inevitable conflict between machine and labor, or, more broadly stated, that between capital and labor. However, it is equally true that capital accumulation, in the form of increasing mechanization, has brought great advantages to society, accruing not just to the capitalists but also to labor in a far-reaching way. Standards of living have improved in many many tangible & intangible ways. Indeed, the pauper of today arguably has more surety against disease & misfortune than the greatest kings of medieval Europe. Therefore, it is the natural state of humanity to employ tools & technology in increasing magnitude, and this process must be allowed to continue. In fact, this is among our most cherished beliefs at The Neanderthal, and we thus wish to declare our ideological stripes on the matter at the outset.
That said, the Marxian question of the trade-off between labor and capital still stands. The economic dialectic between the two forces is immensely complex, and despite our editorial conviction on the matter, the set of potential theoretical outcomes is not unequivocally sanguine. This question has demanded a response in each new economic area, with updated evidence and theory. We attempt to do so here for our own modern machine age, which is now imminent.
In fact, we believe that the urgency of answering this question is greater in our present time than ever before. Because for the first time, technology offers us the possibility of the wholesale elimination of most forms of labor from the production process. The work of both muscle & mind can now be replicated with astonishing precision & effectiveness by the machines, and their abilities compound super-linearly. To put it another way, we might be at a point in the technological curve where we are inflecting from linear to exponential gains, with far reaching consequences. To put it in mathematical terms, we might be approaching a Cobb-Douglas production function with the output elasticity on labor well near zero.
Imagine a world where machines can manufacture our cars, serve our food, cure our ailments, comfort our aged, and write our literature. What does a world look like where labor is no longer necessary? Let us examine closely.
NOTHING TO LOSE, NOT EVEN THEIR CHAINS
Labor of mind & muscle is the only economic resource innate to every individual. Non-labor economic resources include land, capital stock, and technology, which may all broadly be classified as capital. The defining feature of capitalism in the modern age is that capital is not innate to individuals; it can only be acquired by sweat of the brow over time. By renting their minds & muscle to economic processes, individuals can accumulate wealth beyond mere subsistence wages, and then deploy this wealth back into the economy as capital. However, in our envisioned hypothetical world in the extreme, labor has absolutely no purpose in the production process. In such a world, without the initial opportunity for participation in the economy, an individual cannot accrue any capital.
Therefore, the primary outcome of the annulment of labor is that an individual may literally have no means at all of survival. Historically, at least land was a communal resource that could be tilled by individuals for some measure of subsistence. By over the years, even land has gradually fallen into private hands, as happened in England through each successive Enclosure Act.
A secondary outcome of exponential technological progress is that the usual dictum of diminishing returns to scale might be turned on its head. Diminishing returns are what keep the economic playing field somewhat level, that allow new competitive entry into established industries. For instance, soil can be made more productive through the application of modern farming techniques & fertilizer, but beyond a certain threshold yields peter out (asymptotically approach some structural ceiling). In other words, as the old saw goes, trees do not grow to the sky. In the specific cases where returns do not diminish with scale, as with natural monopolies, most countries have instituted legislative mechanisms to provide some guardrails. However, if returns to scale accelerate, as is possible with technology, then governments around the world will have a hard time ensuring adequate competition, and economic gains will be increasingly unevenly distributed, even within the capital owning strata of society.
The end-result of these two outcomes is that society will increasingly bifurcate between capitalists and laborers, with the capital-owning incumbents firmly & unassailably entrenched, and in fact with an escalation of disparity even within the capitalist strata. While Marx conjectured that capitalists grow rich by siphoning off the surplus value of labor, in our modern-day hypothetical capital would have no need for labor. Capitalists would generate their very own surplus value through the escalating compounding of technological advancement.
Or perhaps more realistically, only an extremely small sliver of humanity would have sufficient labor value to be of use to incumbent capitalists. Such utter foreclosure of labor is indeed a Ricardian caricature, but it is very much within the realm of possibility. This has already occurred for certain segments of the working population. Were the economic forces of the system to propagate unhindered, the world would surely approach our conjectured state.
YET SOMETHING TO GAIN
However, economic forces do not operate in a vacuum. Social & political factors are major influences on the economy, and in fact there is a feedback loop between these. Clearly as we have seen in the US Presidential election, social agents can band together to influence the economic trajectory of the country. In other words, labor is not a mute observer, and will not idly bear witness to its own foreclosure.
While labor certainly can swing elections, capital is not a silent bystander either. Though capital does not have a preponderance of votes (under the American system of one vote per person), it does have alternate means of influence. Therefore, while labor votes at the polling both, capital votes at K Street.
We live in a world with a great degree of ongoing government intervention in the economy. We at The Neanderthal lean towards favoring private enterprise as the most efficient mode of economic organization. That said, while the primacy of private enterprise is sacrosanct, government does have a necessary role to play. Because government already places a heavy hand on the scale through taxation, we recognize that changes in the tax regime can have substantial & immediate economic impact. Therefore, we formulate certain tax-based policy prescriptions to steer us through our changing economic times. We supplement these with certain social prescriptions.
Our editorial goal, as always, is to maximize aggregate utility. While preserving, as much as possible, pareto optimality at every intermediate step.
1. Our primary policy prescription is that the tax on labor must be zero. If an individual is willing & able to contribute sweat to the national economy, he should not be penalized for it. In other words, there should be no individual income tax on labor income. Because capital is increasingly preponderant, government’s share of economic surplus must be derived from capital.
However, by this we do not mean that labor should be subsidized. While in the extreme case of our above stated hypothetical, where labor is completely foreclosed, that may be necessary; but we would proffer labor subsidization only as a last resort.
2. Secondly, a progressive tax on capital must be imposed. All capital stock, whether owned at the corporate or individual level, must be taxed annually. Like real estate taxes on private homes, corporate machine stock must also be taxed. In other words, corporations must be taxed not only on their income statement earnings, but also on their balance sheet assets. The greater the amount of capital employed in a business, the greater the magnitude of annual tax burden.
Alternately, under the American system currently, depreciation of capital is a deduction to corporate income, which decreases the tax burden on capital. In the future, it may be necessary to eliminate the tax deductibility of depreciation.
In either case, a very delicate balance must be struck, such that just enough rent seeking is allowed to encourage innovation but no more. Increasing returns to scale must be tolerated to the maximum extent possible, but only if the economic surplus is plowed back into the economy through investment & research & employment.
A tax on capital would greatly compensate for the elimination of taxes on labor income. And it would vastly alter the calculus of relative attractiveness between labor & capital in economic production.
3. Thirdly, a certain measure of social insurance must be provided against poverty & disease. This insurance must be so scant, however, that it constitutes no disincentive to labor participation. With a great degree of technological & capital stock in the economy, basic food items will eventually have zero marginal cost of production – these must be guaranteed to every individual. The administration of healthcare will also become cheaper over time – a certain measure of preventative & curative medicine must also be offered to every man, woman, & child.
4. Fourthly, government must provide low-cost financing for individual education. To the extent that education improves the probability of employment, it must be encouraged in every possible way. This goes to the dictum of teaching a man to fish, but the cost of the education must not be borne by the state, the state must merely serve as lender of last resort.
5. Fifthly, forums for civic engagement must be strengthened, or built where not present. Because increasing capital stock will lead to a bifurcation of wealth levels, means must be found to encourage social cohesion despite the splintering effects of wealth stratification.
6. Sixthly, society must reach a well-informed consensus on the right level of population growth. Families must be educated & encouraged to have only as many children as can be supported by the national capital stock. As the capital stock grows over time, society’s capacity for social & welfare services will grow.
7. Seventhly, and lastly, the balance between capital & labor must be constantly measured, and the tax regime suggested above must be fine-tuned periodically to ensure that some parity is maintained between these two factions.
CONCLUSION: WE ARE NOT MARXISTS
While capital formation and the capitalist instinct are central to human progress, we must ensure that this progress does indeed accrue to humanity, and not just humanity narrowly but broadly. Capital holds the possibility of more economic output with less effort, indeed capital has the potential to liberate humans from labor, and it has certainly delivered on that promise for millennia. In fact, we will conjecture that if capital formation had been more rapid, if the mechanical harvester had been invented in the 17th century, America might have avoided its unfortunate entanglement with the institution of slavery.
However, despite its potential for good, capital can also be an adversary to labor, as the Luddites of 19th century England discovered. Therefore, instead of embracing it, they rebelled against the very means of their eventual liberation.
Let us make sure that this time around we have no need for a Luddite insurrection, that we do not engender a disenfranchised Marxist underclass, and that capital is unmistakably our friend not foe.
PS Happy birthday America! The best is yet to come!
04 July 2017