Economists Don't Know Much About the Economy, #46,523: The Story of the Robots

The public's confidence in economists was rightly shaken by the fact that almost no economists recognized the housing bubble and the damage that would be caused by its collapse. We still don't know the full cost of this failure, but the latest projections from the Congressional Budget Office imply lost output of more than $17 trillion (at $50,000 per person) through 2025. And that is apart from the lives that have been ruined due to unemployment and the loss of homes.

Given this track record, it is not surprising to find economists spinning tales of robots and the development of technology that don't make sense. An often repeated story from economists is that technology is displacing jobs that had paid a middle-class wage. In this story, we see fewer middle-class jobs, and therefore a shrinking middle class. Most workers are left to compete for low-end jobs, driving down the wages in already low-paying occupations. This leads to a redistribution of income from workers to the people who own the technology.

There is both a small and big problem with this story. The smaller problem is that the "hollowing out of the middle" story doesn't seem to fit the data. The only occupations that have been seeing a substantial growth in their share of the labor market have been those at bottom end. Occupations at both the middle and top end of the labor market have seen a decline in their share of total employment in this century.

But this is the less important problem with the story of a redistribution to the people who own the technology. The more important problem is that "owning" a technology is not an economic relationship, but rather a legal one. If we are seeing a redistribution to the owners of technology it is because we have written laws that give strong ownership claims, not because of the technology.

If this sounds confusing, think about how Bill Gates gets rich from owning Windows and other software programs. He has copyright and patent protection for these programs. If people were to use these programs without paying him a licensing fee, Gates could use the legal system to sue for damages. If they continued to use these programs without his permission, Gates could have them thrown in jail.

The same story applies with most other areas of technology. New drugs sell for treating diseases like cancer and Hepatitis C sells for tens or hundreds of thousands of dollars for a treatment because of patent monopolies. Without government patent monopolies, we could be getting most new drugs for ten or twenty dollars per prescription.

Patent and copyright protection are not laws of nature, they come from the government. And in recent years we have been making them stronger and longer. As a result, these forms of protection apply to a much wider range of products, which means the products of technology cost us much more money.

In the absence of these protections, we might all look forward to paying a few dollars for the robots that will clean our houses, cook our food, and drive us wherever we want to go. Low cost robots would make almost all of us richer. Only if the government imposes patent monopolies that keep robots expensive do we have to worry about a redistribution from the rest of us to those who "own" the technology.

There is an argument for why we might want stronger and longer patent and copyright protections, in spite of the distributional consequences. The story would be that by giving people more incentive to develop new technologies, we will all benefit from more rapid economic growth.

While this is a plausible argument, there are two important points to be made in response. First, one would look in vain for the economic research showing that the strengthening of these protections in the last thirty-five years has been a net boost to the economy. We know that we have raised the cost of computers, medical equipment, drugs, software and thousands of other items with these protections. The evidence that the boost to innovation has been more than offsetting is at best weak.

The other point is that even if we could make the case that the additional innovation has justified the costs, this would still mean that policy, not technology, was driving inequality. If stronger and longer patent and copyright protections really do have a payoff in more rapid growth, albeit with a byproduct of higher inequality, then we would have to recognize that inequality was policy driven, not the result of technology. We may decide that the inequality was worth the benefits in more rapid growth, but we can't escape the fact that the government gave us the inequality, not the technology.


This has been reposted from The Huffington Post.

Posted In: Allied Approaches, From CEPR Co-Director Dean Baker