Guest Post: The Second Machine Age Book Review Part I

This guest post was contributed by Richard Serlin, who teaches personal finance at the University of Arizona and is president and co-founder of National Personal Finance Education. Serlin blogs at richardhserlin.blogspot.com. Serlin will be reviewing The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew MacAfee in a series of guest posts.

I will right away get to the crux of the book, for me, and perhaps most people, and then do a beginning-to-end review over multiple posts that will refer back to this crux again and again.

The crux is, Will the explosion in computer/robot/machine ability result in mass unemployment this time, even though previous technological revolutions haven't? If yes, why? If no, why?

With my primary career in personal finance, this an issue I've worked hard to understand. Because there is a very real possibility of massive unemployment, and/or non-livable market wages. And I really do mean non-livable, like not even enough money to buy enough food to stay alive. There potentially are a huge number of jobs today that computers/robots will be able to do over the next generation at a comparative cost of pennies per hour, or less.

So, I will attempt to answer this big question, using much of what Brynjolfsson and MacAfee say in The Second Machine Age, as well as in their first book on these issues, Race with the Machine, which I also carefully read cover-to-cover. The authors don't directly say what will follow. This is my interpretation, or my interpretation of what they are saying combined with some of my own thinking.

We start with the classical L-shaped production function, which I think is especially instructive. Anyone who's taken beginning, or perhaps intermediate, microeconomics has seen this:

The graph has two inputs of production, labeled Z1 and Z2. I'm going to consider Z1 to be units of labor, specifically unskilled (or low skilled) workers, and Z2 to be a package of other – complementary – inputs. This package includes machines, buildings, and other physical capital, but also skilled labor.

So, for example, one unit of Z1 might be 1,000 unskilled workers. One unit of Z2 might be 800,000 square feet of facility, 400 machines, 500 robots,…, and 300 skilled workers: engineers, advanced technicians, MBA's, CPA's, etc.

Now, let's assume that there are two choices of production processes in the world to make use of raw materials. There's the one above – the ultra-high output one. And, there's using only unskilled labor (or unskilled labor with relatively low-tech tools). This can make the end products too, but at 1/1,000^th the output per hour worked. As a result, if workers were forced to resort to this kind of work, they would have a subsistence wage (or might not even be able to subsist). The technology is just too primitive, too ancient.

Of course, even in prehistoric times, with the most primitive technology, people were usually able to produce enough to eat, usually at least to live into their 20's. But, they had more than just the value of their labor. They had access to free raw materials, basically by just taking them from whatever land they came across, or could fight to get. Today's unskilled would have little in the way of free, or owned, raw materials, or wealth of any kind. Already just 85 people have more wealth than the poorest 3.5 billion. To get raw materials they'd have to sell some of their labor endowment, and if that was worth too little, they would not be able to get enough raw materials to subsist.

The key feature of L-shaped isoquants is that without adding more L2, you're not going to get any more production no matter how many units of L1 you add. So, here, you're just not going to employ any more unskilled workers (L1), unless you can get more building space, machines, computers, robots, and – crucial to the argument I'm going to make – skilled workers: engineers, advanced technicians, college degreed business people (and not just a paper degree, one with the skills, knowledge, and analytical abilities to go with it), etc.

The skilled workers are just useless productivity-wise without complementary units of L2. Otherwise, all they can do is the primitive production method which produces so little that they starve. People will pay very little in the needed raw materials to the unskilled for the primitive production method, because for just a relatively tiny expenditure on high tech production they can produce the same as with all of the billions of unskilled laborers in the world working with primitive tools. Not only that, there are so many products today that the wealthy and middle class want that are simply impossible for the unskilled alone to produce at all, in any quantity, without the skilled, and the high-tech production method.

The unskilled only become valuable if the units of L2 get so large that complementary units of L1, unskilled laborers, start to get relatively scarce.

Now, what's happened historically. Metal stamping machines started replacing blacksmiths, but then we just started producing more and more metal stamping, and other, machines until all of the initial unemployed were countered with an equal number of jobs running, maintaining, and working with, the metal stamping and other machines. In other words, we just kept building more and more L2 until we pretty much soaked up all of the unemployed L1.

The initial building of the L2 made some lose their jobs, but every unit of L2 that you built required some units of L1 to complement it. When there was tons of unemployed L1, the L1 was cheap, and it made sense to just keep building tons of L2 to take advantage of that cheap L1 until the price (wage) of L2 (unskilled, or low skilled, workers) got extremely high by historical standards. And this was also because the combination of L1 and L2 produced so vastly much more than before using the primitive production function.

In other words, maybe blacksmiths and such forever lost those jobs, but we kept producing so many metal stamping machines, and other machines, and assembly lines, and blast furnaces,…, that eventually we replaced all of those jobs with jobs that were necessary for the new high-tech production method, assisting, maintaining, and complementing the new machines. And we produced so many of these new machines that the unskilled became relatively scarce enough, compared to the new productive capacity, to drive their wages far higher than ever in history.

So, you could just say, That's the solution today! The computers and robots won't 100% not need humans for a very long time, if ever. Just keep building more and more computers, and more and more robots, then you'll need more and more people to attend to, work with, and complement those computers and robots, until every unemployed human is now employed! They're all maintaining, assisting, and otherwise working with the robots and computers that took so many jobs originally!

The biggest current problem with this is there's a bottleneck. And it's a very serious one – skilled workers. It's relatively easy to keep building more and more and more robots, and computers, and facilities, and high-tech machines (at least if you have the skilled workers), but to produce enough trained engineers, and business managers, and skilled technicians, etc. to complement, and keep employed, all of the billions of unskilled workers globally, that's what we're not nearly up to the task for. That's the bottleneck, or at least the biggest and hardest one.

Without far more skilled workers – many highly skilled – there will not be nearly enough need for the masses of unskilled workers. There just won't be anything for them to do that's a high-tech production method like we've discussed without more skilled workers. All you'll be able to do with them is the primitive production method that employs only unskilled workers. And that production method is so relatively low output, it will be paid too little in raw materials to create non-poverty, or perhaps even subsistence, wages for most of the workers.

So it looks like to me the solution depends most on attacking this bottleneck, skilled labor – and the right skills needed for an L2 package. You do this, and you keep employing more and more of a smaller and smaller number of remaining unskilled workers, until their unutilized numbers get small enough to push their wages to a middle class, or at least non-destitute, level.

Of course, this is easier said than done. It would require a massive investment in education and training – starting prenatal; see the work of Nobel Prize winning economist James Heckman – but that effort, in of itself, would create an enormous number of jobs. And it would be hugely high-social-return and positive-social-NPV. If your goal is to maximize total societal utils, or if this is an important goal for you, then this is enormously efficient. 

The authors of The Second Machine Age recognize the crucial point of the importance of high public investment in education to prevent massive technological unemployment. And they also note that they are far from the first prominent economists to do so. On pages 208-10 they write:

The United States was the clear leader in primary education in the first half of the twentieth century, having realized that inequality was a "race between education and technology", to use a phrase coined by Jan Tinbergen (winner of the first Nobel Prize in Economic Sciences) and used by the economists Claudia Goldin and Lawrence Katz as the title of their influential 2010 book…Over the past half century that strong U.S. advantage in primary education has vanished…It's been said that America's greatest idea was mass education. It's still a great idea that applies at all levels, not just K-12 and university education, but also preschool, vocational, and lifelong learning.

I'll add too, that it's not just a bottleneck of insufficient skilled workers to utilize all of the unskilled in the high-output production method. On top of this, to make education even more important, we're also looking at a potentially profound shrinking in the proportion of workers needed in high-output production that are unskilled.

In other words, those L-shaped isoquants may shift 50%, or much more, to the left within a decade or two. Brynjolfsson and McAfee present dramatic evidence that long-vexing stumbling blocks in human-like robotics and computers are finally being overcome, with dramatic recent progress, after decades of slow frustration. And this is what you typically see with exponential growth of the kind we have with Moore's Law. At first the progress, the slope, is not so steep, but suddenly it takes off skyward, as each new doubling now doubles an enormous number.

I'll review this in detail in a later post, but for now I'll quote the authors on pages 31-2:

After revisiting Rethink and seeing Baxter in action we understood why Texas Instruments Vice President Remi El-Quazzane said in early 2012, "We have a firm belief that the robotics market is on the cusp of exploding." There's a lot of evidence to support his view. The volume and variety of robots in use at companies is expanding rapidly, and innovators and entrepreneurs have made deep inroads against Moravec's paradox.

It may not for long be that computers can beat Garry Kasparov, but they can't flip a burger, or oil machines spread across the factory floor. There's recently been breakthrough progress; long intractable walls have fallen in machine pattern recognition, sensation, and dexterity, and it's showing up in a lot more than just the Google Car.

Now, most of my economic analysis so far comes from The Second Machine Age, or I think is implied by it. In particular, I've bolded the terms complementary and bottleneck. Brynjolfsson and McAfee's use of these terms was important in leading me to my analysis. And I think it's possible that given how they use these terms they were also thinking in terms of L-shaped production functions, or something similar.

For example, starting on page 181-2, they write:

The better machines can substitute for human workers, the more likely it is they'll drive down the wages of humans with similar skills…But in principle, machines can have very different strengths and weaknesses than humans. When engineers work to amplify these differences, building on the areas where machines are strong and humans are weak, then the machines are more likely to complement humans, rather than substitute for them. Effective production is more likely to require both human and machine inputs, and the value of the human inputs will grow, not shrink, as the power of machines increases. A second lesson of economics and business strategy is that it's great to be a complement to something that's increasingly plentiful.

And on page 213:

We have little doubt that improving education will boost the bounty by providing more of the complementary skills our economy needs to make effective use of new technologies.

For the term Bottleneck, on page 200:

The college premium exists in part because so many types of raw data are getting dramatically cheaper, and as data get cheaper, the bottleneck increasingly is the ability to interpret and use the data.

Another important term the authors use is inelasticity of demand, but that will have to wait until my part II post! There, I will begin a detailed chapter by chapter review.