On OWS, fairness, and why we’re all screwed
I camped over at the Occupy LA protest a few weeks ago. It was fun– most of the people seemed thoughtful and genuine and I sympathize with a lot of their concerns. I have some friends who are “occupying” as I write this. People are mad, and I get it.
I also have friends and family who work in the greater investment community. Their opinions of OWS are all over the map: some welcome the protests if they can bring about more market transparency and accountability, others are quite frustrated by the protesters’ general lack understanding, sophistication or solutions. To put (my) words to their feelings: things aren’t perfect, but many of the protesters’ demands betray a striking lack of comprehension about how the market works.
I’m not here to pick a winner. I am here to say that this dispute hides a much bigger problem, one independent from any issue of corruption and one that will unravel the fabric of society if we sleepwalk into it. Settle in, get a cup of coffee, and I’ll explain why.
Why people are mad: it’s not winning, it’s cheating
Matt Taibbi at Rolling Stone succinctly explains why the Occupy Wall Street protestors are mad:
Success is the national religion, and almost everyone is a believer. Americans love winners. But that’s just the problem. These guys on Wall Street are not winning – they’re cheating. And as much as we love the self-made success story, we hate the cheater that much more.
In this country, we cheer for people who hit their own home runs – not shortcut-chasing juicers like Bonds and McGwire, Blankfein and Dimon.
That’s why it’s so obnoxious when people say the protesters are just sore losers who are jealous of these smart guys in suits who beat them at the game of life. This isn’t disappointment at having lost. It’s anger because those other guys didn’t really win. And people now want the score overturned.
All weekend I was thinking about this “jealousy” question, and I just kept coming back to all the different ways the game is rigged. People aren’t jealous and they don’t want privileges. They just want a level playing field[.]
Wall Street’s recent antics would probably irk people a lot less if the public didn’t have the perception the bankers are playing a “heads I win, tails you lose” game backed by taxpayer money. Institutions that are “too big to fail” take great investment risks and are either rewarded handsomely, or get bailed out by the government (read: taxpayers).
[I]t’s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed should not get a bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also some insurance companies and even huge hedge funds — should be strictly regulated.
Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.
I don’t agree with many of the OWS complaints, but it’s clear that some parts of Wall Street are broken. Regulatory capture is common, banks seem to operate above the law, and the game is often subtly rigged in a thousand little ways. HFT is arguably a parasite twice-over, siphoning both money and bright young people away from other areas into a negative-sum pit of cheat-or-be-cheated. Goldman Sachs does resemble, in the words of Taibbi, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
The richest 1% (and arguably the financial sector) have seemingly diverted almost all the economic growth of the past 30 years into their pockets, and to a large extent that’s been opportunistic, not meritocratic. What’s more, this ‘short-term greedy’ way of doing business threatens to spread, like a sickening disease, across more parts of our economy and government. We need to fix this or it’ll drag us, kicking and screaming, into a true kleptocracy.
Many in OWS have completely lost faith in the political process, believing that these Powers That Be have successfully co-opted the acceptable mechanisms for change so completely that political disobedience is the only way to send a message. I want to think they’re wrong, but at some level I have to agree.
Not just hippies: Image is retired Philadelphia Police Capt. Ray Lewis being arrested for ‘unlawfully blocking traffic’ during OWS. He had been loudly accusing the NYPD of serving as mercenaries for Wall Street. Given that there have been no high-profile arrests of the people who were responsible for defrauding billions from pensions and taxpayers and (proximately) causing the financial crisis, he may have a point.
Having said all that– and the more I think about this the more certain I am– OWS protesters are on the right side of this battle, but the wrong side of history. The story of why starts with monkeys and ends with robots.
Perception and complexity
Jonah Lehrer recounts a primate study centered around instinctual reactions to perceived injustice:
A similar lesson emerges from a classic experiment conducted by Franz de Waals and Sarah Brosnan. The primatologists trained brown capuchin monkeys to give them pebbles in exchange for cucumbers. Almost overnight, a capuchin economy developed, with hungry monkeys harvesting small stones. But the marketplace was disrupted when the scientists got mischievous: instead of giving every monkey a cucumber in exchange for pebbles, they started giving some monkeys a tasty grape instead. (Monkeys prefer grapes to cucumbers.) After witnessing this injustice, the monkeys earning cucumbers went on strike. Some started throwing their cucumbers at the scientists; the vast majority just stopped collecting pebbles. The capuchin economy ground to a halt. The monkeys were willing to forfeit cheap food simply to register their anger at the arbitrary pay scale.
This labor unrest among monkeys illuminates our innate sense of fairness. It’s not that the primates demanded equality — some capuchins collected many more pebbles than others, and that never created a problem — it’s that they couldn’t stand when the inequality was a result of injustice. Humans act the same way. When the rich do something to deserve their riches, nobody complains; that’s just the meritocracy at work. But when those at the bottom don’t understand the unequal distribution of wealth — when it seems as if the winners are getting rewarded for no reason — they get furious. They doubt the integrity of the system and become more sensitive to perceived inequities. They start camping out in parks. They reject the very premise of the game.
This is a fantastic experiment; I only wish the researchers had delved into the gray areas between ‘totally fair’ and ‘totally unfair’ — where monkeys were rewarded with grapes based on consistent but increasingly complex conditions. Where would their breaking point be?
Just like monkeys, our capacity for understanding economic complexity is not infinite. A friend who works in finance suggested that past a certain threshold, it might be impossible to figure out if any specific part of our economy is fair. And some people are bound to interpret inability to determine fairness as unfairness.
I think this is true. On the other hand, perhaps past a certain complexity threshold, economies play host to greatly more parasitic activities. In fact, I think the complexity-driven decoupling between wealth creation and compensation almost guarantees it. Is the greater total wealth created in more complex societies worth the greater parasite load? And does a default assumption of fairness or unfairness serve us better when we see something we don’t understand? I can see it going both ways. The consequences of going too far in either direction are severe:
– with a too-permissive view of corruption, economically parasitic behavior and distrust can spread from one sector into others, undermining the contracts society is based upon;
– with a too-sensitive corruption radar, the perception of unfairness (as with any negative emotion) can drive a vicious psychological feedback loop, and people (like monkeys) stop working. It might take a Hard Reset like the 1930s to cure this.
It’s a difficult balance, and the devil’s in the details. But the takeaway is that we’re not always in a position to judge what is fair, and, very importantly…
An increasing economic gap can be healthy!
Silicon Valley entrepreneur Paul Graham has a thoughtful article about attitudes toward wealth, arguing that a widening gap between rich and poor can be a sign of health if it reflects people getting paid for creating stuff people want. It’s the same form of argument that conservatives have been using for 30 years to justify the widening gap, but Graham’s perspective from the world of software startups, where success is tightly tied to the wealth one creates for others, is pretty powerful.
Where does wealth come from? People make it. This was easier to grasp when most people lived on farms, and made many of the things they wanted with their own hands. Then you could see in the house, the herds, and the granary the wealth that each family created. It was obvious then too that the wealth of the world was not a fixed quantity that had to be shared out, like slices of a pie. If you wanted more wealth, you could make it.
And since the ability and desire to create it vary from person to person, it’s not made equally.
You get paid by doing or making something people want, and those who make more money are often simply better at doing what people want. Top actors make a lot more money than B-list actors. The B-list actors might be almost as charismatic, but when people go to the theater and look at the list of movies playing, they want that extra oomph that the big stars have.
Doing what people want is not the only way to get money, of course. You could also rob banks, or solicit bribes, or establish a monopoly. Such tricks account for some variation in wealth, and indeed for some of the biggest individual fortunes, but they are not the root cause of variation in income. The root cause of variation in income, as Occam’s Razor implies, is the same as the root cause of variation in every other human skill.
In the United States, the CEO of a large public company makes about 100 times as much as the average person.  Basketball players make about 128 times as much, and baseball players 72 times as much. Editorials quote this kind of statistic with horror. But I have no trouble imagining that one person could be 100 times as productive as another. In ancient Rome the price of slaves varied by a factor of 50 depending on their skills.  And that’s without considering motivation, or the extra leverage in productivity that you can get from modern technology.
None of this excuses Wall Street corruption– far from it, a society where it’s easier to steal wealth than make it will demotivate talented people, and divert their efforts from creation towards theft– but the point is some people are naturally better at creating wealth than others. Moreover, technology leads to more winner-take-all scenarios, and Graham predicts this gap widening:
Will technology increase the gap between rich and poor? It will certainly increase the gap between the productive and the unproductive. That’s the whole point of technology. With a tractor an energetic farmer could plow six times as much land in a day as he could with a team of horses. But only if he mastered a new kind of farming.
I’ve seen the lever of technology grow visibly in my own time. In high school I made money by mowing lawns and scooping ice cream at Baskin-Robbins. This was the only kind of work available at the time. Now high school kids could write software or design web sites. But only some of them will; the rest will still be scooping ice cream.
The larger trend here is that:
Jobs are harder to find, easier to invent.
Thomas “the world is flat” Friedman has a great column about this theme that ‘jobs are getting harder to find, but easier to invent’:
I’VE done a lot of television book interviews lately, and I continue to be struck at what a difference there is in the technology in just a few years’ time.
Here is a typical evening at a major cable TV network: arrive at Washington studio and be asked to sign in by a contract security guard. Be met by either a young employee who appears to still be in college or an older person who seems to have hung on with tenure. Have your nose powdered by that person. Have your microphone attached by that person. Be positioned in the studio chair by that person, and then look directly into a robotic camera being manipulated by someone in a control room in New York and speak to whoever the host is wherever he or she is. That’s it: one employee, a robot and you.
Think of how many jobs — makeup artist, receptionist, camera person, producer-director — have been collapsed into one. I raise this point because there is no doubt that the main reason for our 9.1 percent unemployment rate is the steep drop in aggregate demand in the Great Recession. But it is not the only reason. “The Great Recession” is also coinciding with — and driving — “The Great Inflection.”
In the last decade, we have gone from a connected world (thanks to the end of the cold war, globalization and the Internet) to a hyperconnected world (thanks to those same forces expanding even faster). And it matters. The connected world was a challenge to blue-collar workers in the industrialized West. They had to compete with a bigger pool of cheap labor. The hyperconnected world is now a challenge to white-collar workers. They have to compete with a bigger pool of cheap geniuses — some of whom are people and some are now robots, microchips and software-guided machines.
I wrote about the connected world in 2004, arguing that the world had gotten “flat.” When I made that argument, though, Facebook barely existed — and Twitter, cloud computing, iPhones, LinkedIn, iPads, the “applications” industry and Skype had either not been invented or were in their infancy. Now they are exploding, taking us from connected to hyperconnected. It is a huge inflection point masked by the Great Recession.
It is also both a huge challenge and opportunity. It has never been harder to find a job and never been easier — for those prepared for this world — to invent a job or find a customer. Anyone with the spark of an idea can start a company overnight, using a credit card, while accessing brains, brawn and customers anywhere. [emphasis added]
This isn’t the only employment trend afoot, but it’s one of the most significant. It’s hard to disagree with Friedman’s advice, but for one thing:
Half of all people are below average(!)
Friedman’s advice is not likely to be feasible for, or read by, the average person. The average person (think of your high school graduating class) isn’t as smart, adaptable, and connected as is Thomas Friedman, and it’s a little unrealistic to expect them to thrive when competing against “cheap geniuses — some of whom are people and some are now robots, microchips, and software-guided machines.” This average person is having competitive difficulties in this brave new flat world– and, save for exceptional (and fictional) havens like Lake Wobegone, half of all people are in fact below average in intelligence, adaptability, or social connectedness (and often all three at once).
Fred Reed, a curmudgeon if there ever was one, grumbles about this lack of realism among the op-ed class:
Letting Them Eat Cake
When I read columnists or listen to talking heads on the lobotomy box, they strike me as delusional. What are these decapitated crania prattling about? From what morgue did they escape? What country are they from? Certainly not the America I grew up in.
I conclude that they suffer from Commentator’s Disease, which consists in the confluence of several disabilities, the first being high intelligence. Washington, being a center of power, politics, graft, and corruption, attracts the very bright. An acquaintance once said, “Inside the Beltway, you assume that everyone is in the ninety-ninth percentile.” She meant that in the circles in which she moved, this was true. The city is rife with the very bright, most of them being invisible: campaign planners, pollsters, lawyers, scientists from NIH. The class includes many of the talking heads, the Pat Buchanans and Charles Krathammrs. They may be liberal or conservative, depending on their individual defects of character, but they are way smart.
The exceedingly intelligent form a social class seldom mentioned but inordinately influential. They are not recognized as what they are because they do not append IQs to their by-lines. As a quite ordinary example, consider the magazine The American Conservative, with many of whose writers I have some familiarity. The publisher, Ron Unz, studied theoretical physics at Stanford after graduating from Harvard. Bill Lind, Pat Buchanan, Taki, Steve Sailer, Kara Hopkins, John Derbyshire—I doubt that there is an IQ below 140 in the bunch. The same could be said of many other political slicks, left or right.
These people are not intellectual snobs. In the crowd they run with, they are average. The problem with them is that they hang out together. People tend to associate with those with whom they have things in common. At a hole-in-the-wall in DC like the Zoo Bar on upper Connecticut you may find a table of eight people in jeans and running shoes—Washington is about power, not style—consisting of a biochemist, an editor of a technical newsletter, a talking head you’ve seen, and so on, all highly educated. This clustering together by intelligence is sometimes called “cognitive stratification.” It exists, big time. The clusterers are by and large decent people, not full of themselves, and mean well.
But they don’t know what they are talking about in important respects. They think the Beltway contains America.
The second symptom of Commentator’s Disease is relative prosperity. The nature of Washington is that the very bright usually do well financially. I don’t mean that they are rich, though some are, but that they manage to find secure jobs in government or with law firms or they invest wisely or, in the case of commentators, angle for well-paid gigs with syndicates or networks. Usually there is nothing crooked in this. They are simply smart enough to work the system, and they live where the system is.
The aggregate effect of their brains, security, and isolation is that they are out of touch with the country as it really is. They do not know the bleak strip-development of Route 1 South toward Fredericksburg, red dirt and franchised cholesterol chutes and roaring traffic. Here the diabetic veteran lives in a decayed residential motel and makes his way on crutches to the down-scale diner where he drinks beer and waits to die because he hasn’t got anything else to wait for. (The example is not hypothetical.) Here the aging waitress gets to the diner somehow, aching with arthritis. “Too tired to work, too poor to stop.” I knew this woman. She is much of America. You don’t see her at the Zoo Bar. She has never been to such a place.
I often see victims of Commentator’s Disease arguing against the minimum wage on abstract grounds of economic theory. It is what commentators do—bandy abstractions, railing for or against Keynes, assaulting their ideological opponents with pointed phrases. They have never had to do the arithmetic of forty times the minimum wage minus taxes minus bus fare minus rent and gotta pay the cable because it is the only thing they have after work. They have never had to choose between the electric bill and a new coat as winter comes on.
The commentators don’t realize that not everybody is like them. Those with IQs of 140 and up (130 gets you into Mensa, I think) unconsciously believe that anything is possible. Denizens of this class know that if they decided to learn, say, classical Greek, they could. You get the book and go at it. It would take work, yes, and time, but the outcome would be certain.
They don’t understand that the waitress has an IQ of 85 and can’t learn much of anything.
Conservatives think in terms of merciless abstractions and liberals insist that everyone is equal. Not even close. Further, people with barely a high-school education and low-voltage minds regard any intellectual task with utter discouragement.
Some commentators urge letting people invest their Social Security taxes in the stock market. To them it is a question of abstract freedom and probably the Federalist papers. The commentators are smart enough to invest money. I’ll guess that at least half the population isn’t. Go into the tit bar (does it still exist) in Waldorf, Maryland, and ask the dump-truck drivers and nail-pounders what NASDAQ is.
Liberal commentators want everyone to go to college, when about a fifth of people have the brains. Conservatives think that people can rise by hard work and sacrifice as certainly many people have. Thing is, most people can’t. Commentators only see those who made it.
The tendency of the Beltway 99th to live in an imaginary world, of conservatives to think that everybody can be a Horatio Alger, of liberals to believe that inequality arises from discrimination, guarantees wretched policy. Those who can do almost anything need to recognize the existence of those who can do almost nothing. Few of the latter are parasites. The waitress has worked all her life, as has the truck driver. They ended up with nothing.
Which is easy to do. A girl marries her high-school sweetheart in Busted Hump, Tennessee and he goes to work for the local pickle-bottling plant, which switches to hiring people as independent contractors to avoid paying benefits. Neither of the pair is real bright, just ordinary Americans trying to make a living. They live paycheck to paycheck because they don’t know how not to. Neither is lazy. They just don’t know how to start the next Microsoft. He dies of a heart attack at 45, she can’t make the mortgage, and…she is well and truly screwed.
At the Zoo Bar, they have great wings and some really good walk-in blues bands, and what you have to understand about Keynes is….
Ultimately, I think Reed is right– life is tough for those on the left half of the bell-curve, poverty imposes its own cognitive costs, and a lot of people are simply incapable of following advice like Friedman’s. In an increasingly ultra-darwinistic economy, the ungifted and unmotivated are pretty much screwed. And that’s scary, since…
In the long run, we’re all unemployable
This is deep crystal ball territory, but it seems clear to me the way the wind is blowing: sooner or later we’re all going to be on the left half of the bell curve, driven from our jobs by smarter robots and software. The automation trends that started in agriculture and manufacturing have spread to such rarified fields as translation, chess, and legal and medical research. Whatever rationale people have for why an algorithm can’t replace them is, regardless of field, relentlessly eroding.
Let me be clear: algorithms are sneaking up on your job.
IBM’s Watson and Apple’s new Siri digital assistant are essentially early prototypes of AI, and as time goes on they’ll only get better and more generally-capable, able to replace and improve more sorts of traditionally-human tasks. Over the next ten years many such jobs are going to disappear, never to return. Some of the people displaced will read Friedman and figure out how to thrive in this new “winner-take-all, darwinian, creative destruction economy”, but let’s be honest. Most won’t.
Thresholds, the unemployable, and a new social contract
Vernor Vinge has a quote that I’ve always found striking: “The work that is truly productive is the domain of a steadily smaller and more elite fraction of humanity.” To wit, as time goes on, there will be more and more total wealth, but a smaller and smaller fraction are actually creating the wealth. It’s not necessarily that the poor are lazy: often it’s that they really have nothing to offer, economically speaking. There are jobs, but not for them. (Or their jobs are subsidized– as when the average Walmart employee receives ~$1,000 of Medicaid, food stamps, and cash assistance from the government.)
So ultimately, how do we help our fellow citizens deal with this trend? When 25%– then 75%– of humanity have absolutely no conventionally-marketable skills, are absolutely not economic to hire (vs robots and software), what do we do? We can offer platitudes about education, retraining, and inventing your own job, but that’s not going to hold back the tide very long. There’s a trend here: we’re nearing the end of the “living wage era,” where we could talk about ‘everybody having the right to a living wage’ because this wasn’t too far from the fundamental economic realities. It was nice and egalitarian while it lasted, but what’s next?
Should society keep expanding social programs to permanently support this growing pool of unemployables? Should we keep subsidizing them (and Walmart) through aid to low-income workers? The Romans bought domestic peace with bread-and-circuses; will we need to take that route also? (Aren’t we already?) Or should we e.g., just keep expanding the DMV and TSA to give this class of workers a place to harmlessly soak up government dollars while feeling productive? (I say this only half in jest, since it appears to be the road we’re currently on.)
Moreover, given the social unrest possible once the unemployed/unemployable grows past certain thresholds, can we afford not to?
I’m not being a snob; on a long enough timeline, I think we’re all in this boat.
However one slices it, I think it’s clear that job economics will tighten. The “Occupy” groups are the vanguard in the populist pushback on this, and are spot on with some of their complaints.
It’s not always easy to see, but the political pendulum swings back and forth with tremendous force. We’re in a part of the cycle where we can see very keenly the power and abuses of large multinational corporations. It won’t always be like this: the OWS movement may be the start of powerful modern populism, cycling into focus just when the long-term feasibility of a “living wage for everyone” is naturally and irreversibly eroding. It’s an interesting contradiction, and one which will bring its own excesses. With time we may remember parts of the current economic era fondly.
One danger I see is that this increasing technological displacement and growing pool of unemployables could strengthen, poison, and radicalize the OWS movement, giving it a louder voice and a weaker argument (re: living wages) at the same time. I think it’s a real possibility. I personally hold out hope we may move toward a Basic Income Guarantee such as in Switzerland… but a lot would have to happen before this, not the least a social and legal redefinition of the rights *and* obligations of citizenship.
 Is there anything good about Goldman? In short, yes. Aside from the usual dealmaking, capital allocation, and underwriting tasks investment banks perform, Goldman’s known for being willing to make new markets — being willing to serve as a middleman or counterparty… and sometimes both(!) on unusual sorts of wagers (such as CDOs). This isn’t always economically healthy, as it can increase market complexity faster than regulators (or participants) can understand what’s happening, but being able to effectively buy or ‘short’ certain behaviors can also bring substantial market efficiency.
 Here’s Taibbi again, on Goldman and financial regulations:
The way I look at it is that this isn’t really a financial story, it’s a political story. It’s about how power works in America. They’ve figured out a way to hide power in these little regulations and the minutiae and it’s like a gigantic bulwark that separates ordinary people from those of influence. So in order to be a journalist you have to go through that whole maze. You need space and you need time, and nobody has it anymore….
Do you still follow Russian politics? They’re gearing up for an election. I tend to envision Putin placing Medvedev on a platter and eating him on live television, or something of the sort.
They’re just your basic third-world kleptocracy—which is where everybody is headed. Well, everybody who still has a functioning government.
I think people are going to realize what a blip on the radar American-style democracy in the 20th century was. A big middle class that had a huge powerbase, financial interests, bosses giving benefits… all those things. It’s just a little blip in history. For the most part, concentrated wealth will make all the decisions and everybody else is dictated to.
When it’s not uncommon for large, profitable corporations to pay their CEOs more than they pay in federal income tax, I think we have to take this notion of a sea change seriously.
Will OWS turn to economic vigilantism as a force for change if political disobedience fails? And if they do, can we blame them?
 Many liberal groups would love to use OWS to advance their goals; while I was at Occupy LA there were activists (mostly racial and environmental) who were trying hard to get their pet causes into the mission statement. I think it’ll take a lot of energy to fend off opportunists and keep focused. The Democratic Party in particular is drooling over the possibility of co-opting OWS (just as the Tea Party has been co-opted), much to the movement’s irritation:
The corporate media is anointing a false leader of the Occupy Movement in Van Jones of Rebuild the Dream.
The former Obama administration official, who received a golden parachute at Princeton and the Democratic think tank Center for American Progress when he left the administration, is doing what Democrats always do—see the energy of an independent movement, race to the front, then lead it down a dead end and essentially destroy it. …
At Occupy Washington, DC, we recognize that putting our time, energy and resources into elections will not produce the change we want to see. What we need to do right now is build a dynamic movement supported by independent media that stands in stark contrast to both corporate-bought-and-paid-for parties.
Democratic operatives want to steal the energy of the Occupy Movement because they do not have any of their own.
 I personally think humans have a really good ‘unfairness detector’ module. Give us a complex math problem, and most of us will wilt; give us a card game (of similar abstract complexity) where someone’s cheating, and many of us will figure it out. But again, our capacity here is not infinite.
 A large factor in wages is simple supply-and-demand. People get paid more for doing what the market needs. And employment supply-and-demand is notoriously dynamic. A friend relates that the boom in domestic oil exploration has led to people with degrees in petroleum geology landing jobs paying over a million dollars right out of college. People who are willing to move to North Dakota and drive trucks for the oil economy are making over $120k. Meanwhile, people with degrees in English Literature and Social Work are competing with hundreds of other applicants for starting salaries in the low 30ks, salaries that look even bleaker once today’s ridiculous student loan payments are factored in. An average of 40% of college grads resort to jobs that don’t require degrees, a number which is steadily rising.
Is this fair? Do people who choose to study e.g., art history deserve to make living wage working in their field? I think “deserve” is a loaded term here. The top 1%-.1% of a field will always be able to write their own ticket, but supply-and-demand dynamics will drive compensation for the rest, with little regard for concepts such as a “living wage”.
Of course, supply-and-demand doesn’t happen in a vacuum – policy plays a huge role in creating the employment context it emerges from. We could learn a lot from China in how to nurture emerging domestic industries (or at least not smothering them on the altar of the status quo). Part of this is willingness to experiment– China is now limiting college majors which are correlated with high post-graduation unemployment, an interesting move. Immigration policy matters. Education matters and we could be doing better (though perhaps we tend to be too hard on ourselves, mistaking demographics for quality of instruction).
 The unspoken assumption of the Friedman school is that once we provide good, rugged, and cheap internet devices to the third world, they’ll be able to lift themselves out of poverty by educating themselves, learning foreign languages, science, programming, and design via something like OpenCourseWare, and joining the global economy. It’s a great idea, certainly worth doing, and will work for some. However, regardless of where one stands on IQ as a primary component of economic potential or a lagging correlation which rises with prosperity, I think it’s betrays an overenthusiastic estimate of the quick malleability of human capital, and I also doubt the Vast majority will be able to bootstrap before algorithms and robots eat their niches.
 There is precedent here: many people have argued that welfare got its start essentially as protection money paid to those in LA’s slums, to give them something to lose so they wouldn’t burn down the place.
 My father, on economic policy:
Natural selection is the way things work, but I should say that I’m not at all comfortable with the results – when it comes to people. It is easy to see that the benefits of living in this country are unequally distributed, and, as you point out, that can be beneficial. I think we need to ask some questions, however. Who “owns” this country? How much control should someone who wants to work hard and make lots of money have over someone who does not wish to devote his life to making money? The two are not separate, as one will drive up prices of goods and that will affect the other – right? Does one person have the right to produce products offshore and sell them freely here in the US, even though it makes the labor of the other person much less valuable? And, does the laborer have the right to band together in a union to gain advantage over other workers – using the political process to mandate that advantage? If you take all the laborers here in the US, do they have the right to demand that manufacturing jobs be returned to the US if the investors wish to sell the goods here? (This would simply be a much larger labor union, wouldn’t it?)
Politics is the art of taking money from one group and giving it to another.
And, I think we need to have a discussion about not only the benefits of living here, but we need to talk about the responsibilities too – on both sides of the spectrum.
Edit, 4-4-12: Mindflash has a light but fun infographic: Can your job be done by a robot?
Edit, 4-11-12: A friend has an interesting point on my Inflation, briefly post:
Edit, 4-29-12: From The Atlantic, a piece on How Computers Are Creating a Second Economy Without Workers:
Let’s do some arithmetic.
The Gross Domestic Product for the United States in 2011 was around $15 trillion. There are a little over 130 million non-farm employees. So each worker adds a little over $100,000 to the domestic output. The numbers are quite different for a Google employee. Google has a little more than 32,000 employees and its $38 billion in revenues means it generates about $1.2 million per employee. The numbers are similar for Facebook.
Walmart has some two million employees, and annual sales of around $200 billion. Given that many work part-time, I figure that the company has sales of around $100,000 per employee. With 56,000 employees in 2011, Amazon generated a little over $800,000 per employee.
Here’s the challenge: In the past, every million-dollar increase in economic output generated on the order of ten jobs. In the future, in the productive Second Economy, it may generate only one or two.
When I listen to politicians and policy makers explain how they will create jobs in the future, I never hear mention of the Second Economy. If a large portion of future economic growth will occur in the rapidly expanding and highly productive Second Economy, where will the jobs come from?
The author suggests in a second installment that a ‘repurposing construction boom’ could provide significant employment, as a changing economy will lead to different requirements for city layouts, office, industrial, and residential needs, and so on.
Here’s the idea: construction will be the engine for a much larger fraction of job growth in the Internet Age than we are currently anticipating. I call it a repurposing construction boom. … The faster and cheaper we can move information , the less retail, factory, and office space will be required on a per capita basis.
This means that much of the existing space will eventually be repurposed. Office buildings and shopping centers will be torn down and become locations for apartment buildings, possibly even parks. …
Just as Henry Ford may not have predicted the rise of drive-in movie theaters when he invented the Model T, the Internet Age will produce changes to our physical landscape we can’t yet envision. And other changes that we do expect might never happen, or happen in a different way. The urban transformation may not take the form that I have suggested. But what I am certain will happen is that the Internet will drive the physical restructuring of society.
However, with progress in robotics and the technology of construction (e.g., ‘3d printing a house’) it’s not clear this will mean more jobs for the unskilled.
Edit, 7-1-12: From a NYTimes op-ed, “The Busy Trap“:
More and more people in this country no longer make or do anything tangible; if your job wasn’t performed by a cat or a boa constrictor in a Richard Scarry book I’m not sure I believe it’s necessary. I can’t help but wonder whether all this histrionic exhaustion isn’t a way of covering up the fact that most of what we do doesn’t matter.
Edit, 7-17-12: Cracked has its own sort of take on the post-automation world.
Edit, 8-5-12: A Redditor has a great take on the calculus of automation.
Edit, 1-21-13: The IEET has a good piece on the ‘new economy’: “Apple, Google, Facebook, and Amazon Are Worth $1 Trillion, but Only Create 150,000 Jobs.“
Edit, 1-29-13: Gwern has a piece called “My Mistakes”, writing that “It is salutary for the soul to review past events and perhaps keep a list of things one no longer believes[.]” From the Neo-Luddism section:
The idea of technological unemployment – permanent structural unemployment and a jobless recovery – used to be dismissed contemptuously as the Luddite fallacy. … This is closely related to what I’ve dubbed the30: technologists who are extremely intelligent and have worked most of their life only with fellow potential Mensans confidently say thatLuddite fallacyfallacyif there is structural unemployment (and I’m being generous in granting you Luddites even this contention), well, better education and training will fix that!It’s a little hard to appreciate what a stupendous mixture of availability bias, infinite optimism, and plain denial of intelligence differences this all is. Marc Andreessen offers an example in 2011:
>Secondly, many people in the U.S. and around the world lack the education and skills required to participate in the great new companies coming out of the software revolution. This is a tragedy since every company I work with is absolutely starved for talent. Qualified software engineers, managers, marketers and salespeople in Silicon Valley can rack up dozens of high-paying, high-upside job offers any time they want, while national unemployment and underemployment is sky high. This problem is even worse than it looks because many workers in existing industries will be stranded on the wrong side of software-based disruption and may never be able to work in their fields again. There’s no way through this problem other than education, and we have a long way to go.
I see. So all we have to do with all the people with <120 IQs, who struggled with algebra and never made it to calculus (when they had the self-discipline to learn it at all), is just to train them into world-class software engineers and managers who can satisfy Silicon Valley standards; and we have to do this for the first time in human history. Gosh, is that all? Why didn’t you say so before – we’ll get on that right away!
Edit, 2-2-13: Kevin Kelly has a piece in Wired entitled “Better Than Human: Why Robots Will — And Must — Take Our Jobs” — high points include talking about Baxter, a 2×2 matrix of human vs machine jobs, and the “Seven Stages of Robot Replacement”.