Technology and the Distribution of Wealth

There is a question so important to the modern economy that it often hides in plain view. I’m talking about the role that technology plays in the distribution of wealth. This connection between our distribution of societal resources and our rapidly evolving technology centers on two fundamental phenomena:

1. The way technology displaces labor
2. The way technology concentrates profits

Technology and Jobs

The primary way that technology displaces labor centers on productivity, which amongst most economists today is usually framed as “labor productivity,” or the amount of goods and services produced in one hour of human labor.

Labor productivity gains happen by:

a) Holding the amount of labor steady and increasing the flow of goods and services;
b) Holding the flow of goods and service steady and decreasing the amount of labor; or
c) Some combination of the two

Economists focus on “labor productivity” because, historically speaking, human labor has accounted for the largest portion of the total cost of production. As corporations have concentrated on maximizing profits over the last several decades through downsizing, restructuring and the like, it’s usually been with a heavy reliance on option “b” – i.e. replacing humans, first with hardware, and now increasingly, with software.

When a business makes a fixed investment in a new manufacturing robot or in automation software for taking airline reservations, its ongoing variable costs of operation typically decrease. With smart investments, over time these new automated processes make the firm more efficient and more productive than when these processes were done with human labor. That leads to increased profits. But more on that later.

The question that concerns us first, though, is what happens to the earnings power of those people who’ve been displaced by these investments in automation. The answer, of course, is that the job loss leads to an immediate inability to earn income, which if uncorrected, eventually erodes any wealth these employees may have once built up over the course of their working life.

I should note two things here. First, technology isn’t the only cause of job eliminations, but it is the only way of eliminating jobs without cutting into the firm’s ability to deliver economic value over time.

Second, there are questions about what happens to these employees over time; specifically with regard to their re-employability, and how easily they learn new skills that haven’t yet been addressed by automation. This is the “the race against the machine,” and history has shown that we humans are pretty good at it finding hitherto unimagined, new sources of employment. Buggy whip assemblers get re-trained and go on to build Model T’s.

This argument is hard to counter, of course, because history has demonstrated it time again and again. And yet, looking at our current stage of economic development, there is something quite different from where we were even just a few short decades ago. It’s the pace and interconnectedness of technology’s evolution. You don’t have to necessarily believe in the Singularity to understand how the accelerating pace of technology won’t just eat into more and more jobs that have traditionally been done by humans, but that it will also make it harder and harder for humans to keep up with machines in learning the new jobs that the technology itself makes possible.

Just twenty years ago, most of us would have been puzzled at the idea that technology might lead to out-of-work bookshop and movie rental store employees, just as today it seems hard to believe that New York City taxi drivers will be looking for new work in not too many years. As human jobs are displaced at a faster and faster pace, ever larger portions of our population will lose their ability to generate wealth, as income disparity accelerates from the bottom up.

Technology and Profits

This is only half of the story, however, and it may not even be the most important way that technology accelerates the concentration of wealth. To understand the rest of the story, we need to look back at what happens to the increased profits that resulted from those investments in labor-saving technologies, and to do that, we need to take an accountant’s perspective.

When a company buys equipment to automate its processes, the cost of that purchase isn’t treated as an expense. Instead it’s treated as a “capital expenditure” which increases the assets on the firm’s balance sheet. As an investor, we no longer allow you to own the people who make a profit for you, but you can own the machines that displace those people. And, as the firm makes more labor saving investments in technology, its operating costs go down and its productivity – and profits – go up.

Where do the increased profits from these technology-driven productivity increases go? They go to the owners of the firm, naturally. And so, as long as the technology investments don’t somehow harm the firm’s revenue streams and as long as they result in lower operating costs – which are both pretty good bets – then, the owners of the firm generate greater earnings, either in the form of more dividends or capital gains.

That investors are entitled to a return on their investments isn’t really a point of contention – at least for me. What is is allowing investor returns to transcend all other factors as the driver of modern day capitalism. This “shareholder primacy” perspective elevates maximizing returns for shareholders as the primary purpose of the firm.

Here’s the interesting part as it relates to technology though. Within today’s ascendant shareholder primacy perspective, the main reason to make technology investments is to increase productivity and profits, and the main reason for doing that is to pass those profits on to shareholders. If those shareholders aren’t the employees or other long-term stakeholders of the firm, then technology investments essentially act as a powerful force for extracting profits from businesses and concentrating them in the hands of outside investors who are part of a rapidly shrinking percentage of the population.

As investors generate more returns, they invest in more firms, perpetuating the process in one industry after another and skewing the wealth-generating capacity of more and more sectors of our economy. As this happens, wealth is concentrated into ever fewer hands. Seemingly oxymoronic phrases like a “jobless recovery” also start to make sense as sector after sector begins generating healthy returns for investors without necessarily adding new jobs. Remember, in the United States, 88% of investment assets (excluding residential homes) are owned by just 10% of the population and more than 50% of assets are owned by just the top one percent.

As the primary source of the productivity gains and the profits these investment assets create, technology is the catalyst for most of this growing concentration of wealth.

What Do We Do?

In short, technology plays a critical role in the distribution of wealth. It erodes income generation in lower income families while concentrating profits into the hands of those with the greatest financial assets.

One of the solutions to this dilemma is to design technologies so that humans are better able to race with machines rather of just against them. Remember, labor productivity can increase by either cutting labor costs or by increasing the value of the goods and services that that labor creates. That means thinking a lot harder about how to build our technologies to better augment our human capacities rather than eliminate them.

There are clearly limits here, however. As the race with our technological progeny accelerates, there will only be so much racing with that we will be able to do. The machines will eventually outpace our ability to learn the new jobs and may one day even run our firms.

It’s my view that the real answer to this dilemma is less about technology and jobs and more about how we handle the second question – the question of technology and profits. And here, we get down to some tough questions about ownership and equity. For if ownership of the machines and their earnings potential were more broadly held, then so too would their ability to generate and maintain wealth across a broader base of humanity.

Equity is the central question that now confronts us. Do we really want a world where all of our engines of wealth generation are closely held by a minuscule segment of our citizens? The accelerating pace of technological development lends a certain urgency to this question. How far will it go?

This all raises a fundamental question about the operating instructions for the entities that now create most of our technology: our assumptions about the purpose of businesses. If it truly is shareholder primacy and simply maximizing returns for external shareholders, then we are hard-coding the next evolution of intelligence on the planet for one goal: concentrating wealth.

Surely, there must be some more noble aspiration for the Promethean fire we now hold in our hands.