Blog Archives

Is the World Becoming Wealthier or Poorer?

The core assumption of Universal Basic Income (UBI) and other plans to redistribute wealth and income more broadly is that the world is becoming wealthier, and so the pool of income and wealth that can be taxed is always expanding.

This pool of available wealth and income is so vast, we’re assured, that taxing the super-wealthy will not really dent their wealth or the economy as a whole.

But what if the world is rapidly becoming poorer in every important sense?What if the decline in the standard of living of the bottom 90% of households that I’ve often addressed is not simply the result of the top 10% taking a greater share of the output (gains), but of the entire pie shrinking?

I believe the steady decline of the purchasing power of labor–the source of most households’ income–is not just the result of way income is distributed, but of a steadily diminishing pool of real-world wealth.

We must start any discussion of total wealth/income by asking: what are we measuring with currencies such as dollars? What’s not being measured?

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Marx, Robotics and the Collapse of Profits

Yesterday I discussed how robots only do work that’s profitable, as any enterprise buying, programming and maintaining robots to do unprofitable work will soon be out of business.

What few observers seem to grasp is that automation goes through two distinct stages of profitability: when robots/automation first replace high-cost human workers, profits soar. Observers then draw projections based on the belief that these initial profits will continue essentially forever.

But this initial boost phase of profits gushing from automation is short-lived;as the tools of automation are themselves commoditized and become available to anyone on the planet with some capital and ambition, lower cost automated competitors come to market, destroying the pricing power of the first adopter.

Once an enterprise is competing only with other automated enterprises, profits fall to near-zero as lower cost competitors emerge. Competitive advantages are small once a field has been commoditized/globalized, and there is little pricing power left except for brands that establish some cache people will pay extra to have and hold.

But everything that’s been commoditized will no longer be profitable, as the competitive advantage of replacing human workers with robots vanishes once competitors have also replaced their human workers with robots.

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Why Profits Are Faltering

The bedrock assumption of the Bull market is that corporate profits will keep rising indefinitely. Hiccups are allowed, but current stock market valuations are implicitly based on profits expanding.

The fly in the ointment here is corporate profits have been stagnating since 2014. Here is the St. Louis Federal Reserve (FRED) chart of pre-tax corporate profits:

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Work Won’t Be Scarce–It’s Paid Work That Will Be Scarce

All the media chatter about work disappearing due to automation fails to draw the critical distinction between useful but unpaid work and profitable work.Since value (and profits/wages) flow to what’s scarce, what matters is not the decline of useful work–there’s plenty of that even in a society that has automated production–but the supply of paid work–work that is profitable and hence worthy of wages.

Mark Jeftovic and I discuss work, profit and new models of paying for useful work(44:47) in a free-ranging podcast on my book A Radically Beneficial World.

The great fantasy that many are depending on to solve the decline of paid work is taxing the robots and software that ate all the jobs. These taxes are supposed to pay for the Universal Basic Income that everyone will enjoy once work is automated and jobs become scarce.

The problem with the fantasy is that profits only flow to what’s scarce, and as the tools of automation are commoditized, they will no longer be scarce. Once anyone can buy the same robots/software you own, where is your competitive advantage? If anyone on the planet with some capital can buy the same robots and software, where is the pricing power that is essential to reaping big profits?

Commoditization and globalization push profits down to near-zero. In a world of ever-cheaper, ever more abundant commoditized tools and software, it becomes much more difficult to generate increases in productivity and profits.

Those who dream of the the end of work forget that robots will only be purchased to perform profitable tasks. Much of human life is not profitable. For example, maintaining dedicated bikeways is useful work that serves the health and transportation needs of the community and economy.

There is no way to make this work profitable unless you charge bicyclists for using the bikeways, which defeats the purpose of the bikeways.

The typical response is that governments will pay for robots to maintain bikeways.But that leads right back to the decline of profits and paid labor: since government depends on profits and paid work for its revenues, as those decline, where will government get the revenue to make good all its vast promises for pensions, services, healthcare etc., and buy and maintain robots to do unprofitable but useful work such as maintain bikeways?

Take a look at these charts of productivity and income. Ultimately, increases in jobs, wages and profits flow from increases in productivity, which typically rises as a result of investments in better tools, training and processes.

Productivity struggles when investment stagnates, external costs (such as paying to remediate industrial pollution) reduce the available pool of capital/profits to invest, and new technologies are either limited in scope or do not scale well.

All these factors played a role in the 15-year stagnation of productivity from 1966 to 1980.

As computer/digital technologies improved and dropped in price (i.e. scaled up to impact the entire economy) and financialization (i.e. abundant credit and leverage, and the commoditization of financial assets) provided new sources of profits, productivity increased from 1981 to 2005.

Since then, growth of productivity has been in a freefall: financialization has reached diminishing returns, the technologies of automation have been commoditized, and globalization has opened up a vast new labor force and new places to invest capital.

In sum: what was once scarce is now abundant, and thus it no longer generates value or profits.

When new productivity tools were scarce (unique to American factories and workplaces) and required a growing labor force, productivity growth translated into higher wages. But when productivity growth relied on financial capital and processes and higher-level technical/managerial skills, the gains flowed only to those who owned these processes and skills: generally speaking, the wealthy owners of productive capital and the highly educated technocrat/managerial class (the top 5% and to a lesser degree, the top 20%.)

All of which is to say the model of paying wages for profitable work (or collecting taxes from profits and profitable work to pay government workers) is broken: not slightly broken, but fundamentally broken.

We need a new economic model that recognizes the value of useful work that isn’t necessarily profitable, an economic system that creates money to pay those doing useful work at the bottom of the pyramid rather that creating money only for banks, corporations and financiers at the very top of the pyramid.

There is plenty of work that is useful but not profitable. Work won’t disappear; it’s paid work and profits that will become increasingly scarce. We need a new system that enables an abundance of paid work. This is the topic of my book, which Mark Jeftovic and I Discuss in this podcast (44:47).

A Radically Beneficial World: Automation, Technology and Creating Jobs for All is now available as an Audible audio book.

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How to Escape the Purgatory of Minimum Wage/Part-Time Jobs

Readers responded positively to my recent essay on the emerging economy and jobs: A Teachable Moment: to the Young Person Who Complained About Her Job/Pay at Yelp and Was Promptly Fired

Many young people are stuck in the purgatory of minimum wage and/or part-time jobs: that raises the question: how do you get out of minimum-wage purgatory?

The conventional answer is, “get another college degree.” Perhaps this once had some value, but this now yields rapidly diminishing returns due to supply and demand: everyone else seeking an escape from low-wage/part-time purgatory is pursuing the same strategy, so there is an oversupply of over-credentialed job seekers.

As I point out in my book on jobs and careers in the new economy, Get a Job, Build a Real Career and Defy a Bewildering Economy, issuing 500,000 MBAs does not automatically create jobs for all those graduates: credentials don’t create jobs.

What creates jobs are opportunities to earn high profits via developing profitable skills. Not all businesses are highly profitable; low-margin businesses don’t make enough profit to pay high wages.

Take a high-skill person and put them in a low-margin setting such as fast-food prep (very fast-paced and hard work), and their labor can only generate a limited value for the employer.

Value and profits flow to what’s scarce. Low-skill labor is not scarce–it’s abundant, hence the low wages paid for low-skill work. Workers with credentials are no longer scarce, with the exception of physicians and nurses and a few categories of advanced degrees such as computer science.

What’s scarce are opportunities to earn big profits. Those who have never started a business or operated a business always assume a busy restaurant (for example) is very profitable–but this is not necessarily true. A restaurant with high rent, high labor costs and high overhead expenses could be losing money even if it’s filled with customers every night.

Not only is it not easy to earn a profit, it’s getting harder by the day. Rents are soaring, permits and fees are soaring, regulationary compliance costs more, taxes are higher, minimum wages are rising and competition in most sectors that aren’t protected by the government is fierce.

Employees have to generate a substantial profit for their employers, or the employer will go under. Even large corporations that report big profits are slashing payrolls, trimming bonuses and benefits, and demanding more free labor (though they don’t call it that) from remaining employees. Executives who fail to top profit estimates are sacked.

What’s scarce and what’s abundant? Answering these questions helps us understand the economy and why high wages and profits flow to what’s scarce.

If there’s only one grocery store in town, access to fresh food is scarce, and that store can charge a premium. If there is only one plumber in town, the plumber can charge a premium equal to the travel time that would have to be paid to plumbers in other towns.

In the age of automation, what’s scarce are problem-solving skills. Software and robotics are good with set situations and routines, but not so good at responding to unique situations. If someone wants a high-wage job in a profitable sector, one avenue is to become a better problem-solver.

The best way to become a better problem solver is to start a small enterprise yourself, because the entrepreneur–even the smallest scale entrepreneur selling on Etsy or perfominng some service in the community–must solve a wide range of problems on a daily basis.

Another way is to volunteer for organizations that are woefully understaffed. A beginner will be given responsibilities in these settings that would never be given to him/her in a government or corporate setting.

The more you take on, the faster you learn because you fail often and fail fast. Problem-solving is largely intuitive and a function of experience and networking with those who can help solve the problem.

This is the basis of the eight essential skills I recommend everyone acquire if they want to exit low-wage purgatory.

A third way is to actively acquire knowledge and experience in fields that are not within your chosen speciality. Specialization is not necessarily the best or only way to develop scarce skills; being able to cross boundaries and draw insights from other fields– the opposite of further specialization–makes for better problem-solving skills. Flexibility, adaptability and the ability to bypass rigid boundaries–these are scarce.

Nowadays, virtually every field requires good communication and collaboration skills. Credentials don’t generate these skills–experience is required. Many people complain that they can’t get the experience needed to qualify for a job, so they puff up their resume/CV and lie about their experience.

The better strategy is to get the experience and consciously set out to acquire solid communication and collaboration skills–what’s known as “soft skills” as compared to “hard skills” such as welding or coding Python.

As noted above, there are two avenues: volunteer for an organization you believe in that happens to be woefully understaffed, or start your own enterprise, no matter how small.

What’s scarce and what’s abundant? The answers are not always clear, but the process of seeking answers will be helpful. Finding work you enjoy and developing skills that are scarce–this is the way forward.

There is more on these topics in my book Get a Job.

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The Flaws in Basic Income for Everyone

Finland made the news recently by proposing a pilot program of guaranteed income for all, also known as Universal Basic Income: Desperate Finland Set To Unleash Helicopter Money Drop To All Citizens.

The goal is two-fold: by providing every household with a minimum income, regardless of what other income the individuals might earn, the program does two things: it provides everyone enough money to get by and it removes the disincentive to work inherent in the conventional welfare model: in the current model, recipients who earn money lose their benefits, leaving them no better off if their earnings are modest.

The Finnish proposal offers a basic income of around $850 to $900 per month, roughly $10,000 per year.

Proponents of Universal Basic Income (UBI) see it as the only solution to automation’s replacement of human labor, a topic I discuss in depth in my new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.

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Automation Doesn’t Just Destroy Jobs–It Destroys Profits, Too

The idea that taxing the owners of robots and software will fund guaranteed incomes for all is not anchored in reality.

Automation is upending the global order by eliminating human labor on an unprecedented scale–and the status quo has no reality-based solution to this wholesale loss of jobs.

Two recent articles highlighted the profound consequences of advances in robotics and AI (artificial intelligence) on employment: four fundamentals of workplace automation and Robots may shatter the global economic order within a decade as the pace of automation innovation has gone from linear to parabolic (via Mish).

The status quo apologists/punditry have offered two magical-thinking solutions to the sweeping destruction of jobs across the entire spectrum of paid work:

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