Epilogue to my Notes on Malthusian Ideas

                                                                                           IG, San Francisco, April 2020

Epilogue to my Notes on Malthusian Ideas

(on the US road from idealistic American liberal democracy to populist misery)

Productivity improvements, introduced by the application of some elements of the Industrial Revolution, e.g. improved tools, into agriculture during the Second Agricultural Revolution in Northwestern Europe, significantly reduced the number of people who were needed there to produce food. Subsequently, these advances then spread eastward and southward in Europe, and eventually to other continents too. By the end of the 19th century, new industrial societies became established and replaced agrarian societies in regions now commonly referred to as the developed world, in Europe, North America, Japan, and Australia. The labor released from agriculture was employed in the growing manufacturing industry. In the developed world, this evolutionary process of moving large numbers of people from farms to factories started in the second half of the 18th century. Much of the rest of the world achieved high agricultural productivity and moved the majority of its population into manufacturing industries during and after the Third Agricultural Revolution, during the second half of the 20th century.

Clearly there was a bidirectional exchange between industrialization and agriculture. Increasing agricultural productivity allowed people to move into new industries Industrial advances were applied to agriculture, and this, in turn, further reduced the labor required to produce food; people released from agriculture, could move into industry. Obviously, there was a positive feedback process between a growing new industry and modernizing agriculture.

In the 20th century, significant industrial productivity improvements were achieved. People then moved into the newly emerging service Industries. Furthermore, some of the achievements of the service Industries were of direct benefit to further improve industrial productivity.  While early Industrial Automation was principally simple mechanization, the later phases are principally software-driven. Here again, we observe positive feedback between the emerging service industry and the earlier and productivity-improving manufacturing Industries.

The costs of all man-made goods can be broken down into three fundamental components:  materials, labor, capital. Productivity improvements are driven by automation. Automation involves machinery, to build and install the machinery requires capital. As productivity improves, less labor and more capital are needed. To make things in a fully automated factory, only machines and no labor is required. (A further benefit of automation is that automated factories produce fewer defects than manual production lines do, which results in lower materials consumption; thus capital’s share, depreciation, of the cost of goods produced is thereby also increased.)

In bygone eras capital once was thought of as money owned by rich people who invested it into goods and property. In our time we recognize a new capital. Some name this version of capital intellectual capital. Good education and good ideas can be converted into real money and ideas can also be purchased with real money. The forming of Amazon primarily did not involve the acquisition of goods or machinery, it simply grew out of a good idea, which then, in turn, generated the biggest individual fortune in the world. Even though Amazon delivers physical goods, its core activity and value generator is the software that allows placement of orders for billions of items from practically anywhere on earth, secures all payment without any cash exchange, and manages the deliveries of the ordered goods virtually without any error. Likewise, Google grew out of an idea and so did Facebook. In all of these cases, an idea was born which then was expanded on with the support of investors. Even though the companies that grew out of the ideas may now own real estate and other property, the fundamental business is still dealing with ideas and abstractions; while  Amazon handles physical goods, Google and Facebook only handle thoughts, ideas, and feelings. - - In contrast, earlier entrepreneurs who made major fortunes had ideas that resulted either in new hardware or new mining explorations; Rockefeller, Hewlett and Packard, Watkins & Johnson all created enterprises that sold physical goods. (A possible exception may have been William Hearst, who created newspapers filled with news.) The new tech-entrepreneurs all invent, promote, and sell new ideas, not physical goods. ( Elon Musk and his Tesla electric car may serve as a counterexample, but Musk did not invent the electric car; it was invented more than a hundred years ago by Edison and Ford. Most of what is new in Tesla, what couldn't have been done 100 years ago, is the software residing on silicon chips.) 

The next phase of labor-saving activity involves artificial intelligence, AI, which is likely to completely redo the service Industries, and as a result of this redoing, AI is likely to remove many people from the current payrolls of the service Industries. (For example, Amazon today is a major US employer. It employs 750 thousand people in the US, many in their warehouses and in the delivery to homes of purchased items. Warehouse automation continues relentlessly, and delivery by autonomous vehicles and drones is anticipated within a decade.) This change may present a major question. In the past, as technology improved and productivity increased, labor from one area of the economy could be employed elsewhere. All of the freed-up labor from one industry was immediately employed in a new industry. From agriculture people moved into factories, from factories they moved into services, But now we face a quandary. Where will the people no longer needed in the service industry move; where are they going to find new employment and earn good middle-class wages?  This unanswered question at this time, together with another issue to be discussed below, income and wealth inequality, will need soon to be addressed at all levels of government and society.

Not only earthshaking major ideas that result in billion-dollar enterprises imply intellectual capital, but education also does. In the USA post-high-school education is expensive, but the returns are significant. Graduating from college pays, getting graduate degrees pays even better, especially so in STEM (science, technology, engineering, mathematics).  Typical engineering graduates with bachelor's degrees receive starting salaries that put them comfortably into the upper half of all US earners. Master's degree holders earn even more, and engineering PhDs start out earning at levels in the upper 15% of the US individual income distribution. Unemployment is virtually unknown for STEM degree holders. Many engineering PhDs,  without entrepreneurial success, make it into the upper 5% income bracket. Decades of earning a good salary combined with wise investments can convert educated Americans’ intellectual property, i.e., their education, into substantial physical capital.

The distribution of wealth in the USA is very uneven. The upper 10% holds about a 70% share of the total net worth of all households, while the lower half, 50% of the population, holds only 1.2% of the total. Income and wealth inequality is a major and growing political and social problem in the USA. The rise achieved and the support enjoyed by populist politicians on the right (Trump) and the left (Sanders) are clearly expressions of social discontent. While the core supporters on the extremes of the two groups blame different enemies as the cause of their anger, they all feel left out; they are all unhappy with things as they are now, and they all want change.

The social pressure is very likely going to intensify shortly. A major economic uncertainty resulted from the COVID19 pandemic. Currently, the country is under shut-down. Unemployment is rising to levels not seen since the Great Depression of the 1930s. During the shut-down, the GDP is at a virtual standstill; the GDP in 2020 is likely to contract. We don’t know when the pandemic will end and how: protracted, slowly drawn out, or sudden, the recovery will be. Even less do we know how the economy will recover as normal life resumes. Will there be a sudden step-like rise and return to the pre-pandemic level of activity? Or will the $2 Trillion emergency injection into the ailing economy prove to be insufficient to sustain it? Will the many businesses now unable to operate be forced to permanently shut down and/or face bankruptcy? Is this another phase of main street vs, Wall Street, when the big ones survive and come out even stronger than before, while the small businesses become victims of the crisis?  Will all this result in massive and protracted unemployment and economic contraction? 

We face a nightmare scenario when we consider the possible outcome of the given combinations: 1) the after-effects of the pandemic; 2) the continued AI-driven productivity improvements in the service industries with no place to go for the released labor to find new labor-hungry industries; 3) the wealth and income inequality that is likely to get worse as capital will continue increasingly to replace labor in all three segments of the economy (agriculture, manufacturing, and service); with 4) the growing social anger brewing on both the right and the left, an anger combination that wants to destroy all that we the believers in American liberal democracy hold and cherish.

We brace ourselves, hope for the best, and some of us are relieved and happy to be more than 80-years old!