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ZMP and the Welfare State

July 3, 2013

Let’s start with a basic trade model. Britain is comparatively better at making wool, and Portugal is comparatively better at making wine. In the absence of trade, both countries will make both goods. When trade is opened up, Britain focuses on wool, Portugese focus on wine, and they trade and are “both” made better off.

Why is both in scare quotes? Because countries are not people. While the consumers in both countries get better prices, the wine makers in Britain and the cloth makers in Portugal both suffer as the price of their products drops, lowering their income. If they are able to switch to producing something else, their wages will go up, but if not, they will drop.

Technology works the same way as trade in regards to relative prices and economic growth. So, an increased technology can make certain methods of production unprofitable by shifting relative prices of goods.

If technological growth is fairly even across sectors, wage growth will be fairly even as well. Goods cannot be consumed until after they are produced. If everyone becomes twice as productive, everyone can consume twice as much and work the same amount. In the past, technological innovation has been uneven, but people have been able to switch from low productivity sectors to high productivity sectors and overall wages have increased. Most people today own cars, cell phones, have enough food to eat, and many other luxuries which were uncommon in the past, simply because we have become much better at making those things.

Just as trade can cause disruptions in the labor market, so too can technology. What is important for workers is their productivity relative to other factors of production. Keep in mind, increased productivity implies overall higher wages, like in the example of comparative advantage, that doesn’t mean that everyone individually benefits. Recently, it seems as if lower skilled workers have faced decreased relative productivity compared to high skilled workers. Automation can drastically reduce the value of one’s work, often overnight.

Solving problems completely doesn’t improve GDP, but it does eliminate jobs. If someone cures a disease forever, measured GDP decreases, because there are no more scientists working for the cure, and no more doctors treating patients, but human welfare clearly increases. In my view, a lot of technologies in the internet era resemble solving problems rather than improved productivity.

If technological growth favors a small group of people with particular skills, the rest of humanity could very well face a reduction in wages. I honestly don’t know what will happen in the future. If computers can replace all human labor, then everyone will get a higher living standard since no one will have to work at all. All work will be equally unproductive.

More and more, high skilled people really are significantly more productive than lower skilled workers. Modern production requires many people working together, and any one of them has a change to screw up the product for the whole team. Often, it’s worth hiring over-skilled people just to ensure they don’t totally mess things up for the rest of the team.

Relative productivity is something Marx got wrong. He thought that the low skilled were where all the productivity was taking place and so had to invent boogymen to justify why they weren’t getting commensurate compensation. The primary reason why people get low wages, at least according to mainstream economic theory, is that their work just isn’t worth very much.

The value of the low skilled is not what they produce, but what they consume. I believe mankind is inherently equal in the eyes of God. There is something very precious about human life and each person carries within themselves the entire universe as they perceive it. To each person, their own life is all there is. Say whatever you will about elasticities of supply or effeciency or whatever, but fundamentally I think society should be organized with a perspective of inherent equality. I don’t think everyone should get the same income, necessarily, and in fact that’s often a fool’s errand. However, I do believe that there should be a certain standard of living which should be available to all, regardless of their base life situation.

All of these factors push me toward supporting a guaranteed basic income – some small amount of income that everyone gets no matter what which is sufficient to lead a tolerable, but not luxurious life. Just enough to pay for basic housing, basic food, and a small bit left over for entertainment and “linen shirts” (V.2.148, Goods which are not technically necessities, but are socially required). I favor an unrestricted cash transfer because I don’t think the State has any business dictating the lifestyle of any of its citizens, the poor included. I don’t want the amount to be large, because it should not tempt away individuals whose work is productive to instead take a life of leisure. Furthermore, I think a basic income scheme could replace much welfare as it currently is and reduce much of the associated bureaucracy. Making the income conditionless further reduced administrative expenses. I think Social Security Administration is a much better exmaple of what a welfare program program should look like, rather than Medicaid precisely because it is boring and uncomplicated. I understand libertarian arguments against welfare generally, but I don’t they are sufficiently moral when people cannot produce enough to give themselves a decent standard of living even if they are hardworking and keep their noses clean, as it were.

Further reading:
Nick Rowe on robotic production
Support the undeserving.
Interfluidity on the Generalized Resource curse. More here.

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