Second Machine Age Research (Saito)

AUTOMATION, NETWORKS AND INEQUALITY: why innovation isn’t neutral

The Second Machine Age 1850-1950

For many thousands of years, humanity was a very gradual upward trajectory. Progress was achingly slow, almost invisible. Animals and farms, wars and empires, philosophies and religions all failed to exert much influence. But just over two hundred years ago, something sudden and profound arrived and bent the curve of human history—of population and social development —almost ninety degrees.

Now comes the second machine age. Computers and other digital advances are doing for mental power—the ability to use our brains to understand and shape our environments—what the steam engine and its descendants did for muscle power. They’re allowing us to blow past previous limitations and taking us into new territory.

[Who loses, who gains] Our third conclusion is less optimistic: digitization is going to bring with it some thorny challenges. This in itself should not be too surprising or alarming; even the most beneficial developments have unpleasant consequences that must be managed. The Industrial Revolution was accompanied by soot-filled London skies and horrific exploitation of child labor. What will be their modern equivalents? Rapid and accelerating digitization is likely to bring economic rather than environmental disruption, stemming from the fact that as computers get more powerful, companies have less need for some kinds of workers. Technological progress is going to leave behind some people, perhaps even a lot of people, as it races ahead. As we’ll demonstrate, there’s never been a better time to be a worker with special skills or the right education, because these people can use technology to create and capture value. However, there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.

At the end of the two-day tournament, Watson had amassed $77,147, more than three times as much as either of its human opponents. Jennings, who came in second, added a personal note on his answer to the tournament’s final question: “I for one welcome our new computer overlords.” He later elaborated, “Just as factory jobs were eliminated in the twentieth century by new assembly-line robots, Brad and I were the first knowledge-industry workers put out of work by the new generation of ‘thinking’ machines. ‘Quiz show contestant’ may be the first job made redundant by Watson, but I’m sure it won’t be the last.” 22

Forbes.com has contracted with the company Narrative Science to write the corporate earnings previews that appear on the website. These stories are all generated by algorithms without human involvement.

Our brains are not well equipped to understand sustained exponential growth.

The evolution of photography illustrates the bounty of the second machine age, the first great economic consequence of the exponential, digital, combinatorial progress taking place at present. The second one, spread, means there are large and growing differences among people in income, wealth, and other important circumstances of life. We’ve created a cornucopia of images, sharing nearly four hundred billion “Kodak moments” each year with a few clicks of a mouse or taps on a screen. But companies like Instagram and Facebook employ a tiny fraction of the people that were needed at Kodak. Nonetheless, Facebook has a market value several times greater than Kodak ever did and has created at least seven billionaires so far, each of whom has a net worth ten times greater than George Eastman did. The shift from analog to digital has delivered a bounty of digital photos and other goods, but it has also contributed to an income distribution that is far more spread out than before

[reducing incomes] More wealth will be created with less work. But at least in our current economic system, this progress will also have enormous effects on the distribution income and wealth. If the work a person produces in one hour can instead be produced by a machine for one dollar, then a profit-maximizing employer won’t offer a wage for that job of more than one dollar. In a free-market system, either that worker must accept a wage of one dollar an hour or find some new way to make a living. Conversely, if a person finds a new way to leverage insights, talents, or skills across one million new customers using digital technologies, then he or she might earn one million times as much as would be possible otherwise. Both theory and data suggest that this combination of bounty and spread is not a coincidence.Advances in technology, especially digital technologies, are driving an unprecedented reallocation of wealth and income. Digital technologies can replicate valuable ideas, insights, and innovations at very low cost. This creates bounty for society and wealth for innovators, but diminishes the demand for previously important types of labor, which can leave many people with reduced incomes.

The combination of bounty and spread challenges two common though contradictory worldviews. One common view is that advances in technology always boost incomes. The other is that automation hurts workers’ wages as people are replaced by machines. Both of these have a kernel of truth, but the reality is more subtle. Rapid advances in our digital tools are creating unprecedented wealth, but there is no economic law that says all workers, or even a majority of workers, will benefit from these advances.

[evidence] A good place to start is median income—the income of the person at the fiftieth percentile of the total distribution. The year 1999 was the peak year for the real (inflation-adjusted) income of the median American household. It reached $54,932 that year, but then started falling. By 2011, it had fallen nearly 10 percent to $50,054, even as overall GDP hit a record high. In particular, wages of unskilled workers in the United States and other advanced countries have trended downward. Meanwhile, for the first time since before the Great Depression, over half the total income in the United States went to the top 10 percent of Americans in 2012. The top 1 percent earned over 22 percent of income, more than doubling their share since the early 1980s. The share of income going to the top hundredth of one percent of Americans, a few thousand people with annual incomes over $11 million, is now at 5.5 percent, after increasing more between 2011 and 2012 than any year since 1927–28. 9 Several other metrics have also been increasingly unequal. For instance, while overall life expectancy continues to rise, life expectancies for some groups have started to fall.According to a study by S. Jay Olshansky and his colleagues published in Health Affairs, the average American white woman without a high school diploma had a life expectancy of 73.5 years in 2008, compared to 78.5 years in 1990. Life expectancy for white men without a high school education fell by three years during this period. 10 It’s no wonder that protests broke out across America even as it was beginning to recover from the Great Recession. The Tea Party movement on the right and the Occupy movement on the left each channeled the anger of the millions of Americans who felt the economy was not working for them. One group emphasized government mismanagement and the other abuses in the financial services sector

[evidence] Between 1983 and 2009, Americans became vastly wealthier overall as the total value of their assets increased. However, as noted by economists Ed Wolff and Sylvia Allegretto, the bottom 80 percent of the income distribution actually saw a net decrease in their wealth. 11 Taken as a group, the top 20 percent got not 100 percent of the increase, but more than 100 percent. Their gains included not only the trillions of dollars of wealth newly created in the economy but also some additional wealth that was shifted in their direction from the bottom 80 percent. The distribution was also highly skewed even among relatively wealthy people. The top 5 percent got 80 percent of the nation’s wealth increase; the top 1 percent got over half of that, and so on for ever-finer subdivisions of the wealth distribution. In an oft-cited example, by 2010 the six heirs of Sam Walton’s fortune, earned when he created Walmart, had more net wealth than the bottom 40 percent of the income distribution in America. 12 In part, this reflects the fact that thirteen million families had a negative net worth. Along with wealth, the income distribution has also shifted. The top 1 percent increased their earnings by 278 percent between 1979 and 2007, compared to an increase of just 35 percent for those in the middle of the income distribution. The top 1 percent earned over 65 percent of income in the United States between 2002 and 2007. According to Forbes, the collective net worth of the wealthiest four hundred Americans reached a record two trillion dollars in 2013, more than doubling since 2003. 13

IN S HO RT, median income has increased very little since 1979, and it has actually fallen since 1999. But that’s not because growth of overall income or productivity in America has stagnated; as we saw in chapter 7, GDP and productivity have been on impressive trajectories. Instead, the trend reflects a significant reallocation of who is capturing the benefits of this growth, and who isn’t.

[who gets replaced] To capture these distinctions, work by our MIT colleagues Daron Acemoglu and David Autor suggests that work can be divided into a two-by-two matrix: cognitive versus manual and routine versus nonroutine. 25 They found that the demand for work has been falling most dramatically for routine tasks, regardless of whether they are cognitive or manual. This leads to job polarization: a collapse in demand for middle-income jobs, while nonroutine cognitive jobs (such as financial analysis) and nonroutine manual jobs (like hairdressing) have held up relatively well.

*basically saying labour is getting slammed *biggest winners is stars/super-stars (asymptote)

The first two sets of winners are those who have accumulated significant quantities of the right capital assets. These can be either nonhuman capital (such as equipment, structures, intellectual property, or financial assets), or human capital (such as training, education, experience, and skills). Like other forms of capital, human capital is an asset that can generate a stream of income. A well-trained plumber can earn more each year than an unskilled worker, even if they both work the same number of hours. The third group of winners is made up of the superstars among us who have special talents—or luck.

[winner take all][exclusion] WE’VE S EEN THAT S KI L L -BIAS ED technical change has increased the relative demand for highly educated workers while reducing demand for less educated workers whose jobs frequently involve routine cognitive and manual tasks. In addition, capital-biased technological changes that encourage substitution of physical capital for labor have increased the profits earned by capital owners and reduced the share of income going to labor. In each case, historic amounts of wealth have been created. In each case, we also have seen increases in the earnings of the winners relative to the losers. But the biggest changes of all are driven by a third gap between winners and losers: the gap between the superstars in a field and everyone else.

When Terry Gou, the founder of Foxconn, purchased thirty thousand robots to work in the company’s factories in China, he was substituting capital for labor. 32 Similarly, when an automated voice-response system usurps some of the functions of human call center operators, the production process has more capital and less labor. Entrepreneurs and managers are constantly making these types of decisions, weighing the relative costs of each type of input, as well as the effects on the quality, reliability, and variety of output that can be produced.

The fall in labor’s share is in part the consequence of two trends we have already noted: fewer people are working, and wages for those who are working are lower than before. As a result, while labor compensation and productivity in the past rose in tandem, in recent years a growing gap has opened. If productivity is growing and labor as a whole isn’t capturing the value, who is? Owners of physical capital, to a large extent. While the economy remained mired in a slump, profits reached historic highs last year, both in absolute terms ($1.6 trillion) and as a share of GDP (26.2 percent in 2010, up from the 1960–2007 average of 20.5 percent). 38 Meanwhile, real spending on capital equipment and software has soared by 26 percent while payrolls have remained essentially flat, as noted by Kathleen Madigan. 39

When ‘winner-take-all’ markets become more important, income inequality will rise because pay at the very top pulls away from pay in the middle. 2

[super stars, oligarchy] More often than not, when improvements in digital technologies make it more and more attractive to digitize something, superstars in various markets see a boost in their incomes while second-bests have a harder time competing. The top performers in music, sports, and other areas have also seen their reach and incomes grow since the 1980s. 6

Even top executives have started earning rock-star compensation. The ratio of CEO pay to average worker pay increased from seventy in 1990 to three hundred in 2005. Much of this growth is linked to the greater use of information technology, according to research that Erik completed with his student Heekyung Kim. 8 One rationale for this increase in executive pay is that technology increases the reach, scale, or monitoring capacity of a decision-maker. If executives use digital technologies to observe activities in factories throughout the world, to give specific instructions for changing a process, and to make sure instructions are carried out with high fidelity, then the value of those decision-makers increases. Direct management via digital technologies makes a good manager more valuable than in earlier times when managers had diffuse control via long chains of subordinates, or when they could only affect a smaller scale of activities.

Direct digital oversight also makes hiring the best candidate rather than the second-best that much more important. Companies are ready to pay a premium for executives whom they perceive to be the best, reasoning that even a small difference in quality can have huge consequences for shareholders. The bigger the market value of a company, the more compelling the argument for trying to get the very best executive. 9 A single decision that increases value by a modest 1 percent is worth $100 million to a ten-billion-dollar company. In a competitive market, even a small difference in the perceived talents of CEO candidates can lead to fairly large differences in their compensation. As economists Robert Frank and Philip Cook note in their book, The Winner-Take-All Society, “When a sergeant makes a mistake only the platoon suffers, but when a general makes a mistake the whole army suffers.”

Why winner take all is winning: a) the digitization of more and more information, goods, and services, b) the vast improvements in telecommunications and, to a lesser extent, transportation, and c) the increased importance of networks and standards.

[winner take all economies] In contrast, the economics of personal services (nursing) or physical work (gardening) are very different, since each provider, no matter how skilled or hard-working, can only fulfill a tiny fraction of the overall market demand. When an activity transitions from the second category to the first the way tax preparation did, the economics shift toward winner-take-all outcomes. What’s more, lowering prices, the traditional refuge for second-tier products, is of little benefit for anyone whose quality is not already at or near the world’s best. Digital goods have enormous economies of scale, giving the market leader a huge cost advantage and room to beat the price of any competitor while still making a good profit. 14 Once their fixed costs are covered, each marginal unit produced costs very little to deliver. 15

An economy dominated by winner-take-all markets has very different dynamics than the industrial economy to which we are accustomed.



[Pareto Curves] In contrast, superstar (and long tail) markets are often better described by a power law, or Pareto curve, in which a small number of people reap a disproportionate share of sales. This is often characterized as the 80/20 rule, where 20 percent of the participants get 80 percent of the gains, but it can be more extreme than that. 22 For instance, research by Erik and his coauthors found that book sales at Amazon were characterized by a power law distribution. 23 Power law distributions have a ‘fat tail,’ which means the likelihood of extreme events is much greater than one would expect to see in a normal distribution. 24 They are also ‘scale invariant,’ which means that the top-selling book accounts for about the same share of the top ten books’ sales as the top ten books do for the top one hundred, or the top one hundred do for the top one thousand. Power laws describe many phenomena, from frequency of earthquakes to the frequency of words in most languages. They also describe the sales distribution of books, DVD, apps, and other information products.

A shift in the distribution of income to a power-law distribution would have important implications. For instance, Kim Taipale, founder of the Stilwell Center for Advanced Studies in Science and Technology Policy, has argued that, “The era of bell curve distributions that supported a bulging social middle class is over and we are headed for the power-law distribution of economic opportunities. Education per se is not going to make up the difference.” 26

Bounty/Spread Chapter

[Basic Problem, crux] IN THE LAS T FO UR chapters, we’ve seen that the second machine age contains a paradox. GDP has never been higher and innovation has never been faster, yet people are increasingly pessimistic about their children’s future living standards. Adjusted for inflation, the combined net worth on Forbes’ billionaire list has more than quintupled since 2000, but the income of the median household in America has fallen. 1

The economic statistics underscore the dichotomy of bounty and spread. The economist Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, brought our attention to the way productivity and employment have become decoupled, as shown in Figure 11.1. While these two key economic statistics tracked each other for most of the postwar period, they became decoupled in the late 1990s. Productivity continued its upward path as employment sagged. Today the employment-to-population ratio is lower than any time in at least 20 years, and the real income of the median worker is lower today than in the 1990s. Meanwhile, like productivity, GDP, corporate investment, and after-tax profits are also at record highs.

[If bounty increases, why care about spread?] The fact that technology brings both bounty and spread, and brings more of both over time, leads to an important question:Since there’s so much bounty, should we be concerned about the spread? In other words, we might consider rising inequality less of a problem if people at the bottom are also seeing their lives improve thanks to technology.

Income inequality and other measures of spread are increasing, but not everyone is convinced this is a problem. Some observers advance what we will call the ‘strong bounty’ argument, which essentially says that a focus on spread is misleading and inappropriate, since bounty is the more important phenomenon and exists even at the bottom of the spread. This argument acknowledges that highly skilled workers are pulling away from the rest—and that superstars are pulling so far away as to be out of sight—but then essentially asks, “So what? As long as all people’s economic lives are getting better, why should we be concerned if some are getting a lot better?” As Harvard economist Greg Mankiw has argued, the enormous income earned by the “one percent” is not necessarily a problem if it reflects the just deserts of people who are creating value for everyone else. 2

If the strong bounty argument is correct, then we have nothing significant to worry about as we head deeper into the second machine age. But is it? We wish that were the case, but it’s not.As we saw in chapters 9 and 10, the data are quite clear that many people in the United States and elsewhere are losing ground over time, not just relative to others but in absolute terms. In America, the income of the median worker is lower in real dollars than it was in 1999 and the story largely repeats itself when we look at households instead of individual workers, or total wealth instead of annual income. Many people are falling behind as technology races ahead.

These points have merit, but we are not convinced that people at the lower ranges of the spread are doing OK. For one thing, some critical items that they (and everyone else) would like to purchase are getting much more expensive over time. This phenomenon is well summarized in research by Jared Bernstein, who compared increases in median family income between 1990 and 2008 with changes in the cost of housing, health care, and college. He found that while family income grew by around 20 percent during that time, prices for housing and college grew by about 50 percent, and health care by more than 150 percent. 7 Since American real median incomes have been falling in recent years, these comparisons would be even more unfavorable if repeated over later time periods than 1990 to 2008. However American households are spending their money, many of them are left without a financial cushion. The economists Annamaria Lusardi, Daniel J. Schneider, and Peter Tufano conducted a 2011 study asking people about “their capacity to come up with $2,000 in 30 days.” Their findings are troubling. They concluded that, “Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans. . . . [In other words, we] find that nearly half of Americans are financially fragile. . . . [A] sizable fraction of seemingly ‘middle class’Americans . . . judge themselves to be financially fragile.” 8 Other data—about poverty rates, access to health care, the number of people who want full-time jobs but can only find part-time work, and so on—confirm the impression that while the economic bounty from technology is real, it is not sufficient to compensate for huge increases in spread. And those increases are not purely a consequence of the Great Recession, nor a recent or transient phenomenon.

That many Americans face stagnant and falling incomes is bad enough, but it is now combined with decreasing social mobility—an ever lower chance that children born at the bottom end of the spread will escape their circumstances and move upward throughout their lives and careers. Recent research makes it clear that the American Dream of upward mobility, which was real in earlier generations, is greatly diminished today. To take just one example, a 2013 study of U.S. tax returns from 1987 to 2009 conducted by economists Jason DeBacker, Bradley Heim, and their colleagues found that the thirty-five thousand households they studied tended to stay in roughly the same order of richest to poorest year after year, with little reshuffling, even as the differences in household income grew over time. 9 More recently, sociologist Robert Putnam has illustrated how for Americans in cities like Port Clinton, Ohio (his hometown), economic conditions and prospects have worsened in recent decades for the children of parents with only high school educations even as they’ve improved for collegeeducated families. This is exactly what we’d expect to see as skill-biased technical change accelerates. 10 Many Americans believe that they still live in the land of opportunity—the country that offers the greatest chance of economic advancement. But this is no longer the case. As The Economist sums it up, “Back in its Horatio Alger days, America was more fluid than Europe. Now it is not. Using one-generation measures of social mobility—how much a father’s relative income influences that of his adult son—America does half as well as Nordic countries, and about the same as Britain and Italy, Europe’s least-mobile places.” 11 So the spread is not only large, but also self-perpetuating. Too often, people at the bottom and middle stay where they are over their careers, and families stay locked in across generations. This is not healthy for an economy or society.

. Instead, they’re institutions like democracy, property rights, and the rule of law; inclusive ones bring prosperity, and extractive ones—ones that bend the economy and the rules of the game to the service of entrenched elite—bring poverty. The authors make a compelling case, and when they turn their attention to America’s current condition, they offer important insights and cautions: Prosperity depends on innovation, and we waste our innovative potential if we do not provide a level playing field for all: we don’t know where the next Microsoft, Google, or Facebook will come from, and if the person who will make this happen goes to a failing school and cannot get into a good university, the chances that it will become a reality are much diminished. . . . The U.S. generated so much innovation and economic growth for the last two hundred years because, by and large, it rewarded innovation and investment. This did not happen in a vacuum; it was supported by a particular set of political arrangements—inclusive political institutions—which prevented an elite or another narrow group from monopolizing political power and using it for their own benefit and at the expense of society. So here is the concern: economic inequality will lead to greater political inequality, and those who are further empowered politically will use this to gain greater economic advantage, stacking the cards in their favor and increasing economic inequality still further—a quintessential vicious circle. And we may be in the midst of it. 12

Their analysis hits on a final reason to be concerned about the large and growing inequality of recent years: it could lead to the creation of extractive institutions that would slow our journey into the second machine age. We think this would be something more than a shame; it would be closer to a tragedy. We also believe, based on the work of Acemoglu and Robinson and others, that it is a plausible scenario. Instead of being confident that the bounty from technology will more than compensate for the spread it generates, we are instead concerned about something close to the reverse: that the spread could actually reduce the bounty in years to come.

Keynes was more concerned with short-term “maladjustments,” which brings us to the second, more serious argument for technological unemployment: the inability of our skills, organizations, and institutions to keep pace with technical change. When technology eliminates one type of job, or even the need for a whole category of skills, those workers will have to develop new skills and find new jobs. Of course, that can take time, and in the meantime they may be unemployed. The optimistic argument maintains that this is temporary. Eventually, the economy will find a new equilibrium and full employment will be restored as entrepreneurs invent new businesses and the workforce adapts its human capital. But what if this process takes a decade? 25 And what if, by then, technology has changed again? This is the possibility that Wassily Leontief had in mind his 1983 article when he speculated that many workers could end up permanently unemployed, like horses unable to adjust to the invention of the tractors. 26 Once one concedes that it takes time for workers and organizations to adjust to technical change, then it becomes apparent that accelerating technical change can lead to widening gaps and increasing possibilities for technological unemployment. Faster technological progress may ultimately bring greater wealth and longer lifespans, but it also requires faster adjustments by both people and institutions. With apologies to Keynes, in the long run we may not be dead, but we will still need jobs.

In principle, the equilibrium wage could be one dollar an hour for some workers, even as other workers command a wage thousands of times higher. Most people in advanced countries would not consider one dollar an hour a living wage, and don’t expect society to require people to work at that wage under threat of starvation. What’s more, in extreme winner-take-all markets, the equilibrium wage might be zero: even if we offered to sing “Satisfaction” for free, people would still prefer to pay for the version sung by Mick Jagger. In the market for music, Mick can now, in effect, make digital copies of himself that compete with us.A near-zero wage is not a living wage. Rational people would rather look for another gig, and look, and look, and look, than depend on a near-zero wage for their sustenance. Thus, there is a floor on how low wages for human labor can go. In turn, that floor can lead to unemployment: people who want to work, but are unable to find jobs. If neither the worker nor any entrepreneur can think of a profitable task that requires that worker’s skills and capabilities, then that worker will go unemployed indefinitely. Over history, this has happened to many other inputs to production that were once valuable, from whale oil to horse labor. They are no longer needed in today’s economy even at zero price. In other words, just as technology can create inequality, it can also create unemployment. And in theory, this can affect a large number of people, even a majority of the population, and even if the overall economic pie is growing.

This thought experiment reflects the reality that there is no ‘iron law’ that technological progress must always be accompanied by broad job creation.

Businesses can identify and hire workers with skills they need anywhere in the world. If a worker in China can do the same work as an American, then what economists call “the law of one price” demands that they earn essentially the same wages, because the market will arbitrage away differences just as it would for other commodities. That’s good news for the Chinese worker, and for overall economic efficiency. But is not good news for the American worker who now faces low-cost competition.A number of economists have made exactly this argument. Michael Spence, in his brilliant book The Next Convergence, explains how the integration of global markets is leading to enormous dislocations, especially in labor markets. 27

In the long run, the biggest effect of automation is likely to be on workers not in America and other developed nations, but rather in developing nations that currently rely on low-cost labor for their competitive advantage. If you take most of the costs of labor out of the equation by installing robots and other types of automation, then the competitive advantage of low wages largely disappears. This is already beginning to happen. Terry Guo of Foxconn has been aggressively installing hundreds of thousands of robots to replace an equivalent number of human workers. He says he plans to buy millions more robots in the coming years. The first wave is going into factories in China and Taiwan, but once an industry becomes largely automated, the case for locating a factory in a low-wage country becomes less compelling. There may still be logistical advantages if the local business ecosystem is strong, making it easier to get spare parts, supplies, and custom components. But over time inertia may be overcome by the advantages of reducing transit times for finished products and being closer to customers, engineers and designers, educated workers, or even regions where the rule of law is strong. This can bring manufacturing back to America, as entrepreneurs like Rod Brooks have been emphasizing.

[Racing With Machines] The teams of human plus machine dominated even the strongest computers. The chess machine Hydra, which is a chess-specific supercomputer like Deep Blue, was no match for a strong human player using a relatively weak laptop. Human strategic guidance combined with the tactical acuity of a computer was overwhelming. The surprise came at the conclusion of the event. The winner was revealed to be not a grandmaster with a stateof-the-art PC but a pair of amateur American chess players using three computers at the same time. Their skill at manipulating and “coaching” their computers to look very deeply into positions effectively counteracted the superior chess understanding of their grandmaster opponents and the greater computational power of other participants. Weak human + machine + better process was superior to a strong computer alone and, more remarkably, superior to a strong human + machine + inferior process. 3

[Capitalism is OK] We are also skeptical of efforts to come up with fundamental alternatives to capitalism. By ‘capitalism’ here, we mean a decentralized economic system of production and exchange in which most of the means of production are in private hands (as opposed to belonging to the government), where most exchange is voluntary (no one can force you to sign a contract against your will), and where most goods have prices that vary based on relative supply and demand instead of being fixed by a central authority. All of these features exist in most economies around the world today. Many are even in place in today’s China, which is still officially communist. These features are so widespread because they work so well. Capitalism allocates resources, generates innovation, rewards effort, and builds affluence with high efficiency, and these are extraordinarily important things to do well in a society.As a system capitalism is not perfect, but it’s far better than the alternatives. Winston Churchill said that, “Democracy is the worst form of government except for all those others that have been tried.” 2 We believe the same about capitalism. The element that’s most likely to change, and to present challenges, is one that we have not mentioned yet: in today’s capitalist economies, most people acquire money to buy things by offering their labor to the economy. Most of us are laborers, not owners of capital. If our android thought experiment is correct, though, this long-standing exchange will become less feasible over time.As digital labor becomes more pervasive, capable, and powerful, companies will be increasingly unwilling to pay people wages that they’ll accept and that will allow them to maintain the standard of living to which they’ve been accustomed. When this happens, they remain unemployed. This is bad news for the economy, since unemployed people don’t create much demand for goods and overall growth slows down. Weak demand can lead to further deterioration in wages and unemployment as well as less investment in human capital and in equipment, and a vicious cycle can take hold.

[Basic Income] Basic income is not part of mainstream policy discussions today, but it has a surprisingly long history and came remarkably close to reality in twentieth-century America. One of its early proponents was the English-American political activist Thomas Paine, who advocated in his 1797 pamphlet Agrarian Justice that everyone should be given a lump sum of money upon reaching adulthood to compensate for the unjust fact that some people were born into landowning families while others were not. Later advocates included philosopher Bertrand Russell and civil rights leader Martin Luther King, Jr., who wrote in 1967, “I am now convinced that the simplest approach will prove to be the most effective—the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income.” 3 Many economists on both the left and the right have agreed with King. Liberals including James Tobin, Paul Samuelson, and John Kenneth Galbraith and conservatives like Milton Friedman and Friedrich Hayek have all advocated income guarantees in one form or another, and in 1968 more than 1,200 economists signed a letter in support of the concept addressed to the U.S. Congress. 4 The president elected that year, Republican Richard Nixon, tried throughout his first term in office to enact it into law. In a 1969 speech he proposed a Family Assistance Plan that had many features of a basic income program. The plan had support across the ideological spectrum, but it also faced a large and diverse group of opponents. 5 Caseworkers and other administrators of existing welfare programs feared that their jobs would be eliminated under the new regime; some labor leaders thought that it would erode support for minimum wage legislation; and many working Americans didn’t like the idea of their tax dollars going to people who could work, but chose not to. By the time of his 1972 reelection campaign, Nixon had abandoned the Family Assistance Plan, and universal income guarantee programs have not been seriously discussed by federal elected officials and policymakers since then.*

[Negative Income Tax] The negative income tax combines a guaranteed minimum income with an incentive to work. Below the cutoff point in the example (which was $3,000 in 1968 but would be about $20,000 in 2013 dollars), every dollar earned still increases total income by $1.50. This encourages people to start working and keep finding more work to do, even if the wages they receive for this work are low. It also encourages them to file tax returns and so become part of the visible mainstream workforce. In addition, it is relatively straightforward to administer, making use of the existing infrastructure for filing taxes and distributing refunds. For all these reasons, we like the idea of a negative income tax. At present, the American federal tax system includes a related idea called the Earned Income Tax Credit, or EITC. Compared to Freidman’s forty-year-old proposal, however, the EITC is small; in 2012 it maxed out at less than $6,000 for families with three or more qualifying children and less than $500 for families with no children. In addition, it cannot be used by people who have no income. Even though it’s small, though, the EITC is still powerful: research by economists Raj Chetty and Nathaniel Hendren at Harvard, along with Patrick Kline and Emmanuel Saez at Berkeley, suggests that states with more generous EITC policies also have significantly greater intergenerational mobility. 15 We support turning the EITC into a full-fledged negative income tax by making it larger and making it universal. We also think claiming the EITC should be made easier and more obvious. Approximately 20 percent of eligible taxpayers don’t take advantage of it, probably because they aren’t aware of its existence or are put off by its complexity. 16

[Others] We don’t claim to have all the answers to these critical questions, but we do know that the economist’s toolkit contains other kinds of taxes besides those on labor. As discussed in the last chapter, these include Pigovian taxes on pollution and other negative externalities, consumption taxes, and the value-added tax (VAT), which companies pay based on the difference between their costs (labor, raw materials, and so on) and the prices they charge customers. A VAT has several attractive properties—it’s relatively straightforward to collect, adjustable, and lucrative—but is not currently used in the United States. In fact,America is the only one of the thirty-four nations in the OECD without one. Economist Bruce Bartlett, legal scholar Michael Graetz, and others have put together alternatives to the current American tax system that rely heavily on a VAT. 22 We think these are valuable contributions to the discussion about how to best pay for government services in the second machine age, and deserve serious consideration.

[Multiple Others] • Create a national mutual fund distributing the ownership of capital widely and perhaps inalienably, providing a dividend stream to all citizens and assuring the capital returns do not become highly concentrated. • Use taxes, regulation, contests, grand challenges, or other incentives to try to direct technical change toward machines that augment human ability rather than substitute for it, toward new goods and services and away from labor savings. • Pay people via nonprofits and other organizations to do ‘socially beneficial’ tasks, as determined by a democratic process. • Nurture or celebrate special categories of work to be done by humans only. For instance, care for babies and young children, or perhaps the dying, might fall into this category. • Start a ‘made by humans’ labeling movement, similar to those now in place for organic foods, or award credits for companies that employ humans, similar to the carbon offsets that can be purchased. If some consumers wanted to increase the demand for human workers, such labels or credits would let them do so. • Provide vouchers for basic necessities like food, clothing, and housing, eliminating the extremes of poverty but letting the market manage income above that level. • Ramp up hiring by the government via programs like the Depression-era Civilian Conservation Corps to clean up the environment, build infrastructure, and address other public goods. A variant is to increase the role of ‘workfare,’ i.e., direct payments tied to a work requirement.