Looking at Einstein’s World with Newtonian Glasses – a Message to My Mom

 
My mother sent me this link to a Paul Krugman column.  This is the lightly edited result.
____________________________________
 
Well, he does have a column to write. And he may be correct in some ways even though he does not know it. Like the 5 blind men and the elephant, he is trying to describe something his background gives him no real insight into. It is also why the DOJ is going after Apple – they can not see what is really going on.
 
They touch the elephant’s tail and say “Oh, the elephant is just like a snake.”
 
He is not the only one. It reminds me of the sorts of scientific explanations dealing with new data being generated at the turn of the 20th Century. A lot of data was being found that was not easily explained by classic Newtonian mechanics, People kept trying to find ways to make them fit into what had been current knowledge but more and more new facts simply seemed strange.
 
The Einstein proposed his special and general theories of relativity, explaining the data. It was a scientific revolution that broke apart the old views.
 
We are in the same process here, although at a much greater social level – with possible dislocations not even seen in the Industrial Revolution.

 
And that is a problem of most economists today. They look at ‘Einstein’s’ world with Newtonian glasses. History does not help much, prior knowledge is problematic and today really is different. We are going though a step change to something unprecedented. It is like an economist steeped in the mercantilism of the East India company trying to describe Ford.
 
I am not enough of a theorist to formulate what is coming. I do not know just what it will be but it will be something neither Krugman or any other mainstream economist is describing.
 
As an example, he compares GM – an Industrial Age company – with Apple  – an Information Age one.
 
He, and most economists, are comparing Apples to Oranges (pun intended). First, Apple is not using monopoly rents – the idea that most of their money comes from investments rather than sales to customers. It has no monopoly in any sense. What it does have, if anything, is monopsony rents. It is not dictating terms to is customers but to its suppliers. There has never been a company quite like this before.
 
Capitalism is all about efficiently dispersing  scarce resources. Competiton is supposed to keep companies from acquiring huge amounts of cash. Competition is supposed to push companies to invest any cash (or at least most of it) back into the company or give it to the shareholders.

But Apple is doing something other that abusing a monopoly position – which is seen economically by forcing consumers to pay more than they should.
 
Apple is restraining competition by making sure none of its competitors can get the components to make a smartphone for the same cost as Apple. Any smartphone competitors tried to make when the iPhone first came out would have cost them hundreds of dollars more just to get the parts and make the device. It is not a fluke that the only competitor – Samsung – makes its own parts.

Apple was able to use incentives to get first dibs on new technology, they loaned companies money for expansion with the proviso that Apple got access at reduced rates, they gave suppliers long term deals that could not be really refused. And these deals priced Apple’s competitors out of the marketplace.
 
All economists see is unprecedented huge piles of cash without really understanding it. It goes against anyone’s (conservative, liberal and in between) understanding. It is partly why Wall Street can not value Apple because it represents something they simply cannot explain. 
 
What he, and other economists, see is that if capitalism was working like it should then competition would force Apple to lower its prices which would reduce this huge pile of cash. The only way, to them, that Apple could ever get such a pile is due to its ‘gouging’ of the customer because there is no competition. There would be an equilibrium reached with many competitors and lower costs.
 
What they fail to see is that Apple has used its monopsony position to create things that are already at a lower cost  that their competitors cannot meet. When Jobs said Apple was 5 years ahead of everyone else, it reflected the fact that it would take at least 5 years for the component prices to drop far enough for their competitors to get the same deal.

Only competitors that could supply themselves (like Samsung) could sell an equivalent device for a similar price and make much profit. For example, Amazon sells the Kindle at or below cost, hoping to make up for the loss by selling content.
 
That is what innovating does (and something Tim Cook was responsible for). 
 
One of the key aspects of what we are entering is the opposite of dealing with scarce resources. We are actually entering an age of abundance and will need new economies to deal with that. Peter Diamandis wrote a great book called Abundance that I recommend reading.
 
What happens, for example, when asteroid mining provides more gold and platinum than mankind has mined in its history; when its cost drops to almost zero? What happens when cheap solar power comes in such abundance that energy is essentially free? What happens when robots can make almost anything for no added cost; when 3-D printers can replicate almost any sort of food or internal organ?
 
What sort of economy will it be when almost anything that can be made or used costs next to nothing but few people have a full time job? It is an Age of Abundance but how will people pay for it? How will a post-scarcity economy actually work?
 
Free market capitalism will not work as easily here because it was not really designed to; it was designed for scarcity, not abundance. The economic dislocations are already being seen – productivity and profits keep going up but little of it is making in into the hands of the population. Productivity doubles about every 36 years. If median income had kept track with productivity since the early 80s, the median income would be over $90,000 today rather than about $40,000.
 
Most economists see what we are going through as more of a technical problem – if only we make a few tweaks by retraining, the dislocation can be fixed. Some economists (and I) see it as something fundamental – many jobs are gone for good because there is a fundamental shift in the economy, just as was seen in moving from agrarian societies to industrial ones. 
 
What jobs left will either require just a few people with very specialized skills or are the things still too expensive for robots but so cheap that humans cannot make a living. In time, even those will go.
 
From this graph we can see that the current job recovery is not only slower this time. Recoveries have gotten slower with every recession since the 80s. The next one could be permanent. (All the graphs are from the excellent blog, Calculated Risk)

recessions

And what the above graph shows is only getting back to the same number of employed as we did in 2008. But every month there are about 150,000 NEW people added to the economy. These are not reflected in this graph. 
 
Here is something that shows this – a look at the employment levels to the size of the population aged 25-54. Look at the red curve: the employment-population ratio, This includes increasing population into employment statistics.

employment ratio
 
What you see is that even though that jobs are coming back, they are not keeping pace with the growing population. No recession produced such a huge drop. Up until 2000, every other recession was overcome in less than 2 years. But the peak in the late 90s has never been reached since. The ratio has pretty much been flat since 2009. Something never seen before. 

It has never been flat for this many years. The economy, at least for workers, is just treating water.
 
Or look at this one examining people working part-time because they have to rather than because they want to.

part time emplyment
 
Levels never before seen. 8,000,000 people who would like to work full time but aren’t.
 
Or this one looking at the number who are unemployed for more than 26 weeks.

23 week unemployment
 
4,500,000 who cannot find a job. Unprecedented.
 
12,500,000 people who are not being fully used by our current economy, even as the companies make record setting profits. There is a disconnect there which is what Krugman is trying to explain. But, I feel, using the wrong theoretical framework to do it.
 
He is using Industrial Age theories to state that the increase in profits without labor being helped must be a result of monopolies. That is the only explanation they have.
 
But this is really a one time shift to something else. The companies continue to make profits because they use technology to produce as much as they used to but with fewer people. Technology costs less as time goes on, making their profits grow, even as they first move people to part time employment and then no employment at all.
 
As this continues we will eventually hit a point where it all collapses, where people are not making enough to pay for the things being made.
 
I wish I was enough of an economist to fully describe and document what I see. And to come up with a theory to help see what it all means. 
 
One possibility we also see from a similar time in history, when the specialized and highly paid skills of look operators was displaced by the automated look in the early Industrial Age. However it is not an economic example but a sociological one.
 
The workers rioted, burned down property and killed capitalist. The Luddites were eventually stomped down but only by sheer numbers of the military (more of the British Army was involved in putting down the Luddites than were engaged with Napoleon). The government responded in totalitarian ways, such as mass show trials to intimidate the population.
 
What happens when 20,000,000 people rise up? That is my worst fear.
 
I have written about another possibility, based on some economics. Maybe Plenitude will actually happen. Maybe we will all receive a Basic Income. Maybe the whole idea of wages (which really only appeared with the Industrial Age) will disappear.
 
How to frame an economy that provides people with a living wage when there are not jobs that can support that living? Who will buy the things being made when few have a living wage job? 
 
I do not know how we get there but George Jetson showed one possibility – he had a middle class lifestyle only working 1 hour a week pushing a button.
 
Pilot studies looking at Basic Income Grants – where every adult receives a set amount of money (much like how Alaskans receive a fixed amount from the state) – have shown not only drops in poverty but also INCREASES in economic activity. People do not just sit around and do nothing. Many people leverage the grant into innovative approaches to have more money. It appears that when people’s basic needs are taken care of, a lagr fraction do some risky, innovative things that end up helping everyone.
 
We may see a post-scarcity economy sooner than we think. It will be better than the alternative.
 
 
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One Response to “Looking at Einstein’s World with Newtonian Glasses – a Message to My Mom”

  1. Looking at the future of Capitalism through Newton’s Glasses | A Man With A Ph.D. Says:

    […] And here we have the same problem Marx revealed – extrapolating current trends against human society is a fool’s errand. They are looking at Einstein’s World with Newton’s Glasses. […]


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