Reinventing Henry Ford – My take on tomorrow.

Posted by on Dec 26, 2014 in Economics
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Foreword

Other than the economics courses I took in high school, I didn’t receive any further formal education on the subject. This text is entirely motivated by thought-experiments that might lack deep formal economic analysis, but are nevertheless interesting to me, and enough so that I decided to write them down. Nothing more, nothing less. Make of that what you will. 

The premise of this text is as follows: forget monetary policy as in the flow or the significance of money. Forget the so called “unemployment rate”, for it is increasingly insignificant and detached from the factors which define the standard of living in a society. If one would break this matter down further into its utter banality, one would find that all that matters for a society to flourish is overall economic output, however that might be achieved. 

The idea of this text is for the reader to detach himself from Smith and other economists with theories along the same lines and simply regard the average economic output per person in a society. On these grounds we will establish an illustration of future’s society, in which sufficient economic output is achieved by means of total automatisation of factories, institutions, food production, energy production, and so forth. In such a society each member can be allowed a high standard of living without putting his or her work into the system. 

Chapter 1: A Brief History of Us 

Evolution Chart

Not so fast. Most everyday economic concepts are actually very recent inventions.

The history of mankind has been long and painful. Unlike ants and other insects, which from the moment of their birth already know how to contribute to their societal system, the path for our species has been somewhat more complex.

Throughout the course of recorded history, humans were always part of a system in the making. At times we were organised as communal tribes with reciprocal exchange systems and few significant political distinctions between individuals ((Max Gluckman (2007). “Social beliefs and individual Thinking in Tribal Society”. In Robert A. Manners; David Kaplan. Anthropological Theory)), at others we thought it to be best to let few decide over the fate of many in varies forms of monarchies.

While some of our ancestors’ societies endured longer and some produced more wealth than others, they all shared one inevitability: their societal systems were changeable.

The first recorded sets of common ground rules which were laid out by a society date back to around 10’000 BC, during the Neolithic Age ((Graeme Barker (25 March 2009). The Agricultural Revolution in Prehistory: Why did Foragers become Farmers?)), when farming started in the eastern mediterranean littoral. During that time human societies lived in a state in which every member had to do their share in order for society to be able to support itself, i.e. for the economic output to match the economic demand. This held true for a very long time span of our existence, as becomes clear if we fast forward around 11 thousand years to the medieval ages (to grasp the vast proportions of such a time span for human development, the reader is encouraged to try to imagine where mankind might be 11 thousand years from today). Regardless of the very different cultural states of these societies, both did not have a concept of unemployment. Well over 80% of their labour force worked in the agricultural sector and running out of work was an utopian thought at the time. Everybody had to work, so that there would be just enough food and shelter for everyone. This law of nature did not change for thousands of years – until it was shattered in the course of the industrialisation.

 By the middle of the 19th century increased efficiency and use of machinery allowed for more economic output with the use of less physical labour. The concept of everybody having to work was turned into fiction, as societies soon could not figure out how to handle all the spare man-power, which resulted from this productivity increase. We morphed from an ‘everybody-has-to-work’ society to a ‘some-can’t-find-work’ society. A state we kept until this day with still growing momentum.

Skimming humanity’s economic development we would assume that with the industrialised society the golden age of our species had arrived: finally, an increasing number of us could lean back and simply enjoy the perks of not being economically needed anymore.

Nevertheless, we are mistaken, because a certain group of people threw stones in the way of those golden ages: economists. Classical, Neoclassical, as well as Keynesian economics focus on fighting unemployment, instead of embracing it and thus trying to weave it into the system. As wealth and work is strictly tied together, a part of society will be doomed to poverty.

If we detach ourselves from economic theories of unemployment and simply regard the average economic output per person, the final conclusion must be that if a society can achieve sufficient economic output by means of total automation of factories, institutions, food production, energy production, and so forth, then each member of society can be eligible to a high standard of living without putting his or her work into the system, while remaining in an overall capitalistic and competitive environment. In the next chapters we will consider the validity and implications of this thought.

Chapter 2: Money isn’t wealth. Wealth is wealth. 

There are two ideas which we will discuss. The first one is that of earning money, the second one is that of spending money.

Earning money in your typical 9-to-5 job means to be exchanging some of your productive time for cash. Most people get paid per hour of work. The longer you work, the more you get paid, everything else remaining equal.

Now, if we consider this matter more closely, it becomes clear that it is not really your time that you are paid for, but rather you get a share of the value you created. Why are you paid per hour of work then, and not for your actual impact on, lets say, a company’s yearly revenue? Well, because it is hard to get an exact measure of the value (in terms of a currency) an individual in the framework of a larger organisation created for that organisation. Therefore, we chose another parameter that is much easier to measure, but gives a good enough approximation of the value created: time.

Wealth as seen by most people.

Wealth as seen by most people.

However, time alone would be a rather rough measure, therefore it needed to be coupled with something more: a hierarchy that lets you group different jobs into different ‘impact-per-hour-of-work levels’. If you are, say, a “Junior Executive“ in an organisation you will earn less per hour of work than a “Senior Executive” in that same organisation, on the grounds that the higher in the hierarchy you are, the more your work impacts the revenue of the company. For 95% of all employees that type of calculation determines their income.

What about the top 5%? Or the very top 0.1%? Has a billionaire accumulated his fortune, as some might suggest, by taking money out of society and therefore impoverishing others? He surely cannot be working so much as to add more to society than the billions he kept after all a day only has 24 hours… yes, he can. Just like everyone else he receives an approximation of the value-share which he is responsible for.

Let us make the case for a successful entrepreneur, who made his fortune by founding a company, which produces pencils. What the company does, essentially, is to take the raw materials wood and graphite, and combine them into a tool. This tool has a higher value to people, than the 25 grams of wood and graphite it is made of. Why? Because if you burned 25 grams of wood, you could not even roast a single chicken-wing. And graphite – especially in such small amounts – is useless to humans in its raw form. However, combine them into a pencil and you enable people to draw, write, and thus exchange information. The company buys wood and graphite at a low price, and creates pencils, which it then sells at a much higher price per gram of raw material than it payed, through the means of making them more useful and hence creates value. This value is then given to society in terms of the products sold and to the company’s employees and its founder, in terms of cash. Everybody is enriched. Of the money-flow that is headed towards the company, the founder and owner will take a larger share than other employees. He is becoming comparatively richer to the others, and still, everyone is better off.

What is very visible through this simple example is that, generally, somebody’s personal wealth is proportional to the wealth this individual (or his ancestors in the case of inherited fortunes) added to society. Money is a useful tool to quantify, but is not equivalent to wealth itself, nor is it essentially required for production of wealth, as will be shown later.

Now you might think, surely, that if the founder of our imaginary pencil-factory would not have started it, the next person might have. Why does he get to win the lottery and not anyone else who is just as capable as him? I would like to clarify that personal wealth is not an indicator of somebody’s capability to create wealth for society. It is merely a reference to the individual who kick-started an increase in wealth to society. The payoff for lighting the campfire when you could, is that you may sit closest to it, while it heats everybody unequally. This gives individuals a huge incentive to start more campfires, the bigger the better.

Production of useful things, be it goods or services, enriches society. To be more specific, if world-wide production of a certain tool or service rises compared to world-wide population, people will be wealthier on average. Another way to see it is, that if GDP per capita of a country rises, something in demand becomes more abundant (e.g. bottled water or computer chips), independently of the wealth-inequality in that country. If the production of cars in Imagitopia rises from half a million to one million a year, the owner of the car company might see most of the generated money, but he will not have any personal use for another half million cars, so they are spread among society one way or the other (either demand will hold up with the newly created supply, or the prices of those cars will fall, making them more affordable to the general population). All that matters for spreading wealth is a rise in production on a large scale.

Chapter 3: Control the Four

Production requires work, but humans are smart and lazy, so we keep inventing machines which can do our work for us. It is called automation and will lead to a great societal change in this century. Imagine we could produce housing, mobility, services, consumer products etc. in such quantities and “cheaply” enough through automation of production processes, so that anyone – by birthright so to say – can acquire them, without putting a single working minute of his or her time into the system ((The emphasis on the word “anyone” is very important, as it contrasts a situation in which only the few, by means of wealth inheritance mostly, live under such circumstances)). Thus, creating something equivalent to an universal income.

The idea of an universal income frequently finds its way into the public and political domain, especially in left-leaning european democracies. Still, it always lacks thoroughness and a clear concept of what mechanisms need to be in place for it to work. The popular approach for funding a universal income is tax rises on the rich. The bad news for the left wing is that tax rises will not be the way to implement such an income successfully. The good news is that it will come eventually and if done correctly, the trick lies in tax breaks. During the following chapters we will expand on that.

First, we will list what is required to produce anything of any kind. Adam Smith once defined those requirements as the ‘three factors of production’: Natural resources, labor (which includes know-how), and capital stock (machinery, tools and buildings). Although these three factors made for an accurate enough description at the time of Adam Smith, this view is increasingly outdated. Let us come up with a future proof list of requirements:

Electric Energy is used to run all of our micro-technology (information technology), much of our macro-technology (motorisation etc.) and will remain crucial in the foreseeable future. Why is that? When it comes to micro-technology, the only version of it we know is run by the flow of electrons. For macro-technology it will increasingly replace other fuels, since it is one of the highest forms of energy and can thus be easily converted into mechanical energy at very high efficiency. Also, it can be transported over long distances at very high speeds, which allows for a central production of electric energy ((Such production can be done on a very large scale, which results in an overall efficiency in energy production.)). 

Natural Resources are and always will be the founding elements (quite literally) of all the wealth we touch and feel. Even an all digital society must be run on servers that consist of silicon, copper, iron and more, be safely located in a building of concrete and receive its energy though solar farms that are made of steel and glass. Natural resources are also the only foreseeably limited elements of our factors of production. Therefore, efficient natural resource management, increasingly through the means of recycling, will be inevitable.

Inherited Infrastructure is the amount of infrastructure passed on to the next generation. It is the reason why GDP growth does not tell the whole story of a society’s prosperity. The wealth of the so called first world is built – for huge parts – on the roads, factories, buildings and more hardware that was inherited from earlier generations and can still be used by that society. It is constantly being grown and modernised, but only in small chunks at a time. If it were to be destroyed at once through, say a war or a natural catastrophe, the time and energy needed to reach a previous level would be huge. Thus, it can be viewed as a wealth-momentum which a society has gained over time.

Knowledge or Know-How is a factor of production that has been amassed throughout humanity’s history, with each generation adding a thin layer to our shared mountain of understanding. It is the circuit-plan that allows us to put all other factors together in a way that is efficient and makes them useful to us. And increasingly so as we continue to add layers to the mountain.

What about capital, as in money? In the last chapter we understood money as a mere quantification of wealth. In that same way capital quantifies the amount of factors of production which are available to an entity, but is not one of them. The four factors of production are all independent, meaning that they can’t be used to substitute one another. A company uses capital to convert it into those factors of production.

One million dollars don’t build a car, but acquire the factors of production that build the car. Making this distinctioN will become increasingly important.

Our list of four is actually a dissection and rearrangement of Smith’s factors of production, with the simple cancellation of the human aspect in labour. Smith meant labour as a human-being who brings energy and know-how to the mix. However, if all energy is electric and know-how is stored on servers, there is no need for a biological mass holding it together. Natural resources remained, only that they will increasingly be harvested from within the system through recycling. The inherited infrastructure is widely equivalent to the capital stock, only more broadly defined, including things such as available mobility, since production is much more decentralised than it used to be. 

None of those four future factors of production require a human aspect, which let’s us imagine a prosperous society that doesn’t require human work-input to produce any material thing. Today, human labour still makes up the majority of production costs of goods and services. Without the need of it, using complete automation, wealth could become cheap and therefore abundant compared to today. At that point most mechanisms of our current social and economic system would fail to produce good outcomes for society, or even a stable society itself.

Chapter 4: A Look at Tomorrow’s Society

One can imagine a society in which humans must not put in any work to keep the system running. Theory is one thing, but will we ever get there? All evidence suggests, that this is exactly where we are headed. Just as the industrialisation caused human muscle-work to disappear, use of computer chips does the same for human skill-work, such as assembling products, cleaning buildings, trading stocks, driving a car or flying a plane.

In the course of history we always refined our societal systems to make them more efficient. A society that widely produces without human labour is the most efficient system imaginable. Humans are not efficient compared to the machines that they can build to replace them. For a company, efficiency means profits. For a society, efficiency means wealth. Therefore we are constantly engineering ways to automate the jobs of people in all sectors ((See the YouTube Video Humans Need Not Apply by CGP Grey.)). Full automation of work is on the horizon and will replace a vast majority of workers in all sectors by machines. It will come in fragments, industry by industry, but it WILL come and change everything we thought we knew about how a first world society should function.

One of the more recent examples of this is the self-driving car, which will put bus-, lorry-, and taxi-drivers out of their jobs. Once it is in place it will result in less accidents, less traffic jams and hence more overall fuel efficiency and more overall economic output as it can run more hours a day than a human could ever work.

This can mean salvation instead of doom for todays working classes. Our challenge is to successfully make the transition from a society that was built on everybody’s seek for work to a society which is build on a seek for – if anything – happiness and self-fulfilment. To analytically pave the way between now and day X when tomorrow’s society exists, we have to get a clearer picture of what that society could look like. We will paint this picture by posing questions about it:

How many jobs will really be automated?

Every job that can possibly be done by a machine will be automised, because why shouldn’t it? For most people their job is a tedious duty, performed to make a living. Once there is a good social construct in place that allows for a good and fair distribution of wealth without work, there is nothing that will keep people fighting for their jobs.

Even jobs in the humanities, such as law and politics will follow that lead. Politics is essentially adjusting the societal system to maximise wealth and please the majority – a job that can sooner or later be much better managed by a computer program. Given that computers of the future will have much more perfect information than our bankers and politicians ever had, monetary policy, for example, will be in better ‘hands’.

It becomes more tricky when considering law creation and adjustment, but even in this case it is imaginable that one day it will be natural for people to see small court cases managed by our digital helpers.

How will wealth be distributed in a society that functions without human labour?

Probably more evenly than today. Every citizen from a certain age on until his passing will receive an unconditional income. Therefore, a new minimum standard of living will arise in the countries running on full automation and be more easily applied to a much broader part of the world’s population compared with today, as far as our four new factors of production allow for it. The ways to receive additional wealth include finding one of the rare jobs, starting a business ((There will likely be more opportunities to start new businesses than today, as anybody can easily create using smart software and 3D printing and easily distribute using the internet.)), or adding valuable information to the system ((An interesting concept for such a data driven economy which pays out micropayments has been thought up by Aaron Lanier in his book Who Owns the Future?.)).

In tomorrow’s society there will very likely still be great fortunes, which are held by a few people, since it has never been different. However, as money first and foremost acts as an allowance to acquire wealth, the actual difference in the living standards of rich and poor will be smaller than today.

Will there be a use in receiving a good education?

Anyone who has gone through a school-system (and somebody who didn’t maybe even more so) would tell you that it has without question shaped them as a human being in a positive way. Statistics show that families become more stable as the educational level of its members goes up. That is just one of many ways in which education produces better members for a harmonious and happy society. It tends to make people tolerant towards others since it widens people’s knowledge about the world. And, of course, a society of well educated people is much more likely to produce new ideas that will further its prosperity.

So how could we incentivise an individual to receive a good education if he or she probably will never execute a job based on it?

First, we must differ between primary, secondary and higher education. The incentives for kids to receive primary and secondary education are much less the prospects of a good woking life, but the obligatory nature of it. Those two help to develop kids social skills and – even if it might sound overly-romanticised – teach them about the joy to learn.

When it comes to higher education things look quite differently. For many the motivation behind receiving a higher education lies in the prospect of a good job. How can we incentivise those to study who have a small hope for an eventual economic payback? We guarantee economic payback. The amount of wealth somebody receives from society might be coupled to the level of education he has reached. This is one of the ways we need to make sure that we do not end up with a majority of decadent ignorance.

Chapter 5: Let’s not screw it up 

Human Story of EconomicsAs Niels Bohr famously said: “It is difficult to make predictions, especially about the future.” We can only speculate about the details of tomorrow’s society, but with all the cornerstones and a broad idea in place, we are already struck by a major problem: how do we pave the way from today’s society to tomorrow’s?

Given that the collective prosperity is rising as productivity and efficiency in the system increases while more and more people are pushed out of their jobs, we will arrive at a state of increasing inequality, due to our current societal system in which work and wealth are strongly tied. This development is bound to cause eventual civil unrest. All that will hold true if we keep pushing our current societal and economic system. 

Our economies do not yet have the automation based productivity required to pay everyone an unconditional income. Again, raising taxes on the rich will not solve that underlying economic problem. However, with every bit of automation a few more unconditional incomes could be payed. Therefore, while more workers lose their jobs to automation, let those be the first to receive their unconditional cut.

Consider a taxi driver, who works a 10 hour shift as a taxi renter ((Taxi renters don’t own the cars they operate and are hired by the taxi organisation (as oppose to owner-operators, who pay a yearly fee to the taxi organisation).)). Each customer’s payment is received by the taxi organisation (the employer) which then pays the driver, taxes, for expenses and keeps the rest. Now imagine the taxi driver (including his vehicle) is being replaced by a self-driving car. The driver will be out of a job, while the customers he used to transport keep paying for their rides. How should the money be distributed? A share to the taxman and a much larger remainder to the taxi organisation?

A better proposition is as follows: a larger share than before goes to the taxi-organisation, a smaller share than before goes to the taxman, and the driver keeps receiving a major percentage of the income that he used to work for, say 80%.

Why, somebody might argue, should a person be payed for a job which he or she is not performing? The answer is: because get used to it. In tomorrow’s society, not-working is the default position anybody will be in, no matter how good his or her education is. So regardless of how unusual it might seem at first, keeping a major percentage of the taxi driver’s payments coming is the smoothest step forward.

Such an 80% law could be called the Social Pact, in reminiscence of Jean-Jacques Rousseau’s Social Contract. In the case of self-driving vehicles this measure will keep a few million workers of an entire industry anchored in society. It can be extended beyond the transportation industry as a simple solution for the transitioning generation – the generation who experiences the shift to automation first and. Anyone who had a long term employment of which he was pushed out of due to automation can claim 80% of their old income, under the condition that they remain unemployed.

Being “pushed out of a job due to of atomisation seems like a thinly defined circumstance, but actually a clear pattern can be established using a few economic corner stones: 

  • He or she has not been replaced by another human worker.
  • The loss of the job was clearly correlated to the employer’s investment in automation technology.
  • The company is reducing it’s workforce while keeping production levels equal or growing.

These are all measurable factors that show a binary answer to the position in question: “Yes, it is the case” or “no, it is not the case”. If all three apply a worker is eligible to compensation, according to the Social Pact.

Why should the payments for those unemployed be managed on a company level? Because governments are horrible at managing anything. If you channel the same 80% of the taxi driver’s income adé to the state first in order to redistribute it afterwards, the following is going to happen: bureaucracy and bad legislature will eat up much of it while the poor man waiting for his income has to undergo painful pointless paperwork in order to receive what has long been decided to be his.

Why would the state decrease taxes on the taxi organisation when they buy into automation? Following the tit-for-tat principle, the state will have to give something in order to counter the Social Pact’s refusal by the corporate world. Additionally, a company’s move towards greater automation should be supported as it is beneficial for society overall ((Advantages of self driving taxis include safer roads, less traffic due to crowd intelligence and less human work needed.)). If lower taxes is the ground that the state will have to give in order to make companies pull along, then so be it. Regarding the consequences if the Social Pact is not coming into power, the corporate tax deductions can also be understood as a price the state will have to pay at that stage for maintaining social order.

Why should companies agree to the deal? Capitalism has proven to work well when it comes to using innovative ideas to produce wealthier societies – we don’t want to break it. And we don’t have to. Macro-economically speaking, keeping millions of workers payed means keeping a wealthy customer base to consume products and services. This is entirely in the spirit of Henry Ford, who famously payed his workers a wage that allowed them to purchase the cars they helped build. He realised that it is a company’s calling to keep a wealthy society. Now, we will have to adapt this spirit of Fordism to the 21st century.

«The people who consume the bulk of goods are the people who make them. That is a fact we must never forget — that is the secret of our prosperity.»

That WAS the secret of our prosperity. If we need ever fewer people to make things, it will have to be the ones who don’t make anything, who consume products and services. If all our technological progress ends up making human labor obsolete in a way that results in millions of poor, unemployed citizens who are cut out of the technological revolution, then what is it all good for? What is society good for? If society means anything, it means creating a certain boundary under which we will not let people fall. To do that, companies will have to take up a fair share of the responsibility, while governments keep all mechanisms of capitalism, such as a great payoff for innovation, intact. 

Will it break companies? No. They will simply push automation to a later point in time until falling prices force them to buy into it. To be exact, when the production cost with automation is less than 20% of the cost without. At this point it will become economically viable to push automation while keeping the departing employees payed 80% of their income. Macro-economically the move towards automation will be slowed down, while the society as a whole is being stabilised.

It needs to be mentioned that a transitioning mechanism such as the Social Pact will work only when applied in international accord amongst leading nations. Otherwise, such a mechanism could push companies to move their production and threaten a country’s economical competitiveness in the mid term. Let us hope that international collaboration on this matter turns out to work.

Chapter 6: Threats

Humanity’s future looks bright. We have enough power and resources at our disposal to enable a great life for everybody (up to a ridiculously high population). If we play our cards right, it is a question of when, rather than if we end up there.

Only if we do not recognise new realities due to technological advancements and keep trying to shoehorn every social shift into familiar structures, some mechanisms of our current social systems are going to break. And it won’t be a silent event. Therefore it is going to be unavoidable to introduce measures such as the here described Social Pact and probably some more, to stir our future in the right direction, instead of heading towards a social collision.

However, there are some serious threats besides the more often than occasional inability of politics to act.

The hardest thing to change in this world is people’s mind set. As a person grows older their thinking typically becomes increasingly inflexible ((Interestingly, that same phenomenon can be observed on a company level. For that reason older companies with older board members often struggle to keep up with the innovation of younger ones.)). For many, jobless people are considered to be lazy – as if they could find some work if they would just try hard enough. Although that might have been the case for some until recently, this thinking is going to become outdated overall. That simple fact must be made very clear to the general population, along with all the programs which are introduced to adapt to the new reality. Even then, ladies and gentlemen of an older age (and some conservatives of a younger age) might find it difficult to wrap their heads around the fact that the jobless should be allowed to harvest a decent share of a society’s economic output. Part of the solution to that problem should be the introduction of a new term for a person who does not work. Maybe freelancing catches the right tune. 

The limit of natural resources, our second factor of production, could pose a fundamental problem. Sweet water, especially might end up being a resource that nations go to war over. This problem is not man made, but becomes worse through overpopulation.

Overpopulation is a man made problem. Our grandparents grew up in a world of 1 billion people, our parents in a world of 3 billion, we in a world of 6 billion and according to current predictions our children in a world of beyond 10 billion. This prediction, however, should – like any prediction be handled with care. Actually, the fact alone that this has been predicted almost certainly makes it wrong. The threat of an imbalance between economic size and population is civilian suffering. This can best be seen in Africa, a continent with a population the size of the entire EU plus North America plus South America and an economy the size of Italy (if we really want to help Africa we should be building factories and introduce birth control programs on a massive scale).

2 thoughts

  1. Cecily Drucker

    October 18, 2015

    Tom, very provocative. What do you think Peter Drucker would have thought about your proposition?

    Reply

    1. Tom Kohlmann Kupper

      October 18, 2015

      Hi Cecily, first I should say that I wrote this piece a few years ago and have developed my ideas a bit further since then! :). Nevertheless, judging with (my very limited) knowledge on the work of your father, I assume he would agree that the outcome of technological improvements should be more prosperity for everyone. After all he shared the view, that economics is less about number crunching&earnings projections, but about people and their relationship to each other. And that’s exactly what’s becoming relevant again today, as we read about workers losing jobs to robots and computers. It will be crucial to put much thought into how we can construct a system on that new reality. A system that keeps all the clearly beneficial freedoms and economic incentives of a capitalistic democracy in place while allowing a non-contributing prosperous social bottom/middle-class to exist.

      Reply

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