Productivity and technology in a globalised world

This morning's post is triggered by Winton Bate's recent summary post, Will future technological advances provide widespread opportunities for human flourishing?, drawing together some of his recent writing and thinking. It seemed an appropriate point to use Winton's arguments to draw together some of my own arguments and thinking. None of my points are especially profound, they are just points in the evolution of my own thinking.

I have chosen as my entry point this conclusion of Winton's: "Technological innovation is likely to destroy a substantial proportion of current jobs, but it will not necessarily be more disruptive than it has been in the past."

Looking at history, I have to agree that technological innovation is unlikely to be more disruptive of existing activities than in the past. To illustrate my point, consider the impact of the internal combustion engine and, more specifically, the motor vehicle. In two decades, entire industries were largely wiped out, while the very pattern of human life in developed countries began a process of reshaping that is still working its way through.

I put existing activities in bold for a very specific reason. In the case of the motor vehicle, more jobs were created than lost. They were in different places and involved different people, but the net employment gain was still positive.In the current case, that outcome is less clear to me. I note that Winton has considered this issue. I am just less sanguine than he.

In considering the case of gains versus losses, we need to make a distinction between the wealthier countries and the rest of the world. So far as the world as a whole is concerned, improvements in transport and in computing and communications technology makes it easier for activities to shift to take advantage of differences in factor prices and especially labour. This suppresses labour price increases in certain countries while increasing incomes in other places. Whereas trade used to be the transmission mechanism, we now live in a world where entire industries or economic activities can shift.

If we now turn to the wealthier countries, I can see no a prior reason based on economic theory why we should assume that wealthier countries will (or can) continue to get wealthier. I would have thought that the most that they can hope to achieve as a group is to hold their own, to maintain current income levels with zero or low increases.

Demographic factors contribute to this result. Many developed countries face declining populations and work forces Their challenge is just to maintain GDP. If they can do that, per capita incomes will increase, if slowly. Japan can be taken as a case in point. Japanese economic growth has been relatively stagnant, but per capita incomes have actually increased.

Beyond the demographic challenge is a more fundamental one. How do you continue to grow, even maintain income standards, if other countries can do things things more cheaply? We talk about this in the context of productivity. We must raise productivity so that we can compete, to continue to grow. But what happens if those productivity increases have the effect of suppressing wages? In this case, productivity improvement becomes the device necessary to assist a country to adjust to its decline in relative and perhaps absolute incomes.

We speak of the hollowing out of the middle, the way that structural change in developed countries has created a gap between the top and bottom.  My history of New England maps this for an area, tracing the decline of middle income jobs. In Australian terms, this is seen as as an inevitable and indeed necessary result of structural adjustment. Jobs lost in New England are replaced by jobs created elsewhere in Australia. But what happens if Australia is New England writ large?

If we look globally, there are more middle class jobs now than there have been at any time in human history. I stand to be corrected, but it seems to me that the hollowing out of the middle class in wealthy Western countries is a localised phenomenon. For every middle class job lost in Australia or the US, one or more is created elsewhere. Those jobs may be paid less, but that is part of the adjustment phenomenon.  

I have spoken before about the way boundaries affect thinking.We should not assume that technological advances will lift average real wages in high income countries.The key issue is the way that technological advances create prosperity across the globe. The adjustment processes in a country like Australia. a political construct, will be determined in large part by those global trends.