Mr. Yglesias and the Classics

One of Matt Yglesias’s commenters offers this concern

I fear we’ll get a society where perhaps 10% of the people will own all the land and capital, and they will hire 60% of the people to work for low but comfortable wages, while 30% will be totally dependent on a welfare and the odd temporary job every now and then.

If this scenario is a real possibility, then the only solution I can imagine is highly progressive taxation and wealth distribution, so that the great masses can afford to employ each other (with restaurant meals and dance lessons).

After offering me a shout-out, Yglesias says

At any rate, I’m not blogging about land use at the moment because I’m hoping to build enthusiasm for a potential book, so let’s focus on the “capital” side of this arrangement. What’s missing from the doom analysis (and this is fresh in my mind since coincidentally I’ve been reading Ricardo) is the “human capital.” Employee compensation accounts for the majority of GDP because the majority of the actual capital available to the economy is inside people’s heads.

I’ll offer my interpretation of the phenomenon. It is decidedly neo-classical.

Redistribution is desirable because it raises the living standard of the person we are redistributing to. However, welfare-reinforcing-the-culture-of-poverty arguments aside, it shouldn’t change the basic structure of pre-tax national income.

In a completely free market economy the share of national income that goes to the various factors of production are determined by their role in production. To the extent human capital has a more important role, human capital will command more of national income. The same is true for physical capital and raw labor power.

However, the rents, to the factors are determined by their reproducibility. That is, how easy is it to make more.

The majority of the rise is living standards for workers occurred because they – the workers – were relatively irreproducible. It takes, according to modern law, 16 years to produce a new worker. Most producers, that is to say parents, are not induced, through higher wages, to produce more workers.

So the following scenario ensues. The economy grows larger and larger. Labor, even raw labor, has some productive role in the economy and so it has a share in this growth. However, the number of laborers is not growing as fast as the economy. Thus, labor’s share of the economic pie grows faster than the total number of laborers and so the share of the economic pie per laborer grows.

What we seem to be facing at the moment is culmination of several forces. I think most economists from Tyler Cowen to David Card agree that the production of human capital has become more constrained, while its role in production is growing.

The result is that the economy is growing, human capital’s share of the economy is growing, but the quantity of human capital is not growing as fast as it could be. Therefore, the slice of the economic pie going to each “bit” of human capital is growing very rapidly. We see this in a rising return to education, technology, general smarts etc.

At the same time are seeing massive growth in the pool of laborers. More laborers from rural China move to the city everyday and economic liberalism marches across South and South East Asia. This radically increases the pool of labor.

Labor is still relatively hard to come by, by historical standards. However, it is not as hard to come by as it once was. Moreover, increases in the return to labor are indeed increasing the supply of labor as higher wages increase the speed at which farm workers leave for the city.

This means that the global economy is growing, the share going to labor is growing slightly slower – because it is being crowded out by human capital – but the size of the labor pool is growing faster and faster. Thus, labor’s slice of the economic pie is barely keeping pace with the size of the labor pool, itself. The result is a stagnant slice per laborer.

Indeed, I think the slice is probably declining in the Western World, so that a person with no knowledge or skills whatsoever, earns less today that he would have 20 years ago.

I would guess that is similar to the  phenomenon the classical economists witnessed. Labor was migrating steadily into the city, drawn by higher wages. To some extent – though less than they envisioned –  increased wages also allowed for larger families. This meant that while the economy was growing, and with it labor’s share, the share per worker was not growing or growing very slowly.

At the same time, capital markets were highly underdeveloped. It was not easy to produce new capital. Capital’s share of the economy was increasing steadily right along with labor. However, the number of capitalists was not increasing. Thus the slice of the economic pie per capitalist was exploding.

This trend reversed itself, mainly as the result of several forces: family size stopped growing, the rural labor pool was exhausted and capital markets opened up, allowing a rapid increase in the number of capitalists and the amount of capital available.

The greatest potential source of relief for low skilled Americans will be exhaustion of the global rural labor force. This will mean primarily a fully industrialized Asia. This will exert itself in one of two ways.

If Asian countries retain their very high savings rate then it will occur as enormous foreign direct investment (FDI) in the United States. Chinese and Indian corporations will set up shop in the United States and bid up the demand for raw US labor. One might be tempted to think that this FDI will only support “skilled jobs” but marginalist thinking suggests not.

As the price of skilled workers rises some tasks will be substituted by unskilled workers. Making predictions about what this will look like is hard, especially since it involves the future. However, an one easy vision is to imagine a world where grocery stores turn into a massive “fresh counters” where all the prep work necessary for your meal is done to order from fresh ingredients. You go home with little premeasured containers that you can combine into the recipe you want as easily as Food Network chefs do.

This is a pampered life for high skilled workers, but its also a world in which unskilled workers can regularly find work capable of supporting their families and an ever increasing standard of living.

Another alternative is for savings in Asian to decline, which would shift the balance of trade and cause at least a temporary surge in manufacturing done in the US. The transition period would be different in this scenario, but the end game likely the same. There would be a bidding up of the returns to capital in the US and rather than FDI, domestic investment would bring about the future.

A computer in your head is part of your brain, but in your pocket…

If you had a computer chip implanted in your brain that allowed you to perform complex mathematical computations just by looking at numbers and equations, like an onboard calculator, would you consider that genuine cognitive activity? How about if the computer chip was instead in your pocket? Answering “yes” to the former question is much more intuitive than a “yes” to the latter, but why should that be?

This are questions that occur in the fields of “embodied cognition” and “the extended mind”, and the topic of a recent article in the New York Times. The author of the article, Andy Clark, argues that we should view the theoretical brain-mounted computer chip as “bio-external elements in an extended cognitive process: one that now criss-crosses the conventional boundaries of skin and skull”. Importantly, he argues that iPhones and blackberries function in a similar way that a brain mounted chip would, and so they should be thought of likewise.

I’ve made similar arguments before, and I think that in the not-so-distant future we won’t need thinkers like Andy Clark to prompt us to consider these questions, as technology will place them front and center. Even if you find it absolutely clear that none of todays technologies should be considered cognition, or part of your brain, mind, or self, it will be much less clear as future technologies become more seamlessly integrated with our thought process.

For instance, consider the inevitable scenario I’ve laid out before: micro-computers, visual retinal displays, augmented reality, and neural input devices combined so that you’ve essentially got a brain-mounted computer on virtual floating screens in front of you that you control with your thoughts.   Whether or not using these future devices should be considered cognition and part of our minds will be much trickier than it is with today’s iPhones, especially considering that from everyone else’s perspective “organic thought”, as you might call it, will often be indistinguishable from “computer thought”. “Did he just remember my birthday when I asked if he knew it, or did he look it up?”

The Economics of Cloning

No, believe it or not this paper wasn’t written by Bryan Caplan or Robin Hanson. From the abstract:

In this paper, we analyze the extent to which market forces create an incentive for cloning human beings. We show that a market for cloning arises if a large enough fraction of the clone’s income can be appropriated by its model. Only people with the highest ability are cloned, while people at the bottom of the distribution of income specialize in surrogacy. In the short run, cloning reduces inequality. In the long run, it creates a perfectly egalitarian society where all workers have a top ability if fertility is uncorrelated with ability and if the distribution of ability among sexually produced children is the same as among their parents. In such a society, cloning has disappeared….

Unlike the normal, unpredictable, process of genetic heredity, cloners will be able to guarantee that their clones will be high-ability by cloning high-ability individuals. This paper looks at whether people will create clones for profit. Assuming that slavery will be continue to be illegal, the question is how could someone appropriate wealth from a clone they created?  The authors offer three ways:

Negative bequest – this is when you borrow money in someone else’s name, e.g. adopt the baby clone and rack up debt in it’s name. Apparently, this is legal in Japan.

Informational retention – here you withhold information from the clone about where they came from, and who their “model” was unless they pay for it. A problem with this is that the clone has to wait until he’s older to pay for this (since child clones don’t have money, obviously) in which case you may have ruined a lot of potential, as they could have been investing in particular talents throughout childhood. For instance, the clone who learns on his 18th birthday that his model was Mozart, but he’s neglected to learn piano.

Gene ownership – if genetic codes are patentable in the future, then you could sell a clone his genome which contains information that could help them stay healthy or improve their labor market earnings.

Education – top tier schools could form a consortium to clone high-talented individuals to increase the demand for their products, and since top tier schools are not easily replicable this will drive up prices and increase rents.

The first one seems worst to me, since clones have no choice but to pay rents. Given the desirability of having these high-ability clones as citizens, I assume that some countries would pass laws to serve as sanctuaries from this type of debt.

I am curious as to what Bryan Caplan, who has previously argued for his right to clone, would say about whether these things methods of clone wealth appropriation should be legal?