Like many people, I long worried about the specter of technological unemployment – as machines get smarter and gradually can do the jobs that people do, will we reach a point where machines can do everything people can do?

If and when that happens, we may have a paradise of abundance – machines will make everything we want, without any people needing to work.

But at the same time, how will people get money to buy these things?

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I no longer think that’s going to be a problem.

Last week’s Economist had an excellent report on “The return of the machinery question”, which examines the problem from a historical perspective. People, after all, have been thinking about this problem since the start of the industrial revolution.

Despite all the hand-wringing, the economy always seems to generate more jobs than automation displaces.

Now I understand why (others have understood for a long time).

I’ll explain with a simplified economic model.

LIMITED STUFF-MAKING ABILITY

At any given time, the world (or national) economy has the ability to produce a certain amount of stuff. Food, clothing, houses, cars, entertainment, etc. – all the things we humans want.

How much stuff we can produce at any given time depends on:

• Labor: How many people exist (each has hands and brain)
• Capital: How many machines, factories, buildings, etc. we’ve accumulated. How much education people have received, etc.
• Resources: How much raw materials we can easily get at – metals, chemicals, energy, land, etc.
• Technology: The ways we know to do things and use the things we have.

Of course how well we use these things matters – we can run factories 24×7 or only 8 hours/day. We can have rules that make us waste time and materials, or incent people to be efficient. We can work long hours, or take lots of vacations.

And over time how much of these things we have changes – population can grow or shrink, resources can be discovered or run out, and we can discover new ways to do things that are better.

But, still, there are limits. At any given time, we can only produce some limited amount of stuff.

LIMITED MONEY

Also at any given time, there is a (again, roughly) fixed amount of money in the world.

Sure, we can print more, but that doesn’t help. If we can make a billion stuffs each day, and there are a billion dollars of money, then the billion dollars will buy all the stuffs, so 1 stuff for each dollar.

(I said this was simplified.)

But if we print another billion dollars, that doesn’t help. Now there are 2 billion dollars, but still only 1 billion stuffs each day. So you need 2 dollars to buy each stuff. (This is inflation.)

MONEY CAN ONLY BE SPENT ON PEOPLE

When someone buys something, they give money to some person.

Yes, you can buy a building, which is not a person. But to buy it, you give money to a person (who owned it).

The same is true with everything – whether you’re buying labor or capital or resources or technology – the money goes to people.

There’s no place else it can go, except to people.

NOW INTRODUCE ROBOTS

So, we can make a given amount of stuff, and the given amount of money will buy that stuff.

And money can only be spent on people.

Now we introduce lots of robots that can do most of the jobs that people do. The robots are cheaper to use than humans, so they get used instead of people.

So now there are people doing nothing, who used to be making stuff.

I just said “the robots are cheaper”. This is key.

Let’s simplify some more and assume we’re still making the same amount of stuff (actually we’ll be making more, which makes things better, but let’s ignore that for now).

So we’re making the same amount of stuff, but the robots are cheaper. That means somebody has extra money left over (probably whoever is using the robots, but that’s not important, as we shall see).

Same amount of stuff. Extra money left over. Which can only be spent on people.

The extra money will eventually get spent (that’s the only thing money is useful for – being spent).

If it’s spent on stuff made by robots, there is still extra money left over. Because robots don’t get paid, only people do.

Yes, robots cost money, but that money is paid to people – the people who make or own them.

So there is still extra money around. Held by people. They can spend it on more robot stuff as much as they like, but that doesn’t use up the money – it just moves it around to other people.

And since we’re already making as much stuff as before, that means it has to be spent on new stuff made by people, that wasn’t being made before. That’s the only place it can be spent.

So now we’re making more stuff than before. And that new stuff was made by people. And the only people available – who aren’t already busy making the old stuff – are the ones who lost their jobs to robots.

So those are the people who get hired to make the new stuff.

That’s it. That’s the whole enchilada.

That’s why despite 200 years of worries, technology has never caused mass unemployment.

Because it can’t. There is only so much money around at a given time. If money is saved by cheaper robots, that money gets spent on people.

(Yes, technology has caused, and will cause in the future, adjustment problems as people switch jobs. That’s different, and while not minor or trivial for the people involved, temporary.)

Finally – Since the robots are cheaper, prices for the stuff they make go down. Which means people can afford to buy more of them.

Which means that people actually get wealthier, in terms of how much stuff they can afford to buy. (They don’t necessarily have more money – they might have more or less – but they can afford more stuff.)

They can’t buy more of the stuff made by people, but they can buy more of the stuff made by robots. Which means stuff made by people is more expensive – more valuable – than stuff made by robots.

Which means the wages of the people who make stuff has gone up, in terms of what the money you pay them will buy.

Up, not down.

Technology makes wages rise. Not decline. Rise.

And that is why we have nice things today, like houses, and medicine, and air conditioning, and clean rivers, and airliners, and indoor toilets, and the Internet, that our ancestors with little technology didn’t have.

As far as I can tell, the popular image of a “millionaire” in the US comes from the 19th century.

Whether you figure by the gold price or by the CPI deflator, one million dollars would buy between 1 and 2 tons of gold during most of that century.

Here in 2016, a ton of gold is worth about $35,000,000.

That’s inflation for you (which I suppose is why many people today use “millionaire” to mean someone who earns $1M/year, instead of someone with a net worth of $1M).

But gold doesn’t inflate. A ton of gold is a millionaire. A nice visualizable amount.

Why does almost everyone (even me) feel disgust at disaster profiteering?

On the face of it, that’s the market at work – big needs bring high prices, which bring lots of supply, right? It seems (looking at it economically, not emotionally) the quickest way to get help to those in need. But it disgusts me, too.

My hypothesis is that people instinctively fear that profiteers will engineer a crisis if they can make a profit from it. To prevent that, there’s social opprobrium for profiting from a crisis.

Just a thought.

This is a letter to the editor in response to “How to Break the Internet” in the May 2015 issue of Reason magazine.

Dear Editor,

There are many legitimate criticisms that may be made of the FCC’s approach to net neutrality. Unfortunately, Geoff Manne and R. Ben Sperry do a poor job of making any of them in their May article.

While I agree that Title II regulation is the wrong approach, net neutrality is an attempt to solve a real problem that requires solution.

What Manne and Sperry miss are two points that have gradually become clear to those of us who have worked on these technologies over the last 30 years:

1 – Internet bandwidth is not, in practical terms, a scarce resource. In theory of course it is scarce, just as the amount of air we can breathe is limited by what Earth’s atmosphere holds. But in practical terms, we are not going to run out.

This took a long, long time for technologists to understand – a huge amount of network engineering development and standardization has focused on bandwidth prioritization and allocation mechanisms.

Almost none of which are used in practice. Because it turns out that it is almost always cheaper to simply add more network capacity (“overprovision”), than it is to implement mechanisms to allocate bandwidth as a “scarce resource”.

2 – Contra Manne and Sperry, at least in the US, Internet service provision is not a competitive industry, but a quasi-monopolistic one. This (as Reason should know) is mainly due to regulations at the state and local level. Having 2 or 3 regulated firms offering service in a given area is not the same as free entry into a market.

If truly free competition in the ISP business were allowed, there would be no need for “net neutrality”; competitive forces would solve the problem.

But we don’t have that. I’d much rather see Federal legislation that truly deregulates the ISP business (taking monopoly power away from states and localities). Until that happens, ISPs really do have quasi-monopolistic power.

ISP attempts to tax content providers based on “scarce resource” arguments are spurious excuses for a money and power grab that is in fact simply rent seeking.

As long as that situation is allowed to persist, we do need some limits on how ISPs may abuse that power.

Lee Kuan Yew passed away yesterday.

Much to my regret, I never met him. I did not agree with him about many things.

But he was the greatest single benefactor of mankind in history.

As a direct result of the actions of Harry Lee and his “socialist” People’s Action Party, billions of people were lifted out of abject poverty, through reforms first in Singapore, then copied in China and in much of Asia.

Billions of people.

Today Reuters quotes Lee as saying in 1986 “We have to lock up people, without trial, whether they are communists, whether they are language chauvinists, whether they are religious extremists. If you don’t do that, the country would be in ruins”.

He outlawed long hair on men in the 1970s. Banned the sale of chewing gum. And, of course, many drugs.

Those things don’t fit with my politics. But look at the result. Singapore, once almost a synonym for filth and poverty, today is arguably both the freest and wealthiest country in the world. And – billions of people.

Deng Xiaoping, architect of China’s rise through market economics, based directly on emulation of Lee Kuan Yew’s policies in Singapore, famously said “it doesn’t matter whether a cat is black or white, if it catches mice it is a good cat”.

Lee’s cats caught mice.

And so, despite everything, I mourn Lee Kuan Yew.

And, about our political disagreements? Maybe I’m wrong.

Arbitrage is the act of moving things from a place where they’re less valuable (cheaper, if you like) to where they’re more valuable (more expensive).

Normally the term is used in financial transactions – if a ton of wheat is worth $200 in Chicago and it’s worth $250 in Houston, I can buy it in Chicago, sell it in Houston, and make money. That’s arbitrage.

But – that’s just a financial manipulation; a trick played with numbers to cheat the system. I haven’t really created anything or done anything useful.

Right?

Tho it may seem that way, not right. Economics is not intuitive.

Suppose I have a pile of wood. It has some value. I get tools, work hard with them, and turn the wood into a house.

(If you’re outside America, assume a pile of stones – I know you people think making houses out of wood is crazy.)

The house is worth a lot more than the wood pile was.

This also is arbitrage. We don’t usually call it that, but it is – I’ve moved the low-value wood in such a way that it’s now a high-value house.

Yes, I used capital (the tools) and labor (the work) to do it, but that’s how I did it – not what I did.

This is where all wealth comes from – moving things around from less-valuable conditions into more-valuable conditions.

Capital and labor and technology are useful only when they help with arbitrage (digging holes and filling them up again uses labor, and shovel-capital, and scooping-technology – but doesn’t create any wealth).

Another example – when I was in kindergarten, sometimes I’d get sent with a salami sandwich (this was before in-school cafeterias). I didn’t love salami – I preferred tuna. But a friend had a tuna sandwich, and preferred salami. We’d swap. (Yes, I know that’s not allowed anymore.)

By swapping, we turned two not-highly-valued sandwiches into two more-valued sandwiches – because we each preferred the other’s sandwich. The sandwiches remained exactly the same. But the value increased – by arbitrage.

Back to the ton of wheat in Chicago. Let’s ask why wheat is cheaper in Chicago. There must be a reason, even if we don’t know what it is. Maybe there was a bumper wheat harvest in Illinois (where they keep Chicago), so there’s more than people can eat. Maybe they like rice better. Whatever.

In Houston – the opposite. Maybe there’s a pizza holiday that uses up lots of wheat. Or a bad harvest in Texas…again, whatever.

The point is, by moving the wheat from Chicago to Houston, I’m moving it from where it’s needed less to where it’s needed more – afterwards, there is less excess wheat in Chicago (and more valuable money), and less shortage in Houston. So I made both places better off.

Which means it was not a trick – I really did do something useful. I created wealth. And some of that wealth I get to keep (some will go to the seller in Chicago, and some to the buyer in Houston – exactly how much depends on negotiating skills, buy/sell spreads, etc.).

So arbitrage is where all wealth comes from. It is the sole reason we don’t live in caves anymore.

Abstraction is good, magic is not. Remove magic.

Be nice. Work hard.

Be polite to armed people.

Be tolerant.

Correlation is not causation.

Don’t buy consumer goods on credit.

Hard cases make bad law.

In One Time Pads We Trust. (All others pay cash.)

Internalize externalities.

It’s a democracy; compromise.

Keep Right Except To Pass.

Life is only fair on average.

Spend less than you earn. (Other people do; you can too.)

Subsidy is the root of all evil. (Separate post coming on this…someday.)

…but capitalism doesn’t have to.

The poor popular reputation of free markets may be connected to the prevalence of deceptive advertising, especially for consumer goods and services.

Spend just an hour watching TV after midnight, and you’ll be bombarded with ads for penny auctions, infant life insurance, sports betting (you’ll win thousands), anti-impotence drugs (or is it penis-lengthening? They’re never clear.), etc.

As Michael Caldara said in the first link above, “we don’t hear calls to regulate infomercials, get-rich-quick seminars, and fad diets”, but – perhaps we should?

I’d prefer vigorous enforcement against common-law fraud, but (in my humble opinion; don’t sue me,) these ads intentionally mislead the ignorant and incompetent. That’s why they air when most successful people are asleep.

To many people this gives the impression that capitalism is little more than legalized theft and deceit. A crackdown on these obvious (to me, anyway) cases of fraudulent advertising might go a long way toward improving the reputation of both government and business. Markets only work to society’s benefit – not to enrich those with the least scruples – when the basic rules of honest dealing are enforced.

If that’s too hard, another path would be an organization of ethical businesses that observe a code of honesty (complete with a membership seal).

Pope Francis is quoted in the March 8 2014 Economist:

“While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by the happy few,” he has written. “This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control.”

No, “the absolute autonomy of the marketplace and financial speculation” is precisely what we don’t have. As an old-time socialist friend once said, “The main problem with capitalism is that we don’t have it.”

His Holiness has it exactly backwards, and in two independent ways at that.

First, “the earnings of a minority growing exponentially” is not a problem unless it comes at the expense of others. Reminds me of “Tax the rich, feed the poor/ till there are no rich no more”; it is poverty that we want to eliminate, not wealth.

Second, and less obviously, the reason crony capitalists have enormous fortunes is precisely because politicians do have the power “for the common good, to exercise any form of control”.

As long as politicians have power, whether “for the common good” or with any other excuse, to pick winners and restrict competition, people will find ways to corrupt politicians to get these goodies.

Whatever the original motivation, regulators are always and everywhere captured by the regulated, who write regulations for their own benefit.

Capitalism works for the public good only when people are allowed to freely trade with one another without permission or blessing from heavily armed government thugs.

The things Pope Francis doesn’t like about capitalism are not part of capitalism. They are part of the doomed attempts to “regulate” it. His Holiness doesn’t understand what capitalism is. Neither do most capitalists. Or most Republican “defenders of capitalism“. Maybe we need a new word.

I read today that Pope Francis thinks the global economic system shouldn’t be based on “a god called money”, and that “Men and women have to be at the centre (of an economic system) as God wants, not money.”

Maybe he’s right. Our economic system should be about people – that’s who it is supposed to be for.

We should have an economic system that encourages people to help each other out, and voluntarily give one another the things they need. One that works without threats and coercion, and which makes people want to be nice and helpful to each other.

Here’s an idea I’ll call “smile economics” – it’s based on an economy of “smiles”:

Each time someone does something nice for a stranger (helps them out, gives them something they need, etc.), that person should give “smiles” in return – to show their appreciation of the nice thing. It might be a lot of “smiles”, or just a few, depending on how big the favor was.

(This would be mostly for use with strangers – people tend to be naturally nice to their friends and relatives.)

The people who accumulate lots of “smiles” would be those who are especially nice and helpful to others. Of course most people want to be perceived as nice, so wanting to have lots of “smiles” would act as a social incentive to encourage everyone to be nice to each other.

Now, when someone really wants a lot of help or something from other people, they could offer a lot of “smiles” for that help. Other people would know that they can really help someone a lot, if that person is offering a lot of “smiles” for the help. Because people want “smiles”, and everyone would know that others wouldn’t offer to give away many “smiles” unless they really wanted the help very much.

Here is the best part – even people who are not naturally nice – selfish people – would want to be nice, in order to get “smiles”.

Why? It’s true that nasty people often don’t care what people think about them. But in order to get help and other things they want from strangers, they’d need to offer “smiles”. Probably they’d have to offer even more “smiles” than nice people, because people don’t generally want to help nasty people. So, in the “smile economy”, nasty people would have to to be nice to others, in order to get the “smiles” they need to get the things they selfishly want for themselves. (Because, in this system, they can’t just buy what they want with money – they need “smiles”.)

“Smile economics” actually makes nasty people want to act nice, in order to satisfy their own selfish desires. It actually makes their own selfish interest drive them to be nice to other people! How about that!?

Of course, to do the most good, the system should be utterly universal and work between strangers of all races, religions, and nations, no matter where they are. We want to encourage people to be nice to one another no matter who they are. Anyone who said, for example, that someone in Brazil shouldn’t do nice things for someone in China (or any other pair of countries) would be seen as evil – because wanting people not to be nice to each other is evil. Nobody should ever tell anyone not to be nice to one another.

What do you think?

Addendum – A few people who have read this think it won’t work because people can just make fake “smiles” all the the time (as many as they want) in order to get things. They have a point. So let’s say that everybody gets a certain limited number of “smiles” to spend – maybe eight or ten each day (they can save them as long as they like).

Addendum #2 – In case it still isn’t clear, it doesn’t need to be “smiles” that people give as a reward. It could be anything that’s limited in number which other people value – for example pretty marbles (if they’re hard to get), or shiny rocks, or little pieces of gold. Or what the Spanish used to call “pesos de ocho” (pieces of eight). Or Greek drachma, Pakistani rupees, or Thai baht. Japanese Yen would work. Or Bitcoins. I suppose those all have their pros and cons, but it doesn’t really matter.

You get the idea now, I’m sure. Pope Francis is going to love this idea!!