The mother of invention
I thought I’d quickly highlight a point made recently by two great posts. First, here’s J.W. Mason:
There is increasing recognition in the mainstream of the importance of hysteresis — the negative effects on economic potential of prolonged unemployment. There’s little or no discussion of anti-hysteresis — the possibility that inflationary booms have long-term positive effects on aggregate supply. But I think it would be easy to defend the argument that a disproportionate share of innovation, new investment and laborforce broadening happens in periods when demand is persistently pushing against potential. In either case, the conventional relationship between demand and supply is reversed — in a world where (anti-)hysteresis is important, “excessive” demand may lead to only temporarily higher inflation but permanently higher employment and output, and conversely.
Now, from the blog direct economic democracy:
Of course we COULD choose to have just a few in the owning class and have everyone else rioting. BUT the owning class would get no benefit at all by keeping itself select. In fact that would make each member of the owning class less rich because the market would be smaller. Technological innovations have very high development costs relative to the unit cost of the product. A product such as a new medicine or an innovative electronic gadget becomes dramatically cheaper to produce per unit item if the development costs are spread across many more units sold. Imagine if we lived in a world with greater disparities of wealth than we do now. Imagine if the market for the latest medicine or electronic gadget was 1/10000th the current size. Those few who could still afford such items would have to pay massively more to cover the development costs. That dynamic works in the opposite direction too. Imagine if the potential market for the latest product was all seven billion people on earth. Then development costs would be spread so thinly they would hardly be noticed. Capital goods such as the robotic workers themselves also have the same economy of scale. It starts to make financial sense if many factories staffed with robots are to be built but not if just a few… [H]aving an economy directed towards technological development is critically dependent on having lots of potential customers.
It’s something of a cliché, starting with Marx and moving through Schumpeter, to gush over capitalist economies’ capacity to innovate, reinvent, and overthrow themselves. Profit-seeking entrepreneurs constantly strive to find new and/or cheaper ways to “serve customer needs”. In a capitalist economy, necessity surely is the mother of invention.
But with a very large asterisk. Capitalist entrepreneurs are motivated by the accumulation of money claims. In a capitalist economy, it is not mere necessity, but purchasing-power-weighted necessity that is the mother of invention. American entrepreneurs don’t compete to meet the needs of money-poor Africans or Chinese. Instead, Chinese entrepreneurs compete to meet the needs of citizens of the country money comes from. Within the US, entrepreneurs don’t much innovate to discover and address unmet needs of the poor. That’s a rough business. The poor have more needs than they can pay for already, and entrepreneurs hope to be paid. There is, of course, plenty of business activity on behalf of the poor, but the preponderance of it is in sectors that are in one form or another subsidized, e.g. health-care, education, and finance. The customer businesspeople work to please is the state, or quasi-state financial firms, who may or may not need to solicit the collaboration of or delegate some decision-making to actually poor “end-users”. Entrepreneurial energy always goes where the money is.
It is in this light that I think we should interpret, for example, problems of “general glut” or “abundance”, as Izabella Kaminska puts it. Actual scarcity has not, in fact, been overcome. We have not achieved overcapacity in aggregate. In a depression, businessmen perceive overcapacity all over the place. But that is a distributional phenomenon. There is an abundance of goods and services relative to the needs and desires of people with purchasing power to consume. There is no such abundance in an absolute sense.
Abundance, ultimately, is a choice variable for the political class. “We” are presented with a devious choice, a Faustian seduction. We can choose abundance, for ourselves, by maintaining a distribution under which a relatively small fraction of humanity claims a sufficiently large share of world purchasing power that the economy’s capacity to produce will remain safely in excess of that group’s needs. Or we can choose scarcity, by distributing purchasing power widely enough to put our productive capacity under pressure, leaving all of us, even the affluent, at risk of actual shortage.
If we choose the abundance, we can expect Tyler Cowen’s “Great Stagnation” to continue. Technology will stagnate, because purchasing-power weighted necessity is the mother of invention, but people with needs have little purchasing power while people with purchasing power have trivial needs. If we choose scarcity, we take a risk. We may fail, and end up impoverished relative to where we (some of us) might have been, had we chosen the more conservative path. But purchasing-power-weighted necessity is the mother of invention, and in the past, mass affluence has inspired extraordinary innovation in pursuit of the mass dollar. If you believe in the power of capitalism and technology, then you should favor choosing scarcity, both for your own benefit (robots, yay!) and to expand the “we” by whom some level of abundance might plausibly be claimed.
Political conversation often obsesses over a pathological and ahistorical fear of idleness among the non-affluent. Given the choice, if not absolutely compelled by necessity, wouldn’t “they” become lazy slackers, eating diabetes chips and watching monster trucks on teevee all day? Or would they lift themselves up, spend a few hours at the gym, and take advantage of their leisure to find creative and productive use of their capacities?
Human fears project outward, and so it is for the political class. For as a group, it is “we”, not “they” who are choosing comfortable idleness. They are desperate for jobs. But we are collectively slouched on easy chairs in the sky, enjoying decent stock returns, low inflation, and remunerative careers. The question is whether “we”, the relatively well-to-do who call the political shots, have the moxie to shed our pantsuit pajamas and take a chance on capitalism’s capacity to transform the world. So far we have chosen a comfortable depression, which makes for grand debates and entertainments. Would you pass the remote? Shall we watch Maddow or O’Reilly or Colbert, or read yet another self-righteous blog post?
- 30-Apr-2013, 4:30 p.m. PST: Fixed too-general google books link to Mating by Norman Rush; fixed spelling of “asterisk”, was “asterix” like the comic character, thank you William Pietri!
- 1-May-2013, 8:35 a.m. PST: Avoiding duplication of “constantly”: “economies’ capacity to
- 24-Mar-2013, 9:25 p.m. PDT: “enjoying
adecent stock returns”