Why the Market and Technology Aren’t Playing Well Together (and Five Possible Solutions to Fix the Problem)

A SYLLOGISM TO EXPLAIN THE PROBLEM IN THE ECONOMY

The impact of new technologies on the economy is a hot topic right now. Just a few years ago, the idea of machines replacing human labor was widely dismissed, but now a growing number of pundits and economists are expressing concerns about the impact of automation technologies and the possibility of technological unemployment.

People tend to approach this complex issue in different ways. It can be a difficult topic to think about, so for the purpose of discussion, I’d like to present a simple syllogism as a possible framework for understanding what is happening.

MAJOR PREMISE: Economic opportunities arise from the monetization of scarce commodities.

This is Economics 101. For a good to have a price on the market, it must be scarce. That is, the good must be in demand and exist in limited supply. If you have only one of these two elements, the good will not be worth anything.

For example, breathable air is in high demand but it does not exist in limited supply. Good luck putting air in a bag and trying to sell it. Conversely, your old dirty socks might exist in limited supply, but since no one demands them, they are probably unsellable.

The market rewards people who are able to take a scarce commodity—whether a physical good like a chair or a service like massage therapy—and monetize it. In this way, scarce commodities are the source of all economic opportunities.

MINOR PREMISE: Technological progress reduces the number of scarce commodities by creating abundance.

Technology is a tool that humans use to get more of what they want. So it shouldn’t be a surprise that over the years technological progress has made a wide variety of goods—from food to music—less scarce and more abundant.

Today in the economy, a few trends in particular are having a big impact:

  • Goods are being digitized. Example. Mp3s have digitized music.
  • Services are being automated. Example: Self driving cars will automate driving.
  • Processes are being disintermediated (cutting out the middle man). Example: The web has made travel agencies unnecessary.
  • Markets are being globalized, allowing superstars to crowd out competitors. Example: MOOCS enable a few top-tier professors to lecture to world-sized classrooms.

All of which are part of the same bigger trend: technology is making all manner of goods and services—music, driving, travel planning, education—less scarce, more abundant, and therefore lower price in the marketplace.

It should be acknowledged that abundance in one area often gives rise to new scarcities in another. An abundance of fatty foods gives rise to a scarcity of healthy choices. An abundance of entertainment options gives rise to a scarcity of time to enjoy them all.

That being said, I still believe we are making progress towards a more abundant world. I think it would be wrong to suggest we are just treading water. Like a mathematical limit that approaches zero but never quite gets there, we are getting incrementally closer to the post-scarcity ideal with each passing year, even if such an ideal is fundamentally unreachable. The result is that progressively fewer scarce commodities exist as technology moves forward.

CONCLUSION: Therefore technological progress reduces economic opportunity.

I believe this is the simplest way to understand what is happening. Our technology and our market system, once comfortable collaborators, are increasingly on a collision course. This is because these two institutions have fundamentally opposing goals. The goal of the marketplace is to find and exploit scarcity. The goal of technology is to find and eliminate scarcity. The second goal undermines the first.

If true, this conclusion would partially explain both the unemployment and the inequality we see. Unemployment could arise from the fact that it is increasingly difficult to find a scarce resource to exploit. More and more people find themselves without a scarce service to offer or a scarce good to sell.

Inequality arises from the fact that the few remaining scarce resources are increasingly concentrated in the hands of the few. We can think of the economy as like a game of musical chairs where the chairs are scarce resources. As the chairs get removed, fewer and fewer people have a place to sit.

In the past it has been possible to find new chairs to replace those that have been taken away. It might still be possible to do so. But it increasingly feels like the game is being played faster and faster—that the chairs are being removed much quicker than we can replace them.

CATEGORIZING POSSIBLE SOLUTIONS

Actually developing a detailed solution for this problem is a complex policy question that I do not hope to answer in this article. However, I think the above framing makes it possible to categorize broad types of solutions.

SOLUTION ONE: Freeze Progress

If technological progress is undermining our market system, one option is to try to stop technological progress. This could take the form of government bans on automation technologies that displace human workers.

However, this hardly seems like a good choice. Aside from the fact that technological progress is generally desirable and gives us lots of nice things we want, such an initiative is probably infeasible given that it would require muzzling scientists and inventors the world over. In addition, without avenues for continued growth, the market might stagnate or collapse.

SOLUTION TWO: Artificial Scarcity

If we are running out of scarce commodities for ordinary people to exploit, then one response is to create new scarcity by artificial means.

Our society creates artificial scarcity all the time. We create artificial scarcity when we grant an author exclusive copyright over a book he’s written or an engineer exclusive patent on an invention he’s developed. We create artificial scarcity with licenses that make it illegal to practice law, drive a cab, or sell alcohol without permission from the government.

It might be possible to greatly expand our current system of artificial scarcity and thereby create more economic opportunities for ordinary people. With regards to the musical chairs analogy mentioned above, you might view this as one way of creating more places for people to sit. Less favorably, you might look upon this solution as counterproductive: essentially encouraging people to put air in bags and charge each other to breathe.

One possible artificial scarcity scheme is to treat all data like property. Ordinarily, data is not scarce. Just as their is no limit to the number of times you can tell a joke, there is no limit to the number of times you can use a piece of data. However, in the future it might be possible to turn every idea, photo, or bit of text you generate into an artificially scarce commodity to be monetized. Enforcing such a system would require either a universal operating system or an overarching surveillance system to strictly monitor and regulate all instances of copying.

I view this solution as less extreme than solution one, but still counterproductive to technological progress. A growing body of evidence suggests that artificial scarcity in the form of intellectual property hinders rather than helps innovation. In addition, by creating artificial scarcity and erecting walls around various goods, we are working at cross purposes to what one might consider the primary goal of technology: to have more access to the things we want.

Still this is a solution which might gain some traction since it could be seen as one way to empower ordinary people. At the same time, elites might like this system because it would afford them numerous levers of control in the form of legal bureaucracy. However even with broad support, it is questionable whether a full-fledged artificial scarcity regime would actually be enforceable. History suggests that decentralized technologies are hard to contain. Our failed wars on drugs and piracy are prime examples.

SOLUTION THREE: New Platforms

There are some commodities that will always remain scarce. These include intangible goods such as authenticity, status, good will, and belonging. Is it possible to carve up these remaining scarce resources in such a way that we can continue to create economic opportunities for ordinary people?

For example, could we have an attention market that allows broad participation? Right now the attention market is dominated by a few advertising middle men like Google. Perhaps with further disintermediation, we could all become our own localized advertising platforms—the digital equivalent of wearing your friend’s band t-shirt and getting paid for it. Alternately the advertising giants might find it worth their while to start paying users for their continued attention/loyalty. These are just a couple (not very imaginative) ideas.

(In Race Against the Machine, McAfee and Brynjolfsson discuss how “new platforms leverage technology to create marketplaces that address the employment crisis by bringing together machines and human skills in new and unexpected ways.”)

In addition, there are bound to be temporary pockets of human ability that cannot yet be duplicated by machines and are therefore still scarce. Although these pockets will shrink and vanish with time, if we can find and exploit them quickly enough via some sort of crowd-sourcing scheme we might be able to ease unemployment in the short term.

Effectively monetizing the remaining scarce resources may require the creation of new economic platforms, along the lines of current platforms like Kickstarter, Flattr, HumbleBundle, and Mechanical Turk, but on a much larger scale. We can think of these platforms as being like “apps” that run on top of the market “operating system.” They do not rely on artificial scarcity; instead they find novel ways to facilitate the exchange of existing scarce resources.

It remains to be seen, of course, whether it is possible to develop a platform or platforms that can actually come close to replacing more traditional forms of employment. I think there is great reason to be skeptical such an outcome is possible. However, we cannot entirely rule it out. This solution is highly desirable because it would cause the least disruption to our current system.

SOLUTION FOUR: Expanded Welfare

(An expanded social safety net could take the form of a universal basic income. In his essay Robotic Freedom, Marshall Brain asks “What if we, as a society, simply give consumers money to spend in the economy?”)

If ordinary people are being crowded out of the market, then one solution is to reduce our dependence on the market as a means of providing for people. We already have a variety of social safety nets that seek to accomplish exactly this goal. So we might extend these safety nets to ensure that people who are no longer economically viable still have access to food, housing, and essential services. This could get expensive, but advanced technologies might help make up the difference by lowering cost of living.

This solution would not require getting rid of the market entirely. Under such a scenario, the market could continue to do the important job of distributing those commodities which still remain scarce. However, over time fewer and fewer people might be active market participants. This could be a smooth transition or a disastrous one, depending on how things play out. To prevent market collapse and maintain the cycle of consumer spending we may need to ensure that people not only have money, but continue to routinely purchase products from the marketplace. Like shaking any addiction, weaning ourselves off the market could be a slow and painful process.

SOLUTION FIVE: Automation Socialism

(Futurist Jacques Fresco has long advocated abandoning money and markets in favor of what he calls a “resource based economy.”)

We could decide that since the market is no longer working well with our technology, we ought to just get rid of the market system entirely. A central government body would then have to take over the distribution of resources. Ideally wealth would be shared equally amongst all people.

Obviously a socialist system would have many detractors. However, some of the traditional problems of socialism—lack of motivation on the part of workers, inefficiency of central planning—could perhaps be mitigated through aggressive use of new automation technologies. It would be incumbent upon the government to aggressively invest in the sorts of technological breakthroughs that would make a fully automated society feasible.

In a best case scenario, automation socialism could speed us on the way towards a utopian society. In a worst case scenario, automation socialism could lead to tyranny and stagnation.

CONCLUSION

The above solutions can be placed on a loose spectrum that runs from those which prioritize the market over technology (freeze progress) to those which prioritize technology over the market (automation socialism). My personal opinion is that the best path is somewhere in the middle, utilizing a combination of artificial scarcity, new platforms, and expanded welfare.

Specifically, I favor new platforms if they can be made to work. Barring that, I would vastly prefer to move in the direction of expanded welfare rather than artificial scarcity. My intuition is that scarce resources are best handled by markets, care of people is best left to governments, and abundance is best left unfettered by artificial scarcity.

What do you think?

7 thoughts on “Why the Market and Technology Aren’t Playing Well Together (and Five Possible Solutions to Fix the Problem)

  1. Nicely put together and super useful continuum of scenarios!

    As you know, I’m an advocate of the Transformed/Superfluid Market scenario as the most likely solution going forward. This line of thinking relies heavily on many elements from your #2 and #3 scenarios, with a few caveats.

    regarding #2:
    Artificial scarcity, eg patents, copyrights and associated protections, have already proven very useful to our economy (though many of these systems are obviously outdated), and I think we’re very likely to improve on these systems moving forward. I view these Artificial Scarcity devices as commonly agreed upon finders’ and inventors’ fees that incentivize innovation, and as a natural market outgrowth as innovators and finders demand more protections. Moving forward, groups of value creators, neo-unions of a sort – something i like to call social nodes, could leverage their collective might to, say, place restrictions on how the data generated in their closed social network or physical network (eg 1000 sq acres of rain forest) is utilized/licensed. These people will have great incentive to leverage their data power and restrict others’ access to it. En mass, they could generate formidable bottom-up pressure to evolve our current Artificial Scarcity or Incentivization systems and make them far more efficient, changes the agreed upon game rules in a good way.

    regarding #3: I believe it’s likely that much of what’s currently intangible or considered unquantifiable or external to economics will inexorably be counted and brought into the market fold – authenticity, status, good will, attention, etc. Quantification of brains and human behavior certainly seems to be accelerating along with data input tech. I guess I fundamentally view the human brain and social behavior as just more systems to be datafied, figured out. That said, there’s so much MORE to our cosmic environment (resources in space, the sun’s energy, information from across the universe / other living systems, the fundamental rules of the cosmos that we are uncovering, etc) that will keep us busy for a long long time. These currently unimagined and external scarce (to us) resources could become very central to our economy quickly thanks to acceleration. ….. Overall, I wholeheartedly agree that new platforms, startups, processes will extend the underlying market and make tradeable not only new creations / data combinations, but also relatively scarce knowledge, data that exist at the fringes. You are right to be skeptical about the structures that could enable a superfluid economy because they are not dominant now, they exist in the fringes and the scenarios generated by our minds. Having played at startups often, I’m a bit biased toward them, seeing how much economic potential there is in data.

    #5 – I think your #5 scenario could well come out of natural market evolution, reduction of externalities. A superfluid market economy could resemble what we currently view as socialism.

    I look forward to your thoughts and more great posts!

    • Thanks for the great comment! I agree with you about #3 pretty much entirely so I will focus on #2.

      “Artificial scarcity, eg patents, copyrights and associated protections, have already proven very useful to our economy (though many of these systems are obviously outdated), and I think we’re very likely to improve on these systems moving forward…I view these Artificial Scarcity devices as commonly agreed upon finders’ and inventors’ fees that incentivize innovation,”

      So this statement seems reasonable on the surface but I have never seen any study that offers anything like actual evidence that this is in fact true (please provide if you know of one!). What I’m asking is: have these mechanisms of artificial scarcity ever actually helped incentivize innovation in any demonstrable, measurable sense? It’s obviously a hard question to answer empirically. Given current evidence, I think you could make a very strong case that they have consistently done the opposite: stunted innovation. That said, artificial scarcity is too ingrained in society at this point to go away, so it will definitely have a role to play in the future.

      At one point you refer to the “game rules” and those are what concern me most. We need a system for arbitrating disputes over ownership, which can get very thorny once you enter this fuzzy world of ideas and data. My ideas are influenced by the ideas of other people who were influenced by the ideas of other people before them, and so on, ad nauseum. Data is the same way. The history of a piece of data is a long chain that, even if you can trace it, becomes very complicated to parse if you are trying to assign ownership. Consider one way the patent system is broken: patent trolls are almost always able to find some antecedent patent that can be reasonably argued is the predecessor of some existing idea. This sounds like a problem with the patent system, but I think it is really a deeper problem with trying to draw discrete lines of demarcation between things that are not easily quantized, like ideas and data.

      So I’m worried the rules would have to be very complex, which to me implies that they would also be highly game-able and not very transparent. (Just like intellectual property today, but potentially much worse if the sphere of IP is expanded.)

  2. I think basic income, is the easy and first good step to be placed. Skilled and no-skilled workers will need of this, because of technological unenployment.

    We don’t need 100% unenployment to create a really bad cenario. We just need enough(maybe 25% or even less) to create a big problem.

  3. ….Ian M Banks ‘The Culture’, Gene Rodenberry’s Star Trek and quite a few other futurist I could mention.

    Nice piece. I’ve been following this argument in its various forms for 5 or so years now and this is very concise.

    I lean heavily towards #5; resourse based economics, but I also appreciate the usefulness of the market mechanisms to which you refer. As a species of ‘individuals’, specialisation is a big part of what we do but or ability and the opportunity to monetise that skill set is changing, and fast.

    Its good to know you’re out there….

  4. Strange to see that the whole misunderstanding of the Spinning Jenny is stil present in our world today.
    May be there are other interests behind it, not making it a misunderstanding, but rather a vehicle for something else entirely. It’s a little hard to believe that people can fall this deep.

  5. Your article makes the mistaken (though tragically common) assumption that socialism requires central planning. In fact it does not require this, nor does it even require any government.

    You can read up about decentralized socialism (aka libertarian-socialism, aka anarchism) in the following sources. Mind you there are various ideas of how this form of socialism would operate, so don’t expect uniformity.

    Wikipedia
    http://en.wikipedia.org/wiki/Libertarian_socialism

    An Anarchist FAQ
    http://anarchism.pageabode.com/afaq/secIcon.html
    (See especially section I.4)

    Socialist Party of Great Britain
    http://www.worldsocialism.org/spgb/pamphlets/socialism-practical-alternative
    http://www.worldsocialism.org/spgb/taxonomy_vtn/term/2835

    Participatory Economics
    http://en.wikipedia.org/wiki/Participatory_economics
    http://zcomm.org/wp-content/uploads/zbooks/htdocs/ParEcon/lookingforward/toc.htm