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Musings Report #27 7-6-14 Our New Robot Overlords & The 3rd Type of Capital
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For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Welcome to the Musings Reports, My Favorite Project of the week
I want to welcome new readers by mentioning that the weekly Musings Reports are my favorite writing project of the week because I feel free to "let my hair down" (only a turn a phrase now, alas) and explore ideas in the safety of the Inner Circle of my key supporters (you). I enjoy sorting through the hundreds of links I receive via email and social media to pick a dozen that are united by some (often tenuous) themes while also being eclectic enough to snag the interest of a diverse readership, and discussing markets in a free-form fashion.
I hope you enjoy the Musings Reports as much as I enjoy assembling them. I also want to thank my lifelong friend G.F.B. for his continuing suggestions on improving the Musings, which remain a work in progress
Our New Robot Overlords & The 3rd Type of Capital
The current issue of Foreign Affairs sports a catchy article teaser: Our New Robot Overlords. This brings to mind various sci-fi scenarios, but the actual article title is academic to the point of obscurity: Labor, Capital and Ideas in the Power Law Economy.
But rather than a rehash of the usual economics blah-blah-blah, the article lays out three extremely powerful ideas that resonate very strongly with my own work:
1. Digital technologies (networked software, automation and robotics) are radically reducing the need for human labor and the leverage of traditional capital (land, plant and cash) globally.
2. Premiums flow to whatever inputs are scarce. Labor and traditional capital are no longer scarce; what's scarce is innovative, practical ideas. Ideas (for new models, products, services, processes, etc.) are a third form of capital that will accrue most of the rewards.
3. This distribution of premiums/rewards follows a power law, i.e. the Pareto Distribution where the "vital few" with the 3rd type of capital (good ideas) reap most of the rewards.
This is of course a generalized simplification, and there are plenty of parts of the economy that still depend on labor and conventional capital. But the point here is that thanks to globalization and overcapacity, most inputs are no longer scarce, and so the premium (high wages and/or profit margins) that the owners of labor and capital can charge is trending down in every tradable sector.
We all know that one systemic source of rising inequality is crony-capitalism (and crony socialism): the vast array of insider deals, collusion, winners being picked by the central state, too big to fail banks bailed out with taxpayer money, etc. People are increasingly aware the Status Quo is rigged, and the playing field is tilted to favor the few inside the crony-capitalist castle (what I call the New Nobility in a Neofeudal economy).
But the authors of this essay are pointing out that the leverage of digital technologies rewards the 3rd form of capital (good ideas) to an extreme degree. In an economy where the premium on labor and ordinary capital is falling (i.e. the yield on ordinary capital is near-zero, and wages are declining in real terms), those who can leverage ideas digitally can reap the premium reserved for what's scarce.
"This means that the real winners of the future will not be the providers of cheap labor or the owners of ordinary capital, both of whom will be increasingly squeezed by automation. Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.
The distribution of income for this creative class typically takes the form of a power law, with a small number of winners capturing most of the rewards and a long tail consisting of the rest of the participants. So in the future, ideas will be the real scarce inputs in the world -- scarcer than both labor and capital -- and the few who provide good ideas will reap huge rewards."
"Should the digital revolution continue to be as powerful in the future as it has been in recent years, the structure of the modern economy and the role of work itself may need to be rethought."
For individuals, this means being able to solve problems and create value in ways that can't be automated: this is the core message of my book "Get a Job and Build a Real Career". The way to leverage one's ideas is to network, network, network and acquire multiple skills that can be applied in innovative, practical ways to a wide spectrum of problems.
As a society, we will have to deal with the reality that the nature of work is being fundamentally changed, and wages are no longer an adequate means of distributing the surplus of an economy. What's the solution: tax the owners of robots? As this essay points out, even the value of capital invested in robots is declining.
In my view, the answer is to broaden the scope of work beyond the state (i.e. working for the government) or private sector companies which must make a profit or they perish, to what I call the community economy. More on that as I work on my next book, which is on this very topic.
Summary of the Blog This Past Week
What's Cooking at Our House: Stir-Fried Prawns with Black Beans (7/5/14)
(In)Dependence Day 2014: Freedom from Pain, or Freedom from Dysfunction? (7/4/14)
Is This a Self-Sustaining Recovery or As Good As It Gets? (7/3/14)
The Inevitable Stock Market Reversal: The New Normal Is Just Another Bubble Awaiting a Pop (7/2/14)
The Next Global Meltdown Is Baked In: Connecting the Dots Between Oil, Debt, Interest Rates and Risk (7/1/14)
The Systemic Sources of Geopolitical Turmoil: Instability, Fragmentation, Resource Wars (6/30/14)
I think the entry on oil, interest rates and risk touches on some critical dynamics that will drive much of the financial turmoil in the decade ahead.
Best Thing That Happened To Me This Week
Seeing the many connections between the article referenced above (Labor, Capital and Ideas in the Power Law Economy) and my own ideas in "Get a Job, Build a Real Career & Defy a Bewildering Economy." It's nice to have some confirmation that I'm on the same wavelength as heavy-weights like Michael Spense.
Market Musings: The Subprime Economy
I've been recording conversations with Gordon T. Long for over two years now, and it's a fruitful relationship because we approach a diverse range of important topics (changing nature of work, geopolitical risks, etc.) from different perspectives: Gordon is a techie from way back, having worked for IBM for decades, and moved successfully from the tech world to financial analysis.
So it's interesting that we both see the U.S. economy as an increasingly Subprime Economy based on low-cost credit issued to risky borrowers. This applies to the entire spectrum of the economy, from marginal car buyers to corporations selling junk bonds. (This is our next topic of discussion.)
The intrinsic inefficiencies of relying on subprime credit for "growth" is reflected in the ratio of new debt and GDP: it now takes 4 yuan of new debt in China to generate 1 yuan of GDP, and the ratio is much higher in the U.S. This means the economy is collectively taking on much higher risks of default and domino-like cascades of defaults for diminishing returns.
Meanwhile, the cost of servicing debt rises quickly as debt expands. The Federal Reserve has masked the consequences of expanding debt by lowering interest rates to near-zero, but there is no more room to run this game: rates can stay low, but the cost of servicing ever-rising debt rises, eating into income that could have gone to savings or consumption.
In other words, depending on marginal borrowers and risky debt for your "growth" is self-liquidating: the risk and interest costs will eventually bring down the entire credit edifice.
When will this become visible? The next recession will act as the trigger for the implosion of credit, as all the tricks played by central banks to "save the system" in 2009-14 cannot be repeated: interest rates are already near-zero, credit is already unlimited and central banks are already propping up markets by buying assets.
The key phrase here is self-liquidating: the process destroys itself.
From Left Field
These 23 Charts Prove That Stocks Are Heading For A Devastating Crash (via U. Doran)
Clubbing with China's Cocky Young 1 Percenters (via Maoxian) -- how to guarantee a revolution -- conspicuous consumption by the 100-bottles of champagne crowd and no real rule of law....
There is a secret ingredient in your burgers: wood pulp (via Pam & Pat) -- what's the daily requirement for cellulose?
Doubling of Beijing’s cancer rate spurs pollution fears (via Maoxian) -- first come industrialization and unhealthy diets, next comes epidemic-level diseases... is China wealthy enough to care for 300 million diabetics and tens of millions of cancer patients?
Authoritarian regimes are changing how the world defines democracy -- paranoia, secrecy and obsessive control -- are these compatible with democracy? Do we "save" democracy by destroying it?
Price tag for the American dream: $130K a year -- this aligns with my own published estimates-- nice to see confirmation....
Living the American dream would cost the average family of four about $130,000 a year. Only 16 million U.S. households — around 1 in 8 — earned that much in 2013, according to the U.S. Census Bureau.
Stash Pad: The New York real-estate market is now the premier destination for wealthy foreigners with rubles, yuan, and dollars to hide.
"But much of the foreign money is coming in closer to the median for a Manhattan condo ($1.3 million and rising). In fact, if you’ve recently been outdone by an outrageous all-cash bid for an apartment, there’s a decent chance that, behind a generic corporate name, there’s a foreign buyer and an offshore bank account."
The Chimera of Global Convergence -- the U.S. is still dominant in many sectors... BRICs growth is mostly commodities and credit-based speculation....
"There are six sectors in which the rise of the BRICs has been staggering: banking (from 8 per cent in 2007 to 42 per cent in 2013); construction (from 1 to 32 per cent); forestry, metals and mining (from 22 to 41 per cent); real estate (from zero to 20 per cent); utilities (from 5.2 to 20 per cent); and oil and gas (from 21 to 40 per cent in 2010, but then down to 34 per cent in 2013). Unsurprisingly, China accounts for much of the progress across the twenty-two sectors, most of all in banking (32 per cent), construction (28 per cent), and real estate (19 per cent). Without sectoral diversification, these countries remain exposed to price fluctuations."
The race to stop Las Vegas from running dry:
Amid a brutal drought the reservoir that supplies 90 per cent of Las Vegas’s water is fast disappearing and desperate attempts to save Sin City are under way
What’s the Matter With Eastern Kentucky? (via Joel M.)
Coal country is the most disadvantaged part of our nation. Why have decades of federal intervention failed? -- John Kenneth Galbraith wrote a book about the solution in the early 1980s: to escape poverty, move to a place with better prospects. It's not the solution people want to hear, but it works....
Extinct human cousin gave Tibetans advantage at high elevation -- we all have some Neanderthal genes as well....
Yuja Wang, Joshua Bell: Beethoven Kreutzer Sonata (1st movement; 11:31) -- Two superstars of classical music trade chops; interestingly, they come across as an "artistic couple"--they seem to relate on a level that is not romantic but close to it...
"(There are) three types of large corporations: those about to go bankrupt, those that are bankrupt & hide it, those that are bankrupt and don't know it." Nassim Taleb
Thanks for reading--
charles |
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