Reinvent: Determining Bargaining Power in the Platform Economy: Our political system has been hacked by time, circumstance, chaos, and disaster...
...The failings of the electoral college, the fact that small states hacked the constitution in 1787, so we now have a world in which the minority in the Senate represents 175 million people, while the majority represents 145 million people, and the gerrymandering after the 2010 census are primary examples of this dysfunction.
Fixes for the economy?:
- A 4 percent inflation target from the Federal Reserve,
- Incentivizing businesses to invest in workers,
- Reinvigorating the idea that technology should be used to augment workers, not replace them.
The possibilities for positive human flourishing from the platform economy are immense, provided the platforms actually work. Uber’s investors are currently paying 40 percent of Uber’s costs. What happens when these investors start wanting their money back? The platform economy moves bargaining power away from the service providers and from the customers, and into the hands of the platforms. This is a problem for both consumers and independent workers. What bargaining power workers will have will be correlated to the time and resources devoted to training them: when you walk, you disrupt a general production value chain, and it is expensive to figure out how to replace you, even if there’s someone else who certainly could do the job just as well. But if it is not very expensive, you have little power.
Nevertheless, here in California it is hard not to be a techno-optimist—especially if you are an curious infovore...says...
Pete Leyden: Hello. I'm Pete Leyden. Today, we have Brad DeLong with us. He is an economics professor here at U.C. Berkeley. He's also the recently installed chief economist of the Blum Center for Developing Economy.
Pete Leyden: It's good to have you here.
Brad DeLong: Great to be here.
Pete Leyden: We’re here at this moment with all these folks from the OECD, the economists from the United States here, and the technologists. If you had to think about the kind of moment we're in right now, how would you characterize where we are as far as the evolution of the global economy and our technologies are? Is there anything special about this moment? Anything critical about it? Any ways you think about this juncture?
Brad DeLong: Let me give you a three-part answer to that: a 50-year horizon answer, a 15-year horizon answer, and then a 0-5-year horizon answer.
Brad DeLong: The 0-5-year horizon answer is: America has been deeply scarred by the financial crisis that started in 2007, the deep recession that followed, and the extraordinarily anemic recovery since. That still leaves us with four million people fewer in the labor force and looking for jobs than we ought to have. We are not sure what all of them are doing. Many are living in their sisters' basements playing video games. The economy and people's expectations of how it works have been shocked. How well our society functions is still deeply scarred. We are recovering only slowly, if at all, back to what we used to think was normal. that is the 0-5-year horizon answer.
Brad DeLong: The 50-year horizon answer is: Expect the collapse of the need for people to do a great many tasks that people used to do and are still doing that provide value. In the next 50 years an awful lot of paper-shuffling tasks are going to be taken over by software bots. An awful lot of blue-caller, traditionally male, tasks are going to be taken over by robots. Few occupations will disappear. But many occupations will be transformed. And many will shrink. The income and wealth distribution will be upset—either in a positive or a negative direction. These 50-year horizon processes are what most of us upstairs at this conference are worrying about.
Brad DeLong: Then there's a 10- to 15-year horizon. How much of this transformation is going to happen in the next 15 years, as opposed to the rest of the next 50? How fast is the 50-year horizon process going to come upon us? Where exactly will be the first sectors and first places in which the coming of—call it the “Rise of the Machines”—the replacement not just of blue-color manufacturing but also construction and transportation and distribution and warehouse workers will be hit by technology, and who? Where and when will a good deal of standard white-color paper-shuffling work start to disappear as expert systems and software bots take it over?
Pete Leyden: In your career, is this about as momentous a time as you've seen? Or is that overhyping it?
Brad DeLong: That we are recovering from the macroeconomic catastrophe that started in 2007 has definitely made it very, very fraught. The failure of our Electoral College to deliver us a competent president in 2016 has definitely made it very, very fraught. Our political system was hacked partially by malevolent people, but mostly by time, circumstance, chaos, and disaster. It has been hacked in three ways.
Brad DeLong: The first way it has been hacked is the Electoral College failure; that gave us a president who really is not up to the job in practically any dimension. The second way is that small states hacked the constitution in 1787, so today the 49-seat minority in the senate represents 175 million people, while the 51-seat majority represents 145 million people. The desperately minority congressional government understands it is a minority government. It is acting oddly as a result. Third, the state-level Republican gerrymandering after the 2010 censushas given us House of Representatives is extraordinarily unrepresentative of the median American voter. These have created a time of great political fraughtness. We clearly have a very badly broken political system. That greatly deepens and increased the dangers of managing what I call the 50-year transition. And on top of that is the economic fraughtness left from 2007.
Brad DeLong: The 50-year transition has been going on since Steve Jobs and Steve Wozniak began building personal computers in the garage. It has been going on at a more less constant pace. We see a little bit more about where it's heading with each passing year. It really has not sped up much. What has made this moment fraught is the political disaster of 2016 and the echoing effects of the economic disaster of 2007.
Pete Leyden: There are three challenges we've been wrestling with here. You mentioned one of them—the robots and AI. But there's this idea that the economy is moving towards more and more independent workers. There's also this rise of the "platform economy". How do you think of those other two challenges? How important developments are they? How much do they concern you—or actually encourage you as good thing?
Brad DeLong: The platform economy has a number of dimensions. One is what Hal Varian was talking about at the conference yesterday—the "end of the need for scale". With Amazon Web Services and with Google anyone with a good idea can launch their website at scale for pennies, providing through the web whatever service or commodity they want to provide. And if demand is there they can scale up as far as they need to using very cheap world class-efficiency systems to support their businesses. You no longer need a large initial lump of capital of any. You just soft launch and look for demand. You use the web and search to attract customers. You use AWS and Google to provide your back end. This should be the cause of an enormous upward surge in entrepreneurship and enterprise, and a great flourishing of creativity. Whether it's individuals with an extra four hours a week making extra money by driving for Lyft, or whether it's writers saying, “I don't want to have to sell books at 20 bucks and get only a \$1.50 in royalties. I want to establish my own Patreon and have my fans pay me directly”, or any of a whole bunch of other things.
Brad DeLong: The possibilities for positive human flourishing from the platform economy are immense—if the platforms actually work. Right now we find ourselves in a world in which riders are paying essentially 60% of Uber's costs. Uber's investors are paying 40% of Uber's costs. What happens when the investors begin wanting their money back? Do we find that Uber has enough economies of scale, and scope, and enough of a brand and a first mover advantage, that it’s a profitable business? Or do we find that the business gets taken over by somebody else? What if Google puts a little taxi ride button on every Google Map screen, saying: “We'll only charge you a \$1.50 as a handling fee”? Uber will have charge you considerably more if it wants to repay its investors. Uber may turn out to have done the trail-breaking thing. Uber may suffer the fate of most pioneers—arrows in their back, and face down. Or perhaps the platform economy will not be a good thing. Perhaps it moves bargaining power away from the real producers, who are doing the work, and also away from the customers, and into the hands of that one large company in the middle that controls the information. That’s still up for grabs.
Brad DeLong: Most people who fear that we are, as the extremely sharp Zeyneb Tufekci of Duke University says, “building a dystopia one brick at a time in order to trigger people to click on ads", greatly fear that individual humans, given our cognitive disabilities, will be no match for the informational middleman organization using deep learning and information to figure out how to trigger and control us. Others are much more optimistic—although not necessarily much more optimistic about the prospects of individual platform pioneers like Uber. They are, however, more optimistic about the prospects of the large companies that have entrenched dominant positions: companies like Apple, Google, and Facebook—not that they are optimistic about any one of them, but rather they are optimistic about the prospects for profits for all of them put together, because what opportunities one of them fumbles another one is likely to recover.
Pete Leyden: They will do well for everybody, or do good for themselves?
Brad DeLong: They will well, and they will do good.
Pete Leyden: Do good. And where do you find that, actually?
Brad DeLong: I’m basically a techno-optimist. It's hard not to be a techno-optimist in California—especially if you're an intellectual, a data loving infovore.
Pete Leyden: You think even though there are all these challenges, the platform economy is something we could get behind?
Brad DeLong: Yes.
Pete Leyden: What about speaking as an economist now? This other thread: independent workers playing an increasing role in the economy. There’s a positive way to see that. There are also challenges in that. I'm curious to how you see that challenge.
Brad DeLong: Independent workers have, by their nature, very little bargaining power over what economists call “rents embedded in the system”. Your bargaining power is limited by what you could charge if you walked away from the relationship and went out on your own, and by what your counterparty would have to pay in order to get someone else to step up in your place. You have bargaining power if, when you walk, you disrupt a complex and valuable general production value chain, and your counterparts finds it expensive to figure out how to replace you. You have bargaining power even if there is someone else who could fill your job just as well if and only if it is difficult to find that person. A lot of successful middle-class societies have been based on situations in which relatively low-skill workers have bargaining power and share big time in economic rents, either because there aren't that many replacements in the area or because they threaten to walk as a group.
Brad DeLong: Yesterday at the conference, ex-governor Jennifer Granholm of Michigan told a heartbreaking story about a town in central Michigan: 8,000 people, of whom 3,000 worked in the refrigerator plant. Those 3,000 workers made a very good living for Michigan at the start of the 2000s—some 35 buck an hour, I think, in wages and benefits. But the refrigerator plant goes. And after it leaves they are lucky to make \$12 or \$15 an hour. And then all those who worked to satisfy their demands find their markets have halved in value. The refrigerator plant workers' skills, machines, lifetime of experience bashing metal and operating things that form refrigerator coils—there's really not much demand for those skills in central Michigan, and they find that they can't transfer their skills to do anything else of great value. The principal source of their income was sharing in the rents created by the refrigeration value chain: their dominant market positions and imbedded technology. That kind of danger faces a lot of people who become independent workers. And the middleman firm does not have to close. All the middleman firm has to do is say: "I am altering the deal. Pray I do not alter it any further".
Brad DeLong: On the other hand, an independent worker economy is not bound to be destructive. As long as we have a middle-class society, these are immense amounts of work to be done for one another. And replacing any of us with somebody else will be expensive. Think of the typical job in the economy going from being a manufacturing worker to being a barista at a coffee shop or a teacher at a yoga studio. As long as you have a middle-class society, there'll be a lot of people who will be willing to pay handsomely for yoga lessons or for a particular espresso beverage brewed exactly the way they like it with a smile, a handshake, and a friendly three-minute conversation about how they’re doing, while the thing brews.
Brad DeLong: On the other hand, if we have plutocracy, in which the only people who have a lot of money are the rich, then the potential customers for the yoga studio won't be able to pay very much and your fancy expresso drink won't command very much. The only people who’ll have middle-class lives will be those who control resources that are useful for making things for which rich people have a serious Jones. There’ll be relatively few of those as well. Thus most of it is the shape of what the income distribution will be. That is ultimately a political choice about the distribution of wealth. An unequal distribution of wealth will drive an unequal distribution of income. That will then reproduce itself. And an equal distribution of wealth will drive a more equal distribution of income, which will also reproduce itself.
Pete Leyden: You’ve kind of given—this is probably right that could go this way, could go that way, could be positive, could be negative—I get that and that's good choices here but...
Brad DeLong: ...This is why we economists want not to have just two hands, but a prehensile tail as well...
Pete Leyden: But in that respect, what do you see is the most promising ways forward to kind of deal with this juncture we're in—tip the balance? What are the things that you'd like to see happen soon here that would evolve this economy in the direction to make it healthy?
Brad DeLong: Am I allowed to say a 4% inflation target from the Federal Reserve? A Federal Reserve that is less focused on keeping inflation very low, more focused on keeping employment high, and more focused on making sure that there's enough inflation in the system that the Federal Reserve can maintain interest rates at a level at which it will have the power to stabilize the economy? Businesses are not going to want to train their workers unless workers are scarce. Workers tend to be scarce only in what we call a “high-pressure economy.” The first and most important thing would be to change the calculations of those businesses that might be willing to invest in training workers. They need to feel that workers are valuable commodities under their control that they need to boost the value of. It has been totally the case since 2008, and largely the case since 2001, that businesses think there are plenty of workers out there, and we really don't care about them, because the bottlenecks keeping us from being more profitable are elsewhere. Making labor a serious bottleneck for business so that business focuses on helping workers become more productive and more useful is, I think, the first thing we could do.
Brad DeLong: The second thing would be to repeat what Silicone Valley did in the 1980s and 1990s, that is you’re old enough to remember the coming of the Macintosh computer in 1984...
Pete Leyden: ...Indeed...
Brad DeLong: ...Apple bought Super Bowl time for a dystopian 1984 TV commercial. It was all about how important the Macintosh computer would be as an engine of freedom. They really believed that the personal computer was an engine of freedom. It allowed you to control and access your own information, rather than having to rely on some human resource or IT department backed by some large mainframe that had lots of data that you weren't allowed to access and controlled your life. The fear back then was that people would become information serfs: the valuable parts of the enterprise and the value chain would be kept under lock-and-key in the hands of the priests of IT and HR. It was a world in which people would take their draft cards and burn them, in which your information would come on five IBM cards which would all say, “Do not fold, spindle, or mutilate", and which you would feed into the machine face down, nine-edge first. The vibe was that those cards produced decisions over which you had no control or knowledge. Thus making information technology tools to augment people's abilities to figure out and maneuver in the world that they were in, rather than information technology being a tool for supervision and control—“you're 15% less productive at processing claims, so we don't need you around anymore, and you have no skills or information that can be transferred elsewhere.”
Brad DeLong: The idea of Apple Macintosh 1984 was of information technology as a way of augmenting human intelligence and boosting productivity—rather than information technology as a way that we can substitute capital for labor, and getting these annoying workers out of the factory or office while still producing as much. That was a key and a revolutionary social goal of Silicon Valley as it existed in the 1980s and 1990s, from the coming of the personal computer to the flourishing of the internet. In some sense, Silicon Valley has to figure out how to do this again. Organizations like, say, Berkeley's engineering school have to help. Large companies tend to be much more interested in figuring out how to use information technology to shed annoying and expensive workers, rather than how to give those annoying and expensive workers more control over their lives.
Pete Leyden: Well, that's fascinating. It's a big challenge to the tech world as well as a challenge to policy makers. I wish we had more time to kind of go deeper into many, many possible solutions there. But just to wind up here, big challenges, possible big solutions shift, how confident are you that we're going to manage this transition here? Whether it's the five-year, the 15-year transition, how confident are you going to do it and how worried are you?
Brad DeLong: I would say I'm not confident at all.I would say that our income and wealth distribution now has managed to tilt itself in a bad way. If you want the economy to pay attention to you, you better have money. And the money is too concentrated now. If you want the polity to pay attention to you, you better have a movement. Yet somehow it seems that the age of the internet and of the decline of manufacturing has made it harder rather than easier to create durable social movements. At the same time it has made it much easier to create the appearance of a social movement via software bots controlled by some server in the Former Yugoslav Republic of Macedonia. And that crowds the information flow. What is the cartoon? "1980: my incandescent light bulb produces ten times as much heat as light. 2017: my LED light bulb has been taken over and is now running a button out of 50,000 Twitter followers controlled via a server on another continent." That that seems to be the world we're moving into. It's not terribly a reassuring one.
Pete Leyden: Well, that's a good place to end. At least that’s a sobering thought, and thanks so much for joining us here and giving us your thoughts.
Brad DeLong: You're very welcome. It's a great pleasure. Bring me back again.
Pete Leyden: I will.