Fairly Recently: Must- and Should-Reads, and Writings... (May 28, 2019)

Joshua Gans: An Old Result on Automation and Wages: "Herbert Simon... The Shape of Automation for Men and Management.... Simon starts wondering what happened to the horses and the jobs they held. He argues that the problem with horses was that their existence depended on market forces. In other words, when the demand for horses fell, soon after supply went down—that is something that doesn’t necessarily happen for labour.... If a production technique is employed in equilibrium, the value of output will equal the sum of labour and capital costs. If the price of the good is 1 then: w * a + (1 + r) * b = 1.... Now suppose there was a new production process with coefficients (a’, b’) such that w * a’ + (1 + r) * b’ < 1.... Producers would expand their production.... The pie will be increased but who will get what?... Suppose a’ < a but b’ = b. Then it must be that w’ > w. In other words, reduce the labour requirement in production and labour captures more and, indeed, all of the value arising from this technological change.... Second, suppose that a’ = a but b’ < b. So capital is more productively efficient. So long as the rate of interest does not change (which it won’t if it is set by consumption level savings preferences), then once again w’ > w!... To quote Simon, 'so long as the rate of interest remains constant, an advance in technology can only produce a rising level of real wages. The only route through which technological advance could lower real wages would be by increasing the capital coefficient (the added cost being compensated by a larger decline in the labor coefficient), thereby creating a scarcity of capital and pushing interest rates sharply upward'...