Noahpinion on China and robots

Noahpinion gets what I’ve been trying to say, and says it better than I do in his post, “Are we replacing robots with Chinese people?” Here’s a meaty extract :

I’ve been critical in the past of Mike Mandel’s thesis. After all, productivity gains from outsourcing are real. Suppose I am a guy who designs and builds widgets. Hiring cheap Chinese workers to make my widgets more cheaply boosts my productivity almost the same, in the short term, as inventing a robot to make my widgets more cheaply (minus the small amount I pay the Chinese workers).

BUT…productivity is not the same thing as technology. This is a fact that often gets ignored, since economists tend to treat the two as being equivalent. But they are not. In particular, trade can boost productivity without any new technology being invented. This is what Mandel claims has been responsible for the large productivity gains in the U.S. over the past 10 years. I tend to believe him.

So why should we care whether our productivity comes from robots (technology) or from cheap Chinese labor (trade)? One answer – and I feel like this is what Cowen and Mandel may have been getting at – is that one may crowd out the other. And this brings me to the theory of endogenous growth.

Paul Romer (a physics B.A. like me!) invented the theory of endogenous growth back in the 80s. The idea is that technological progress does not simply arrive out of nowhere, but is a byproduct of economic activity. Since ideas are a nonrival production input (a.k.a. a “public good”), there is no guarantee that the market will produce enough of them. Some growth models may be a lot better at innovation than others, and policy can make a big deal. If we’re not channeling enough of our economic output into the production of new technology, we’ll all be poorer down the line.

And here’s the interesting part. Romer’s first crack at a theory of endogenous growth was this 1987 paper. His model uses this very interesting assumption:

“I also assumed that an increase in the total supply of labor causes negative spillover effects because it reduces the incentives for firms to discover and implement labor-saving innovations that also have positive spillover effects on production throughout the economy.”

In other words, if we suddenly get access to a bunch of cheap Chinese labor, we don’t bother to invent robots. Then tomorrow, when the cheap Chinese labor runs out, we find ourselves without any robots.

Yes. That’s it exactly.

Noahpinion also asks the very good question about what to do next.

 

Comments

  1. Stephen McCracken says:

    This reminds me of the Harvard Business Review debate on US manufacturing from a few years ago. Some of the participants worried that innovation ecosystems are harmed and vital embedded know-how is lost when manufacturing activities move overseas. To phrase it similarly to the quote above: when we get access to cheap Chinese labor, we forget how to make new things, possibly including robots.

    http://blogs.hbr.org/hbr/restoring-american-competitiveness/2009/11/the-us-must-manufacture.html

  2. I see, so now the problem with cheap Chinese labor is that instead of replacing some Americans with temporarily cheaper Chinese laborers, although that temporary period could be very long given the billion-plus Asians still living in rural poverty, we could be replacing all of them permanently with robots! [START SARCASM] Yeah, great theory, with basically no constituents. Run with that, see how far it get’s you. [END SARCASM]😉 The point you’re missing is that a low price and productivity is all that matters: it doesn’t matter if it comes from a few American workers maintaining robotic welders or a horde of cheap Chinese workers or billions of hamsters running on wheels,😉 whatever’s cheapest and stays cheapest wins. If the robots can’t compete with cheap human labor yet, that means they’re just not good enough but I have no doubt they will be eventually. As for the notion of us getting caught unprepared with enough robots when cheap labor runs out, trust me, considering smart people were demoing robotic hands that could use tweezers or catch a cellphone two years ago and robotic birds and hummingbirds this year, it’s the roboticists who’ll finish first, long before we run out of cheap labor.

  3. yes you’re right, but we still should use the cheap labour which raises living standards of those workers (see krugman’s best piece)

    the US subsidises robotics to a large degree through defense, which takes care of some of the public good worry, if thats what you’re worried about.

    on a more technical point, what are you trying to say exactly, that we’d be richer over the next ten years if the US raised import taxes and used this to subsidise robotic research (in the universities) i’d say thats a courageous claim.

    more importantly is what to do with the displaced american workers (from either robots or outsourcing). you seem to suggest they will be taken up in manufacturing (potentially of robots) but i see it more as a long run trend in the decline of labour.

    hence its time to start thinking about negative income tax or guaranteed income (basically the same thing) to pay living costs for the unemployed masses.

  4. Glad I got what you were getting at.😉

    Policy-wise I would say: do everything possible to force China to float its currency. That won’t remove the impact of a huge global labor glut, but it’ll mitigate it somewhat, and also help correct a host of other problems (while allowing Chinese households to boost their consumption).

    Also we can subsidize basic research through the government. Invention is a nonrival good, so chances are that even without a labor glut we’re not doing enough of it. China will benefit from this as well, since the new technologies will leak across borders and Chinese people will learn how to build, operate, and maintain the robots too.

    And yes, of course, we can try to counteract the domestic inequality that the labor glut creates.

  5. And we wonder why we are going through a drought in innovation.

    US innovation has always been about saving labor costs – but, for the last 10+ years companies have been getting their productivity increases through labor arbitrage.

    No need to spend money on R & D when you can just outsource something to Asia.

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  1. […] spending a lot of time on Mandel. Here is another one I disagree with. In other words, if we suddenly get access to a bunch of cheap Chinese labor, we […]

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