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.