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More on Capital-Biased Technological Change

Friday, 28 December 2012 08:59

Since several people in comments and e-mails raised questions on my earlier post on capital-biased technological change I will try to clarify my point. The original impetus was a Paul Krugman post in which he raised the possibility that changes in technology were causing a redistribution from labor to capital. (He has since written further on the topic.)

My point was to note that this sort of redistribution cannot just be a matter of technology, it also involves a very big role for the laws and norms that make such a redistribution possible. I referred in the earlier post to the Cambridge controversies in the theory of capital. Unfortunately, these debates were sidetracked into a narrow and largely irrelevant discussion of the possibility and likelihood of "re-switching," a story where a production technique flips from being less capital intensive to more capital intensive as the interest rate rises or falls.

From my perspective the main takeaway from this debate is that there is no measure of capital that is independent of its price. How do we compare a steel mill, the latest supercomputer from IBM, the software produced by Google and the method for producing a lifesaving cancer drug whose patent is owned by Pfizer? Are we going to weigh each one, takes its volume? There is no measure of capital apart from its price.

This is in contrast to labor, the other part of the technology story. I would not want to minimize the problems of aggregating labor either (is an hour of a brain surgeon's time the same thing as an hour of dishwasher's time?), but at least there is something physically present that we can identify. What is the physical presence of a software or pharmaceutical patent? Yet, these items are hugely important in the modern return to capital story since a very large chunk of profits is earned by software companies, drug companies or other corporations that profit primarily based on their ownership of intellectual property.

Intellectual property serves a social purpose. It is a way to provide an incentive for innovation and creative work. However it is certainly not the only way. An enormous amount of research is funded publicly, as with the NIH, and also through universities and non-profits, and from private companies not seeking to profit from patent or copyright protection. It is far from clear that patents and copyrights are the most efficient mechanisms for supporting innovation and creative work. If our current intellectual property regime also has distributional consequences that we consider bad, then that would be a serious strike against it.

But the basic point is that if we are concerned that the economy is leading to a situation where an ever large share of the gains from growth are going to capital, we should not imagine that this is just the result of technological change. It was the result of conscious policy choices. As we say here at CEPR, money does not fall up.


Comments (7)Add Comment
written by skeptonomist, December 28, 2012 9:15
Economists who think that inequality is driven solely by technology and "free-market" forces must be living in some kind of ivory tower (and who is paying for that structure?). There always has been and always will be a political struggle - when an interest group or even a company gets enough money it invests it in political influence in order to get even more money. It has been obvious for a long time that "free-markets" do not operate in favor of workers who compete on an individual basis - they must organize or get legal support of some kind to get a reasonable share of technological advances. Are those who argue that inequality is due to "capital-based technology change" or "structural unemployment" really unaware of this constant political and cultural struggle? If so, maybe economic education in the US is grossly deficient.
written by JSeydl, December 28, 2012 9:47
Yep, and I would also throw in the financial sector. In The Winner-Take-All Society (Frank, Cook), the case is made that technological change has altered the structure of many markets, which now offer large prize for the small number who make it to the top; the financial sector is used as a key example in the book. But what Frank and Cook don't note is that policy changes have also helped to create a winner-take-market for bankers/traders. For example, the government's TBTF insurance policy as well as the Fed and Treasury's strong dollar policy has changed reward structures.

The point is, I'm sure there are some natural changes taking place, but almost everywhere you look, there is some policy story accounting for the increasing gains to capital.
Patent Free Research?
written by Mike Brennan, December 28, 2012 10:26
Don't universities generally patent any valuable results of their research?
capitalism? does our system benefit the majority of our people?
written by mel in oregon, December 28, 2012 11:50
no, keynes pointed out that austerity for the bulk of the people creates an environment whereby people become desperate & usually turn to an autocratic dictator. europe seems to never learn from history & is repeating the same stupidity of the 20s & 30s. & so are we, evidenced by the enormous idiocracy of the republican party & to a slightly smaller extent by the democrats. we are gonna come a cropper which seems to be unnoticed by many of our brighest economists, who seem to, while trying to become the intellectual saviour of the masses, use too many graphs, & no longer do enough research.
written by Jeffrey Stewart, December 28, 2012 2:08
Can it be that Dr. Baker's main takeaway from the Cambridge Capital Controversies is that there's no measure of capital independent of its price? That's certainly part of it.

Another major point is that there's a problem of overdetermination in that price of capital, which is part of the initial endowment, must be market clearing and also be equal to its cost of production. There's no necessity that capital's market clearing price is equal to its price of production.

Supply and demand curve price theory, i.e., neoclassical economics integrally depends on the possibility of substitution among goods as relative prices change, i.e., on well behaved, elastic demand curves.

If a unique inverse relationship between interest rates and capital demanded can't be demonstrated to exist in theory because of reswitching, then the essential structure of neoclassical supply and demand curve theory breaks down.

Dr. Eatwell used to say that there's no logically consistent theoretical foundation for the proposition that long run equilibrium prices are determined by supply and demand. That proposition is false.

Thus, the onus is on neoclassical economists to explain why they cling to their theory when there's no logically consistent theoretical basis for it.
Capital vs labor
written by R. nemo, December 29, 2012 5:35
Tax capital at a much higher rate and redistribute it to the rest of the people. If the capitalists insists on beggaring the proletariat Marx's solution is the only option. We have to run society for the majority of people--not the few.

Otherwise what is the point of having a so called demos?
Oh no,they haven't forget!
written by Jacques René Giguère, December 29, 2012 10:55
Mel:"europe seems to never learn from history & is repeating the same stupidity of the 20s & 30s."

Yes they learned. But elites long for the good old times. And they won't waste the current opportunity.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.