Archive | September, 2014

Seed Loans – the Solution to Technological Unemployment

30 Sep

As technology advances, some futurists are raising concerns about something they have labeled “technological unemployment”. Erik Brynjolfsson and Andrew McAfee have written an entire book on the subject entitled Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy:

Book Cover

Economists tell us that technological unemployment is impossible:

Brynjolfsson and McAfee’s mistake comes from considering only first order effects of automation where the machine replaces the worker. But when a machine replaces a worker, there is a second order effect: the organization using the machine saves money and that money it flows back into to the economy either through lower prices, higher wages for the remaining workers, or higher profits. In all three cases that money gets spent which stimulates demand that other companies respond to by hiring more workers.

http://www.technologyreview.com/view/519016/stop-saying-robots-are-destroying-jobs-they-arent/

In fact, the whole concept of technological unemployment has been classified neatly under the category of what is called the Luddite fallacy. Based on this categorization, it has been summarily dismissed:

Historical concerns about the effects of automation date back to the very beginning of the Industrial Revolution, when a social movement of English textile machine operators in the early 19th century known as the Luddites protested against Jacquard’s automated weaving looms. The Luddites destroyed a number of these machines, which they felt threatened their jobs.

The Luddite events of 1811 were the beginning of humankind’s analysis of whether it is possible for technological unemployment to be other than temporary and confined to particular industries and firms. Contrary to the Luddites’ fears, technological advancement did not ruin Britain’s economy or systemically lower standards of living throughout the following decades of the 19th century. In fact, during the 19th and 20th centuries, the opposite happened, as technology helped Britain to become much less impoverished than before. For this reason, some economists think that the general Luddite premise is fundamentally flawed, and thus they apply the term Luddite fallacy to it. (Wikipedia, Technological Unemployment)

However, economists have never clarified exactly how we will make a transition to an economy where no human physical or mental labor is required for production. What, exactly, will ordinary people do to secure an income when their services are no longer required?

A solution that is often discussed on far-left forums is a universal basic income:

http://en.wikipedia.org/wiki/Basic_income

However, there are nearly insurmountable obstacles to this proposal. A large percentage of the population views a guaranteed income as a giveaway that will damage the personal values of industry and independence. I.e. they are afraid it will create a population of slackers:

Slackers

There are also systemic problems. A basic income would require that taxes be raised substantially, thus tying up investment capital. Moreover, any nation that implements such a program would probably drive industry offshore. The result could be that they have no domestic product to tax. A solution to this problem might be to implement a global tax that industry could not run from, but such a tax would require international cooperation that is unlikely in the foreseeable future. A universal basic income does not appear to be a viable solution to technological unemployment.

One of the problems that may result from technology replacing people is dramatic deflation. When people are not needed to manufacture products, the cost of production will go down, leading to lower prices:

Deflation involves a fall in the price level –  a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation:

  1. A fall in aggregate demand (AD)
  2. A shift to the right of AS – i.e. lower costs of production through improved technology.

http://www.economicshelp.org/blog/8968/uncategorized/cause-deflation/

This deflation may be exacerbated by newly unemployed people having no money to spend on these products.

deflation can occur because of a combination of four factors:

  1. The supply of money goes down.
  2. The supply of other goods goes up.
  3. Demand for money goes up.
  4. Demand for other goods goes down.

http://economics.about.com/cs/inflation/a/deflation.htm

The easiest cure for deflation is to increase the money supply:

Of the four factors listed, the easiest one to control is number 1 “The supply of money”. By increasing the money supply, we can cause the inflation rate to rise, so we can avoid deflation.

http://economics.about.com/cs/inflation/a/deflation_3.htm

I propose a solution to the problem of technology replacing human labor that addresses every concern at once. It solves the problem of people making the transition to an essentially jobless economy while also solving the problem of the deflation that is likely to result from completely automated manufacturing. I call this solution Seed Loans.

A seed loan is a loan that is made to almost anyone who seeks it with the stipulation that it be invested in a prescribed selection of rapidly growing industries. Possibly, to keep the money supply from increasing too quickly, these loans can be made only to people who have recently been displaced by automation. These loans will be guaranteed in a manner similar to how student loans are guaranteed so that banks can make them without incurring any risk.

Most of us are familiar with the phenomenon of constantly being offered loans in the form of credit cards. Banks like to loan money because that is how they earn money. A little understood fact of banking is that when banks loan money, they do not loan money that is on deposit from customers. In fact, as unbelievable as it may seem to the unsuspecting public, when banks loan money, they invent the money from thin air. They simply write the money into existence by getting someone to agree that they are “borrowing” the money from the bank with the expectation that they will pay it back according to an agreed upon schedule:

For many, the way that banks create money through the process of making loans is reprehensible and a flaw in our economic system. However, it may be helpful to give some attention to the reason why this process came into existence in the first place. At about the time that this practice began, Europeans had commenced their exploration and colonization of the world. It turned out that this process of banks conjuring money through the making of loans provided capital to finance these adventures. At the time, the apparent weakness of this system was actually a strength.

It is once again time to turn this apparent flaw in our system to our advantage.

Investors are starting to look to what appears to be a new gold rush and a new period of exploration and colonization: the mining of asteroids:

http://www.bbc.com/news/magazine-29334645

When robots are able to do most or all jobs done by people, it should be possible to set up mining on asteroids throughout our solar system. Since robots do not need an atmosphere, they can work without spacesuits. Since they are not biological, they can endure cosmic radiation without shielding. If robots are able to do any job a person can do, they should be able to mine asteroids and set up in situ manufacturing on them. These robots will not only be able to secure materials and manufacture goods. They will be able to manufacture more robots; thus initiating a feedback loop of unprecedented industry. I have described this plan in detail:

colonizing space

The result of this extraterrestrial industry will be unprecedented growth. Since the universe, to our knowledge, has no boundaries, it may even be unbounded growth. However, this growth will require investment capital. It will require investment capital from anyone and everyone who is able to invest.

As the economy expands, banks can get everyone involved in this expansion by making the afore mentioned Seed Loans. Anyone will qualify for a Seed Loan as long as they meet certain need criteria and agree to invest it in the rapidly growing new industries. By granting these loans, banks will make their own money in the usual way. In the process, they will also prevent deflation by constantly increasing the money supply.

Seed loans are not actually a new concept. There is a longstanding precedent for banks loaning money to start new businesses. In this case, they will be loaning money to invest in businesses, probably through the purchase of stock.

Due to the nature of a completely automated economy, the return on investments of Seed Loans will be astronomical, making it easy for borrowers to pay back their original loans. Moreover, the borrowers will earn enough money to support themselves while being transformed into entrepreneurs that will never be a burden to the system. No one has ever accused an entrepreneur of being a slacker.

In the United States, the Fed can encourage banks to make these loans in the usual way:

The Fed encourages banks to loan more money by:

  1. Reducing the Cash Reserve Ratio (Money that needs to be deposited with the fed by every bank) This way banks have more cash to lend and hence they loan it to customers
  2. Reducing Interest Rates – By reducing interest rates, loans become cheaper thereby prompting customers to take new loans which encourages banks to lend more loans in order to gain new business

http://www.answers.com/Q/How_does_the_fed_encourage_banks_to_loan_more_money

As explained above, governments around the world can encourage banks to make Seed Loans by guaranteeing these loans in a manner similar to how they guarantee student loans. Banks will have no objection to loaning money when they know it will be paid back.

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