The foundational economics problem

2011-11-10 14:21

We like to make fun of the music industry for being wedded to a fundamentally broken business model, based on a flawed assumption. But you know what? Our entire modern economy is predicated on a single, key, assumption, which is also false:

A willing, healthy, adult worker can earn a living.

That is to say that a healthy adult who is willing to work can do work which is worth more than the costs of that worker’s survival, and probably enough more to cover the cost of supporting a family in whole or in part.

Two things have gone wrong. The first is that costs are up. Way up. This isn’t all about greed; it’s also about the fact that, in the 1940s, not a lot of doctors proposed the use of MRI scans. Which is to say, we have more treatments available. We have lots of new stuff; we have the Internet, we have laptops, and so on. And to a significant degree, our culture assumes that you necessarily have access to phone and email.

The second is that automation and technology have dramatically reduced the value of many kinds of work. A lot of work used to be done by throwing lots of guys at it; now we tend to use a few guys with machines. The guys who don’t know how to use the machines can’t compete. Even when it is still cost-effective to hire people, there’s a lot of work which is not worth enough to justify paying someone as much as it costs to keep a family fed and clothed. We could demand that wages increase, but mostly that would just mean that those jobs would evaporate, because they were no longer worth paying someone to do.

There’s lots of things we can do. We can mess with minimum wages, we can encourage both parents to work… but fundamentally, all of these are delaying actions. We are reaching a point where the number of people who are simply not able to do anything for which it is worth paying them enough to feed them is too large to ignore.

The obvious solution is not to worry about it — the productivity available to the people who [b]can[/b] do stuff is high enough that we have plenty of spare productivity. The thing is, though, we’ve never really solved the question of how you get people to work if they don’t have to. We don’t have meaningful tools for distinguishing between “unable” and “unwilling”. Most of our attempts end up producing systems which someone who could work but doesn’t want to can finesse, while people who are genuinely incapable of working are completely stymied.

I am pretty sure that “eh, let them starve, they’re no good to us” is probably also an unacceptable solution.

I don’t have a solution, really. I just think it’s important to understand that the problem here is that we have a flawed assumption. We really have reached a point where it is quite possible for a basically sane and healthy adult to lack the capacity to earn a living, certainly in the short term, and possibly in the long term.

Peter Seebach




  1. This is not a new problem. In fact, it’s at least 5000 years old. People can’t survive through farming or hunting/gathering, so they move to a city. The city can only survive if (1) urbanites can convince farmers to give them food, and (2) resources are distributed equitably enough to keep rioting at a manageable level.

    The Romans solved #1 with “tax farming”: taxing a conquered territory up to, but not beyond, the breaking point. They solved #2 with bread and circuses. Literally free bread and entertainment for the underemployed. Tax farming turned out to be unsustainable, as it required Roman soldiers, who liked to be paid in land, which required an ever expanding empire.

    However, cities persisted. They must frequently find new ways to solve those two problems. Particularly since agricultural technology is always improving. (Though before the industrial revolution, it tended to improve very slowly.)

    Henry Ford famously paid his employees enough that they could purchase his cars. It wasn’t that he hired enough people to drive the economics of his factories; rather, his wages drove up prices in the city, thereby forcing other employers to raise their wages.

    Socialism and progressive taxes are a stopgap measure, but often a necessary one, to cushion the transition from one healthy economic model to the next. Every street corner merchant, from New York to New Delhi, is an entrepreneur working to solve these ancient problems for at least one person.

    About the modern situation:

    Our current problems probably have little to do with insufficient innovation among entrepreneurs, but rather that the US has, over the past 30 years, concentrated wealth in the hands of the wealthiest while not investing in the future. For example, the rising cost of higher education can be explained entirely by decreased state educational subsidies.

    As for the cost of health care, it can be explained largely by three factors. One, we spend $500 per capita annually on medical administration (insurance companies and doctors bickering over bills). Two, there is no incentive to keep costs down. (In comparison, doctors in India are finding ways to provide state-of-the art care at a fraction of western costs.) And three, doctors’ wages are on average 5x their patients salaries (vs. 3x in most countries.) This may in turn be related to the amount a medical student must take out in loans.

    Dave Leppik · 2011-11-10 16:05 · #

  2. Economists refer to this as ZMP — zero marginal product. See, e.g. a search at the econ blog Marginal Revolution,

    Linda Seebach · 2011-11-12 10:41 · #

  3. You may also want to review the Iron Law of Wages.

    — Steven Appelget · 2011-11-23 19:34 · #

  4. but profit margins are also, very measurably, up. absurdly so. in a way that influences this thing more than laptops.

    — sdsd fs · 2014-07-17 12:24 · #