Thanks for your comment Phil. That’s helpful, I hadn’t considered the question of where labour shifts after less of it is needed to produce an existing good.
I understand you as saying that as productivity increases in a field and market demand becomes saturated then the workers move elsewhere. This shift of labour to new sectors could (and historically did) lead to more overall productivity, but I think this trend may not continue with the current waves of automation. It seems possible that now areas of the economy where workers move to are those less affected by the productivity enhancing effects of technology. I think this is what actually happened with the economic shift from manufacturing to service industries. Manufacturing can benefit a lot from automation technology, whereas service jobs (especially in fields where the human element of the service is what makes the service valued) are not as capable of becoming more productive. e.g., A massage therapist is not going to get much more productive no matter how much technology we have. So what I imagine is that as automation makes it take less and less labour to produce physical and digital stuff, then most of the jobs that remain will be in human-centered fields which are inherently harder to make more productive through technology.
Thus, it still seems possible that automation could cause worker productivity to go down (which is the opposite of what Krugman was assuming). This is counter-intuitive because clearly there is a common sense way in which the automated economy is much much more productive. More and more goods become plentiful and virtually free. But these cheap plentiful goods do not have much market value, despite their value to us as human beings, so they don’t contribute to labour productivity as measured by economists.
But even if workers move to less productive industries, productivity must still go up, adjusted for inflation.
Suppose 5 workers lose their jobs because it takes 5 fewer workers than before to make 10 widgets. The country is now making the same as before, but with 5 fewer workers. So productivity is higher than before, if the 5 workers remain unemployed. (Same output, less labor).
If the 5 workers get jobs elsewhere, even if they are almost completely unproductive and make only 1 grommet combined, the country is still more productive than before—more output (1 extra grommet), same labor.
If productivity is output/labor, it must always be true, mathematically, that even if the (now) surplus labor is even minimally productive, average productivity rises.
For the case where the workers stay put making widgets and it’s just that more widgets get made, that’s just a special case where the surplus labor stays in the same industry, and the “proof” is the same as before.
Ah, thanks for clarifying. So the key issue is really the adjusted for inflation/deflation part. You are saying even if previously expensive goods become very cheap due to automation, they will still be valued in “real dollars” the same for the productivity calculation.
Does this mean that a lot rides on how economists determine comparable baskets of goods at different times and also on how far back they look for a historical reference frame?
I’m saying that if previously expensive goods become very cheap due to automation, the total for all goods will be valued higher in “real dollars”. For that one good, the total dollar value could indeed be lower, even after overall inflation (such as, for instance, if the price drops by a factor of 20, but only 10 times as many items are produced).
But for the economy as a whole, the value in “real dollars” will always at least stay the same after productivity improvements that lower some prices relative to the status quo. That’s because even though that one good may be lower in value even after adjusting for deflation caused by the lower price, the other goods in the economy will make up the difference and more by being higher in value after adjusting for deflation.
Thanks for your comment Phil. That’s helpful, I hadn’t considered the question of where labour shifts after less of it is needed to produce an existing good.
I understand you as saying that as productivity increases in a field and market demand becomes saturated then the workers move elsewhere. This shift of labour to new sectors could (and historically did) lead to more overall productivity, but I think this trend may not continue with the current waves of automation. It seems possible that now areas of the economy where workers move to are those less affected by the productivity enhancing effects of technology. I think this is what actually happened with the economic shift from manufacturing to service industries. Manufacturing can benefit a lot from automation technology, whereas service jobs (especially in fields where the human element of the service is what makes the service valued) are not as capable of becoming more productive. e.g., A massage therapist is not going to get much more productive no matter how much technology we have. So what I imagine is that as automation makes it take less and less labour to produce physical and digital stuff, then most of the jobs that remain will be in human-centered fields which are inherently harder to make more productive through technology.
Thus, it still seems possible that automation could cause worker productivity to go down (which is the opposite of what Krugman was assuming). This is counter-intuitive because clearly there is a common sense way in which the automated economy is much much more productive. More and more goods become plentiful and virtually free. But these cheap plentiful goods do not have much market value, despite their value to us as human beings, so they don’t contribute to labour productivity as measured by economists.
But even if workers move to less productive industries, productivity must still go up, adjusted for inflation.
Suppose 5 workers lose their jobs because it takes 5 fewer workers than before to make 10 widgets. The country is now making the same as before, but with 5 fewer workers. So productivity is higher than before, if the 5 workers remain unemployed. (Same output, less labor).
If the 5 workers get jobs elsewhere, even if they are almost completely unproductive and make only 1 grommet combined, the country is still more productive than before—more output (1 extra grommet), same labor.
If productivity is output/labor, it must always be true, mathematically, that even if the (now) surplus labor is even minimally productive, average productivity rises.
For the case where the workers stay put making widgets and it’s just that more widgets get made, that’s just a special case where the surplus labor stays in the same industry, and the “proof” is the same as before.
Ah, thanks for clarifying. So the key issue is really the adjusted for inflation/deflation part. You are saying even if previously expensive goods become very cheap due to automation, they will still be valued in “real dollars” the same for the productivity calculation.
Does this mean that a lot rides on how economists determine comparable baskets of goods at different times and also on how far back they look for a historical reference frame?
I’m saying that if previously expensive goods become very cheap due to automation, the total for all goods will be valued higher in “real dollars”. For that one good, the total dollar value could indeed be lower, even after overall inflation (such as, for instance, if the price drops by a factor of 20, but only 10 times as many items are produced).
But for the economy as a whole, the value in “real dollars” will always at least stay the same after productivity improvements that lower some prices relative to the status quo. That’s because even though that one good may be lower in value even after adjusting for deflation caused by the lower price, the other goods in the economy will make up the difference and more by being higher in value after adjusting for deflation.