Friday, April 17, 2015

The rule of robots in Stiglitz and Marx

It is always instructive to speak to Joe Stiglitz. In a conversation in Paris which we had after his talk at the INET conference, he pointed out that the elasticity of substitution between capital and labor greater than 1 (which is often assumed by Piketty in his “Capital in the 21st century”), combined with technological progress which does not fall like manna from heaven but develops in response to the existing factor prices, would lead to an explosive process that would end only with capital owning the entire net income of a country. How?

Suppose that we have a given r (you can imagine that it is 5% as is often  mentioned by Piketty) and a given wage (w). Suppose also that at this ratio of factor prices, it is profitable to invest in more capital-intensive processes (that is, they reduce unit cost of output). So capitalists will replace labor by capital and K/L and K/output ratios will both increase. Since elasticity of substitution between K and L is greater than 1,  r will only slightly decrease while wage will only slightly increase. Although factor prices, being sticky, will not have budged much they would have moved ever slightly further in making capital intensive processes even more attractive. So there would be another round of increased capital investment, and again K/L and K/output will go up with only minimal effects on prices.

This will continue round after round until the entire output is produced practically only by using capital and perhaps just an infinitesimal quantity of labor. Both r and w will remain almost as they were at the beginning, but instead of (say) 100 machines and 100 workers, we will, at the end, have 100 robots and 1 worker. Almost all output will belong to the owners of capital. Piketty’s alpha will be close to 1.

This is why, in my interpretation, Stiglitz argues that the elasticity of substitution greater than 1 combined with endogenous technical progress leads ultimately to an explosive equilibrium. Now, this interpretation is, to repeat, mine and it is quite possible that Stiglitz might not agree or that I got something wrong.

But, after talking with Joe, on the way back to the hotel, I thought of something else. Isn’t this in some ways almost the reverse, and in some ways, very similar, to Marx’s process of increased “organic composition of capital” eventually leading  to the euthanasia of a capitalist (to use Keynes’ term in a Marxist framework)? In Marx, the assumption is that more capital intensive processes are always more productive. So capitalists just tend to pile more and more capital and replace labor (very similarly to what we have seen they do in the Stiglitz example). This in Marxist framework means that there are fewer and fewer workers who obviously produce less (absolute) surplus value and this smaller surplus value over an increased mass of capital means that the rate of profit goes down.

The result is identical if we set this Marxist process in a  neoclassical framework and assume that the elasticity of substitution is less than 1. Then, simply, r shoots down in every successive round of capital-intensive investments until it practically reaches zero. As Marx writes, every individual capitalist has an interest to invest in more capital-intensive processes in order to undersell other capitalists, but when they all do that, the rate of profits decreases for all. They thus work ultimately to drive themselves “out of business” (more exactly they drive themselves to a zero rate of profit).

What are the similarities and differences between the two outcomes? In both cases, labor will be replaced by capital to an extreme degree,  so in both cases, production will be conducted mostly by robots. Employment will be negligible. In Marx, the ultimate equilibrium would be with r at almost zero, and wage (by assumption in Marx) at the subsistence—with of course a huge “reserve army of the unemployed”. In the Stiglitz case, capitalists will end up with an unchanged r and with pocketing the entire net product. In the Stiglitz equilibrium, that sole remaining worker will have a higher wage, but again, no one else would be employed.

Net income, in Marxist equilibrium, will be low because only labor produces “new value” and since very few workers will be employed “new value” will be low (regardless of how high capitalists try to drive the rate of surplus value). To visualize Marxist equilibrium, imagine thousands of robots working in a big factory with only one worker checking them out, and with the useful life of robots being one year so that you keep on replacing robots continuously and thus run enormous depreciation and reinvestment costs every year.  The composition of GDP would be very interesting. If total GDP is 100, we could have consumption=5, net investment=5 and depreciation=90. You would live in a country with GDP per capita of $500,000 but $450,000 of that would be depreciation.

(To see how this works, imagine having income of $1100 per year and in order to earn it needing to have a laptop which costs $1000 and whose useful life –everybody would agree on that—is one year. So every year you  just use most of your income to replace the laptop and your net disposable income remains small. To make the situation worse, assume that every additional year, as you are competing with other guys with laptops, you need to increase the number of  laptops you own by 5%; your net income will keep on decreasing although you would live in a cornucopia of laptops.)

The Stiglitz equilibrium, in some ways, looks very similar: there would the same immense factory halls with thousands of robots but their net marginal product will be high and the entire net product will be appropriated by the capitalists.

For labor, in either case, there is almost nothing—simply because practically no one will be employed. Quite a negative utopia either way, one could say. But not quite: in the Stiglitz case, you could tax the capitalists and use that income to keep potential workers happy enjoying lots of leisure, watching TV and playing funny games on their laptops. In the Marxist equilibrium, net income will be low although we would live in a world full of complicated machines. So, there would not be much income to redistribute.  Your pick?

Tuesday, April 7, 2015

Notes on Frantz Fanon

As I was writing the 3rd chapter of my new book which deals with the change in the factors underlying global inequality (from being driven by within-national inequalities to being driven by between-national inequalities, and perhaps in the future, going back to within- inequalities), entitled “From Karl Marx to Frantz Fanon and then back to Marx?”, I decided that I should reread some of Fanon.

A couple of days ago, in Washington, I found my 1973 copy of Croatian-Serbian translation (with a very nice postscript by the Croatian/Yugoslav sociologist Vjekoslav Mikecin) of “Les damn├ęs de la terre” which I read probably in 1974 or 1975. Now I reread basically only my notes, and as in 1975, I skipped the last chapter on the psychological effects of violence (Fanon was a psychiatrist).

What are my impressions, reading now a book published at the height of decolonization and when the income gap between the First and the Third World was at its peak, in 1961? First, I noticed how much the world has changed. Fanon was one of the “prophets” of the Third World. Well, neither the Third, nor the Second, worlds exist anymore. He spoke of colonies in Africa. None exists today. He spoke of Western left-wing Marxist intelligentsia. It is all gone. Even the copy of the book I held in my hands added to this eerie feeling. It was published in Yugoslavia, which no longer exists. It was published in Croato-Serbian, the language which (at least under that name) no longer exists. Did everything he wrote about disappear?

What can we say about Fanon today? I divide my impression under three headings: violence, new man and economics.

Violence. Fanon is perhaps best known for his support of violence used by movements for national liberation.  He never glorified violence like Sorel and many Europeans writers who glorified World War I (or people who today read books like “An American sniper”). But he thought that violence was necessary to fight the colonizers: “eye for an eye, tooth for a tooth”, knife for a knife, gun for a gun. Was he right? In some sense yes. There is no doubt, I think, that in Vietnam, Algeria, Angola, Zimbabwe, Burma, Kenya, the colonizers never wanted to give up power. They were the first to use violence and national liberation movements had to do the same. Moreover, the violence used by the weaker side is not the same as the violence used by the stronger side.

But Fanon’s language is not guarded. Although I think that his Chapter 1, “On violence”, is the most interesting part of the book (perhaps the only one that he really finished; the book was published posthumously), he seems at times to view violence as a “cleansing tool”, to believe that there is something valuable in it as such, and not to realize that once it ceases to be used carefully and in very controlled and instrumental doses, it turns against the one who uses it. This was indeed often the history of the newly independent countries; many have descended into infernal cycles of violence: civil wars in Algeria, Nigeria, Ivory Coast, Sudan; permanent wars in Congo, numerous coups d’etat.   

New man. In Chapter 2 especially, but throughout the book as well, Fanon insists on Africa rejecting (1) colonizers, (2) capitalism, (3) domestic small bourgeoisie often allied with the colonizers, and (4) a return to a romanticized African past. He believes that the objective of the national struggle should be the creation of a “new man” or a new society. This was a common belief of all revolutionary movements throughout most of the 20th  century. They have not achieved much. “The new man” has remained elusive. Often the quest has led to tyrannies. And indeed Fanon gives us almost no guidance about how this “new man” and new society are to be created, other than identifying  (like Mao before him) in peasantry the truly revolutionary class. But while Marx explains, at least in theory, why the proletariat might produce this “new man”—because the condition for its  own liberation is the liberation of the entire society—Fanon does not explain much at all.

Economics. Fanon does not spend much time on economics (a common feature among Marxisant authors of the 1960s). He obviously rejects capitalism, but rejects also state ownership of the means of production because it would simply lead to state officials taking positions of authority. He is in favor of the nationalization of the tertiary sector (services). Interestingly, he regards control of trade as crucial: perhaps it itself is a reflection of Africa’s backwardness.

Fanon seems, in two comments that he makes on the matter, in favor of democratic ownership of capital, perhaps similar to “self-management” or “market socialism” that existed in Yugoslavia. That sounds good because indeed the internal organization of such enterprises was much more democratic than the organization of similar enterprises under capitalism. But (perhaps unfortunately) history seems to have taught us that people work harder under dictatorship in the workplace, and are content to let democracy exist only in public (but not work) sphere. Thus worker-controlled enterprises tended to waste capital, make bad investment decision, prefer to distribute income in wages, never fire anyone and not require workers to put in much effort. As every Marxist would tell you, if you are economically inefficient, you are “toast.”

So Fanon’s preferred economic formula would have also failed, and indeed it failed, not only in Yugoslavia, but also elsewhere it was tried: in Zambia, Tanzania and Algeria. It could be even argued that countries that kept state ownership like Vietnam and China did better. Fanon perhaps did not know the comment attributed to Bela Kun during the 1919 Hungarian Soviet revolution that “workers will die for the revolution, but will not work for it.”

Fanon is ferocious in his critique of inability of the local Third World bourgeoisies to save, innovate, create any value, and go beyond their role of “cocktail party organizers for the Western bourgeoisie”. He writes: “the national bourgeoisie will take the role of foreman of European companies and will practically convert the county into a brothel”.  These pages in Chapter 3 (“The problems of national consciousness”) are very powerful and could have been written today. The problem however is that, when you start with low income and have little education and knowledge, and  with little or nothing to offer to the rest of the world, you really cannot be more than “a foreman” or a “brothel.” Regardless of what you would like to be.

Et alors? Thus, melancholically,  I have to conclude that Fanon was often wrong on all three  (important) topics. But being wrong is not a good reason for not being read.  Fanon remains, I think, one of the best sources for the period of decolonization. This is a period which is (self-satisfactorily) ignored today, so much so that Obama, US president whose own father fought for independence of Kenya and whose grandfather was jailed and tortured by the British, could in his long and wide-ranging speech on world history in the 20th century avoid to mention any names or countries linked with the struggle for independence except for a few anodyne comments on Nelson Mandela. Thus, no Vietnam, no Algeria, no Zambia, no Ghana, no Indonesia, no Kenya, no Tanzania, no Egypt. No… Well, if you are satisfied with such a truncated history of the past half century, then you should ignore Fanon too.