The Economy of the Future

This post has been inspired by the book "The lights in the Tunnel" by Martin Ford. It's a short, interesting and thought provoking book on how the economy needs to adapt to the possibility of automation taking over most of the mundane and routine tasks. The book discusses the danger posed by the possibility of some members of society unable to compete with machines and unable to find any form of employment. In addition to the book's thesis, the fact that it is a set-your-own-price book and can even be downloaded for free from "The Lights in the Tunnel" makes it especially attractive. I urge the readers to check it out and the one hour that is spent reading the book might be well worth it (and if the reader feels it has been helpful then maybe he/she can retroactively pay for the book).

Some of the highlights of the book are:

1. Concise representation of what the future will look like if the market, without any government intervention, is allowed to evolve naturally with machines becoming more and more capable of not only taking over blue collar jobs but also white collar jobs.
2. The steps and remedies in terms of tax reforms and government incentives outlined under the current framework to address the issue raised in the point above.

However, I have some criticisms (hopefully constructive) to make on the book:

1. I feel the analogy of the lights in the tunnel, which ironically is the title of book, adds nothing of value to the reader. The analogy does not give any special insight into what the author is trying to convey. The rest of the book is lucid, however, and is sufficient to get the main thrust of author's thought process.
2. The author uses the concept of wages, earning, taxes and consumer spending to explain how an economy based on free market principles can work in the future. However, there is a danger that the reader might miss the forest for the trees. It is important for such discussions to take money completely out of the picture to get a true sense of what is really driving the economy in the futuristic scenario painted by Martin Ford. 
3. The picture painted by Martin Ford, I think, is too dire. Humans will always find new needs and desires where none existed before and we will find employment for everybody in the society but there will be periods where the government would have to step in to ensure that every member of the society continues to be a participating member of the economy.

In this post, I will attempt to summarize the message from the book in layconomic terms. First, we need to establish some assumptions that we take for granted implicitly. 

1. Money has no intrinsic value. It only has value if it can be exchanged for goods either now or in the future. The main driver for an economy running on free market principles is barter or the exchange of goods. Money acts as a conduit for complex barter exchanges and acts as GOU (Government owes U) if the producers of goods putting their goods into the market place can NOT pull something else out that they find of value. Instead, they can pull GOUs out in exchange for putting their goods into the market place which they can redeem whenever they find something of value in the same market place in the future.  
2. In an economy operating on free market principles, nobody likes to trade what they produce for nothing. People produce goods for others only if they get something in return either today or in the future. People will not produce, even if they have the capability, if the feel that they will get nothing in return for their efforts.
3. I have already pointed out earlier that in modern day societies a subset of the population can produce enough to meet all the consumption requirements of the entire society (http://layconomics.blogspot.com/2012/11/austrian-vs-keynesian-economics-deficit.html).  

In the scenario painted by Martin Ford the assumption in point 2 above is taken to the extreme where a very small fraction of the population is able to produce everything that the society needs. In which case, there are four categories of people:

1. People who are not at all productive (because the machines can do a much better job than them)
2. People who are productive (because the machines may not be able to do as good a job as them or they are required to program and maintain the machines)
3. Owners of the productive factories that cater to the needs and desires of other productive members - namely people in categories 2, 3 and 4 (they may also cater to the needs of people in category 1)
4. Owners of the productive factories that cater to the needs and desires of people only in category 1.

If there is no government intervention, eventually people in category 4 will also end up in category 1, because neither people in category 2 nor people in category 3 will want to engage in barter exchanges with them. Obviously, they do not find anything that people in category 4 produce appealing. Eventually, we will end up with only three categories of people:

1. People who are not at all productive (because the machines can do a much better job than them)
2. People who are productive (because the machines may not be able to do as good a job as them or they are required to program and maintain the machines)
3. Owners of the productive factories that cater to the needs and desires of other productive members - namely people in categories 2 and 3 (they may also cater to the needs of people in category 1 but will not trade with them because they will get nothing in return).

People in categories 2 and 3 will just trade among themselves shutting people in category 1 out and will produce just enough to meet the needs of people that constitute categories 2 and 3. This reduces production and the GDP of the society falls. 

However, government can step in and maintain the four categories of people via the use of GOUs. This way:

1. People in category 1 can obtain goods and services from people in categories 2, 3 and 4 by handing them GOUs that they got from the government either via welfare or via working for the government.
2. People in categories 2 and 3 can exchange goods and services with each other.
3. People in category 4 can obtain their goods and services from people in categories 2 and 3 by handing them for GOUs that they got from people in category 1 as payment.

This way the people in categories 2, 3 and 4 can build up their savings via GOUs. Note the important point that the more GOUs are in circulation the greater the debt that the society carries. So ultimately, what this boils down to is the same scenario that was painted in http://layconomics.blogspot.com/2012/10/stimulus-tax-cuts-debts-deficits-and.html where some of the people will have to be supported by the government in form of either welfare or stimulus package for them in the hope that they will find something useful in the future (i.e. there will have to be a lot more government funded research programs like NASA, NSF and NIH).

In summary, if what Martin Ford is saying comes true then a lot more people will be in the employment of the government with the rich people in the society either bearing a higher tax burden and/or their assets will be in the form of continuously rising debt owed to them by the government.