Monday, January 9, 2012

Sun and rain on the terrace

Where and how we work can lead to profound social change, as we just saw in the last post. And so I am struck again at how much difference the little ipad and keyboard makes to how I can do things. 

We flew out for ten days vacation on Saturday, a long flight to one of the warmer, palm-tree fringed parts of the US. 

And so I am now sitting on the balcony of our rented condo apartment, looking out over ocean and mountains, palm-trees and dappled parades of clouds across the landscape , and the sun flitting amidst the rainclouds. (It will brighten up later).

It is just remarkable to be so connected when we are so far away, so convenient to be able to write and think here on a balcony. It's a brief episode of an ideal. 

A rainbow just appeared. 

Resistance to technology

I'm discussing Joel Mokyr's book The Gifts of Athena: Historical Origins of the Knowledge Economy. He talks about how the knowledge economy arose, and how it changed where and how people worked and allocated their time. Knowledge propels the economy forward. 

 The trouble is the process Mokyr describes is fragile. 

.. technological progress in a society is by and large a temporary and vulnerable process, with many powerful enemies with a vested interest in the status quo or an aversion to change continuously threatening it. The net result is that changes in technology, the mainspring of economic progress, have actually been rare relative to what we now know human creativity is capable of, and that stasis or change at very slow rates has been the rule rather than the exception. It is our own age, and especially the rapid technological change in the Western world, that is the historical aberration. 

Technology always generates resistance, because it creates winners and losers. 

Any change in technology leads almost inevitably to an improvement in the welfare of some and to a deterioration in that of others.To be sure, it is possible to think of changes in production technology that are Pareto-superior, but in practice such occurrences are extremely rare. Unless all individuals accept the "verdict" of the market outcome, the decision whether to adopt an innovation is likely to be resisted by losers through non-market mechanisms.

So there is inevitably much conflict over precisely how technology will change society.  Society makes decisions by following what Mokyr calls an aggregation rule

To reach this decision, society follows what I will call an aggregation rule, which maps a vector of n individual preferences into a decision. This aggregation rule may be a market process (as would be the case in a pure private economy), but such a rule is a very special case. The pure market outcome is equivalent to an aggregator that weights preferences by their income. The optimality of the outcome will vary with the income distribution even for the market aggregator. 

 In the terminology of the new historical institutional analysis, an aggregator is an institution, that is, a non-technologically determined constraint on economic behavior. 

Economists tend to believe that more of the decision ought to be left to the market, of course, rather than other aggregator processes like politics. (Of course, economists tend to take preferences as given and unchanging as well). But many others disagree. 

Why would there be support for removing the market as the sole arbiter of technological decisions and delegate part of the decision-making process to political bodies? Technological progress disrupts the existing allocation of resources and thus involves externalities as soon as we admit that the reallocation involves costs. Yet a mechanism that relies on markets alone effectively truncates preferences over technology at zero. If one supports a new technique, one can vote yes by buying the new product or switching to the new technique. By not buying the product or refusing to switch, one can express indifference or dislike, but individuals have no control over what others do even if they feel it might affect them. In markets it is difficult to express a no vote. 

Technological change will always create disruption and losers. And the losers will fight back.  

 The more specific a skill or a piece of equipment, the more incentive its owner has to resist anything that will reduce its value through technological obsolescence. It is hard to think of a technological advance that did not reduce the value of somebody's specific assets and skills. .. Moreover, technological change altered the non-pecuniary characteristics of labor. It created and destroyed labor hierarchies, it changed the physical work environment, and it increased and decreased the advantages of domestic production where workers were in control of their own work schedule. 

Organizations also tend to resist change.

.. cases in which corporations, presumably trying to maximize profits, resisted innovations are legend... .For any bureaucracy, routine and standard operating procedures are the essence of its long-run existence, and deviance is persecuted and uprooted if possible (Goldstone, 1987). For that reason, it is critical whether the decision-making body is facing some form of competition; if the Xerox Corporation would not make the computer mouse it developed, somebody else would.

There are also intellectual and moral objections to change. 

 A different source of resistance comes from purely intellectual sources without a necessary direct economic interest. Much of this resistance derives from a genuine concern for some social values. Schumpeter, in fact, predicted that it would be intellectuals that would bring about a growing hostility to what he called the "capitalist order" 

These range from concern at the 'dehumanizing' aspects of capitalism to environmental objections, to concerns that technological change is producing unforeseen risks and hazards. 

It is not just a matter of risk preference in isolation, though. It is also a matter of how optimistic you are that technology will generate solutions to any problems it creates along the way.  When you think about it, it is obvious, but it is nonetheless a separate and interesting judgment.  (Liberal views of social change no doubt also entail an optimistic view that solutions will be found to social disruption.)

 It is a matter of how optimistic individuals are about society's capability to generate additional new knowledge that will solve whatever unintended consequences a specific new technique will produce.  

That partly depends on the structure of property rights, which can obscure costs or benefit private interests at the expense of the public.  

 Many environmentalists are suspicious of innovations because they believe that new technologies often make extensive use of resources that have poorly defined property rights. 

Indeed, the last book we looked at argued that old-stlye industrial capital frequently fails to earn its cost of capital if you measure costs correctly. 

Putting it all together, however, Mokyr argues technological change tends to create insuperable opposition after a time. 

Sooner or later in any society the progress of technology will grind to a halt because the forces that used to support innovation become vested interests. In a purely dialectical fashion, technological progress creates the forces that eventually destroy it. This result holds for a single closed economy. 

Assessing the book as a whole

The reason the book is rewarding is it traces through a persuasive account of the incentives which surround technology, and the social impact that technology has on daily life. 

For the most part, I did not find it broke new ground, perhaps apart from the chapter on the impact of health arguments on housework and womens' roles. But it provides a more concrete , satisfying account of how economic change works.  It gives a more analytical framework for thinking about economic change. And it is one which complements Douglass North's arguments that I discussed earlier.

The discussion of the origins of the industrial revolution, and why it happened in England, is interesting, but gets a little insiderish and technical. It is of course perhaps the most significant question in economic history, but the precise sequencing and details is of more limited general interest.  

Mokyr's emphasis on access to technology and the importance of the institutiions and informal ties that spread knowledge around a society is fascinating, however. I so often feel that the sheer profusion of knowledge is far beyond any one individual's bandwidth. The institutions that integrate knowledge together and generate new combinations can therefore be uniquely important in Mokyr's view. And it is hard to get them right, as they cost resources and may be resisted by many specific insittutions guarding their own domains.

It means that feeling that we get when there are a thousand books and articles on the smallest issues is not just a matter of individual limitations. It is a social limitation that has to be solved and overcome, something which needs institutions and networks and adaptation and informal links.  

Above all, Mokyr's discussion of how and why economic activity moves between formal organizations and households and the optimal scale of economic activity is very interesting. One of the most important aspects of IT is how it change the optimal scale of production. That is something which has a direct and profound impact on daily life, in the routine and nature of people's days. One of the biggest changes in the economy is simply where and how we work.

The Gifts of Athena

I still need to catch up with talking about some books I've read over the holidays. One of them is The Gifts of Athena: Historical Origins of the Knowledge Economy by Joel Mokyr, a well-known economic historian. He talks about the role of technology in economic growth, the origins of the industrial revolution, and where the knowledge economy came from.  Clearly that is important for understanding where the economy may go next.

He starts by distinguishing two kinds of knowledge:

One is knowledge "what" or propositional knowledge (that is to say, beliefs) about natural phenomena and regularities. Such knowledge can then be applied to create knowledge "how," that is, instructional or prescriptive knowledge, which we may call techniques.'In what follows, I refer to propositional knowledge as omega-knowledge and to prescriptive knowledge as lambda-knowledge. If omega is episteme, lambda is techne.

The critical role of access to knowledge

He then spends several chapters arguing that it is not just a matter of what is known, i.e propositional knowledge.  Access to knowledge is crucial.

In other words, changes in the overall size of omega (what was known) may have been less important in the Industrial Revolution than the access to that knowledge. Moreover, the process was highly sensitive to outside stimuli and incentives. The social and institutional environment has always been credited with a central role in economic history. 

As we've seen so often on this blog, the progress of technology (and the economy) is evolutionary. 

In that respect the evolution of technology again resembles biological evolution: changes in the environment (including changes in the availability of complements and substitutes) may trigger the activation of "dormant" knowledge or select those techniques that happen to "express" information adapted to a new environment. 

And again, progress is often driven by recombination of elements. And that is why lower access costs to different kinds of knowledge can be very important, because it makes it easier to recombine elements from different areas. 

After all, a substantial portion of invention consists of recombination, the application of a sometimes remote and disjoint sections of omega together to form something novel. It is one of the chief reasons why lower access costs are so important in triggering the new mapping of techniques from omega to lambda. If taken to an extreme, recombination can lead to dazzling rates of invention, because the rate of invention will be combinatorial, which is faster than exponential 

And this is why information technology, a true "general purpose" or macro technology, is transformative. 

Thanks to the "information and communications technology revolution" of our own age, marginal access costs have been lowered enormously, and in many areas have been reduced practically to zero. The idea of a "knowledge economy" is of course something of an exaggeration if taken literally: people still need food and hardware, and nobody can live on knowledge alone, not even graduate students. But the accelerating decline in access costs has opened the floodgates to further technological progress in our age, not just thanks to a single advance such as the Internet but through a host of changes that reduced access to knowledge as it increased the size of omega. The differences between the two episodes are at least as instructive as the similarities, and not too much should be made of such historical analogies. 

But often the nature of the change is not easy to see or understand when we are in the middle of it. 

One more striking conclusion to be drawn is that it is enormously difficult for contemporaries to realize how dramatically their world is changing, what the important elements are, and how technological change will shape their future. 

It always seems rash and imprudent when historians analyze contemporary events as if they occurred sufficiently long ago to be analyzed with some perspective. But the arguments made above suggest that the cluster of innovations around semiconductors and their applications will be viewed by future historians as a macroinvention; they represent the kind of discontinuity that separates one era from another, much like the two previous Industrial Revolutions.

Where and How people work

One of the most interesting consequences is what this means for how and where work is carried out - which in turn carries many consequences for people's daily lives. Why in the course of the industrial revolution did production increasingly move away  from households and into large factories and organizations? What explains the optimum scale of the economic production unit, and its location? 

Part of it was higher fixed capital costs made it more effective to make sure the large machines were used in a disciplined way, and they made it more difficult to measure productivity just by piecework. 

But much of the rise of the large organization was because more knowledge was required than most households could offer.

As long as production was simple and could be summarized in a finite number of rules of thumb, a single household could know all there was to know and effectively serve as the unit of production with all the advantages thereof. But the Industrial Revolution and the subsequent technological developments after 1760 led to many production processes that required a level of competence that was beyond the capability of the individual household. 

Transmission of knowledge was also a criticial reason for the rise of large organizations:

Putting all workers under one roof ensured repeated interaction and personal contact provides maximal bandwidth to maximize the chances that the information would be transmitted fully and reliably. Inside a plant agents knew and could trust each other, and this familiarity turned out to be an efficient way of sharing knowledge. 

Factories thus served as repositories for technical knowledge and vastly reduced access costs to this knowledge for individual workers. 

As tacit knowledge becomes less important, the scale advantages of large firms diminish too.  The transmission of information in trusted, reliable ways can have a major impact. 

The model further predicts that when knowledge can be shared and trusted among people by means other than personal contact (say, through repeated electronic communication), firms may survive, but large plants may become less necessary.

That has major implications for how people organize their time.  

The "factory" as a system is in retreat not only as a physical central location of activity, but also as a time-organizing institution in which work begins and ends at given times and the lines between leisure and labor are firmly drawn. Instead, work is dispersed over space as well as time, allowing workers to calibrate their trade-offs to reflect their preferences. The welfare implications of home work are the mirror image of the costs of the factory system: less commuting, more flexibility in the leisure-work trade-off, and the ability to combine work with household-services production.

The commute, for instance, is not a contributor to welfare. 

As things are, the purchases of transportation services needed for getting to work are treated as consumption. Commuting time does not enter into GNP calculations but is treated as leisure. 

A considerable amount of time spent on "leisure" is nothing of the sort but is an intermediary cost of production or consumption. The new-economy pessimists who fail to see much evidence of a gain in productivity should keep in mind that the numerator of all productivity measures fails to capture some of the most important effects of the new technology. In short, commuting-much like shopping-is a "friction" that drives a wedge between total output as a measure of effort and as a measure of welfare. Hence, a sharp increase in telecommuting and teleworking would have clear-cut welfare effects but would appear nowhere directly in our national accounts. 

Reorganizing the location of work and the leisure-work trade-off that comes with it could have significant social effects, too. 

 Community life has not done well in America in the second half of the twentieth century, but perhaps the reason is in part that community life and the workplace are substitutes, competing for the same time and serving similar needs. If the workplace and the commute were to claim less time and effort, people might re-invent the social institutions associated with life before the Industrial Revolution as well as create entirely new forms of social interaction, as witnessed by the growth of e-mail pals and Internet chatrooms. 

Technology will make it easier to get and keep a reputation, but households will also have to keep up with knowledge - and some may struggle with that challenge. 

The return to household-plants and even household-firms will not mean a return to a world of peasants and artisans with loose selection standards. Modern ICT will make it easy to establish or lose a reputation for expertise and reliability. Establishing standards for veracity will be one of the challenges of the world of cheap access to knowledge. Such a world, however, will contain few pre-1750-type household-producers muddling on without continuously keeping up with best-practice techniques. As access costs continue to decline, codifiable knowledge will flow to where it can be used. All the same, it is not clear how society will handle individuals who cannot or will not stay up to date. 

Knowledge also affects how people choose to allocate their time. He also has a fasincating discussion of the rise and fall of "housework" locating in partially in a 19th century panic about germs and disease which hugely raised the perceived importance of household chores. 

Women had primary responsibility in society's eyes for the health of their family, so new medical knowledge which seemed to indicate household work was literally a matter of life or death had a major impact on how women spent their time. 

What really had been "discovered" was neither "the child" nor "the mother" but that mothers could, by their actions, affect the life and well-being of their offspring. This was the message science had taught, and as mothers became convinced that the physical well-being of children was a function of their actions, they had to rethink their most basic time-allocation decisions. 

As people came to realize the health benefits of keeping the front step scrubbed to perfection had been exaggerated, time allocation preferences shifted again.  And that is one additional reason for the increased movement of women into the formal labor force in the postwar years.  

I'll conclude a look at the book in the next post.