Technology in the gaps

It must have been strange to be an ancient Greek. Storms happened because Zeus woke up in a bad mood. Seas were calm because Poseidon was off playing XBox...or something. Basically, everything happening around you was due to the whims of mercurial, ineffable superbeings.

I feel like economists often treat technology the same way - as a capricious god who lives in all the gaps of our theories, pulling the levers and making the clockwork run.

The most famous example is the "Real Business Cycle" (RBC) model, for which Ed Prescott won the Nobel Prize.in 2004. Briefly...In this model (as in many others), you split economic production into two "factors": capital and labor. Whatever's left over - that is, the fraction you can't measure as capital or labor - is called "total factor productivity," or TFP. The RBC model says that TFP is, basically, technology. When technology gets better at a rapid rate, the theory says, we have an economic boom, and when it gets better only slowly (or gets worse), we have a recession. Ta-da! Business cycle explained!

Of course, there are many, many problems with this theory, and that's a blog post for another day. I want to focus here on one point: When you look at the wider world, you can't actually see the changes in technology that would be needed to cause the economic fluctuations we observe. RBC theory basically says that technology causes the movements of the economy, but that the only way you can see changes in aggregate technology is by...watching the movements of the economy. The storm is the proof that Zeus is angry.

Recently, many economists are using technology to explain a different set of phenomena - income stagnation, unemployment, and inequality. One prominent example of this is Tyler Cowen's The Great Stagnation, which claims that a slowdown in the rate of innovation and scientific discovery is causing the long-term flatlining of U.S. median income. This idea has been somewhat endorsed by Paul Krugman.

But there's a second strain of technologist theories bouncing around out there in the econosphere. These claim that technology is finally replacing humanity, making many of us irrelevant.

One of these is the theory of skill-biased technological change - basically, the idea that information technology is so hard to use that it's creating inequality between those who are smart/educated enough to use it and those who aren't. In the 90s, this theory was put forth as a reason why education could help fight rising inequality. But these days, some economists are saying that it's too late for that - that technology is replacing educated people too. Here's Paul Krugman:

[My magazine piece postulated] that information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing — indeed, replaced more easily than a lot of manual labor. Here’s the piece: I still think it’s a fun read. 

So here’s the question: is it starting to happen?...

and again in today's NYT:

Computers, it turns out, can quickly analyze millions of documents, cheaply performing a task that used to require armies of lawyers and paralegals. In this case, then, technological progress is actually reducing the demand for highly educated workers..

[S]oftware has also been replacing engineers in such tasks as chip design...

The fact is that since 1990 or so the U.S. job market has been characterized not by a general rise in the demand for skill, but by “hollowing out”: both high-wage and low-wage employment have grown rapidly, but medium-wage jobs — the kinds of jobs we count on to support a strong middle class — have lagged behind...

Why is this happening?...Some years ago, however, the economists David Autor, Frank Levy and Richard Murnane argued that...[c]omputers...excel at routine tasks, “cognitive and manual tasks that can be accomplished by following explicit rules.” Therefore, any routine task — a category that includes many white-collar, nonmanual jobs — is in the firing line.

(For a skeptical response, see Brad DeLong, and Brad DeLong again. Also Ryan Avent.)

And the most extreme example of this class of theory has got to be Tyler Cowen's "Zero Marginal Product Workers" hypothesis, which holds that many unemployed workers have been completely, utterly replaced - that they have no skills that are worth even minimum-wage compensation.

Now, I can't say with any conviction that any of these "technologist" theories are wrong (except for RBC, but that's for other reasons), so I'm not going to violate DeLong's Rules of Krugman. Maybe these things really are happening! And the bald fact is, technology is hugely important to long-term economic growth, to the composition of the labor market, and to our modern wealthy existence. This is not in dispute. So for me to say "Bah, technology is always just Zeus by another name" would be very silly.

But I will say that technologist theories deeply trouble me. They imply that economics, as a science (yes, I used the S-word!), is ultimately of limited use in explaining the economy. If all of the interesting stuff is happening in research labs and tinkerers' garages, then economists are basically reduced to being futurists, speculating on the rate and type and social impact of future technological advances. Our patron saint would be not Paul Samuelson, but Alvin Toffler.

Furthermore, frequent use of technologist theories forces economists to do some pretty tricky mental gymnastics. Cowen and Krugman, for example, claim that overall technology is advancing too slowly to raise our median incomes, but that certain kinds of technology are advancing fast enough to replace a huge number of workers. Of course, it's possible that's true; we've seen a lot of innovation in computers in the last 20 years, and less innovation in kitchen appliances. But it illustrates the fact that, the more phenomena you attribute to "technology," the more hyper-specific claims you are forced to make about a process that you can't accurately observe. 

How far are we willing to go with this? Taken to their absurd extremity, technologist theories would have us explaining every single fluctuation in any economic variable in terms of invisible changes in technology...oh wait, never mind, that's called "RBC."

Therefore, I recommend that economists be very sparing in our use of technologist theories. When we see something we can't easily explain - stagnating incomes, rising inequality, shifts in job opportunities - we should try very hard to explain the phenomenon in terms of things we can understand, observe, and predict. For example, Krugman offers globalization, and the outsourcing of white-collar desk jobs, as an alternative explanation for stagnant employment in those job categories. That might turn out to be less important than technology, but it's something we should look at first, because we can understand it and we can observe it and we can even predict it to some degree.

So, in conclusion: Using technology to explain short-term or medium-term economic phenomena may be perfectly spot-on correct. It is also a kind of giving up.

Update: I do want to point out that I'm not trying to trash Krugman's NYT column. That column's main thrust is that education will not be a panacea for inequality, stagnating wages, or unemployment. I think that that is an excellent point, for many reasons. And Krugman's hypothesis about technology replacing skilled workers is really meant as an alternative to the standard theory of skill-biased technological change, not as an assertion that technology drives everything about the labor market.

Update 2: Via Thoma, a paper investigates "skill-biased technological change" and finds that changes in skills were a much bigger factor than changes in technology in the inequality increase of the 1990s. Just another reminder of the danger of putting "technology in the gaps"...