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Monday, October 26, 2015

Stephen Hawking Doesn’t Understand Economics

Bad Robot? No, Bad Government.

Stephen Hawking, the University of Cambridge physicist and bestselling science writer, says that technology is driving an “ever-increasing inequality.” He is a brilliant polymath, but he doesn’t understand economics.

In a Reddit Ask Me Anything forum, Hawking wrote:

If machines produce everything we need, the outcome will depend on how things are distributed. Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution. So far, the trend seems to be toward the second option, with technology driving ever-increasing inequality.

His error here is in too quickly accepting the assumption of technological unemployment, which asks us to imagine a world where a large percentage of the populace is unemployable because they have zero marginal productivity thanks to machines. In other words, in no conceivable circumstance will an employer pay them anything for their labor. They cannot get jobs and pay their bills. Those without savings will starve and die.

New technology changes productivity, but it does not upend the logic of exchange and production. 

Given this apocalyptic assumption of crippling and permanent unemployment, it is unsurprising that Hawking comes to a bleak conclusion — one that seems to demand government as a solution. But the idea of technological unemployment suspends the laws of economics: specifically, scarcity and comparative advantage.

Scarcity occurs when our desires exceed our means of achieving them. We cannot perfectly multitask: to do one thing implies not doing something else. This is an inescapable quality of the world. No matter our level of technological development, scarcity will still exist. People cope with scarcity through trade.

Trade and production occur because of differences. If everyone were the same, having identical tastes and possessions, there would be no reason to trade. Trade is a powerful force because it allows radically different individuals to come together for mutual betterment. The logic of trade also implies specialization. With trade, people will produce the goods or services they are best at and trade for everything else they consume.

Mechanics who try to grow their own food will find themselves much poorer than those who spend that work time in the garage and buy their food instead from the local grocer. The gains from trade are created by the differing opportunity costs of production. If tomorrow we discovered aliens with science-fiction-level technology, it would still be possible to trade with them. New technology changes productivity, but it does not upend the logic of exchange and production. Differing opportunity costs, not technology, are why we trade.

Regardless of the number or quality of the machines of the future, if they are doing one thing, they are not doing something else. Specialization and gains from trade are created by scarcity. Simple machine ownership does not destroy the gains from trade.

Economic history tells us a story of constant dynamism and change. Almost 150 years ago, roughly 45 percent of the working population was employed in agriculture. These people earned their bread from the sweat of their brows and the strength of their backs. A pessimist might have concluded that if laborsaving machines were introduced, these people lacking knowledge of a trade would find themselves in dire circumstances. But that is not what happened. Today, less than 2 percent of the population is directly involved in agriculture, and we are not suffering a shortage of either food or employment.

I may not know the specific wonders the future will entail, but the mundane reality is that people will still engage in exchange and production, if they are allowed to do so.

Hawking implies that the only alternative to technological unemployment is a political redistribution of wealth. His prescription gets things exactly backwards.

Government’s hampering of the market is a time-tested method of generating poverty and unemployment. Labor laws that prevent employers and employees from entering into voluntary contracts worsen both parties. Minimum wage laws and occupational licensing requirements make it harder to find employment, and this burden falls most heavily on the already poor and marginalized of society. Barriers to trade and employment are some of the most regressive laws on the books. And more direct forms of socialism destroy economies altogether.

We are better served by helping the poor of today — by freeing the market to increase wealth and productivity — than by worrying about the imagined threats of tomorrow.

Find a Portuguese translation of this article here.