This is the first of three articles discussing how the benefits of technological progress are shared, and thus determine the distribution of income and influence our economic and social structures. This first article focuses on how these benefits have been shared historically.
Throughout history the growth in living standards has come from increasing productivity and over thousands of years almost all that productivity growth has been driven by technological progress. Furthermore, the standard model used by economists who study economic growth typically assumes that this increase in productivity is more or less equally shared.
In fairness, economic theory has always recognised that new technologies can be biased towards either capital-saving or labour-saving, and that will in turn change the share of national income accruing to capital and labour. But for the most part, economic theory and policy have ignored the distributional impact of technological change on the assumption that the ‘productivity bandwagon’ will benefit all, and pretty much equally.
Indeed, it is not surprising that – to coin a phrase – every galah in the pet shop is calling for economic reforms to boost productivity. The presumption is that our living standards are determined by the growth of productivity, and that we all benefit from productivity growth.
However, in recent times some economists, including me, have argued that technological progress in the form of automation has hollowed out middle-level jobs and that has been the principal reason for the increase in inequality that has been observed in most industrialised countries since the beginning of the 1980s.
Now, most interestingly, two of the world’s leading scholars of economic growth, Daron Acemoglu and Simon Johnson, in their new book, Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity, argue that technological advances do not necessarily lead to broad-based prosperity, but instead may only benefit a wealthy elite.
They conclude that:
“The broad-based prosperity of the past was not the result of any automatic, guaranteed gains of technological progress. Rather, shared prosperity emerged because, and only when, the direction of technological advances and society’s approach to dividing the gains were pushed away from arrangements that primarily served a narrow elite.”
“Most people around the globe today are better off than our ancestors because citizens and workers in early industrial societies organised, challenged elite-dominated choices about technology and work conditions, and forced ways of sharing the gains from technical improvements more equitably. Today we need to do the same again.”
The history of technological progress and its impact
In support of this conclusion, much of Acemoglu and Johson’s book is taken up with a review of economic history since ancient times discussing how new technologies impacted on the society and the distribution of income at the time.
They discuss the improvements in technology dating back more than two thousand years but find that the benefits back then did not flow to the ordinary people because “organised religion helped convince them that this life was appropriate or indeed their unavoidable fate.”
Similarly, Acemoglu and Johnson list a host of technological advances in the medieval era, but again find that the benefits were not passed on to the farmers and workers because the feudal system then prevailing gave these people no rights.
For example, from 1100 to 1300, water mills and other advances in agricultural technology roughly doubled yields per acre in England. And by the later medieval period water mills had boosted the output of their workers to as much as twenty times the level that hand milling could achieve and helped kick-start the English woollen cloth textiles.
But the rural population of England did not benefit at all. Feudal lords and religious elites imposed more onerous labour requirements and so gained all the benefits from the new technologies.
In sum, “despite myriad medieval innovations the quality of life of a European peasant in 1700 was not much different from that of an Egyptian peasant two thousand or seven thousand years previously.”
Thus, Acemoglu and Johnson’s conclusion is that “How technology is used is always intertwined with the vision of those who hold power.” Workers only benefit when there is greater demand for their labour and employers have to compete to attract their labour, but in medieval Europe there was no such competition.
By the 1700s, however, the enlightenment facilitated a process of social and institutional change that convinced the previous ruling classes to accommodate a new middle class of entrepreneurs and inventors who were crucial for the industrial revolution.
Nevertheless, this new aspirant class were also focused on accumulating wealth and did not worry about improving the living standards of their employees either. Contrary to conventional economics, wages did not rise in the first half of the nineteenth century. Workers were not organised and lacked political power, and the bosses were able to impose tight rules forcing longer working hours and child labour, resulting in less pay for more work.
However, by the second half of the nineteenth century, densely populated cities enabled people to organise and exercise countervailing power and the direction of technological change shifted. Acemoglu and Johnson discuss the example of British Rail and how that and a number of other emerging industries increased productivity while also generating new opportunities for both skilled and unskilled workers. For the first time real wages in England started growing significantly, as output per worker rose by 90 per cent while real wages increased by 123 per cent between 1840 and 1900.
After the reforms and redirection of technological change in the second half of the nineteenth century the future seemed more hopeful, but then two World Wars and the Great Depression in between destroyed the foundations for a shared prosperity.
But lessons were learned and coming out of World War II much of the western world and some countries in Asia built new institutions supporting shared prosperity and laid the foundations for rapid economic growth that benefited almost all segments of their societies.
The technologies that transformed American and European industry relied upon mass production, electricity and the greater use of information, engineering and planning in the production processes. The mass production and systems approach allowed the use of machinery to produce a large amount of standardised, reliable output at a lower cost.
While the machines substituted for the strength of the workers, those tending the machines became more like inspectors raising their marginal productivity, and the systems approach increased the role of engineers and white-collar workers to analyse the much greater information collected. In addition, electricity was critical in encouraging the development of new consumer products, and the installation of specialised electrical devices and the new tasks that accompanied them, such as welding, punching, and specialised machinery operation.
In this way, the reorganisation of manufacturing created relatively high-paying jobs for both blue-collar and white-collar workers. But equally important was that skills training was also prioritised.
Acemoglu and Johnson find, however, that:
“Things look very different from 1980 onward. During this era, we see faster automation but only a few technologies counterbalancing the antilabor bias of automation. Wage growth also slowed down as the labor movement became increasingly impaired. In fact, lack of resistance from the labor movement was likely an important cause of the greater emphasis on automation. …. Once countervailing powers from the labor movement and government regulation weakened, rent sharing subsided, and a natural bias toward automation set in.”
Furthermore, Acemoglu and Johnson argue persuasively that “there is plenty of evidence that the direction of technology and the emphasis on cost cutting were choices”. “Technology does not have a preordained direction, and nothing is inevitable. Technology has increased inequality largely because of the choices that companies and other powerful actors have made.” “Different choices [about the direction of digital technologies, for example] will likely translate into gains and losses for different segments of the population.”
Thus, while technology trends have been broadly similar across most Western countries, differences in institutions and how they affected the choices has made a difference. As an example, Acemoglu and Johnson discuss the way German and Japanese car makers responded to the automation of their production lines by also creating new jobs that lifted productivity and retrained the staff to fill them, while the US concentrated on cutting costs.
The net result was that employment rose in the German and Japanese auto industries, but fell in the US between 2000 and 2018, while productivity increased faster in German and Japanese auto production as did their profits.
Acemoglu and Johnson thus conclude that in the US, “shared prosperity was not destroyed by automation per se, but by an unbalanced technology portfolio prioritising automation and ignoring the creation of new tasks for workers.” “Worse, without countervailing powers, digital technologies became engulfed in a new digital utopia, elevating the use of software and machinery to empower companies and sideline labor.”
But Acemoglu and Johnson also think that “More fundamentally, productivity gains from automation may always be somewhat limited, especially compared to the introduction of new products and tasks that transform the production process.”
They argue that “In the quest for greater automation, managers have ignored technological investments that could boost worker productivity by providing better information and platforms for collaboration and creating new tasks. With a more balanced portfolio of innovations, rather than the excessive automation focus fuelled by the digital utopia, the economy could have achieved faster productivity growth.” And as we have seen productivity growth has slowed in most Western countries in the last decade or so.
Acemoglu and Johnson conclude therefore that “The most important driver of the increase in inequality and the loss of ground for most American workers is the new social bias of technology. We have seen throughout that we should not bank on technology inexorably benefiting everybody. The productivity bandwagon works only under specific circumstances. It does not operate when there is insufficient competition between employers, little or no worker power, and ceaseless automation.”
And looking ahead, Acemoglu and Johnson think that things may well get worse, economically, politically, and socially, as tech visionaries have found a new tool to remake society: artificial intelligence, but that is the subject of the next article in this series.
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.
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