Ganga Prasad Rao
http://myprofile.cos.com/gangar
Economics might be the Les Miserables of Social Sciences, but that did not stop John Jetson from day dreaming between his shifts as a week-on/week-off temp at the automobile factory and the Masters he pursued at the local Community college. And day dream he did, between his gulps of beer while fixing a tyre on his Chevy….this being a warm Sunday afternoon in August ….of a world in which he would wake up to breakfast served in bed by his very personal robot, of being robot-driven thrice a week to his very own Executive office, and apprised of his appointments by a robot Secretary, then supervising robots assembling robots, ….and, not to forget, lazing in the sun between work days writing lyrics set to robot music. But an all too familiar shrill voice woke him up. With a cantankerous 2-year old on one arm and a suckling baby on the other, his wife of 4 years was berating him to find a ‘real’ job, a full-time job that would bring soup to the dinner table instead of a ‘back to school’ program in Economics at 42 that impoverished the growing family.
“God”, Jetson murmured to himself, “should have turned certain female frequencies inaudible to men”. Honestly, why would anyone want to work when robots were at his beck and call? But reality got the better of his virtual self. Only last month had the smart-alec Engineers put the finishing touches on an AI-enhanced robot assembly line at the automobile factory south of Main Street. The entire community was outraged at the carnage that followed; the labor force cut in half and their families on the road on the double. And yet, it was necessary for the Big 4th to retain its share in the auto market and survive to fight another day. Besides, there weren’t too many employers waiting to offer him wages that supported his family and the College. Caught between a rock and a hard place, Jetson Sr. wondered why labor-saving technological change, a concept he had been taught in Production Economics, should bring misery to those who could least afford it? And what could the Government do to anticipate a world of robots running our factories? Couldn’t anyone find a “…..Hey, that could be my Master’s paper, even my ticket to graduation!” With a twinkle in his eye….and a mollifying hug and kiss…Jetson Sr., set out in his run-down Chevy to the College library with a scratch pad to prove his genius and, just perhaps, start along a new road, to new career.
Thank the Good Lord for mercies small and ...hmm?,... for the library was open, perhaps anticipating sophomores returning to school for an early start on their Fall semester. Jetson found a corner table, and literally ‘hit the books’. Taught to be methodical in research, Jetson began by writing down his objective: to maximize an Aggregate Social Welfare Function, SWF, for the society in general, but in particular labor, subject to various constraints that included the nation’s macroeconomic identity, an industry aggregate profit function, a population-evolution function, a ‘labor-supply’ function, a ‘Social’ (as opposed to ‘Private’) Resource discovery-cum-Reserve transformation function, and ancillary functions governing capital, wage and price formation in the economy. The objective and the constraints identified, Jetson began by specifying the Resource-Reserve functions. There was the conundrum of specifying the process of Resource discovery, and the transformation of Resources to Reserves. He addressed it by positing a 2+1 set of functions and identities.
The first function, ResDisc, represented the process of resource discovery as a multiplicative probabilistic process: the success rate being both a function of cumulative resources discovered and the Exploration Budget, ExpBud in the current period. The latter was a function of many variables, including Lifestyle expectations, LS, discount rate, r, rental rate of Capital, v, per-capita consumption, C/Pop (= y), ratio of domestic to international (resource) prices, p/P, Population, Pop, and Economic Policies, EcPol. The identity represented the addition of discoveries to the Resource Base, RoB. To model Reserve Base, ReB, the currently economic portion of the resource base, Jetson specified a third function of domestic and international prices, p & P, technology embedded in (net) capital investment, IT, capital K, wages, w, and a variable denoting the comprehensiveness and stringency of Environmental Regulations, ESHReg.
Next, he turned his attention to a Population growth function. Given the lags and the inertia of population dynamics, he chose the widely used Koyck-lag specification around an optimal Population, Pop*:
In his model, Population responded to changes in the underlying determinants and moved toward the target, Pop*, across time periods. The target, ‘optimal’ population was influenced by Lifestyle expectations, LS, the aerial extent of the political entity, D, National wealth, W, Capital, K, per-capita income, y (=Y/Pop), the price level, p, and notably, a measure of the economic policies followed by the political entity, EcPol (an euphemism for the extent of subsidy in the economy and trade policy). The National Wealth variable, W, was the aggregate value of net monetary (Liquid assets + Equity - Debt), ‘Real’ Land Assets, Gold, and further, included the imputed net present value of natural (in particular, mineral)-resources, ReB, that passed the definition of a ‘Reserve’.
Moving next to Labor Supply, Jetson modelled the fraction of population, Lf, seeking employment at any time, t. It had as its arguments, per-capita income, y, lifestyle expectations, LS, prices, p, wages, w and Wealth, W:
Thankfully, the National Macro-economic identity was easily specified:
where Y denoted GDP, C stood for Consumption, G for Government Spending (Infrastructure, ESH and Equity), and XM represented a net trade function.
For modelling factor demands, Jetson Sr. chose an Aggregate Industry Profit function, hoping the choice would enable lateral use in macro-financial modelling. pirepresented the sum of Retained Earnings, RE, and Dividends, Div. There was an additional complication concerning the nature of technical change – whether embodied, or disembodied. Jetson preferred the simpler alternative of technology manifesting itself via capital replacement. Embedded within the Profit function was a KLEM production function enhanced with Net Technical change, IT, and EnvReg as critical endogenous variables:
Jetson realized that for a large macro-system, the evolution of prices, p, a crucial determinant of lifestyle, too was of interest. He therefore posited a price-evolution function:
in which prices moved with per-capita consumption, capital, wages, GDP growth rate, international prices, economic policy and environmental regulation.
Finally, he turned his attention to the specification of the ‘Wage Evolution’ function. Well aware of the dichotomy between macro- and micro-economics as regards the endogeneity of wages, Jetson chose to model it endogenously given his intended focus on macro-labor policy. In specifying the wage evolution function, the Sr. envisaged it to be influenced, beyond the ‘tightness’ of the labor market, by the labor-saving nature of technical change, IT, as well as capital in place, Kt-1, the ratio to domestic to international prices, and Economic Policy:
With the above definitions and specifications in place, Jetson specified the SWF, given its political sensitivity, with particular attention to the labor market. He figured the society would seek to maximize employment among those seeking jobs, Lw/Lf, per-capita income, y (= Y/Pop), wealth, W, and ESH standards, but hold down the cost of living as represented by the vector of real prices, p. Thus, motivated, the SWF function read:
Gingerly, Jetson penned the ‘grand optimization system’ to sustain Social Welfare in a dynamic, capitalist system characterized by cost-cutting, labor-saving technical change:
Solving the 12-equation model was a monstrosity given the lags and inter-dependencies, but Jetson had the benefit of an ‘equation-crunching’ optimizing software on the ‘Cloud-enabled’ library computers that aided the analytical derivation of the critical relationships. Beyond the maximized SWF (and optimal factor demands), the rules specified a) Economic policies necessary to obtain an optimum population time profile that fit the larger optimization of social welfare, b) the implied optimum rate of change of technology-embodying capital, and, c) the implied relationship between labor demand and wages consistent with a scenario of continued labor-saving technical change and population projections.
Jetson didn’t like what he saw in the outputs spit out by the optimization routine. Yes, capital accumulation and reserve addition drove output growth, but population was a damper on wages. Life-style expectation and Economic policies played an important role in the economic growth of the society. ESH Regulations impacted upon labor supply thru its impact on living standards.
The optimal short-run labor demand, L*, was of the general form:
The coefficients indicated that optimal labor use, expectedly, fell with wages and capital in place, and with the pace of introduction of labor-saving technical change. Free trade resulted in labor-saving imports in times when p > P in sectors with k/l < K/L. The implied Capital-Investment, IT* was a function of the wage-rental ratio, the ratio of domestic to international prices, Economic policy, and Lifestyle Expectations, among other factors. Labor-saving technical change, motivated by the necessity to reduce costs and increase profits, would necessarily imply either a steep reduction in labor use and/or a significant drop in real wages in manufacturing. Given the ‘momentum’ in population growth, the prevalence of per-capita, subsidy-pandering politics, the arrival of AI-enhanced robot and automation technology, and aware of the ‘sacred cow’ that employment was, Jetson foresaw a tendency to politically accommodate blue-collar labor far beyond what was cost-efficient for the technically-advanced economy. The maximization of the SWF implied the society either manipulate trade policy in labor-intensive sectors, hold back technical change, reduce labor use, or accept deep cuts in blue-collar wages to accommodate advanced, cost- and labor-saving technology. It is surprising how even otherwise ordinary people rise to the occasion in times of crises. A humble roughneck though, Jetson foresaw a distant cloud of social strife if capitalism were to be pursued to its logical end. For a society to reap the benefits of advanced technology – the outcome of an elaborate system of education and research supported annually with billions of dollars worldwide, and employing the best of global talent - it’d be necessary to resolve the issue of Manufacturing Labor-employment and wages. It would be a challenge to a society that had stressed technology without anticipating suitable policies to address its social impacts; in fact, and to the opposite, even exacerbating it in to a crisis with its per-capita-based subsidy policies. Jetson perceived an opportunity to design a policy resolution to address the same. And although he hadn’t modelled it, Jetson anticipated that in all likelihood, the rise in incomes among households in a high-efficiency, high profit world would imply a concomitant increase in demand for service-sector employees, as affluent households demanded personal attention and customized services. It was perfunctory then to first consider a flexible mechanism for facilitating the smooth transfer of Manufacturing Blue-collar labor to the Service industry. With a deep sense of responsibility to future generations, he scoped out the ‘2-pronged Jetson Proposal’: the first part being a rather simple ‘Labor Switch-Points’ module, and the second, a more involved ‘Macro-financial’ module. The intention behind the ‘Labor Switch-Point’ construct was to both inform potential blue-collar Manufacturing labor of their relative likelihood of continued employment given changes in the underlying ‘shadow wages’ upon the advent of labor-saving technical change, and simultaneously offer a formal, automated mechanism to bring about a smooth transition in to employment in the Service sector. Toward that objective, Jetson posited both a ‘Switch Point Demand’ function and a ‘Switch Point Supply’ function - akin to Excess Labor Supply & Demand functions:
Jetson modelled the Service Sector as demanding Switch points, SwPtDS; the demand increasing in Service sector Output, Ys, but decreasing in manufacturing wages, wM, and Experience, ExpM, of prospective Manufacturing employees. To factor in family-stage-specific circumstances that obstructed the transition, he included, Dep, representing the number of dependents, as an additional variable (Jetson gulped hard for what it meant in his case). In a similar vein, the Supply of Manufacturing Sector Switch points, SwPtSM increased in wages, wM, and Net Investment, IT, but decreased in own Output, YM. In addition, Jetson added a variable, FD, representing Cumulative FDs subscribed to by Blue collar labor in lieu of wages (Jetson made a mental note to explain later what he meant by his ‘Wage-FD’ strategy). It captured the employer’s proclivity to retain employees willing to sacrifice wages for long-term financial security.
The demand and supply functions specified, Jetson set the ball rolling. He required a pan-industry Labor Organization to minimize the area to the left and below the intersection of the two functions in the SwPt–wM space. The intersection of the SwPt Demand function with the SwPt Supply function (plotted against wM) revealed the optimal Switch Points, SwPt*, below which the Service Sector made ‘Wage-protected’ offers to ‘redundant’ manufacturing employees. The equilibrium SwPt* varied with both Supply and Demand factors, thus lending a touch of uncertainty and cyclicity to the process of Labor migration. The Switch Point strategy facilitated the smooth transfer of Manufacturing labor to the Service Sector while protecting wages, and offered blue-collar labor the opportunity to tune their wages and savings in line with economic and labor-market prospects.
Having designed a mechanism that provided for a smooth adjustment in the Labor market, Jetson chose strategically to aggregate the Blue-collar work force across all Manufacturing industries separate from Service Sector Employees (in which, he included the Manufacturing White Collar employees as well). Next, he bought in to the Blue Collar Pension Fund Authority, PFA, which managed FD contributions as well as the stock purchases and bond assignments to each employee’s portfolio). He intended, given his read of the future, that the Blue-collar PFA would facilitate the implementation of a policy that would, in essence, reduce the wage-rental ratio, w/v, in each sector to that consistent with a robot economy as revealed in the K*, IT*, and L* expressions. In essence, he achieved it by offering wealth compensations to induce voluntary reductions in wages. Each blue-collar employee, whether in Manufacturing or Service Sector, was offered as much in stocks and bonds as the reductions he or she accepted from wages, toward purchase of Long FDs in to his or her pension account. The FDs, and the bundled, matched Stocks/Bonds ensured employees were left at least as well-off in the immediate term, and likely wealthier in the long-run. In this manner, Jetson de-linked wages from work hours, and effectively reduced the wage-rental ratio as it applied to, or, was perceived for operational and investment decisions, thus facilitating a transition to an AI-Robot Economy. Employees too, factored in the wage reduction for their consumption decisions, but made longer term lifestyle decisions based on assets they held with the PFA.
In choosing their Stock compensation for wages ‘sacrificed’ to the future as FDs, Blue collar employees were permitted their choice of stocks between ‘Own firm stock’, a zero-correlation ‘Perpendicular firm stock’ and a broad Stock market Index fund. The Employer, however, deferred the issue of FDs funds; instead it guaranteed ‘Earned Wage Payables, EWP, issued by the PFA. EWPs represented a ‘wages payable’ against the Employer, and listed as an ‘asset’ on PFA books in the sense it was liquid and could be encashed on demand. These EWPs were taken a lien upon by the pan-industry Blue-collar Labor Union, after which the PFA issued FD credits, FDCs (a ‘legal-twist’ that Jetson leveraged for a larger resolution) to the pension accounts of its subscribers.
Yet weary from thinking thru the first part of his proposal, Jetson moved on to the second. Lest the ‘wealth compensation for wage sacrifice’ strategy be presumed a mere re-classification of compensation, and given potential impacts upon various facets of the society, Jetson hastened to unravel a larger resolution for the Robotmation economy. In his resolution, the Fed was an independent agency in charge of ensuring financial stability – a charge that included the management of currency, bank deposits, bullion, interest rates and foreign exchange. Now, the Fed, as part of its duty to ensure financial stability, managed Asset-Liability balance of the economy, with a ‘back of the envelope’ thumb rule:
In the context of his task, Jetson imagined a creative re-interpretation of the above:
The Fed accommodated the demand for currency arising from the growth in Net Assets by either permitting or issuing IPOs/FPOs, issuing FDs or Long Bonds, or by managing its Foreign Currency and Bullion operations. Jetson was no genius, but he found the EWPs (which constituted an ‘earned payable’, a ‘Receivable’ on PFA books, and upon which the FDCs were issued), both an excellent ‘raison d’etre’ and a suitable ‘collateral’ for the issue of new Currency during asset re-balancing operations. By his reckoning, the Fed, rebalanced assets and liabilities around its endogenous instruments – the issue/manipulation of Currency, Bullion, IPO/FPO, Foreign exchange and Long Bonds. Jetson first required that Bullion be adjusted to cancel out changes in the FD and Foreign currency holdings:
Thus cancelled out, the Asset-Liability balance reduced to:
By his 2-step resolution, the Fed on one hand, adjusted its bullion operations to cancel out against foreign exchange and FD(C)s issued, and on the other, issued new Currency to equal the sum of IPO/FPO and Long Bonds issued. The Fed paid for the use of EWPs by ‘sponsoring’ the conversion of FDCs to FDs that were in turn credited in to the accounts of the Blue-collareds at the PFA. The Government ‘bought’ the new issue of Long Bonds from the Fed (or, equivalently, sponsored them), and forwarded them to the PFA toward its match for the participation of employees in the ‘Robotmation scheme’. In addition, the Government strategically bought in to the IPO/FPO so it could recover tax revenues lost from ROE-based tax-credits that it offered to firms when the stock appreciated post the rise in profits following introduction of Robotmation. Compensated, on one hand, with ROE-based tax credits, and relieved of immediately making good on the EWPs, manufacturing firms offered larger discounts on their stocks to their blue-collared employees in their ESOPs to pave the way for robotmation. The discounts, funded by the deferred EWP and limited to FD subscribers, served to further incentivize the participation of the Blue-collared in the ‘Robot Economy’.
Tying the loose ends, Jetson confirmed that his 2-pronged proposal compensated the wage sacrifices made by the Blue-collared labor in anticipation of a Robot economy three ways – FDs, Employer-discounted stocks, and Government-sponsored Long Bonds. Jetson verified that the Blue-collar Union cancelled its lien on the EWPs, and the PFA recovered its FD ‘principal’ – the face value of the EWPs issued – when the Fed ‘sponsored’ the conversion of FDCs to FDs. The Employers leveraged, and made good their deferred FD obligations to the PFA, by funding a discounted Stock offer to participating employees. The Government, too, found it convenient to leverage the issue of Long bonds by the Fed toward its Bond-obligations to the Blue-collar PFA. Further, it found the IPOs/FPOs a convenient asset class to invest in and recover tax revenues lost when those stocks appreciated upon the realization of higher profits following introduction of ‘robotmation’.
The bell rang to alert users the Community College Library closed 6pm sharp. Jetson barely had a minute or two on hand. Hurriedly he scribbled that his 2-pronged solution was of a pareto-nature that benefited all stakeholders – Labor, Capitalists, the Government and the broader society. The three-way compensation to the labor, and the ‘pareto’ nature of adjustments and incentives offered to the Industry and the Government brought about a much faster transition to Robotmation than was considered feasible.
Robotmation was both an opportunity and a threat to humanity’s future. Compensated with wealth accretions, Jetson had eased the Blue-collareds in to an orderly inter-generational transfer to the Robot economy without the mass unemployment and the social strife that had bedevilled other proponents. His resolution, in fact, anticipated and reduced the threat of social discord, while preserving the opportunity of genuine economic gain that a Robot economy offered. His brand of Robonomics was, he felt, particularly appropriate to per-capita-based subsidy economies grappling with a population crisis and a large public sector– a description that fit many emerging nations. But more to his ideals, Jetson believed his proposal was an appropriate transition policy from an inefficient/per-capita, subsidy-based, socialist economy toward a high profit, distributed capital ownership-based, and more efficient Closed Cycle/Robot Economy. It’d interest policy makers and politicians alike for the manner in which it tackled a highly sensitive social issue. The Jetson brand of finance was particularly apt to....
Interrupting himself before he could be shooed away by the library staff, Jetson walked out in to the yet warm late afternoon Sun. As he got to the Chevy, the sun glinting off its windshield, he thought ‘Gotta get the steering fixed soon’.
….. And no day-dreaming on the snaky way back home either!
