Automation and the Resource Curse

Important article by Steve Randy Waldman at intefluidity. He has, I think, a significant insight. The increasing wave of automation (and globalization for that matter), has meant that Western industrialized nations are now becoming resource curse countries.

For years, economists have noted that countries with plentiful natural resources - fossil fuels being the most significant - are often corrupt, poor, and backward places. Think places like Saudi Arabia, Iraq, Libya or Nigeria. And often countries with poor natural resources - think Japan or South Korea or Ireland or Denmark - are relatively wealthy and well-governed. What's going on?

As Waldman tells it, countries with plentiful natural resources need only a small amount of people to extract the resource, meaning most people are superfluous to how the country makes its money. Wealth is produced not by business activity, but by ownership of the resource. That means a few things - the country does not develop its "human capital" like a resource poor country does. The leadership shares the proceeds of the resource among an "ownership class," who see themselves as "civilized," while those who lie outside of that class are increasingly seen as "uncivilized." They do not need to produce much domestically, because they can trade the natural resource for whatever goods they need from abroad. So most people are simply ignored, and even seen as a threat.

Automation acts as sort of a natural resource. The owners of automation, don't need us anymore - they can produce what they want with just a few workers, and the majority of us are superfluous to the economy. Thus 'human capital' is not developed - people are allowed to get poorer, education to atrophy, social services to be cut, health to decline, and infrastructure to decay. Wealth becomes concentrated into a hereditary ownership class based on automation rather than natural resources. Politics becomes corrupt too, more responsive to the needs of the ownership class and hostile to anyone outside of it looking for more bargaining power, much like a "banana republic." Thus, the pathologies of resource-poor countries become manifest in industrialized nations as well.

[Resource-rich countries have] valuable tradable goods the extraction of which requires a small numbers of workers relative to the size of the economy as a whole. [*] Goods like this create a very strong tension between private property and social welfare. In the mythology of capitalist economics, “as if by an invisible hand”, the self-interested pursuit of private wealth promotes the general welfare precisely because we all require one another’s help. The butcher slaughters her beasts and the baker sugars his cakes, each with an eye to their own profit. But the butcher needs her carbs and the baker likes his meat, so the end result of their self-interested selling is mutual aid rather than mere accumulation.

This logic breaks down in an economy dominated by a valuable natural resource. Yes, the miners require meat and mead, but if they are small in number relative to the rest of the population, that won’t cost them very much. They are few mouths to feed, and the not-miners are many and lack bargaining power. What makes happy capitalism work, the silent tendon of the mythologized hand, is a kind of balance between individuals’ desire to accumulate and their need for the assistance of others. If there exists a very valuable natural resource, and if that resource can be privately controlled, there is no balance. Self-interested agents drop their butchering and bakering, and try to gain control of the resource. No magic force turns that into a positive sum game. Unless there are “very strong institutions” — whatever that might mean — the pursuit of wealth becomes a game with winners and losers. The invisible hand can manage no more than to lift a middle finger.

The more resource-curse logic binds, the more likely as a technological matter that control over economic value will be concentrated among a relatively small fraction of the society. This leads to a greater separation of circumstance, between winners who perceive themselves and their communities as “civilized”, and losers exhibiting social pathologies that may be more effect than cause of disadvantage, but are nevertheless real, and usefully assist in reinforcing the arrangement’s legitimacy. Corruption and idealism become impossibly fused. Did Timothy Geithner “save the world”, or did he perpetuate the stranglehold of a particular extractive elite? He did both. He saved his world.

You also get circumstances where the society's wealth and resources are channeled into protection of elites' wealth rather than human capital development. Thus you get the American phenomenon where we spend more on prisions then on schools, and a blank check is handed to the national security state even as more and more Americans lack jobs or adequate health care. Again, very similar to a banana republic. Note that Waldman points out the demonization of the "uncivilized" in resource-rich societies, and we're seeing the same thing here - the poor are lazy, they drop out of school, they have babies too early, etc., never mind the failing schools, lack of jobs and job training, crushing debts. etc.

But his footnote is even more intersting. He notes that they key is bargaining power. In countries which need just a fraction of the workforce, most workers have no bargaining power, i.e. the ability to demand higher wages as their productivity goes up. He notes that the period of industrialization we have just been through was an anomaly in human affairs - it needed a lot of workers for economic production. Take that away, and what you have looks a lot like feudalism - poor and desperate workers unable to achieve bargaining power or exercise control over production.

It’s probably more accurate, although depressing, to qualify this, and rewrite it as “a small numbers of workers capable of achieving bargaining power relative to the size of the economy as a whole.” Feudal economies, in which the majority of people work to produce agricultural goods, look a lot like resource-curse economies, even though numerical involvement in production is not concentrated. Bargaining power, defined as the ability to assert control over production, remains very unequal. If you define the resource curse this way, you end up with “cursedness” as the normal state of human affairs, and it becomes more sensible to talk about the “industrial age blessing”, a fleeting mix of social and technological conditions under which large numbers of workers contributed to production through processes that required scale and coordination. These circumstances allowed unusually broad segments of the population to organize and achieve bargaining power, increasing the scope of economic prosperity and the impetus to mass production that economists eventually label “growth”.

I think this is a very important insight. People assume the way things were is the way things will always be, but the fundamental cicumstances have changed. A lot of people have compared our current conditions to a sort of Neofeudalism, and based on the above, we can see why this is the case. Are automation and globalism driving us toward Neofeudalism?