Page - (000060) - in Disrupted Development and the Future of Inequality in the Age of Automation

5 AUTOMATION AND STRUCTURAL TRANSFORMATION … 53 Summers (2013) considers a modification of the neoclassical two-factor production function in which output is created via both a complementary and a substitutive use of capital and labor (see for discus- sion Atkinson & Bourguignon, 2014, p. xilx). Capital will be “deployed in these two uses to the point where their marginal productivity is the same” (Summers, 2013, p. 4) and a certain mix of capital and labor will result. Summers highlights three implications of labor-saving capi- tal use: (i) production opportunities are augmented and output thus increases; (ii) wage rates fall; and (iii) returns to capital rise. Atkinson and Bourguignon thus argue: We can therefore tell a story of macroeconomic development where initially the Solow model applies (…). A rising capital-labor ratio leads to rising wages and a falling rate of return. Beyond a certain point however (…) [labor-substituting capital use] begins to be positive. We then see further growth in the economy, as capital per head rises (…). There is no longer any gain to wage-earners, since they are increasingly being replaced by robots/automation. What is more, the capital share rises, independently of the elasticity of substitution. [The modified Solow model] highlights the central distributional dilemma: that the benefits from growth now increas- ingly accrue through rising profits. (Atkinson & Bourguignon, 2014, p. xilx) In line with the argument of a distribution dilemma, Roine and Waldenström (2014, p. 79)—though they are skeptical of any “mechan- ical relationship between inequality and industrialization or technologi- cal change”—argue that: “the technological development starting in the 1970s constitute[s] the start of a shift, not from agriculture to industry as in Kuznets’ original story, but from traditional industry to an ICT- intensive sector that initially rewards a small part of the population, but eventually will spread, bringing inequality down.”1 There is thus a theoretical case that automation may be linked to income inequality and wage stagnation. Is there also a case for it leading to technological unemployment? The Solow model and its iterations sug- gest greater output (i.e. supply) due to automation which should trans- late into lower prices under conditions of competition. Lower prices in turn should lead to greater quantities demanded which necessitate more net employment of humans. So, the net effect of using labor-saving technology could still be labor-increasing domestically. It may, however, not be if we took the Summers’ model to its extreme: this would mean assuming a perfectly