Pensions and Robots

by George Hatjoullis

I keep reading about a pension crisis. Apparently we are living longer (which is good) but this is causing an ageing population and placing an unsustainable burden on the working population. The solution, allegedly, is for us all to save more and work until we drop (as we used to do). Elsewhere, and often in the same edition of a newspaper or magazine, I read that automation and robotics is going to take your job. There is robot crisis, apparently. It appears no one is capable of joining these two stories together and recognising there is neither a pension crisis nor a robot crisis. Instead there are two quite different crises. First, we have a crisis of intellect. People are incapable of joining dots even when there are only two dots to join. The second is a crisis in income distribution. The latter is recognised by some but is never connected to the pension and robotics issues. Let us give it a go!

The promise (at the moment it is a promise) of automation is that labour productivity will increase exponentially. So we will need less labour. Your job is at risk! Remember the hand-loom weavers and the Luddites. Unemployed workers will be unable to support themselves let alone our ageing population. In technological terms there is of course no problem. The economy is much more productive so it can produce enough for all. There is no pension crisis or unsustainable burden on the young. Everyone works less hours and retires earlier but earns over a lifetime at least as much as before. If there is a crisis it is clearly in income distribution.

The owners of the robot production need to be persuaded to distribute some of their largesse to the workers and pensioners. Indeed they have an incentive to do so because they must sell the stuff of which there is now an abundance. The question is how does the system maintain an incentive towards ever-increasing productive investment (in robots) and rising real incomes. Is there a steady state solution and will the market system trend towards it in a stable manner? This is what economic theory should be trying to address. We play with the mathematics of differential equations and topology and construct systems that fulfil these conditions but that does not mean they will materialise in practice.

There is a crisis of income distribution. It is the modern, and polite, equivalent of what used to be referred to as the crisis in capitalism. This latter term has been dropped because it makes you sound like a socialist and everyone is a capitalist these days (Russia, China, Vietnam…). One may however speak of a crisis in income distribution in polite company. One rarely speaks of it in economic theory though! Economists are obsessed with maximizing the production possibility set. They like to assume that, once maximised, it can be distributed according to some social welfare function without harming the process by which maximization was achieved. This assumption is inconsistent and constitutes a convenient sleight of mind. Maximization is achieved via a market system that is driven by the profit motive. If one starts to meddle with this based on some social welfare function it must inevitably affect the maximization process.

It is not simply about caring about people. It is about matching supply potential with demand. In the Walrasian system this is not a problem and it was one of Keynes’ vital observations that the Walrasian system made assumptions that are not valid in the real world. The amount people want to save as financial assets may not equal what corporations want to use to invest. This can lead to an unemployment equilibrium or, in today’s terminology, consistent below potential GDP growth. Higher productivity will make this tendency worse.

The solution, ironically, lies in earlier retirement and shorter working hours for the same pay. The complication is in the accounting and financing of this reduction. In principle it is quite simple. An independent state agency charged with ensuring price stability calculates the excess of potential supply over demand in the economy. It then makes cash equal to this excess available to the state which distributes it to workers on shorter working weeks and pensioners to top up their incomes. Demand equals supply. No inflation and no unemployment. The owners of the robots sell their produce and realise their profits. Steady state is achieved.

This solution is also circulating in the press at the moment in the form of a discussion about so-called ‘helicopter money’. Most of the discussion is about how it is created but this is not really an issue. Imagine the Central Bank (an independent institution charged with maintaining price stability) prints various denominations of notes and ferries them over to the government. They are then put in envelopes and given out to workers on payday, and to pensioners at the post office. The mechanism would be different but this is the intended effect. Sounds ridiculous? Imagine we are on the gold standard and the state finds a gold mine on state land. It mines it and decides to distribute the gold mined (minus costs) to the population in the same way. Not so ridiculous but same effect. I rest my case.

The alternative is to allow the market system free rein. The result will be intergenerational  structural unemployment, wide income disparities and social instability. Your choice.