07 April 2016

My Argyle Socks

The capitalist's dilemma is simple enough. Samuel Colt is generally credited with devising the interchangable part method of production. Being the USofA, he made guns, of course. Decades later, Henry Ford devised larger assembly lines to make the Model T. In both cases, the notion was to replace master/journeyman craftsmen with minimally skilled anonymous hands. In the case of Ford, the savings in labor expense was passed on (largely) to the consumer in a lower price. The Model T was the Yugo of its time, so it was not an apples-to-apples bargain vis-a-vis a Cadillac, say. Both shared one characteristic: the physical work didn't change much from past practice; a human attached a part to a unit-in-process. Little to no adjustment was needed, however, thus the skill substitution.

Modern robotic/automation/computerization/fairy dust production is very different. Rather than just moving the unit-in-process from worker to worker, now much of the process is carried out by machines. This has a profound effect on the business. Gordon goes off the rails big time when he repeats/re-uses the classic capital/labor ratio of Solow: 70% labor 30% capital. By far and away the stupidest idea in the book. We'll look at the numbers, to the extent that any are available, with the recent announcement that Ford (them, again!) will build an assembly plant in Mexico to exploit cheap labor and export cars to our Blue States.

Today's high machinery production poses a real problem for the capitalist: no matter how many units you produce, you still have to pay for the plant and equipment. You can't layoff a robot. High machinery production is fine and good, for the capitalist, when demand is at least steady. Any fall in output raises the imputed capital cost per unit. Oops.

My family was poor, but unhappy, before, during, and after I grew up there. La Madre did little to aid the poverty, preferring to sit and smoke Parliaments. She did, however, do a bit of sewing. Mostly, clothes for herself and my sister, much younger than I (my brother and I never figured out how that happened :) ). We got a shirt or two along the way. La Madre wasn't a master tailor, so she'd go to the fabric or department store (back when they had notions departments) and buy a pattern. Butterick is a brand I remember. They were packaged in an envelope about the size (H X W) of a standard textbook. Dress patterns are printed on the thinnest paper imaginable. Pity the poor child that should tear one.

Pattern recognition and pattern matching are the essence of intelligence, human or artificial, and mean that, given sufficient cycles and memory (you do know how many bytes can be addressed in a 64-bit space?; no, your i7/motherboard doesn't generally implement more than 36 lines) any problem can be solved by brute force. I give you Watson. And the FBI's success in finding the passcode to that iPhone.

One of the patterns that growth economists, especially the Freshwater sect, like to prance out whenever the income/wealth inequality issue is raised is the historical record. Which record demonstrates that poor, ill-educated blacks and whites migrated from The South to The North post WWI through post WWII to work in factories. The notion is that they traded low skill work for higher skill work, and thus better income. I've never bought that, since bolting on a tire to a Model T requires no intelligence at all. These days such a task is often done by robots. Being a farmer requires a much higher degree of skill, particularly when you're not getting vast subsidies from Uncle Sugar. The assumption that there will always be more higher skill/wage jobs available when/after capital destroys current ones is just an assumption. Convenient to the capitalist.

All of which brings us to a Sorkin piece today on the assault on finance by automation. More than once, in these endeavors, it has been mentioned that much of the employment of all those "high value" educated folks has been in FIRE, and not real science and engineering. Of course from a macro point of view, FIRE is pure overhead, not production. So, what does the future hold? If the major uptake in "high value" education has been in overhead occupations, and these occupations are under assault by computerization, isn't dystopia the likely result?
Some 800,000 people will have lost their jobs at financial services companies to some of the newly dreamed up software in a decade, the report said. "Roughly 60 to 70 percent of retail banking employees are doing manual-processing-driven jobs," the report explained. "If all the current manual processing can be replaced by automation, these jobs can disappear or evolve."

"Do you want fries with that?"
Silicon Valley has long shunned regulated industries, but having conquered so much of the landscape in other industries, it is now turning to finance.

I guess that's where all those now redundant MBAs will end up. The stories from years ago, snickeringly so from such MBAs, of Ph.D. sociologists driving cabs may well cut a bit closer to the bone. From a macro point of view, it's not a funny story. If we've been employing our best and brightest in overhead occupations, rather than productive ones, and even those overhead jobs go poof, what then?

Keep in mind the M&A fury of the last few years is fueled by all that trickledown money from TARP, QE, 0 interest rates. It went to corporations sitting on $$$trillions they haven't a clue how to invest in real physical capital. So they buy themselves and their competitors, better to extract consumer surplus.

On to Ford. Here's one report. And, of course, The Donald used the announcement to polish his populist bona fides:
Mr. Trump was quick to comment on Tuesday, saying in a statement that Ford's plan to build a new factory was "an absolute disgrace."

The capitalist zealots will counter with something along the lines of, "well, yes 2,800 Americans will be made redundant, but X00,000 new Fords will be cheaper for the Blue State folks who still have jobs. Seems a fair trade, don't you think?" Well, they may not be quite that honest, of course. Whether the Fords produced in Mexico will actually be sold at a lower price than if they were made in Michigan is an assertion with no evidence. The price of a Ford is determined by demand. If they make a hit (think: original Taurus), then they'll keep the cost savings for themselves and charge as much as the consumer will bear. If it's an Edsel, not so much.
Ford, the nation's second-largest auto manufacturer, said it would invest $1.6 billion to construct a plant that will employ 2,800 workers and begin making vehicles by 2018.

Now, let's see if we can ferret out the capital/labor ratio for such an investment. Here's an article. 300,000 units, eyeballing it, looks like an average. So, $1.6 billion over a five year straightline depreciation gives us $320,000,000 per year. 2,800 workers at $15/hr at 40 hours/week and 50 weeks/year yields a labor bill of: $84,000,000. How much of the $1.6 billion is plant and how much robots isn't said. We'll treat it all the same for this exercise. So, each Ford will cost: $1,066 in capital and $280 in labor. Add in material, of course, and electrics to run the lights and robots. And so forth. It certainly appears that labor hours/unit isn't all that much. Hell, the plant manager's annual bonus is likely more than the entire labor cost for the year. :)

Here's the bedtime story:
The difference is that back then, businesses were actually spending that cheap cash, buying equipment, building factories and hiring workers. Today they're just hoarding it. The pile of corporate cash on the balance sheets of nonfinancial companies has grown to $1.48 trillion, according to Moody's. That's an 81 percent increase since 2006.

So, more evidence that Big Capital is buying itself and competitors. But, you knew that anyway.

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