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Day July 9, 2006

Why Hayek + social preference research supports welfare-state liberalism

A couple of days ago, Brandon Berg posted on Catallarchy a response to a common hypothetical:  what happens when a large percentage of a population becomes superfluous given much cheaper labor?  Berg’s posting was in response to Michael at Half Sigma, who raised the possibility that cheaper sources of labor would cause a segment of the population to become permanent unemployable at almost any wage, rendering them "economically worthless."  Michael and Brandon take this example to its logical conclusion by assuming that a class of "worker" exists which can beat *any* worker on price and management costs — in this case, robots.  But of course we need not imagine actual robots here, the analysis is equally useful if one simply imagines very large relative differences between groups of people in their expected wages and working conditions. 

This may seem like a bizarre science-fiction scenario, but of course it’s also a thought experiment for possible "halting states" of a globalized economy.  For example, progressives in the U.S. wonder whether it’s even possible to ensure that we can roughly match the supply of jobs (let alone well paying jobs) to the domestic demand among American workers, or whether additional technological advances (in communications, supply, energy efficiency, etc) will further decrease the "friction" that continues to make globalized workforces a difficult thing to manage for most companies.  Were that "friction" to lessen, it’s an open question as to whether we can count on there being a rough balance between labor demand and job supply.  Massive domestic unemployment, or at the very least drastic "underemployment" at low wages, may result.  The end result of such a scenario is a "third-world" economic structure here in the U.S. — a small population of wealthy property-and-company owners, and vast numbers of people who are chronically under- and unemployed, dependent for subsistence and survival.  Clearly, this is a problem of political economy most progressives would wish to avoid, or if not, to remedy.   

Not everyone agrees that such a situation is problematic, however — there is a strain of libertarian economics which seems to view such a situation as almost desirable if the economy is productive enough in aggregate.  For example, examine Brandon’s response to such a situation:

We live in a world of scarce resources and unlimited desires….But let’s suppose for the sake of argument that scarcity is eradicated. Robots make everything, including other robots. They perform all manner of services as well as or better than humans, and no feasible desire, however trivial, goes unfulfilled. There’s no work left to do except to maintain the robots, and a small minority will be sufficient to handle that. I don’t see the problem. A world without scarcity would, by definition, be a world so fantastically wealthy as to allow the productive minority to support the idle majority at virtually no cost.

Note that a welfare state would not be necessary to achieve this. With no scarcity to temper the benevolence of the wealthy, pure charity would be far beyond sufficient to provide for the needs of the rest.

I suspect this argument is deeply flawed, even though it seems to be fairly common in libertarian circles.  I see at least two flaws, although there may be more.