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Bank of England Paper: How Automation Impacts Inequality

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EDITOR NOTE: Capitalism can be a tremendously rewarding system, but its benefits and advantages don’t come without its share of risks. Capitalism’s invisible hand can be cold and iron-like, especially if you don’t act with the appropriate level of agility and competitiveness that it often demands. This brings us to “automation" and how automation impacts inequality. Automation marks a harsh evolutionary turn towards production and efficiency. Skills get aged-out, no matter the age or skill of the worker. Huge swathes of the labor class will get aged-out. Many who rely on a paycheck from an employer, and not on capital invested into assets or businesses--or even just one business, theirs--may no longer have the economic “fitness” to survive in a formerly-bustling space rendered wilderness or wasteland. Those incapable of reading the economic terrain and weather will be rendered unfit for survival. Holding capital, investing in a business, and remaining agile and competitive is what are needed to survive this new age of automation and thinking machines. When it comes to your finances, machines will soon perform many tasks that humans in the banking industry used to perform. Not only are machines prone to error, but they can also be used to efficiently gather your financial data. Holding physical gold and silver is one way to keep your wealth relevant, private, and accessible. Not all innovations pan-out well. And when it comes to money, gold and silver have seen eras of innovative financial instruments come and go. In the end, both have always prevailed.

Research published by the Bank of England tries to fill a gap in the existing theoretical literature on how automation impacts inequality.

In the working paper, authors Benjamin Moll, Lukasz Rachel and Pascual Restrepo focus on the returns that accrue to holders of capital. They note much of the literature to date has focused on how labour income is affected by automation, neglecting the importance of capital holdings as a source of income, particularly for richer people.

The authors develop a theoretical framework with households that differ in their skills. They add the assumption that household wealth accumulation is subject to random “dissipation shocks” that cause wealth to drop to zero, leaving the household only with labour income. The authors say adding these shocks helps them deviate in a “tractable fashion” from models that assume a single, representative household.

The framework highlights two novel channels linking technology and inequality. First, automation raises inequality by raising the returns to wealth. Second, the model suggests automation is more likely to lead to stagnant wages “and, therefore, stagnant incomes at the bottom of the income distribution”.

“Our framework provides a complete characterisation of how technology and, more generally, changes in the economy’s production and market structure affect the personal distribution of income, wages and capital ownership, as well as macroeconomic aggregates,” the authors say.

Originally posted on Central Banking

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