Robot Macroeconomics: What can theory and several centuries of economic history teach us?

Bank of England may be clueless on what next, but its blog Bank Underground keeps giving us food for thought via its posts.

In the recent one, John Lewis looks at this question of how robotics will impact macroeconomics. Will it lead to lower jobs as said and so on. For this, he draws upon years of history where some new technology has replaced an existing one.

The consensus view amongst economists is that technological change is labour augmenting- i.e. it acts to increase output in the same way as an increase in labour input.  If that sounds counterintuitive it is merely the flip side of assuming that innovations are labour-saving.  History provides a good testbed for this hypothesis – if technical change is labour augmenting, then technological change should lead to a rise in the wage rate, but leave the interest rate unchanged.   The Bank’s own historical datasets suggests long rates have (periods of high inflation excepted) hovered around 4% since the 1500s.  And the chart below shows that  since 1800, the return to labour – i.e. the real wage rate – has  grown by a factor of around 15.  Of course these aggregate figures might well mask substantial variation across industry and worker groups.  Certain workers may be hit very hard, especially if their human capital is rendered obsolete. Robotisation may not be good news for all workers and may pose important distributional challenges.

Figure 1: Wages and Interest rates over time

figure 1

Hmmm. So, Is robotisation different?

So to argue that robotisation will benefit capital at the expense of labour you have to believe there is something intrinsically different about it compared to innovations that went before.  One thing that might, and I stress might, be different is the substitutability between labour and capital. Under labour augmenting technological change, if this parameter is less than one, then rising capital to output ratios over time increases the labour share, if it’s equal to one, the labour share is unchanged.

Looking at back data suggesting a constant or rising labour share, for the bulk of the post-industrial era many economists concluded the elasticity was less than or equal to one.  So more capital meant its relative price had to fall by more than its quantity increased – hence a lower share of income goes to capital.  How might technology change this?

Imagine a taxi and its driver – there is in essence no substitutability between the two.  They have to be combined in fixed proportions, and so having a taxi with two drivers, or a driver with two taxis creates no extra output.  Earlier technological progress, faster cars, satnav, Uber, didn’t change much on that score.  But perhaps robots will make labour and capital much more interchangeable – so the driver can be substituted by a computer, and the passenger rides round in a driverless car.  If this pushes substitutability above one, growth in the capital stock over time leads to a higher share of income for capital.  Indeed Piketty and Zuchmann argue this applies to a much broader range of technological change than just robotisation and has driven up inequality in the past two decades.


So in the long run, labour-saving technological change means we can make more stuff.  And that is a generally a good thing. In the long run it doesn’t create unemployment and might even help avoid secular stagnation.  But it might alter how that output is divided up.  Working out the theory behind that, and unpicking the effects of particular innovations will probably keep economists in human or robot form occupied for years to come.


One is now seeing researchers pointing to importance of distribution . Earlier, they would just say overall there will be gains with no mention of impact on different people.

The unintended consequences bit is also very important. All public policy suggestions should be really wary and point to unintended consequences of whatever they propose:

But perhaps the most important historical lesson of all for economists is to remember that often the biggest implications of an innovation occur far away from that good’s own industry.  Take the humble shipping container.  Transporting goods in pre-packed locked containers, which can be lifted straight onto a lorry or train, yielded enormous savings relative to having cargo transported in crates which needed loading and packing individually at each port.   Their inventor estimated that the combined savings on labour costs, time at the dockside and insurance for breakage and theft reduced the price of a tonne of cargo 39-fold.  Bernhofen et al calculate this led to an eight fold increase in bilateral trade between countries with container ports. Whilst employment fell, productivity of labour increased nearly 20 fold. For the shipping industry this wasn’t a massively disruptive technology- though trade patterns changed, the industry became more concentrated and ironically less profitable.

But by reducing the cost of trading, containerisation opened up the possibility of new supply chains and trading arrangements that were previously too expensive to undertake. And, inso doing, the resultant trade flows led to a substantial spatial reallocation of economic activity. The real macro impact of containerisation didn’t occur at sea or on the dock side.  Perhaps the biggest effect of robotisation might occur far away from the industries which adopt the robots, and in ways which today’s macroeconomists could never imagine.

Nice bit.

Much better than several BoE papers which are way too specialized and soporific after a few pages…


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