Land and Labor in a World of Robots
There is fear that robots will replace labor.
March 8, 2015
Fred Foldvary, Ph.D.

As the technology of computing, robots, and drones advances, there have been discussions on the economic effects. Will robots displace human labor? Who will end up with the wealth?

Suppose that robots could manufacture all physical goods and many services. A robot could take a restaurant meal order and deliver it. Robot soldiers and drones would replace many of the human troops. Would this cause massive unemployment?

Technological displacement has been happening for three hundred years. Agricultural machines replaced most farm workers, but this did not cause unemployment. Farm workers shifted to manufacturing and services. The automation of manufacturing shifted labor to fields such as computer programming. The unemployment rates in economies today are caused by policies in labor and taxation, not by advancing technology.

The unemployment rates in economies today are caused by policies in labor and taxation, not by advancing technology.

There are many services that people much prefer to be done by a person rather than by a machine. The members of a church would not want to minister to be a robot. Somebody seeking counseling prefers to be treated by a sympathetic human being. Some teaching is being automated, such as with web-based video lectures, but the human element is ultimately desired for grading and discussion. Legal issues ultimately need human judgment. Robots can create art and remodel a house, but people may have a psychological preference for human-made art and remodeling. Robots may be able to write books, but readers want human authors. The human instinct to interact with other humans will not end. In my judgment, machines cannot replace the imagination, judgment, sympathy, and emotions of the human mind.

But suppose that most of the work is replaced by machines, and only a few activities remain done by live labor. Robots would build and service other robots. With minimal labor costs, the wealth would first go to the owners of the robot firms. But competition would drive down profits to a normal return on asset values. In the long run, when patents have expired, the surplus income would not go to the owners of the robots and other capital goods.

Economists call the surplus value, after paying all expenses including normal returns on investments, the "producer surplus." But since labor would not get this surplus, and it is not going to the owners of firms and capital goods, it flows down to the non-labor factor, land.

Image Credit: Neil Kremer

With lower labor costs, the producer surplus would be that much greater, and so the rent of land would soak up the gains from economic expansion and more productive technology. The beneficiaries of the displacement of labor would be either those who have title to land, or to the people in general if the rent is distributed to them.

The more productive locations would fetch a higher rent. So the portion of wealth going to rent would depend on how the use of robots is affected by location. If there are economies of density and scale, so productivity rises with a greater geographic concentration, then the differing productivity of various locations would generate differential rent.

If, however, manufacturing and retail locations no longer matter, as rapid transportation brings materials and people to production and retail facilities at low cost, then residences and business can be scattered, and their rent would be low. Much of the wealth would go to locations where natural resources are being extracted, such as mines and the extraction of oil and natural gas. Copper mining has to be done where the copper is concentrated. Thus if all labor is replaced, and transportation costs go to zero, the ultimate limits to production would be raw materials, and the rent of those locations would soak up the surplus.

If people have no income, they buy no goods, and all the robots will be useless. If society and governments rescue people from starvation, government would provide at least minimal food, shelter, and medical services to all. The rest of the wealth would go to the landowners as rent. The more equitable way to solve the problem is for all the land rent to be distributed to all the people in equal shares. Some call this a “residents’ dividend” or “universal basic income.”

The more equitable way to solve the problem is for all the land rent to be distributed to all the people in equal shares. Some call this a “residents’ dividend” or “universal basic income.”

The problem with robots is not the displacement of labor, but economic policies that redistribute the surplus to land rent kept by the title holders. There is also the problem of drones and other robots used for evil purposes. The proper use of robots is a governance problem. Technology as such is not an economic problem.

I think the most likely outcome is not massive unemployment. Human desires are unlimited, and even if robots do much of the servicing, there would be substantial psychological demand for human services. But there would be a large surplus as rent, so even if people are employed at wages above subsistence, the equitable solution is to distribute the community-based rent to the local residents, and distribute the rent due to natural resources globally to all people.

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FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.