Noah Smith writes

Karl Smith claims that the rich-world investment drought is not about “stagnation,” it’s about “deindustrialization.”Tyler Cowen politely coughs his throat and points out that those are, um, the same thing.

That’s not really what I meant and I’ll let Tyler say but I don’t think that’s what he means either.

My point was that you have a number of different stocks all showing different patterns of growth. In particular, in terms of equipment the only stock that actually collapses in growth rate and at times goes negative is transportation.

Thus when you see a graph of net investment that shows collapses and negative values you are seeing a graph of fluctuations in investment in transportation equipment.

You do have a slow down in industrial equipment but if you look at the stock this is offset by a rise in information equipment. The stock that lagged in 70s and 80, boomed in the 90s and collapsed in the 2000s was transportation.

In any case, as I understand it part of the TGS thesis is that we have at root a slowdown in technological progress and this is what is leading to a slowdown in median wages.

I am not sure if Tyler is willing to just change frames to talking about the return to unskilled labor but that’s how I think about it.

My longer thesis is that the rising return to unskilled labor is a function of industrialization and that industrialization is unique in this. The wage rate on unskilled labor never benefited before and its not immediately clear that it will ever benefit again.

This is because rents always accrue to the scarce factors of production. Industrialization meant that the only thing we were short on were “control systems” everything else in the production process was effectively cheap.

However, any mentally healthy human being is a decent control system. So, this meant huge returns to being a human. It also meant collapsing returns to being a horse. Though, people think of this as a difference in kind, I urge you not to. Horses are not so different than you and I.

As it so happened the wage rate for horses fell below sustenance and they died off. There is simply no basic reason this cannot happen to humans, save for the fact that other humans will enact policies to stop it. The market itself will not differentiate.

That is part of why industrialization is different.

The other part is that it is extremely hard for the innovators to earn rents on innovation. The Brian Palmer story on Detriot is an example of this. Copying and transferring technology is rampant in industrialization. Its often the case that the true innovators die penniless.

But, this means this makes innovation unable to capture its rents, which in turn fall down to unskilled labor. If you can capture your rents then innovation effectively becomes the relatively scarce factor and the rents start pouring into the pockets of the innovators.

The fact that information technology can be hidden, copy protected and patented should make this so.

Now to be clear, this isn’t saying that growth will be slower. Indeed, growth may be faster if some of the rent is quasi-rent, though my readers know I am skeptical of this.

However, the growth will be radically uneven. You could see overall income in America skyrocket even as the return to unskilled labor falls.

You can say well then people need to get more skills, but in a free market this shouldn’t matter. More people acquiring skills will bid down the wage for skilled labor and will bid up the cost of acquiring skills. This can happen particularly fast if skills themselves are a major input to skill production.

Thus the marginal worker is left indifferent between becoming skilled or not and since the unskilled wage is stagnating, so are his living standards.

You need there to be a shortage of something that human beings have a comparative advantage at simply by being human beings. Unless this exists the wage for the average person will be continually bid down.

So this is a sketch that has nothing to do with a technology slowdown but nonetheless predicts stagnation in the absence of income transfers from the wealthy to the rest of society.

This is already gone on longer than I meant but I will note that if you tax the wealthy to pay for the skill accumulation of the masses then this will look like you earn a good living by going to college and studying hard but underneath it all its just an income transfer. You only earn a good living because taxes on the rich are making college cheaper than it would otherwise be.

And last last thing, if you make the college technology cheaper then this will work for a time but it will just explode the number of people globally with skills which should still drive down the return.

Ultimately if you are born with nothing to sell but your labor power then the return to labor power determines your market value. In a free market nothing changes that.