Automation can be viewed as an increase in productivity; less people do more by leveraging machines and software. In 1776 Adam smith addressed the issue of increased productivity by explaining the natural market forces that result. In an environment of increasing productivity, capitalists (those who invest capital in business in Smith’s terminology) see increases in profit as the demand for labor simultaneously is reduced. In immature (unsaturated) markets, the labor demand can remain constant because the increased productivity leads instead to quicker saturation, but the capitalist still profits. As long as the majority of capital is invested in mature markets, there is an overall reduction in labor demand. Only if the majority of capital is spent on finding and exploiting new markets (meeting unmet needs or wants) can labor demand be sustained. If labor demand is not sustained or grown, the value of labor falls because the supply outstrips the demand (the exception, of course being major violent events that significantly reduce world population).
When the value of labor falls, wages stagnate or fall. This tightens the budget of the families that make up the labor force, who are the vast majority of the citizens of a country. This in turn, reduces the demand for nonessential goods and services, causing a “contraction” in the economy. But, keep in mind the capitalists are still more increased profit per worker. There is some harm to the capitalists investing in nonessentials through this reduced demand.
One thing that is very different now is Smith’s economics was based on metal-based money. While some metal money enthusiasts will refer to such currency as “sound money”, Smith saw it differently. He studied history and saw that throughout time the weight and composition of various coinage was changed, without changing the denomination. As such, it was always decreasing, since that meant the issuer could issue more currency with less metal or cheaper metal. Why would the issuer want to issue more currency? Because innovation has increased productivity, which has contracted the labor market and thus the economy as a whole. Recall what I said above: if the majority of capital is spent on finding and exploiting new markets labor demand can be sustained. By issuing new currency and choosing the right investments, they hope to get things moving again. These devaluations of the currency were the analog of what we today call QE. But QE is a different beast and we got here in stages, so let me start with metal coins.
Metal coin based money was “semi-sound” in that there was a lower limit as to how flimsy you can make coins. The more you dilute the gold, silver, or copper coin, the more obvious it is. If you take a 50 pennies made before 1982 and 50 made after, the ones made after will be way more likely to be heavily worn, even if they are only a few years old (95% copper 5% zinc vs 97.5% zinc, 2.5% copper). At the time of metal coins gold, silver, and copper were the currencies of international trade. So while increasing the money supply got the local economy moving, it only hurt the local economy’s purchasing power on the world stage due to the reduced base metal content in labor’s wages and capitalist’s profit. This basic process is still occurring, but money is quite different.
First, metal coins were replaced by paper bills. This paper was a certificate of deposit for metal coins and bars. This meant that you could take it to the bank or your country’s treasury and exchange it for gold, silver, or copper. Paper certificates have also come to be used for international trade. There have been several currencies that became standard for international trade, and each has started off being a certificate of deposit for actual metal (usually gold). I won’t dwell on the earlier ones because I honestly haven’t studied them thoroughly, but I do know that each one prior to the US dollar has at some point been unable to deliver on all the promises made. So, again, we have the dilution of the currency, but there is still that ability for foreign nations to request their metal, which acts as a lower limit on how flimsy your promises are.
That’s it for now, next episode, I’ll dig into the establishment of the USD on the world stage via the Federal Reserve Bank, the great depression, and the Bretton Woods system. Then we’ll go over the electronification of money, the 1971 crisis, and the paradigm shift that has been perpetuated so far of allowing electronic balances to substitute for metals in international trade even without the ability to redeem for gold. This separates the money system of the world completely from the base metals that have traditionally served this purpose. Will this shift stick, or will the world revert to metal at some point? Or will we find a middle ground like bitcoin, which is truly “sound money” in that it has a hard limit that would be extremely difficult to change, yet can be moved around the world dramatically faster and cheaper than the existing electronic money manage.