Herbert Simon on stagnation and automation

by on September 3, 2013 at 12:14 pm in Economics, History, Science | Permalink

In his review of a prescient work called The Shape of Automation (1966), by Herbert Simon, a manifold genius who would go on to win the Nobel Prize in Economics, Heilbroner scoffed at Simon’s notion that the average family income would reach $28,000 (in 1966 dollars) after the turn of the century: “He has no doubt that these families will have plenty of use for their entire income. . . .  But why stop there? On his assumptions of a three percent annual growth rate, average family incomes will be $56,000 by the year 2025; $112,000 by 2045; and $224,000 a century from today. Is it beyond human nature to think that at this point (or a great deal sooner), a ceiling will have been imposed on demand—if not by edict, then tacitly? To my mind, it is hard not to picture such a ceiling unless the economy is to become a collective vomitorium.”

Simon responded drily that he had “great respect for the ability of human beings—given a little advance warning—to think up reasonable ways” of spending that kind of money, and to do so “without vomiting.” He was right about that, of course, even though he was wrong about the particular numbers. Nobody at the time foresaw the coming stagnation of middle-class incomes. His estimate of the average family income in 2006 translates into more than $200,000 in current dollars.

That is from an excellent piece by Daniel Akst on what we can learn from the automation crises of the 1960s.

ad*m September 3, 2013 at 12:48 pm

Weak. He starts to shed light on the importance of the social changes and then waffles on inequality. As long as people without jobs and people in jail are more fit in Darwinian terms, have higher fertility and more children younger, this will continue. Earlier resorts like the one described by him did the opposite.

Reduced financial inequality in return for reduced fertility would be one solution.

Lee A. Arnold September 3, 2013 at 12:56 pm

“Nobody at that time [among economists] foresaw the coming stagnation of middle-class incomes.” –There were dystopian futurists, among them science-fiction writers etc., who were a bit more dour about what automation would do.

Larry Siegel September 4, 2013 at 1:32 am

Actually I’d go even further and say that almost nobody except a few economists foresaw the rise in incomes that we did experience. The Club of Rome, which was supposed to be promoting science fact, not fiction, said basically that we’d all have starved by now. Now that’s stagnation!

Mark Thorson September 3, 2013 at 1:11 pm

I see no barrier to spending all of that surplus income on health, specifically on phamaceuticals. Pharmaceuticals could eat it all up and be hungry for more.

If there were a drug that would reduce your risk of Alzheimer’s disease by 90% but it cost $20/day to take it and you have to start at age 40 to receive the full protective benefit, do you think there would be a market for that drug?

JWatts September 3, 2013 at 2:03 pm

That would be a relatively short term barrier. All such drugs tend to have high R&D costs and low production costs. So all such prices are only high, until the patent expires. That’s twenty years at most, and that assumes a better drug doesn’t show up before the patent expires.

It also assumes that the monopolistic patent pricing maintains it’s rigidity. If you have a lot of countries defecting from the payment for the high costs of miracle drugs, then you start to see a drop in the creation of such drugs and subsequently a drop in spending on that type of drug.

Mark Thorson September 3, 2013 at 2:41 pm

Actually, the drug I have in mind already exists and is out of patent. It’s Kuvan from BioMarin, and it’s currently about $100/day. It’s an orphan drug, marketed for an extremely rare genetic disease. However I believe it has great potential in Alzheimer’s disease, and there’s currently a clinical trial testing that possibility. If it were marketed as a preventive agent against AD, I think the cost of a daily dose as a generic would be about $20 — that’s a $5 pill four times a day. It might be possible to make it more cheaply, but probably not less than half that. It’s also possible the same drug would offer similar protection against atherosclerosis and type 2 diabetes.

Considering that the potential market is every adult over 40, in the hands of another company, this could be the first trillion-dollar drug. But how would society handle it? Insurance companies likely would balk at paying for a drug for people who do not have a disease, especially if it costs $20/day. A society as rich as envisioned by Simon might find a way to pay for it somehow, but I’m not at all sure how it would be done.

JWatts September 3, 2013 at 4:46 pm

Yes, but if its use was widespread and there aren’t any patent royalties, then it’s hard to believe the pill would cost $5 each. In such cases, the overwhelming bulk of the cost is in the original factory line setup. The actual marginal costs are apt to be very small.

gwern September 3, 2013 at 5:15 pm

> However I believe it has great potential in Alzheimer’s disease, and there’s currently a clinical trial testing that possibility.

So in other words, given that there’s something like a >90% failure rate of drugs in the clinical trial process & the threshold for benefit is higher for healthy people taking something prophylactically than critically ill people taking something out of desperation, the drug you have in mind does not exist.

Mark Thorson September 3, 2013 at 11:19 pm

Neither of your assumptions is correct for this drug. If the etiology for atherosclerosis, type 2 diabetes, and/or Alzheimer’s disease begins with endothelial dysfunction, only this drug (or a prodrug form of this drug) will be an effective treatment. Unlike most pharmaceuticals, Kuvan does not mimic a molecule that occurs naturally in the human body. It is the actual molecule which in deficit causes endothelial dysfunction. Treating endothelial dysfunction with Kuvan is like treating scurvy with vitamin C. It is possible that someday Kuvan will be recognized as a vitamin, and that Alzheimer’s disease will be recognized as a deficiency of this vitamin.

The emerging consensus with regard to AD is that the disease process begins at least 15 or 20 years before being diagnosed with the disease. If endothelial dysfunction turns out to be a critical phase of its etiology, the process actually may begin even earlier. That’s why an effective treatment may require beginning treatment at age 40, so there would be no alternative treatment schedule other than one which treats healthy people. If you wait until diagnosis with AD, that may be too late. AD appears to be a self-propagating process, which is initiated and then promotes its own spread. It’s like forest fires. The most effective way to treat a forest fire is as early as possible, not before it becomes a raging inferno.

Therapsid September 3, 2013 at 11:56 pm

The problem is that the cost-control orientation of the political establishment creates a massive disincentive towards the development of any such drug.

Washington and the policy-making establishment are not interested in fundamental medical breakthroughs. Or, at least, they’re much more interested in bureaucratic cost-control measures.

Mark Thorson September 4, 2013 at 11:33 am

Yes, that’s exactly why I brought this up. How will society react when a drug is developed for preventing one of the dread diseases, but the price is very high — higher than can be justified by balancing the cost of the drug against the cost of treating the disease? Although no such drug has yet appeared (or recognized, if it has appeared for another purpose like Kuvan), there is a similar situation with the so-called orphan drugs. These are drugs for very rare diseases — often only a few hundred people. They are very expensive — often costing over $100,000 for a year’s treatment. Somebody’s paying for them, the insurance companies I suppose.

Does it make sense for society to pay such high prices to benefit such a tiny number of people? I suppose we consider it compassionate to do so, but the result has been a boom in the pharmaceutical companies like BioMarin specializing in orphan drugs. They’ve got more orphan drugs in the pipeline, and none of them will be cheap or even moderately priced. At what point do we just say stop — this is not a cost-effective use of our medical dollar? If $100,000/year is acceptable, what about $1 million? There are some diseases so rare that it does cost that kind of money to treat them. (There’s even a word for that — “ultra-orphan drugs”.)

The case I brought up is different in important ways. I can see that we might as a society say the victims of these rare diseases must die because it would be so costly to treat them. But in the case of Alzheimer’s disease, we are all potential victims. We all fear that fate. If an effective prevention becomes available at a high price, how do we handle that? Does it only go to the very rich? Do we just ban it, so nobody gets it? Do we tax everybody and then the government pays for it for everybody? Do we force the insurance companies to pay for it and force everybody to buy insurance?

ChrisA September 4, 2013 at 9:41 am

Seems like high doses of statins can also reduce Alzheimer’s by 2/3rds. This is a huge effect, and I wonder why this has not been more widely reported.

http://www.telegraph.co.uk/health/healthnews/10279507/Statins-could-reduce-the-risk-of-dementia.html

mpowell September 4, 2013 at 4:22 pm

You are implying a manufacturing cost probably an order of magnitude higher than for most drugs. Why is it so hard to manufacture? And if it is as difficult to manufacture as you claim, the answer to your claim is simple: in a wealthier society it is cheaper to manufacture the drug.

Mark Thorson September 4, 2013 at 6:34 pm

I don’t know the details of its synthesis, but even the non-pharmaceutical grade for laboratory use is very expensive, over $100/gram. It might have something to do with having six chiral centers and the consequent difficulty of making a product with high chiral purity.

wiki September 3, 2013 at 1:14 pm

They also didn’t anticipate the breakdown of the nuclear family. If you don’t count modern households (which include a lot of singles, divorces, and single parents) but look at the average income of a group of 4 Americans aggregated as pseudo-households, the $200K number doesn’t seem so out of reach if the Great Stagnation ended.

kiwi dave September 3, 2013 at 1:19 pm

His estimate of the average family income in 2006 translates into more than $200,000 in current dollars

Akst doesn’t compare the prediction with the current stats. The Westegg.com inflation calculator says that 28k in 1966 is approximately equivalent to 195.5k in 2012. USA per capita GDP in 2012 (current prices) per IMF was a shade under 50k per person (49,922 USD). So if the average American family had 3.65 members, as it did in 1960, family income would be 182,215 — not far off the lofty prediction (as it is, families are smaller now, averaging 3.14). Of course, these stats are means, not median, but the quote talks of “average” (normally understood to be mean) not median. Obviously there are increasing disparities in the distribution of income, but in general terms, those projections of growth weren’t actually all that far off.

Household (as opposed to family) income is another matter – average household size was 2.58 in 2010 vs. 3.14 in 1960 (about an 18% decrease). Since so many costs of living don’t increase proportionally with household size (heating, lighting, home maintenance etc.), I do wonder how much of the perceived stagnation in incomes is due to that.

sort_of_knowledgable September 3, 2013 at 3:34 pm

Unless the original 1966 income was also calculated by per person GDP this is not completely comparable.

Jacob September 3, 2013 at 4:01 pm

The Census reports (http://quickfacts.census.gov/qfd/states/00000.html) the number of households in the US for 2007-2011 to be 114,761,359. For a rough figure, in 2009 dollars, GDP was right about 15 trillion (15.0524 as per the BEA), so average household income (for 2009 at any rate) was approximately $131,162.61.

But yes, mean and median have huge differences, since income is far from symmetrically distributed. Median household income as per the Census for the same time period was $52,762.

Charlie September 3, 2013 at 2:06 pm

“Nobody at the time foresaw”…except, it would seem, the reviewer in the prior paragraph.

Chris Hansen September 3, 2013 at 3:45 pm

No kidding. Right?

Douglas Knight September 3, 2013 at 4:39 pm

Would the Heilbronner of 1966 have called the America of 2000 a vomitorium? What about the Heilbronner of 2000? Did anyone ask him about this? (Heilbronner died in 2005.)

jmo September 3, 2013 at 4:43 pm

To my mind, it is hard not to picture such a ceiling unless the economy is to become a collective vomitorium.”

I think that explains his outspoken socialism and why socialism would have worked great…if everyone thought like Robert Heilbroner.

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