I could start with some anecdotes about high pharmaceutical and medical-procedure prices in the USA, and about much more reasonable prices that I and many others have encountered abroad. But why bother? Every American knows that healthcare-related prices in the US are insane. This crisis needs no introduction.

I should point out, though, since many Americans seem to have forgotten, that this crisis originated long before the risibly named Affordable Care Act took full effect in 2014 (ostensibly to help fix the situation). Thus, any enduring solution needs to cover not only the problems the ACA a.k.a Obamacare added, but also the more fundamental problems that have been festering for decades.

Some of the reasons for America’s grossly inflated healthcare prices are obvious. A law from 1986, for example, forces most hospital emergency departments to provide screening and stabilizing care regardless of patients’ ability to pay—which means that paying customers foot the bill via higher prices. In an environment where many patients don’t pay, hospitals also deliberately inflate prices so that even selling medical debt “cheaply” to debt collectors allows them to recoup most/all of their actual costs. The cartel-like organization of American doctors, and the American tort system with its lottery-like jury awards, have clearly made their own contributions to healthcare price inflation.

But there is one feature of American healthcare that towers above all others as a driver of high prices. I am referring to health insurance, which generations of Americans have been gaslighted into seeing as a critical necessity.

Insurance makes sense in principle as a way of protecting against rare and extreme costs. In reality, Americans long ago got into the habit of using insurance to cover even minor and routine healthcare. That gross overreliance on insurance has allowed the entire structure of healthcare prices to drift ever-upward.

Insurance inflates prices by inserting insurers, with their bureaucracies and need for profit, into what should be relatively simple cash transactions. It creates situations of costless consumption once out-of-pocket limits have been reached. Worst of all—by far—it erodes buyers’ sensitivity to cash prices by replacing those prices with streams of smaller premium payments. (Via the same behavioral mechanism, credit-based purchasing has lifted the cash prices of houses, cars and higher education.) Employer and government/taxpayer subsidies for health insurance premiums reduce buyers’ sensitivity further. Again, Obamacare has worsened this mess in various ways, but didn’t originate it.

Essentially, America’s healthcare system tries to make healthcare affordable by spreading costs around, but fails utterly because the method it uses for cost-spreading removes the natural, market-based brakes on prices.

That failure, by the way, entails not only a huge amount of financial stress on the tax-paying, premium-paying Americans who have to support the whole thing, but also a correspondingly stupendous undeserved windfall on the provider side.

That the current system is defended fiercely by its beneficiaries—including hospital chains, Big Pharma, insurers, and politicians who use the federal healthcare bureaucracy to buy votes—is to be expected. Unfortunately, their gaslighting is made much easier by commentators, including “expert” health economists, who continue to encourage the assumption that insurance is the only valid basis for modern healthcare.  (The only clear attack on insurance-based medicine I’ve ever seen was published in 2009 by a TV-industry executive.)

As a straightforward reality check, though, consider what would happen if insurance and all other forms of cost-spreading and cost-hiding were banned in healthcare markets, so that patients and providers had to revert to simple, transparent, cash-on-the-barrel transactions. If you run a drug company that has been charging hundreds of thousands of dollars for a course of some drug treatment, or if you run a hospital that has been charging similarly exorbitant amounts for a few days of inpatient care, would you keep your prices up at those levels, where almost none of your customers could now afford them? Of course not—you would now be in a normal, competitive market situation, where survival requires making products and services affordable. And by the way, roughly a million American “medical tourists” every year fly to foreign countries where cash payment for private healthcare is still the norm, prices are much lower, and quality of care is often superior.

A better way

That part of the solution is obvious, then. But what about Americans who could not afford even the dramatically lowered prices of a de-insurancized, market-based healthcare system?

Until modern developments including Medicare and Medicaid made them largely redundant, charity hospitals were ubiquitous in the US, and often were supported not by government budgets but by private philanthropists and even community funding drives. Some of these hospitals had endowments large enough to keep them going indefinitely without further external funding.

How much would it cost to convert 20% of US community hospitals—roughly 1,000 of them—to fully endowed, free-care status? The annual operating cost for an average, 150-bed US hospital has been estimated at about $250 million. For a no-frills charity hospital, an estimate of $200 million annually is probably conservative, and could be outright excessive if costs come way down with the elimination of insurance. In any case, multiplying that $200 million by 1,000, then dividing by a standard 5%-of-endowment-per-year expenditure assumption, suggests endowments totalling $4 trillion. That one-and-done cost, though it might seem huge, is only about twice the annual cost of Medicare/Medicaid/Obamacare—and of course it is just a tiny fraction of the philanthropic potential of America’s wealthiest.

Again, if a network of charity hospitals were to be endowed to this extent—or if all hospitals had endowments allowing the same proportion of free and/or subsidized care—little or no further support would be needed to keep this charity-care system afloat. Charity hospitals and market hospitals together could replace the current Medicaid/Medicare/Obamacare systems, removing entirely those gigantic taxpayer burdens, and no one would ever have to worry about their insurer’s willingness to cover a treatment.

Important details would have to be worked out, including how to confine charity care to those who really need it, and how to transition to the new system. But overall and in the long run, it could hardly fail to be a significant improvement over the current arrangement—an arrangement that is not only unreasonably burdensome and stressful, and a major driver of socioeconomic inequality, but also an ever-present reminder to citizens of the inadequacy (thus illegitimacy) of their government and elites.

***

The United States by any money-based standard is a wealthy country. Yet much of its population struggles financially—and this struggling subset extends well beyond the demographic groups that are traditionally dependent on handouts. Around 50 million people in the US use food banks, implying that they couldn’t feed themselves otherwise. A third of citizens and legal residents earn so little that they pay no federal income tax. A third—perhaps the same third—live paycheck-to-paycheck without savings. Meanwhile about nine million Americans work more than one job, presumably in a desperate attempt to make ends meet.

I could go on citing stats, but everyone knows that the “struggling class” is very large now, and struggles not so much because they can’t find work but because the prices for important things in their lives keep rising, while their wages fail to keep up.

Why their wages have failed to keep up is not hard to grasp. Mass immigration—including the legal immigration of skilled and semi-skilled foreigners—has put downward pressure on wages, as has the weakening of labor unions, DEI-based preferences (especially in years past) for blacks and browns over whites, offshoring, and automation/AI.

Why prices for important items keep going up—and up and up—also should not be hard to grasp, though it has been a remarkably under-covered story, as if the beneficiaries of those prices don’t want consumers to understand what has been happening.

What has been happening is that, mainly over the last century, American markets for healthcare goods and services, for housing, for college tuition and other big-ticket items have been modified from their traditional forms, financialized, in order to boost demand.

Financed Purchasing

Expanding credit has been the main form of financialization. Consumers like to think of expanding credit as a development that benefits them—empowers them to buy more stuff. But in an easy-credit society, it is really the business owners who are empowered. The business owners have no downside—they simply get more customers into their stores. The customers, on the other hand, while they can “buy” more stuff, are apt to be burdened increasingly by debt. More importantly, the advantage that customers think they have, in terms of buying power, is largely fleeting.

More customers means more demand, and we all know from Econ 101 that more demand, all else being equal, means higher prices. Conceivably in the long-term higher prices invite an increase in supply, which then brings prices down again. What they don’t teach in Econ 101, or at least don’t emphasize enough, is that the ramp in prices from expanded credit and other demand-boosting measures is not necessarily temporary.

Suppliers of goods and services don’t like to lower prices once they have raised them. Public companies tend to be punished in capital markets if their revenue ever drops. But even privately held companies in a given industry tend to adhere to their own industry culture or set of standard practices, and those practices, including pricing, can be very “sticky” once they are widely adopted. (Most American industries are effectively cartels in this loose sense.)

There are also technical, structural, and/or legal factors that can make it harder for producers to create enough supply to meet excess demand, even when they want to do so. Real estate is an obvious example: For decades now, there has been a finite and probably dwindling supply of real property in the vicinity of desirable places with good jobs and good schools. Even when there has been undeveloped land available for new home-building, states often have blocked such construction—or, worse, have devoted it to “low-income” or “multi-family” construction that dooms the quality of local schools and jobs. Moreover, corporations can and often do buy up much of the scarce stock of available housing, forcing would-be home buyers to rent from them instead. Meanwhile, mass immigration, the rise of two-earner families, and ultra-low mortage rates during 2009-2022 have helped keep demand on the boil.

The story of the American housing market and its levitation away from affordability thus illustrates that financialization in the form of expanded credit can, over time, paradoxically weaken consumers by reducing their buying power and burdening them with increasing debt. On the positive side of the ledger, businesses and their investors are enriched, overall economic activity (GDP) is expanded, and the stock market goes up and up—all of which tends to discourage any talk of harmful side effects.

There is another, more intuitive way of looking at this issue, which focuses on the actual payments made by the consumer. Actual payments are, after all, what the consumer is considering as he or she mulls over a potential purchase. When the price is a simple cash price and there is no credit in the picture, the buyer considers whether that full cash amount will excessively draw down (or exceed) his or her savings, whether the purchase represents good value in that context, and so on. When the price is, instead, not a lump sum but a string of much smaller payments including interest—let’s assume monthly payments—the buyer starts to consider how the size of each monthly payment relates to his or her monthly disposable income. The net price, in other words, stops being the principal basis for the buyer’s decision, which means that the buyer no longer exerts direct and downward pressure on that price, which in turn means that, ceteris paribus, the cash price can float upwards. Only when the size of each monthly payment becomes unmanageable in the context of monthly income, other credit sources, liquid savings, etc., does the buyer’s resistance start to intensify meaningfully.

We have seen this phenomenon at work not only in the housing market but also in the credit-goosed market for college tuition. Both of these markets are, of course, notorious for their price inflation in excess of CPI. The market for automobiles is well on its way to the same destination, though cars are not yet as badly overpriced because the switch to a credit-based norm for buying cars has begun relatively recently, and the used-car market is still largely cash-based.

This idea or hypothesis that financialization drives prices higher we can test with a simple thought-experiment: What would happen to real estate, college tuition and car prices if loan-based purchasing were suddenly outlawed? Obviously, prices in all three of those markets would have to come down dramatically, and stay down, due to the disappearance of a large subset of buyers. It should also be obvious that regaining and sustaining the previous levels of per-capita sales would require these industries to redesign their products and services so that selling them would be profitable at much lower prices.

Leasingization and Insurancization

Credit-based purchasing is not the only form of financialization. Another is to replace purchasing altogether with “leasing” or “subscribing,” as has been occurring, for example, in the markets for cars and higher-priced software. Both leasing and subscription replace lump-sum cash-on-the-barrel payments with long-term streams of monthly, quarterly or annual payments, and in that sense have the same magical effect as credit-based financialization: expanding the pool of buyers while raising effective prices.

Nowhere in the American economy is the malignancy of financialization more evident than in the market for healthcare goods and services. Here, of course, the old-fashioned practice of simply paying cash for doctors, hospital procedures, pharmaceuticals, etc. has been replaced by a system of “insurance”—which deserves to be in scare-quotes because it increasingly resembles a leasing or subscription-based system rather than a true insurance system.

The modern American health-insurance disaster originated, of course, from the understandable desire to insure people against medical costs that their savings could not cover. Health insurance in that sense was compellingly analogous to home insurance against a catastrophic fire or flood. Over time, of course, the insurancization of healthcare has come to cover not just catastrophic medical costs but virtually all medical costs. “What insurance do you have?” is the first question any American medical receptionist or pharmacist will ask a customer these days, even for small things like checkups or generic pills. And as I know all too well from my own profession, academic discussions of how to fix the American healthcare system universally assume that healthcare must be insurance-based—it is never an object of debate, other than in the context of advocacy for 100% socialized medicine.

Insurancization lifts costs principally in the way that other forms of financialization do: by replacing traditional cash prices with a stream of usually monthly payments. It also interposes a large industry between buyer (patient) and seller, even for small transactions—indeed, in the eyes of the care provider the insurer becomes the true “customer.” There is also the insurance-related phenomenon called “moral hazard,” which, after deductibles and co-pays are exhausted, manifests as greater risk-taking and less sensitivity to expenditure (“someone else is paying for it”). Other price-inflating factors include the law that mandates effectively “free” ER care for those who won’t pay, rules that force health “insurance” policies to cover pre-existing conditions, the cartel-like practices of the doctors’ lobby, and the rules and traditions by which corporations help hide costs by covering employees’ healthcare insurance premiums. (A 2009 piece in the Atlantic by David Goldhill does a decent job covering all these factors, even though it was written before the ruinous Obamacare law took effect.) Not all of these factors fit into the category I call “financialization,” but I think it’s fair to say that when you disrupt a market with financialization, it becomes easier to disrupt it in other ways too. I think it’s also obviously true that the American healthcare fiasco serves as the ultimate cautionary tale of how well-meaning “tweaks” to markets can end up inflating prices, hurting consumers and widening economic inequality.

And speaking of inequality, the impacts of financialization clearly extend beyond the economic realm. When a modern society stratifies into rich and poor, it becomes inherently less stable politically and fertile ground for radicalism. When young people can’t afford to buy a house or pay for healthcare (including pregnancy/childbirth care) they are less likely to marry and have children, and ultimately this can cause a society literally to die out. When citizens are overburdened with long-term financial obligations (mortgage payments, car loan payments, college loan payments, health insurance premiums) they are made much weaker relative to corporations and the state. In that sense, of course, corporations and the state have a strong interest in continuing and expanding financialization, and in discouraging discussions such as this one. Still, it is not hard to imagine that the vicious chain-reactions set in motion by financialization must eventually reach a point of crisis.

***

The term “empathy economy” has been used to describe the practice, in our feminized age, of appealing to or claiming “empathy”—usually meaning empathetic compassion—in business advertising. I think it is more useful to consider the term in a different sense, that of a resource that flows in its own system or economy.

The idea here is not complicated. Humans have various resources they spend, or employ as catalysts, to obtain things for themselves and others. The resource that dominates discussions is, of course, the external resource we call money. But humans in their quests also routinely draw on their personal stores of energy, intelligence, inventiveness, wit and charm, social status, “a sense of style,” acting ability, psychological stability, and many other traits and characteristics. Empathy—the ability to understand another’s mindset or emotional state, not in a detached way but by feeling, to some degree, what the other is feeling—is another one of these resources.

Men do not lack empathy, but women on average have a stronger capacity for it, not least in regard to empathy that triggers feelings of compassion for the poor, the hungry, migrants, etc. This trait presumably has deep biological roots as an adaptation for women’s traditional roles centering on child-rearing.

Since women, just in the past several decades, have begun venturing from their traditional domestic domain to become present and powerful in all public domains and institutions, their greater capacity for and tendency towards empathetic compassion has made this sentiment more important in the shaping of policy and culture. That’s putting it mildly—the shift has been massive. Western societies since the 1960s, the period of women’s rapid ascension to power, have embraced policies that would have been hard to imagine in the 1940s or 50s. Politicians often had low partisan motivations for these policies, e.g. liberalizations of immigration law brought in new voters, while more generous welfare programs kept poorer minorities on side. But they were able to justify such policies with unprecedented ease, thanks to women—by framing them as compassionate and therefore virtuous.

The cultural ascent of women has brought another strong albeit not-too-surprising trend: the decline of marriage, childbearing and the stay-at-home mom. The feminist movement, which both drove and was driven by women’s new power, encouraged this trend by telling women and even girls to attach less value to marriage and homemaking, and more value to career-oriented lifestyles. By the 1990s, Western societies were essentially saturated with this messaging, which could be found even in books and TV shows for toddlers. This had many knock-on effects, of course. For example, as it became the norm for women to have careers and to add their salaries to their husbands’, home prices rose—creating an ever-higher barrier to the formation of families, and limiting the average size of families that did manage to form.

What does all this have to do with the empathy economy? My suggestion here is that the ascension of women to cultural and political power, and the related trend towards a more atomized, low-marriage, low-fertility society, have greatly reduced the traditional use or absorption of empathetic compassion within the family-centered domestic sphere. Since this ancient, instinctual resource is produced naturally and automatically in women—it cannot easily be shut off—it must flow somewhere; thus, it has overflowed into the public sphere.

To put it more crudely: childless “cat ladies” and “wine aunts” have natural womanly stores of empathetic compassion, and tend to spend it on (apart from their cats and their wine) “starving African children” or “the homeless” or “undocumented immigrants”—both directly and by steering government policy—if they don’t have loved ones to absorb it instead.

It’s not hard to see as well that, as the demographic presence and cultural power of these compassion-givers have expanded, society has catered increasingly to their needs, e.g. by making it ever easier for these women to pour succor over the world’s unfortunates. And, of course, politicians, businessmen and their marketing experts have sought to exploit the sentiments and sentimentality of this important group.

By now, moreover, greater flows of empathetic compassion in the public sphere have become very much the norm. In that “cultural norm” sense—and cultural norms appear to bind women more strongly, on average compared to men—we should expect these sentiments to be prominent not only among single, childless women but even among women who have children.

My central point here, then, is simply that Western and other societies in which women have strong public presence and power are necessarily awash in empathetic compassion, which at least helps to explain many new and remarkable cultural and policy trends.

I haven’t attached a “value judgment” to all this. But the fixation on short-term emotional payoff that is typical of compassion-driven or compassion-justified new policies and cultural traits seems inherently dangerous, due to its relative blindness to long-term consequences. It is also dangerous, and frankly stupid, to assume that a trait evolved for the domestic sphere (or a relatively simple paleolithic social sphere) will work well in a modern complex social setting.

In any case, it follows from my argument here that, ceteris paribus, increasing fertility and family formation to more traditional, demographically healthy levels would eventually—against the resistance of the new cultural norm—reduce the current surplus of empathetic compassion in the public sphere. This in turn should make government policies and non-governmental actions aimed at “helping people” more judicious and sustainable, though of course Western societies face so many other problems that we may never experience a solution to this one.

***

Originally published July 15, 2010

A couple of weeks ago in my town, someone organized a “Be Great 5K Run & Fun Walk,” in which people ran and fun-walked, and a handful of businesses – a bank, a brewery, a sport shoe store – donated money to the local Boys & Girls Clubs. The following week I learned that two teens from my local neighborhood have been cycling across the USA with Lance Armstrong’s foundation, to raise money for cancer research. It occurred to me that these ritualized suffering-for-charity events are now so common and popular that on any given weekend they must involve at least tens of thousands of people throughout the Western world. There are fun runs, walkathons, full and partial marathons, swim-a-thons, scuba-dive-a-thons, ski-a-thons, climb-a-thons, and bottom-chafing trans-continental bike-a-thons. Yet no one ever questions the behavioral logic of these things.

Typically for one of these events, a group of charitably-minded local people agrees to undergo some feat of minor endurance. There may be special inducements for the winners, but often there is none. In economic terms, the most important goal may be to create a local audience for advertisements—on banners, t-shirts, cups, etc.—which local donors will purchase. Thus the sweat of the sufferers is transmuted into dollars for charity.

It seems a clever way to crowdsource philanthropy. But there may be more to it than that. In many of these events, donors are not compensated with significant advertising or even recognition. Moreover, the donations are often made in the name of a particular participant, and linked to the level of endurance achieved—such as miles run or laps swum. This linkage is rather mysterious. One party deliberately suffers; another party correspondingly pays; a third party—a charity—benefits; and everyone ends up feeling that they have done something good for their fellow man.

I suspect that the logic at work here goes unsaid because it is essentially spiritual. And since these charity-endurance affairs are found predominantly in Western societies, I can’t help wondering whether they derive somehow from the original “West,” namely medieval Europe. In that environment, public acts of endurance and suffering for the common good were very prominent—not too surprisingly, since they represented the central theme of the dominant religion. Their logic also was widely understood: One’s material suffering could serve as a gift to God, who in return would grant benefits to the giver, or more broadly to his family or community.

This is the logic of sacrifice, and it has appeared in so many cultures that it is likely to have originated prehistorically. However, in medieval European societies, there were forms of public, charitable endurance that I think bear a particularly strong resemblance to those of today.

One example is the walkathon known as the pilgrimage, in which groups of people would spend weeks or months travelling hundreds of miles to places of special religious significance. Jerusalem ranked highest among these destinations, and wealthy nobles or merchants who could not be bothered to join these pilgrimages were often called upon to sponsor them. The payoff was a spiritual boost not only to the pilgrims and their sponsors but also to the friends and loved ones for whom the pilgrims offered prayers. Thus a pilgrimage could be a charitable act.

The odd medieval practice of self-flagellation, often practiced in groups, also bears a resemblance to our modern charity endurance events. It appears to have originated with certain monastic orders, who at times would emerge from their cloisters and parade through nearby towns, publicly scourging themselves and streaming with blood. In the late Middle Ages these monastic displays turned into a mass movement. According to the historian Norman Cohn, cults of “flagellants” roved from town to town and were popularly seen “not simply as penitents who were atoning for their own sins but as martyrs who were taking upon themselves the sins of the world…” The belief that the sins of the world had brought the deadly pandemic known as the Black Death made the flagellants’ public service seem especially important, and certainly worth paying for. “It became a privilege to welcome and assist such people,” wrote Cohn. Ordinary folk donated to the flagellants, and “even the urban authorities drew freely upon public funds” to do the same.

From the perspective of evolutionary psychology it is not hard to see how the old logic of sacrifice could have been both adaptive and culturally persistent: To believe that one’s suffering or loss can be used as a sort of currency, with which to buy benefits for oneself and others, should provide quite a psychological boost, potentially enabling one to bear severe hardships.

It would be easy to make too much of these resemblances between past and present, but some could give us practical insights. For example, one of the most common forms of self-sacrifice in medieval times was fasting, often of the severe and continuous variety. Even in extreme forms it was not viewed as an “eating disorder,” but instead as a mark of self-discipline and a way to overcome sin and guilt, thereby achieving a state of spiritual grace. Very similar themes of “discipline,” “purity” and “perfection” are emphasized by modern anorexics (e.g., on their websites), although the idea that they might be acting out an ancient reflex—meant to cleanse their sins and ours—does not yet seem to have occurred to at least the vast majority of those who treat them.

This comparative perspective might also help us to better understand the modern jihadi suicide bomber. The sacrificial aspect of his motives is obvious. But the resemblance of his journey to a pilgrimage doesn’t seem to have been widely noticed. In certain quarters of modern Islam the suicide bombing appears to be considered a special variant of pilgrimage, more exclusive than the traditional Hajj to Mecca but fulfilling a nearly identical spiritual purpose. “Hajj or jihad?” is a choice often posed to young Muslim men, and “Your jihad is Hajj” was Muhammad’s invocation to Muslim women, meaning that their spiritual struggles are best worked out in pilgrimage. Certainly among medieval Christians, the lines between pilgrimage and armed crusade were often blurred. Thus both the jihadi suicide bomber and our secular sufferers for charity may be moving along the same, well-worn path in the human psyche.

“Runaway” processes, in which vicious-circle feedback mechanisms move economic systems and societies to extremes, have been getting more attention recently. The economic crisis, and especially the months-long panic triggered by the run on Lehman Bros. in late 2008, have reminded us that such processes are very real and can wreak havoc without much warning.

There’s one potential economic runaway that I’ve been thinking about a lot lately. It’s the kind that would eventually limit itself (see image) but would still quickly reach disastrous extremes. The idea here is that technological trends, exacerbated by the recent recession, are leading the economy to consume its own consumers. In this view, the sharp drop in US employment starting last year—or anyway one of the economic recessions to come in the near-future—may not be something we’ll snap back from, but instead may mark the beginning of a cataclysm from which there will never be a natural, market-driven recovery.

Technology will soon be displacing human labor faster than human labor can adapt. In the past, advances in technology eventually increased employment. This happened because an advance in technology led to increases in profits and investment, which ended up creating more jobs than were lost due to the technological advance. But these days technology is evolving so quickly that humans are having trouble retraining in time to find new jobs before those jobs too are displaced by new technology. Already grocery checkout clerks, telephone receptionists and toll booth operators are pretty much obsolete. And before the labor market recovers from the current recession, robots and other AI systems will have begun moving into other skill areas. Soon commercial systems should be able to use tools and control heavy equipment (including vehicles), carry objects in all kinds of terrain, and monitor their environments with better-than-human sensory acuity.

Government policies and the inefficient health care market have hastened this process by making human labor ever more expensive. Think of rising health insurance and all the other overhead costs that employers must pay, not to mention the threat of litigation if an employee is fired.

The companies out in front of this wave are those that use technology to make a lot of money while employing relatively few people. The tech industry has the advantage here. Google has only about 20,000 employees and a market capitalization of $150B+ — thus, about $7.5M/worker. Facebook is said to have a market valuation of about $10B and fewer than 1,000 employees ($10M/worker). My favorite example is plentyoffish.com, run by one guy, Markus Frind, from an apartment in Vancouver, and with annual revenue of about $10 million — thus, a value per worker that must be close to $50M, i.e., up in the realm of film and sports stars. Compare those enterprises to an old-tech dinosaur like Delta Airlines, which has 60,000 employees and a market cap of only $7B (~$100K/worker). But as time goes on, even the airlines will use more machines and fewer people for every dollar of revenue, starting with back office and baggage handling staff and ending with maintenance techs and flight crews.

In some technology-intensive market sectors, the economies of scale needed to compete will soon be out of reach of all but a few players. Consider Google’s gigantic, ever-growing server/storage infrastructure. Or the creeping dominance of Amazon for almost any online purchase. In these sectors, the dominance of one or a few players forces industry consolidations (and layoffs). New growth here will be reflected chiefly in additions/upgrades to technological infrastructure, i.e., more machines, not more people.

Soon AI systems will become sophisticated enough to perform even creative intellectual tasks. You wanted to be a writer? Or a scientist? Or a hedge fund trader? Too bad. Soon even human entrepreneurs will start to become obsolete, which will mean that in almost every market, AI systems will be able to supply even tiny demand-niches (think: the “long tail”) more cheaply than human business-owners can.

This process will generate economic growth for a while. But that growth will be concentrated among the tech-driven winners, and in time it will start to reduce human employment, thus eating away at the consumer buying power on which its own growth depends. Ultimately it must choke on itself. Thus the “ouroboros” metaphor.

There may be no stable “equilibrium” in this process. Will governments be forced to use taxation to compensate humans for their obsolescence? How will we compete against high-tech, low-population societies that won’t have such a need to tax their industries? I fail to see an obvious sustainable solution here—assuming that the majority of humans still have some influence over their elites—other than a retreat into autarky and perhaps even a devolution into small, no-growth societies along the lines once suggested by E.F. Schumacher.

The key event here is the tipping point at which innovation in the broad economy stops creating jobs and starts killing jobs instead. We won’t see that tipping point except in hindsight. But it seems to me that as long as our society and markets are freely evolving we have to reach that tipping point someday, because machines clearly are evolving faster than humans (however much we drive ourselves to keep up), and already have inherent advantages as economic producers (i.e., don’t have human-like needs). And once we do reach that tipping point, everything else in this scenario follows. So I think many people now sense that while technology has boosted prosperity in the past, this time things could be different—this time or anyway soon there could be a lot of upheaval without any assurance of a happy ending. And thanks to the 2008-09 recession, the upheaval may have started early.

Originally published September 27, 2009