Automation, automatic capital returns, and the functional income distribution

Abstract

This paper studies the economic implications of automation. We consider that automation is affected by disruptive technologies which entail a structural change consisting in the introduction of a new physical capital input (a combination of artificial intelligence and autonomous robots), additional to ‘traditional’ capital assets and labor. This new ‘automatic’ physical capital is assumed to carry out production activities without the need to be combined with labor. We propose a simple production function combining both traditional and new technologies, and show that the consequences of automation depend on the combination of the automatic capital adoption rate and the elasticity of substitution between traditional and automatic technology. We find out that, if the adoption rate is below a threshold that matches the marginal productivity of automatic capital, little effects are derived from automation, independently of the elasticity of substitution. However, if the automatic capital adoption rate is above the threshold level and the elasticity of substitution is higher enough, the automation process can lead to a robocalypse scenario with a total shift of both traditional capital and labor. We estimate, through the benchmark calibration of the model, that the adoption rate threshold for automatic capital is about 22.5%.