This time is different. In investing My other passion – see our sister site 7 Circles these are “the four most expensive words in the English language”.
The quote comes from Sir John Templeton, a famous 20th century investor, and reflects the human tendency to ignore the lessons of history.
- It’s one of the most famous investing quotes ever, and there’s a book of the same title to go with it.
So are we making the same mistake with robots and automation? Fear that machines will put people out of work date back to the Luddites in 1812.
- Why is it different this time?
In modern times, the fear that automation would disrupt society dates back to 1964 and a famous US government report – written by a committee including a couple of Nobel prize winners – called “The Triple Revolution”.
- Two of the three revolutions it referred to – automatic weapons and civil rights – seem very much of their time, but the third – “cybernation” is very much still with us.
The report predicted that “potentially unlimited output can be achieved by systems of machines which will require little cooperation from human beings.”
- This would mean massive unemployment, soaring inequality, and falling demand for goods and services as consumers lost purchasing power.
The proposed solution Eventually – there were several intermediate steps along the way was a guaranteed minimum wage, which has since come to be known as (Universal) Basic Income.
- We’ll come back to this topic in a future post, but in the meantime, our sister site 7 Circles has several articles on the topic (1, 2 and 3).
The bottom line is that Basic Income has many attractions (fairness, simplicity, no erosion of incentives) but is unaffordable at a meaningful level (in the UK at least) as the economy currently stands.
- Perhaps if the “economy of abundance” foreseen by the Triple Revolution (TR) report – driven by massive productivity from cheap automation – arrives, things will change.
The report itself wasn’t well received, and fears of mass unemployment receded as the the threat never materialised.
- President Johnson created a “National Commission on Technology, Automation, and Economic Progress”, which wrote three more reports, each less widely read than the last.
- US unemployment fell from 5% when the TR report was published to 3.5% five years later.
- Even during recessions it never topped 7%.
Times were different then – new technology meant increased productivity, which in turn meant higher wages.
- In the 1970s the oil price shock dominated Western economies, and the threat from automation was forgotten.
So why sound the alarm again today?
- Because it appears that we have a different economy today.
Despite rising productivity and GDP, rich world median household incomes have been flat since the 1980s.
- Wages for a typical worker peaked even earlier (1973 in the US) – household incomes have been supported by the rising numbers of women going to work.
- Income inequality has risen back to the levels of the 1920s, as “the 1%” – really the 0.1% – cream off most of the corporate profits, which are at record levels.
- Male labour-force participation (the proportion of people who are actually seeking work) has fallen in the US from 86% in 1950 t0 70% in 2013. In the UK, labour participation fell, but has recovered over the past 10 years as young, healthy immigrant labour has arrived from eastern Europe to fill as many jobs as the economy can create
- This was temporarily offset by a boost from women entering the job market, but female participation peaked in 2000.
The decline in participation rates is matched by an increase in those claiming disability benefits, probably as a permanent alternative to unemployment benefit.
- And during this period, the number of jobs being created each decade has fallen, apart from during the dot-com boom of the late 1990s. The UK is again an exception here, as lots of low-paid, low-productivity jobs have been created since the 2008 financial crisis
- Recent graduates have suffered more than most, with fewer employed and at lower wages.
- The proportion of part-time, low-skill and low-paid jobs has increased – during depressions high-skill jobs disappear and in recoveries, mostly low-skill jobs are created (polarisation).
It’s quite possible that the transfer of wealth from labour to capital, from ordinary worker to the 1%, and the declining labour participation rate already reflect efficiency gains from technology, and particular from a new kind of technology.
The first wave of post-war technology (up to 1973) was mechanical and chemical, in industries like aerospace.
- After the oil shock in 1973, further progress in these technologies became more difficult (think of how similar jet planes are to those from the 1970s, and of the failed experiments with supersonic aircraft like Concorde).
From the late sixties onwards, the focus was on information technology, as Moore’s Law made computer chips ever more powerful.
- It’s telling that both Apple and Microsoft were founded years before the technology caught up enough for their vision to become popular.
For a few workers (myself included) the spread of computers made them much more valuable (and productive).
- But for most workers, jobs were taken by the machines.
The dot-com boom saw lots of new and well-paid IT – and in particular, internet and “millennium bug” – jobs created, but they didn’t last long.
- Even IT wages have fallen since 2000 (outside of silicon valley at least), as jobs were off-shored to developing countries, particularly India, and then centralised in data centre and “cloud” operations.
IT was also “injected” into other industries like aerospace.
- The jets looked the same, but now they were first monitored then designed and eventually controlled by computers.
We also have to consider globalization as a potential cause for these economic changes.
Globalisation is really just another name for free-trade, but trade with far-off and cheaper, less-developed nations.
- This is has grown massively over the past 25 years, but despite decades of increasing trade, 82% of US consumer spending still goes towards US goods, with only 3% going towards Chinese imports (2011 figures).
And trade only affects the tradeable sector – those goods and services that can be relocated to other countries.
- In Western economies, a growing share of GDP is made up by non-movable services, and these workers’ wages should be unaffected by globalisation.
And the loss of manufacturing jobs began before globalisation and free trade became popular, which suggests it has more to do with technology.
- More and more stuff is being made with fewer and fewer workers.
Along with globalisation, the economy has become more “financialised”.
In the US the size of the financial sector grew from 2.8% of GDP in 1950 to 8.7% in 2011 – three times as much.
- Bank assets and financial workers’ salaries have also increased.
- Financial company profits grew to 30% of all corporate earnings.
It’s a similar story in the UK, particularly since Big Bang in 1986.
Many people disapprove of a large financial sector because it doesn’t add value to the “real economy”.
- It’s a rent-seeking industry that skims profits from other sectors.
- Economists have found correlations between the size of the financial sector and inequality, and the labour share of income.
- Finance acts like a tax that redistributes money up the pyramid to the richest.
So it’s probably the case that finance is – along with technology – partly responsible for many of the trends in the economy that we’ve discussed.
- But at the same time, much of the recent innovation in finance – for example, ever more complicated derivatives and automated trading – has been down to increasing computing power.
So there’s something of a cause and effect / chicken and egg problem here.
- Financialisation may be one of the ways in which automation and accelerating IT works its effects over the economy.
A third factor is government regulation, including tax policy and labour relations.
- The decline of labour unions over the past 5o years, particularly in the private sector, has weakened the negotiating position of labour, and allowed capital to capture more of the growth in profits.
- Tax rates on higher earners and on corporations have also fallen since the 1980s.
These trends are strongest in the US, but are also apparent in other countries.
It remains possible that action might be taken in the future to mitigate the effects of increasing technological automation, though there seems little sign of this happening at the moment.
- Whether it would work is another question, since it is as yet untested.
It seems reasonable to conclude that (information) technology has played at least a part in the observable economic trends of the past 50 years.
It also seems reasonable to assume it will play a bigger part in the next 20 to 50 years, for two reasons:
- many of the other important changes have come to – or are coming to – an end:
- declining union membership
- increasing female participation in the workforce
- offshoring (in some cases, “reshoring” has already begun)
- technology seems poised to make a leap forward in the shape of robots, AI and the internet of things.
Higher-skilled jobs that would have seemed immune from automation only a few years ago will soon be obvious candidates for machine infiltration.
- In the same way that no machine could win at chess or Go, and no man could every fly.
- Until it did, and he did.
There will be other forces in the near future, and it’s hard to predict their effects.
- Globalisation is currently unpopular (in the west at least), but increased automation could open up new opportunities for work to be done remotely.
Should the automated future come to pass, there is sure to be a political and economic response to widespread unemployment and loss of purchasing power.
- but we don’t know what that will be, and given the political and economic instability of the past decade, it seems almost fruitless to speculate
No doubt we will fail to resist that temptation in future articles.
Until next time.
Sources: Primarily Rise of the Robots by Martin Ford, but also a number of articles in the Economist and the Financial Times.
Footnotes [ + ]
|1.||⇧||My other passion – see our sister site 7 Circles|
|2.||⇧||Eventually – there were several intermediate steps along the way|
|3.||⇧||In the UK, labour participation fell, but has recovered over the past 10 years as young, healthy immigrant labour has arrived from eastern Europe to fill as many jobs as the economy can create|
|4.||⇧||The UK is again an exception here, as lots of low-paid, low-productivity jobs have been created since the 2008 financial crisis|