The Automated Economy

28th

NOV, 2017
By Adam Alpert

Trends

When I was in elementary school, I first heard about the legend of John Henry.

Folklore has it that John was the strongest individual the Chesapeake & Ohio Railroad company had ever employed. John has hulking man; standing over 6 feet tall and weighing right about 220 pounds. He could swing 20-pound hammers harder than anyone else, drilling steel drill-bits into mountainsides to blast out tunnels to make way for a new railway. No one else could match him.

 

One day, a salesman came to camp. He had a steam-powered drill and claimed it could out-drill any man. Incredulous and confident, John entered into a little contest to see who would win. John, armed with two 20-pound hammers, one in each hand, went toe-to-toe with the steam-powered drill.

Primed and ready, the foreman counted down.

3…. 2…. 1….. *WHISTLE*

The mountain side became engulfed in a cloud of dust and noise. They drilled, and drilled. After 30 minutes, the foreman blew the ending whistle.

As the dust settled, the crowd went wild! John had beat the machine by mere inches. He held up his hammers in triumph, but after a second collapsed to the floor.

The crowd went silent. The foreman approached John and found he was dead. The exertion has caused him to burst a blood vessel in his head.

In the quest to beat machine, man had drilled himself into the ground at his own expense.

 

 

In the quest to beat machine, man had drilled himself into the ground at his own expense.

This story has always stuck with me. It foreshadows a future where it is untenable to compete directly with machines.

As a former student of history at Brown University, I know that previous fears about machines replacing humans have been around for long time. I think of the Luddite riots that lasted from 1811 to 1816, where workers revolted against the Industrial Revolution by breaking into factories under the cover of darkness to destroy newly built factory equipment.

History shows that these fears about job displacement during the Industrial Revolution ended up being unfounded and exaggerated at the time. In fact, the Industrial Revolution created more jobs than machines displaced because humans were able to adapt and create new labor markets. Machines of the Industrial Revolution boosted productivity, real wages, and enabled more leisure time. Machines reduced cost of goods, which thus increased demand and led to more jobs. Moreover, even if one industry displaced jobs, there were always new, or unaffected industries, which could absorb the workforce

However, the effectiveness of machines has continued to improve at an exponential rate, and they’ve been introduced to just about every industry.

In 1930, John Maynard Keynes famously predicted that in the future we would face wide-scale unemployment “due to our discovery of means of economizing the use of labor outrunning the pace at which we can find new uses for labor.” [1] The rate of technological implementation to automate tasks, partly driven by the decreased cost of computing power, is outpacing our ability to create new markets for human labor. Computers continue to get cheaper, faster, and stronger at a pace biology can’t compete with.

To put it simply, computers are replacing jobs across the board more quickly than we can create new ones. Everything from driving, to accounting, to paralegal work, to security guards, are all routine and therefore susceptible to being automated.

A 2013 study conducted at Oxford University found that 47% of the US workforce is at a high risk of losing their jobs due to automation within the next two decades. [2]

For reference, the peak unemployment during the Great Depression was 25%. [3]

It’s true that technological advancement creates new jobs, but these jobs will not be equal, and far between. There will be a few high-paying jobs that require the ability to leverage technology (e.g. Software engineers, graphic designers) and some service jobs (e.g. electricians). However, the jobs created will be outnumbered by the jobs lost. And the jobs lost will be both the white-collar and blue-collar ones that predominantly were gateways to the middle-class. Automation, is now “blind to the colour of your collar,” notes Jerry Kaplan, author of “Humans Need not Apply.” [4]

Any job that has clearly definable parameters and routine tasks is susceptible to becoming automated (e.g. cashiers, factory work, fraud detection). The ability to apply well-defined procedures to solve problems is not as valued as it used to be (e.g. cashiers). More and more jobs that are cognitive and non-routine, and thus previously believed to be safe from automation, are also becoming susceptible to being replaced as they can broken down into parts(e.g. paralegal work, diagnosticians, truck drivers).

Take driving a car for instance; 10 years ago, the thought of a self-driving car navigating an intersection was almost unimaginable. Now, cars at Google, Tesla, and Uber do this on a daily basis, and with less accidents than human drivers.

It makes sense; Self-driving cars don’t get sleepy, drunk, or distracted. They can process more data, faster than humans can.

Transportation is the biggest employer industry in the US, and a huge portion of those 3 million jobs are about to be replaced. In 2023, 5 years from now, you will get picked up by a driverless-Uber. Just this month (Nov. 2017), Uber ordered 24,000 self-driving Volvos.

The jobs that machines are replacing are the ones that have predominantly supported the middle class. We will experience a hollowing out of the occupational structure, which will cause income inequality to increase significantly causing more social strife.

Nowadays, machines in the form of computers are cheap; and every year they become cheaper. As this happens, the cost of investing in physical capital decreases, to the point where it reaches parity with investing in human capital.

 

While wages increase 3% per year on average, computing costs decrease about 20% per year . At a certain point they intersect and it becomes cheaper to invest in physical capital, thus putting a person out of a job.

 

In other words, at a certain point, it becomes more advantageous economically to buy an iPad than hire a cashier.*

*This happens faster in countries with developed economies where wages are higher/have downward rigidity, although the same dynamic applies in countries where wages are lower.

Similar market forces incentivize companies to off-shore jobs to where human capital is cheaper.

Paying humans to do routine work is increasingly redundant, inefficient, and expensive; thus they don’t get hired. This creates structural technological unemployment, the kind which was predicted by Keynes. [5] Even Foxconn, which employs more than a million people to produce products such as the iPhone in countries where human capital is relatively cheap, has started using automation rather than people in some departments.

What we have is downward pressure on wages as a result of competition from computers. We end up with a race to the bottom in terms of wages in order to stay employed. The equilibrium wage for hiring a person becomes such that any money earned isn’t enough to live off of. This is already happening at the $7.25 federal minimum wage, which equates to $14,500 a year (the poverty line is ~$22,000).

Reducing wages does not put food on the table, and only postpones the day of reckoning.

 

The legend of John Henry highlights the dangers of competing against machines. The 40-hour work week is dying because it is more economical to buy machines than hire humans.

We should not fight this revolution, but rather embrace the liberation from the mundane that automation can relieve us from.

However, we must ask ourselves:

What will we do with our new found time? How will we make ends meet? How will we find purpose when we don’t have a job?

These are questions that we must grapple with as a society.

These are the questions we are solving at Pangeamart.

 

—–

 

Unfortunantly, replacing the Amazon Alexa with a “Jimbob” is probably not the answer…

 

South Park:  Season 21, Episode 1

https://www.youtube.com/watch?v=Sij8Mt9RL_M

 

 

Sources

[1] Keynes, John Maynard, Economic Possibilities for our Grandchildren, 1930.

[2] Frey, Carl Benedikt, and Michael Osborne, The Future of Employment: How Susceptible are Jobs to Computerisation, Oxford University, 2013.

[3] Kaplan, Jerry, Humans Need Not Apply, 2015.

[4] Frank, Robert H.; Bernanke, Ben S, Principles of Macroeconomics, 2017.

[5] Brynjolfsson, Erik, and Andre Mcafee, “Thriving in the Automated Economy,” The Futurist, March-April 2012, pp 27–31.

 

Other Consulted Sources

“Automation and Anxiety: Will Smarter Machines cause Mass Unemployment?,” The Economist, June 25, 2016.

Brynjolfsson, Erik, and Andre Mcafee, The Race Against Machine, 2011.

Skidelsky, Robert, “Ride of Robots: What will the Future of Work look like?,” The Guardian, Feb. 19, 2013.

 

Want to learn more about Pangea?

Follow our blog at http://pangeamart.com/blog/ or @thepangeans on Facebook and Instagram.

 

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