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Disruptive Technology
Part I: Possible Hedges Against the Robot Apocalypse

Disruptive Technology
Part I: Possible Hedges Against the Robot Apocalypse

Garrett Baldwin



May 24, 2015

 

James Pethokoukis was late to the party.

Last month, The Week author modernized a question dating back to economist David Ricardo in 1814 and the Luddites’ chief worry about the automatic loom during the Industrial Revolution.

In the article, “Is the internet killing middle class jobs?” Pethokoukis reignites an age-old debate on the role (or non-role) of technology in fueling unemployment.

The author explores a recent Harvard Business Review article by former Intel executive Bill Davidow called: "The Internet Has Been a Colossal Economic Disappointment." Davidow argues the Internet fueled widespread job displacement and spurred underwhelming job creation.

But before Pethokoukis concludes indecisively on the employment impact of disruptive technology or compares the payroll levels of Facebook today versus General Motors in the 1970s, he paints a grisly future where average Americans and the 1% live under extremely divergent conditions.

“The robopocalypse for workers may be inevitable,” he opens. “In this vision of the future, super-smart machines will best humans in pretty much every task. A few of us will own the machines, a few will work a bit — perhaps providing "made by man" artisanal goods — while the rest will live off a government-provided income.” [1]

Today’s conversation won’t aim to answer Pethokoukis’ title question, which recalls a two-century debate and is exhaustingly prone to theoretical over-examination. Because so little mainstream conversation on the capital-labor dynamic of technological waves and global trade exists, few have taken the first step to solving any problem:

Admitting one exists.

Instead, let’s move beyond Pethokoukis’ hypothetical dystopia, which reads like a bad Matt Damon film, explore solutions in today’s broader debate, and make some money in the process.

This Debate is Long in the Tooth

“Does technology kill jobs?”

This question remains locked in a theoretical time warp, with limited discussions about technology’s role (or non-role depending on one’s stance) in displacing workers.

If the “robot owners” vs. “non-robot owners” or capital/labor chatter sounds Marxist in nature, it’s because it falls in the narrative. The "M word" makes both free-market movers foam and liberal academics nervous by association. That doesn’t mean the conversation should be ignored.

The most recent wave of technological innovation to hit America (the 5th Wave in the graphic below) has dramatically fueled globalization, again realigned the American workforce, and established the base for the next wave of industries and associated jobs.

Here

That hasn’t stopped pundits from bickering over consequences without advancing new ideas that address income-level divergence in the new technological era. Economists have offered solutions, some good, some bad, and some that would require turning society on its side.

Like Harry Reid’s Senate, It’s Still Stalled in Debate

The primary concern for liberal economists appears to suggest that technology adoption increases productivity and societal wealth, but it also produces a widening income gap for those with the greater stake in the implemented technology. That inequality seems to trump innovation.

Have at it, Paul Krugman: “Smart machines may make higher GDP possible, but also reduce the demand for people — including smart people. So we could be looking at a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots.”

As society grows richer thanks to innovation, the pie expands, but the wealthiest tech owners take the largest share. Therefore, it appears that the median income, that middle 50th percentile, will make less money than the average of all Americans due to the skew of the economic distribution favoring the owners of the technology.

Opponents might mock this stance by reciting a childish version of that argument: “Mean technology capitalists will mean falling means for Americans in a nation where mean incomes still rise while median incomes fall.”

Some have called for higher taxes on tech companies, investors, and the benefactors of that wealth, which can be redistributed to lower income Americans...who can would again buy the products created by the next generation of technology. Then, those profits will be taxed at a high level, and the circle of theory continues, except they ignore tax havens and capital flight (the latter two being matters that Larry Summers has addressed in his solution to the Robopocalypse).

Then, there’s the alternate take: Technological innovation raises society’s standard of living, but it comes at the cost of rising income inequality. If a new wave of innovation leads to greater efficiency, a workforce can shift to new skills, career paths, and entrepreneurial endeavors, and jockey for position in the next generation of dynamic wealth caused by technological advancement.

Here’s the Bill Maher-ish way of mocking this argument: “Everything will be fine, trust us… we’re job creators. What do you mean you don’t know how to start a multinational company that has utilized public supply chain infrastructure paid for by taxpayers?”

This crowd loves to point out that America started as a nation of sustenance farmers, but due to substantial innovation, America is now agriculturally self-sustainable while only relying on 1% of its population to feed its people. There was a standard of living boost for all…

Thanks to ag-tech innovation, Americans were able to move into new careers. Cities formed as Americans moved to urban environments. New trades emerged under that 1st Wave of Innovation list above. We saw a boom in commerce, iron production, and mechanization.

The 19th century Luddites’ worry about the economization of labor in the textile industry ultimately eased when workers shifted to non-automated sectors. Afterward, the hypothesis of “technological unemployment” was dismissed and dubbed the Luddite fallacy.

Future waves of innovation, and a resulting unequal distribution of the wealth, followed.

With each wave, a conversation about “technological unemployment” continued to evolve.

Two centuries later, the argument over how to handle consequences of each wave, from income distribution to new skills training for the next generation of jobs, is still taking shape, except, of course, on Capitol Hill.

But widespread tech advancement during the past 20 years has been dramatic. Many industries at once have automated or digitized that some 21st century critics’ arguments on technological unemployment make today’s current joblessness levels ever more difficult to ignore.

New technologies have radically altered many industries. Due to population size, economic factors like housing that anchor workers to local economies, and the incredible consolidation of industry due to computers and the internet to remove double work or to streamline processes, displaced jobs have not been replaced by the “jobs of the future” at an acceptable pace. These are central views by authors and IT engineers Marshall Brain and Martin Ford in their 2009 book The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future.

Some economists have predicted that robots and automation in the future could displace 80% of today’s current jobs. That’s a horrifying number at first sight, but keep in mind a high percentage of farming jobs were displaced during that first technological wave.

But let’s assume that the Robotapocolype is upon us, and current American jobs are going to vanish – hopefully with new industries able to emerge within the decade.

Let’s suppose that the truck driver, which is the most popular job in many states, is replaced by self-driving cars thanks to Google’s latest experiments.

Let’s open up a few ideas on what can be done by companies, policy makers, and investors, and move the debate toward the next step in addressing the fact that nearly 38% of Americans are out of full-time work and middle-class income levels have been stagnant for decades.

Let’s have a real discussion about how the hell to approach this situation from a different angle than past policy prescriptions that are rooted in New Deal economics.

What Ideas Won’t Work?

Assuming that Davidow is correct about the Internet’s lack of job creation, recent proposals to close the wage gap aren’t going to stop the Robotcalypse from swallowing the jobs of today.

Ideas to address the negative effects of automation fail to complement initiatives to reduce the growing income gap between the rich and the poor.

For example, to fix the growing wage gap, Berkeley economist Robert Reich has suggested a number of redistributive proposals that President Obama has re-coined as “Middle Class Economics.” If anything, these ideas might accelerate the erosion of the middle class as technology replaces human workers due to financial incentives.

Reich proposes plans to raise minimum wages and allow low-wage workers to unionize. This might be a short-term fix in theory, but Reich’s solutions only provide incentives for greater technological displacement among low-wage employees.

Vice reported in November that in the U.K. “jobs paying less than £30,000 are nearly five times more likely to be lost to automation than jobs paying over £100,000.” The low-wage jobs that are now booming in the service sector, including servers and retail employees, and other positions like administrative support, transportation, and manufacturing are the most susceptible to automation, according to research from Oxford University’s Carl Frey and Michael Osborne.

Raising the cost of labor through wage mandates will accelerate the financial argument to replace humans over the long-term (unless you raise the costs of technology, which we’ll address soon.)

Reich also proposes a huge public investment in infrastructure. That includes fixing our roads and bridges, boosting Internet infrastructure to improve user access in remote or disadvantaged areas, and improving our power and water systems.

And while that would be a significant one-time Keynesian investment—a throwback to New Deal policy prescriptions—it sets up conditions for an acceleration of job-replacement in the future.

The reason: Public taxpayers would be investing in the very infrastructure on which the corporate robots will operate. (Remember, those trucking jobs are still going away thanks to self-automated supply chains). A broad short-term fix might be politically favorable, but they fail to address the broader labor-capital dynamic of today’s technological revolution. It’s also a massive economic transfer, again to owners of technology…in this case the shareholders of Caterpillar.

Finally, Reich goes full progressive with an old favorite: raise taxes on the wealthy to pay for all of his plans. That includes making the payroll taxes more progressive and that is the most labor-intensive tax that businesses face (although healthcare costs are catching up). Again, anytime taxes make human capital more expensive, it justifies technological adoption or doing more with fewer workers.  

Higher wages through government fiat favor technologies, which are more cost effective, never take days off from work, don’t require government-mandated healthcare, and are statistically less prone to error than a human counterpart is.

Why Technology Is Fueling Incredible Wealth…

In today’s society, a massive misconception exists about the divide between the wealthiest 1% and the rest of Americans. Most people assume that rich Americans were born into wealth, or that they are simply Wall Street tycoons or the CEOs of Fortune 500 companies.

However, research released last year by Joshua Rauh, a Stanford Graduate School of Business finance professor, and Steven Kaplan, professor of entrepreneurship and finance at the University of Chicago Booth School of Business, note that just a small number of America's wealthiest fall into either of these two categories.

According to their research, the recent wealth surge for the top 1% of the 1% evolved from an ability to invest in or own technology that globally expanded the scale of companies or individuals like movie stars or athletes.

Not only does this suggest technological infrastructure, but also the global expansion of content, services, and product branding. Rauh and Kaplan state that this is a relatively new phenomenon.

In their research, they note that in 1982, the Forbes 400 list of the wealthiest people on earth was dominated by what was deemed "Old Money," which consisted of family names transcending generations of wealth from Old Europe and the Robber Barons or emerging America.

For example: The Vanderbilts, the Rothschilds, and the DuPonts.

But within just 30 years, the top 1% of the 1% have risen from a more recent wave of technological innovations on the global markets. They have expanded businesses to the four corners of the earth through best-in-class distribution of high-quality and often commoditized products.

Rauh and Kaplan explain that on a weighted basis nearly 25% of companies owned by the wealthiest 1% have a sizable technology component enabling them to reach global consumers on an unmatched scale.

Retail companies with strong technology components and expanded scale have made billions for entrepreneurs like Jeffrey Bezos of Amazon and the heirs of Sam Walton of Wal-Mart. In addition, tech giants like Microsoft, Apple, and Cisco have generated billions of dollars for their investors. Their founders sit atop the list of wealthiest human beings.

But there’s one thing to note. The Vanderbilts, the Rothschilds, and the Duponts were also families built on Waves of Technological Innovation from previous generations in expanding global sectors like shipping, railroads, chemicals, and international finance. All of these industries can be found in the first, second, and third waves of innovation that swept the globe.

But over time, as new industries expanded scale and implemented new technologies, the Vanderbilts’ were rivaled by the Waltons, the Gates, and the Ellisons.

And while each wave created immense wealth for tycoons, it increased the standard of living for billions of people.

This duel phenomenon has created an interesting challenge for the left-of-center who are interested in redistributing wealth or using 20th century policy to address today’s joblessness.

That’s because when the next wave of innovation emerges, creating remarkable wealth, it also will dramatically improve lives around the world (Imagine how many jobs would be displaced if green energy were able to provide a constant, near zero-cost replacement for oil – and still do so while reducing geopolitical concerns in hotspots around the globe).

This is such an obvious conundrum that Krugman, upon reviewing Rauh and Kaplan’s work in December 2012, said that ownership of technology is a far greater driver of economic inequality than thought, and worried about proposed solutions to the associated wealth gap.

Krugman stated: "If this is the wave of the future, it makes nonsense of just about all the conventional wisdom on reducing inequality. Better education won’t do much to reduce inequality if the big rewards simply go to those with the most assets. Creating an “opportunity society,” or whatever it is the likes of Paul Ryan are selling this week, won’t do much if the most important asset you can have in life is, well, a lot of assets inherited from your parents."

So, conventional wisdom must be turned on its side.

Academics, companies, and investors need to recall Abraham Lincoln’s second address to Congress. Said Lincoln: “As our case is new, so we must think anew, and act anew.”

There are a wealth of ideas we will explore tomorrow – including an investment philosophy one can use to hedge against the Robopocolypse.

 

Go Here for Part II: How to Hedge Against the Robopocolypse

[1] Before we dive into real talk on the Robopocalypse, here’s our take terminology. When Pethkoukis said, “a few of us,” he should have said, “successful entrepreneurs and shareholders who started by finding access to capital, further developed a revolutionary product or process, and generated significant demand.” (Any negatives that follow – such as lobbying, tax breaks, or corporatism – is not the subject of our discussion.) When he said “the rest”, he should have said, “everyone else, including other entrepreneurs whose product and service ideas have failed to generate comparable demand to those few tech billionaires.” (A significant amount of money will be lost chasing the next innovation.)

 

About Garrett Baldwin

Camden 2

Garrett Baldwin is the Managing Editor of the Alpha Pages. He has covered the financial markets since the onset of the RBS collapse in 2007. An author and Baltimore native, he earned a BS in journalism from the Medill School at Northwestern University. He holds an MA in Economic Policy (Security Studies) from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University and will finish an MBA in finance from Indiana University in 2015.

Twitter: @garrettbaldwin, @alphaeditors, @TheAlphaPages

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