Rise of the Machines

Driverless cars, data-analyzing computers and robots are all machines that can perform typical “human” tasks. Machines seem to be getting better at doing our job, and the fear of technological substitution of labor is returning to the stage of public debate.

Classical economic theory states that new technologies should be neutral with respect to labor demand. Gains from cheaper production should be transmitted to consumers in the form of expanded supply, causing labor demand to increase and offset the loss of jobs due to substitution for workers with machines.

Yet recent research by Miguel Barroso Morin of Cambridge University tells a different story. He analyzed the impact of the spread of cheap electricity in the ‘30s – spurred by technological progress — on the cement industry. The results were quite surprising: the drastic drop in electricity prices was not met by an expansion in production, and it correlated with a significant decrease in employment. Additionally, the share of income going to workers fell by 11 percent as labor productivity shot up by 36 percent. In this case, technology was not neutral with respect to labor – rather, technology crowded out workers.

One can imagine a similar pattern occurring with automation, especially if we consider the transformative nature of artificial intelligence. As the gap between what humans and robots can do narrows, technology will threaten not only manual jobs but also several high-skill professions.

Strikingly enough, according to an index compiled by Deloitte and the University of Oxford, accountants faces a 95 percent probability of being automated over the next two decades.

Although humans still significantly outperform computers in pattern recognition tasks, recent developments in machine learning seem to indicate our silicon-wired competitors are catching up quickly. Fast forward to 2050, and the most pessimistic can already picture a dismal landscape of wasted human capital as workers sit idle and machines do all the work.

But even if this does happen, not all is lost. According to Erik Brynjolfsson and Andrew McAfee, authors of “The Second Machine Age,” it’s highly possible to attain fabulous levels of wealth through technology.

The real risk is moving toward a labor-light society wherein machine capital ownership would be the only pathway to such wealth. Thus, the biggest challenge countries will face in the future is the tendency of capitalism to generate stark inequalities. Some claim that we are already experiencing this trend today, but its effects may be exacerbated in a labor-light economy.

The same old story

Yet Morin’s view has its notable critics. According to Martin Wolf, there is nothing special with automation when it comes to the labor market: it can be seen as a simple positive production shock that won’t alter the fundamentals of the relationship between technology and the labor market.

Wolf suggests economically significant technological change has, in fact, slowed down in the recent past. Evidence for this can be found in the slow growth of output per worker, stuck at slightly above one percent in the past decade. If countries were in the midst of an earth-shattering technological revolution, then their economies should have seen higher growth in output per worker in recent years.

Furthermore, even considering measures of innovation that escape crude GDP metrics, we fail to see major shifts in the way technology progresses. Take consumer surplus: when a new, economically significant invention is introduced, its price is effectively taken from an infinite value to a finite one, hence increasing consumer surplus immensely. Yet, we have not seen many large gains to consumer surplus being brought forth by today’s seemingly uncanny technology.

In addition, although recent developments, such as quantum computing, may seem impressive, the quick technological growth we’re experiencing today is not equivalent to the ground-breaking advancements of the 18th century. Although today’s high-tech gizmos appear to be changing and improving rapidly, they all pale in comparison to major breakthroughs, such as the development of steam power, electricity or even access to clean water.

The effects of automation would not be apocalyptic, but rather in accordance to a recurring pattern: as new technologies are introduced, some people will find themselves out of work because they have neither the education nor the technological skills to remain competitive within the labor pool.  As discussed in The Race Between Education and Technology by economists Claudia Goldin and Lawrence Katz, technological progress increases the demand for skilled workers relative to unskilled workers, which inevitably leads to disparities in wages and employment. As routine intellectual and manual jobs fall prey to technological substitution, we will not witness the complete disappearance of human labor but further rearrangement of returns to education and access to technology.

The upshot, however, is not all too different from what Brynjolfsson and McAfee worry about: a massive wedge in the economy between the lucky few, highly-skilled laborers (such as programmers), owners of robot capital, and essentially anyone else.

Another revolution

But is this the whole picture? The answer to the age-old conundrum of technological substitution largely depends on the theoretical framework we adopt. It is however clear that, at the present state, most jobs are safe from a total wipe out and there seems to be no impending risk of labor-market catastrophes.

But there is a different, perhaps subtler technological revolution that might be more concerning than automation – the increasing dominance of information technology.

The commercial implementation of information technology has rapidly increased in the past few years. This is favouring a shift away from an economy based on physical capital towards one that is reliant on software, intellectual property and human capital. A quick comparison between Sony and WhatsApp, two firms boasting a similar market value, evinces how there is an information technology revolution. The former employs more than 130,000 workers — the latter, only 46.

Returns on capital are skyrocketing and the traditional concept of employment may already be evolving. Soon enough we might have to say goodbye to lifelong jobs as they give way to “portfolio careers.” Workers may constantly need to stand ready to take up temporary jobs, retrain and relocate in order to act on the best opportunity available.

This trend has been apparent for quite some time, especially in highly dynamic markets. One can argue that it is largely due to market regulation and underlying macroeconomic fundamentals, but it does highlight an indirect and somewhat overlooked channel through which technology affects the labor market.

Something is indeed disrupting the way we work: it just turns out it is not a dystopian horde of robots but rather a large-scale rearrangement of means of production ultimately caused by good old human ingenuity.