Paul Krugman has recently taken a keen interest in the rise of robots and automation — an issue that I have been focusing on since the publication of my book on this subject back in 2009.
In a recent post, Krugman says the following:
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.
I think there is a fundamental problem with this way of thinking: as jobs and incomes are relentlessly automated away, the bulk of consumers will lack the income necessary to drive the demand that is critical to economic growth.
Every product and service produced by the economy ultimately gets purchased (consumed) by someone. In economic terms, “demand” means a desire or need for something – backed by the ability and willingness to pay for it. There are only two entities that create final demand for products and services: individual people and governments. (And we know that government can’t be the demand solution in the long run). Individual consumer spending is typically around 70% of GDP in the United States.
Of course, businesses also purchase things, but that is NOT final demand. Businesses buy inputs that are used to produce something else. If there is no demand for what the business is producing, it will shut down and stop buying inputs. A business may sell to another business, but somewhere down the line, that chain has to end at a person (or a government) buying something just because they want it or need it.
The point here is that a worker is also a consumer (and may support other consumers). These people drive final demand. When a worker is replaced by a machine, that machine does not go out and consume. The machine may use energy, resources and spare parts, but again, those are business inputs—not final demand. If there is no one to buy what the machine is producing, it will get shut down. Think of on industrial robot being used by an auto manufacturer. The robot will not continue running if no one is buying cars.*
So if we automate all the jobs, or most of the jobs, or if we drive wages so low that very few people have any discretionary income, then it is difficult to see how a modern mass-market economy can continue to thrive. (This is the primary focus of my book, The Lights in the Tunnel).
There is plenty of evidence that consumers are already struggling with the structural shift occurring in the economy. The years leading up to the current economic crisis were, of course, characterized by people consuming on the basis of debt rather than income. A just-released report shows that an ever increasing number of Americans are raiding their retirement accounts to pay current bills.
Does Paul Krugman really believe that it is possible to have a “society that grows ever richer” while a tiny number of robot owners hoover up more and more of total income — and the jobless masses consume the output by running up their credit cards or cashing in their 401(k)s?
The point is that the robot revolution is not just about income inequality. It will ultimately impact the sustainability of economic growth.
Innovation requires the existence of a market. New ideas will not receive the necessary backing if investors do not anticipate healthy market demand. A future with a dearth of viable consumers will be a far more zero-sum future. It will mean less of the type of innovation we associate with Steve Jobs — and more of the type you would find at Goldman Sachs.
One of the main points I make in my book is that I think we will ultimately have to treat the market itself as a kind of renewable resource. Jobs and wages have historically been the primary mechanism that redistributes income (and purchasing power) from producers back to consumers. Widespread reliance on robots and automation may ultimately cause that mechanism to break down — and that will be a threat to continued prosperity.
So what is the solution? In the long run, I think there will be no alternative except to implement direct redistribution of income. One possibility is a guaranteed minimum income funded by more progressive taxes (on the robot owners), and possibly by other sources (for example, a carbon tax).
It goes without saying that implementing such a solution would be an enormous social and political challenge. And it will intertwine with the other major problems we face. Meaningful action on climate change, for example, will become even more difficult in world where much of the population is increasingly focused on individual income continuity.
Make no mistake, responding to the impact that accelerating technology has on the job market could turn out to be one of the defining challenges for our generation.
* Not all robots are used in production, of course. There are also consumer robots. If you own a toy robot, it may “consume” batteries. However, in economic terms, YOU are the consumer — not the robot. You need a job/income or you won’t be able to buy batteries for your robot. Robots do not drive final consumption — people do.
Update: Rise of the Robots – Paul Krugman, NY Times.
Advances in Deep Learning (Neural Networks) - John Markoff, NY Times.
Series on AI / Brain Science – Gary Marcus, New Yorker
Are Droids Taking our Jobs? - Andrew McAfee, TED
How to Invest in an Automated Economy – ABC News
Robots Taking Jobs – Techonomy
More on Momentum Machines (with a photo a robot-constructed burger – Looks more 5 Guys than McDonald’s) – Huffington Post
A Vine-Pruning Robot - Singularity Hub
“Foxbots” arriving at Foxconn’s Chinese Factories – Singularity Hub
Watson-mobile – Business Week
Technology will Replace 80% of What Doctors Do – Vinod Khosla, Fortune
(also see: Dr. Watson: How IBM’s supercomputer could improve health care - Washington Post)
Back in June, I wrote a post suggesting that fast food automation could potentially have a dramatic impact on low-wage jobs:
Millions of people hold low-wage, often part-time jobs in the fast food industry. Historically, low wages, few benefits and a high turnover rate have helped to make fast food openings relatively abundant. These jobs, together with other low-skill positions in retail, provide a kind of safety net for workers with few other options.
In the current economic environment, these jobs are, of course, much harder to get. McDonald’s recent high-profile initiative to hire 50,000 new workers resulted in over a million applications — numbers that give McDonald’s a lower acceptance rate than Harvard.
What about the future? Most forecasts assume that the fast food industry will continue to be a significant job creator. The Bureau of Labor Statistics ranks food preparation as one of the top four fastest-growing occupations, and that trend is expected to continue at least through 2018. Is it possible that these projections miss the impact of technology? Could these jobs begin to disappear?
Increased automation in fast food and beverage providers is likely to someday offer increased convenience, speed, and ordering accuracy. Robotic food preparation could also be viewed as more hygienic as fewer workers come into contact with food. And of course, price will ultimately be the determining factor … If jobs in the fast food industry start to disappear, or even if the rate of job growth slows significantly, the implications for the workers that depend on these jobs of last resort will be dire. There may be few other alternatives for workers at that skill level, especially since other low-wage retail jobs may be similarly threatened.
Momentum Machines is a new San Francisco-based start-up that is planning to automate the burger production process. The company’s website claims its robot will save the average restaurant $135K/year in wages and overhead and that the machine will pay for itself in one year.
One news story notes that the company
… has developed a robot designed to take the place of humans in burger restaurants. Its creators believe their patty-flipping Alpha robot could save the fast-food industry in the United States about US$9 billion (Dh33.05bn) a year. Designed to entirely replace two to three full-time kitchen staff, it can grill a beef patty, layer it with lettuce, tomatoes, pickles and onions, put it in a bun, and wrap it up to go – no less than 360 times an hour. Momentum believes kitchen robots are not only more cost-effective than human staff, they are also more hygienic.
Momentum Machines is a tiny company that has just emerged from start-up incubator Lemos Labs. However, I think it is very likely that we’ll see soon see a lot more interest in this area from both start-ups and larger companies. If one of the major fast food chains gains a competitive advantage with technology like this, the entire industry will have to follow suit — and it could happen quite rapidly.
Here’s another good article at Xconomy (thanks to commentor “wjtgpf”). Includes a great quote from a company co-founder:
“Our device isn’t meant to make employees more efficient,” said co-founder Alexandros Vardakostas. “It’s meant to completely obviate them.”
Alexandros might want to take some lessons in how to spin things from Jeff Burnstein of the Robotic Industries Association…
The graph below, based on data from the Federal Reserve Bank of St. Louis, shows manufacturing employment in the United States as a fraction of all employment. As you can see, the line heads downward in an almost perfectly straight line beginning in the mid-1950s. Notice that the line doesn’t become steeper as globalization takes hold after the passage of NAFTA in 1994 or the rise of China over the past decade or so. The line just slopes consistently downward.
This is primarily the result of technology, and in particular, automation. Manufacturing in the U.S. has become dramatically more productive and requires fewer workers. If we were to graph manufacturing output (rather than jobs), the line would slope upward, not downward. The value of U.S. manufacturing production is now far greater than it was in industrial era of the 1950s, even after adjusting for inflation. We just make all that stuff with a lot fewer people.
One of the most interesting things about the graph above is that, if technology is the primary driver, then employment in China must inevitably follow the same path. In fact, there are good reasons to believe that manufacturing employment’s downward slope will be significantly steeper for China. The U.S. had to invent the technology to make manufacturing more productive, while in many cases China only needs to import it from more developed nations. It is also true that China is beginning its journey at a time when information technology (which is the primary enabler of automation) is many orders of magnitude more advanced than in the 1950s when U.S. manufacturing employment was at its peak. (See this recent article on skilled robots from the New York Times).
In the U.S. (as well as in other advanced countries), workers shifted out of manufacturing and into the service sector — which now accounts for the vast majority of jobs. Will China be able to pull off the same transition?
The U.S. had the luxury of building a strong middle class during an earlier time. Technology was advancing consistently and increasing productivity, but it was not so advanced as to create a mismatch between the type of available jobs and the skills of workers. Unionization was strong in the private sector and helped ensure that the lion’s share of productivity increases ended up in workers’ (rather that corporate owners’) pockets. Those workers, in turn, became the broad-based consumer class that purchased the output from all those factories and kept the overall economy humming.
The situation in China is quite different. Consumer spending accounts for only about a third of China’s GDP (as opposed to 60% or more in nearly all developed countries). While China has built a significant middle class in absolute terms, it remains small as a percentage of the country’s huge population.
Workers enjoy few of the rights and protections that characterized the U.S. workforce of the 1950s. As I wrote in my book, The Lights in the Tunnel:
The [Chinese] government actively enforces discrimination that tends to drive wages even lower. Much of the work in China’s factories is performed by migrant workers who officially live in the countryside but are allowed to come to cities or industrial regions to work. These workers typically live in factory dormitories and do not have the right to bring their families to the cities or to genuinely assimilate into an urban middle class. Wages for these workers are far lower than for urban dwellers, and the money that they do earn is for the most part either saved or sent home to help support their families. These workers are not in a position to become major drivers of local consumption any time soon.
According to the New York Times, those worker dormitories apparently play an important role in Apple’s (or Foxconn’s) ability to bring production online at any time of the night or day:
A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.
Even that level of worker availability and efficiency isn’t enough for Foxconn, which recently announced the introduction of huge numbers of robots. That may be a great way to drive production, but it’s hard to see how China will succeed in dramatically shifting its economy toward domestic consumption.
And that has to happen before a shift to a service economy can take place. As consumers become more wealthy they begin to spend a larger fraction of their incomes on services — things like banking, insurance, healthcare, education, entertainment and travel — and that in turn drives service sector employment. At least that has been the path followed in other developed countries.
In the absence of consumer spending, China’s economy remains highly dependent on manufacturing exports and, especially, on fixed investment. An astonishing 50% of China’s GDP is driven by investment in things like factories, housing and infrastructure (the U.S. figure is around 15%). The problem is that all that investment has to ultimately pay for itself, and that happens via consumption. Once a factory is built it has to then produce something that gets sold at a profit. Homes, retail buildings and apartment complexes likewise have to be sold or rented out. Obviously, no economy can indefinitely invest anything like 50% of its output without eventually finding a way to get a positive return on that investment.
Achieving that return requires consumers — either at home or abroad. China continues to rely heavily on consumers in the U.S. and Europe, but that’s unlikely to be a sustainable formula for growth. The debt crisis and the resulting austerity is cutting into economic growth and consumer spending in both Europe and the U.S.
As manufacturing automation increases (perhaps dramatically) in China, in the U. S. and other developed countries the most disruptive impact from technology will be in the service sector — where millions of white collar jobs and service jobs in retail, distribution, food service and other areas may ultimately be at risk. After all, if robots can build an iPhone, then its a good bet that they will also someday be able to build a hamburger or mix a latte. The result may be continuing high unemployment, stagnant wages and tepid consumer spending throughout much of the developed world.
The real problem China faces is that it is late to the party. Just as it reaches its manufacturing employment zenith, it faces a potentially disruptive impact from automation technology. And that will happen roughly in parallel with similar transitions in the service sectors of the countries that currently consume much of its output. In the face of that, can China succeed in re-balancing its economy toward consumption, increasing personal incomes, and building a vibrant service sector to keep its population employed?
PBS News Hour recently had a special on the main topic I’ve been focusing on here: unemployment and inequality caused by technology, and in particular, automation. You can watch the video below.
At around 05:40, Ray Kurzweil makes a brief appearance. He is asked about the possibility of a “digital divide” — meaning that only a small percentage of the population is able to take advantage of new technologies, even as traditional employment opportunities are destroyed. Kurzweil seems to argue that we won’t have a problem because these new technologies will be affordable and widely available (he gives the example of cell phones). A little later in the video, Peter Diamandis, the chairman of Singularity University, makes essentially the same point.
These views strike me as both unrealistic and elitist. There is little evidence to suggest that most average people are going to be able to parlay access to a cell phone, social media, or other personal technologies into a livable income. Even among the minority of people who actually have the necessary skills and training, there is a strong element of luck associated with the success of any entrepreneurial activity. Most new businesses of any type fail. Assuming that a huge percentage (perhaps most) of the population will someday generate a meaningful income by independently leveraging technology is really quite a stretch.
A second problem with techno-optimists like Kurzweil and Diamandis is their near exclusive focus on the cost side of technology. Many technologists believe that advancing technology and increased automation are likely to drive down costs and possibly make most products and services far more affordable. At the extreme, some techno-optimists believe in the promise of a “post scarcity” economy. Even if we go along with that — and there are certainly powerful opposing arguments based on energy and resource depletion and environmental degradation — simply making “stuff” cheaper is not an adequate solution.
Imagine for a moment that you were living in the year 1900. Suppose you could look through a time portal and see the world of 2012. You might well suppose that a “post scarcity” world had already been realized given the far higher living standards that average people now enjoy. On the other hand, if you got a look at 2012 prices (as opposed to what you were used to in 1900) you certainly wouldn’t feel that things had become more affordable!
The reality, of course, is that prices have increased dramatically in nominal terms since 1900 — but average incomes have increased even more. The average U.S. worker in 1900 earned just $438 per year. Over the past 112 years, incomes have increased dramatically in real terms (after adjusting for inflation), leaving nearly everyone better off, even as prices have increased.
The problem is that if, rather than a period of 112 years, we look at just the last 30 years — say since the mid 1980s — the story is very different. Incomes (wages) for most average workers have been completely stagnant in real terms; after adjusting for inflation, most workers have made little or any progress. And for a number of big ticket items — like health care, housing and education — the situation has actually worsened significantly for most Americans.
So will making all kinds of stuff cheaper, even as incomes continue to stagnate and even fall, solve our problems? No, it will not. If we actually had a situation where prices for nearly everything fell while wages likewise fell and unemployment increased, that would be deflation. You won’t find many economists who would advocate long-term deflation as a good strategy for the future.
Deflation destroys the incentive to invest in the future, and if prolonged, would likely slow the pace of innovation. The problem with deflation is that while incomes, prices and asset values may well fall, debts do not deflate. The result would be widespread insolvency, potentially catastrophic financial crises, and lower living standards for virtually everyone.
The true challenge we face in the future is really about incomes. As technology and globalization advance, how do we get incomes for the majority of the population to continue increasing in real terms? This has been the historical path to prosperity, and we have to figure out how to maintain that trend going forward. One of the main ideas I focus on in my book The Lights in the Tunnel is that incomes power consumers — and consumers ultimately power the economy.
If we can’t find a way to maintain, and even increase, real incomes for the majority of our population, broad-based prosperity will become increasingly elusive.
Ten Jobs that Won’t Be Taken by Robots - The Fiscal Times
Does Facebook Create Jobs? – Pittsburgh Tribune-Review
Is your Job Robot-Proof? – Forbes
Russian Investor Sets Up Robotics VC Fund – The Atlantic
Robot mimics infants’ word learning - Los Angeles Times
Robot Soccer Leads to Innovation – Slate
Robots Learn to Work with Humans – DiscoveryNews
“The Singularity is Near” movie (trailer):
Some recent links showing the on-going march toward job automation:
Automating Legal Work - New York Magazine.
This is more on the the use of e-discovery software to process documents. Automation is likely to hit especially hard at the entry level (and more routine) jobs often taken by recent graduates in a variety of skilled occupations, including law and journalism:
Rapidly Improving Manufacturing Robots – Singularity Hub.
Military Robots – GMA News
Construction Robots – Construction Digital
Productivity Increases are Going to Capital — Not Labor – Paul Krugman
Falling Labor Force Participation Rate – Conversable Economist – As this post points out, demographics (aging workforce) and cyclical factors explain only part of this…