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Technology and jobs

Is a perverted definition of capital efficiency fuelling unemployment?

SWELLENDAM – One of my favourite economic thinkers is the 19th century French satirist, Frederic Bastiat. And among my favourite sketches of economic absurdities are those dealing with the sophisticated thoughts of Robinson Crusoe and the profound simple logic of his servant Friday.

One such has Crusoe toiling for days on shaping a single board from a tree to construct his home on the island. One day he walks on a beach to discover a perfectly shaped board that has washed ashore from a shipwreck. His delight at being able to save much work is quickly dispelled when he realises that if he uses the board he will be doing himself out of work. So he turfs the board back into the sea.

I had a similar experience when at a mine consulting site there was talk of imminent retrenchments among the surface cleaners. When their co-workers got wind of it, they set about overturning trash bins and strewing the contents about to ensure that their colleagues would remain needed. The mine management’s response was swift in employing motorised sweepers and retrenching a large number of them.

Whenever one raises the question whether technology is contributing to unemployment, there is a knee jerk dismissive response, the most disdainful of which is that it implies resistance to progress and a denial of all the good things that technology has brought us. That clearly is not the issue, but ignoring the fall out of technology is like trying to ignore that certain drugs have side effects that have to be managed. Similarly, the effect of technology on climate change is today widely acknowledged and being addressed – some would argue not seriously enough.

But greater resistance to the question comes from conventional economics, rooted in a very long held belief that far from destroying jobs, technology in all its forms actually creates more jobs. It has been argued for as long as I can remember that workers displaced by technology would find employment “elsewhere”, albeit after obtaining new skills and additional training. That “elsewhere” or “what” is seldom defined, let alone quantified. Even vaguer is how that can effectively be achieved. But the assumption that technology on balance creates more jobs is in itself false.

Research by the world leading Massachusetts Institute of Technology (see graph below) provocatively suggests that the opposite could be true, pointing to a growing disconnect between productivity and employment. Productivity gains have outpaced employment since the late 1950’s becoming quite pronounced since 2000. While others in the fuller report (see here) have their doubts about technology on balance actually destroying jobs, the theory that it automatically increases employment simply no longer holds true.

Which may explain increasing public insecurity about the pace of innovation. More than half of the respondents to the latest Edelman survey said they distrusted the speed of development in technology. So if technology is our friend, which undoubtedly it is, why is it also perceived to be a threat? An answer most likely lies in not seeing technology in isolation, but in the broader context of the obsession with the holy grail of capital efficiency, which is the conventional understanding of improved productivity. Bear in mind that the basic measurement of capital efficiency is return on investment. Technology is one element of this. The others are maximum returns on capital in the shortest possible time (or profit maximisation and shareholder value criteria); and investment for maximum short term yields. They are all linked.

Ironically, capital efficiency, especially in the short term, and its main tool of profit maximisation is not always technology’s friend. Technology has two steps – discovery, which is finding or developing a new and creative idea; and innovation, which is putting that idea into practical use. It is often very difficult to find capital supporting untested and new ideas. Even in innovation, the focus on profit maximisation could impede research and development.  Developing longer term technology improvements could be stilted by the requirement for higher immediate returns on capital. The latter also specifically targets the involvement of labour as a cost. Clearly the behaviour of labour itself can contribute to that momentum.

It is indeed possible to use technology to improve profits without necessarily increasing wealth creation itself. Simply displacing labour will do that. But the perceived threat of technology to jobs will be reduced when it is seen for the most part as being in the interest of customers and the broader public and not simply to maximise profit.

The third part of capital efficiency, that of investment, has perhaps a less tangible link to technology per se, but in ensuring maximum returns in the shortest possible time, it adds to the general milieu of distrust, unemployment, and income inequalities. This is the diversion of money into highly speculative financial markets and the growing asset bubbles in stocks, bonds and property. In the end there is less motive to invest in people and more in assets.

Capital efficiency is the cornerstone of Western economic thought. This is at least partly due to a lingering perception that profits are equal to value added or wealth created, or even that it is the primary enabler of wealth creation and therefore the most important component of GDP. To challenge its paramountcy borders on economic heresy and most mainstream economists will not go much further than calling for some constraint in its pursuit – if that. I must concede that my definition of capital efficiency may differ from the conventional which relates narrowly to production and not more broadly to organisational deployment such as share buy-backs; mergers and acquisitions; reserve hoarding and investment in flighty global capital movements.

So to be clear, capital efficiency is an excellent tool in ensuring best use of resources. But it is not the only one. Indeed, value-added or wealth created is superior to the narrow capital efficiency focus which should never be an exclusive and paramount purpose. That’s very much like putting an athlete on steroids.

Returns on capital go to the owners of capital, a relatively small section of the population, apart from the highly diluted individual holdings in pension and other investment funds. Ultimately there must be a backlash. If Oxfam is correct in its calculation that soon only 1% of the people in the world will own more than half of global wealth, at least partly attributable to the emphasis on capital efficiency, it poses a real threat to the global economic machine.

It means simply that half of the world’s wealth is mostly trapped in an asset bubble, never to spread in consumption expenditure, that translates into demand and that is the real fuel of production. In short, the more machines and technology replace people, the more tenuous the link between production and consumption, and the weaker demand, simply because fewer people can afford to spend.

Even if we had to overcome that in future decades through some fancy fiscal footwork in redistribution, humanity will confront something most old folks quickly get to know. The two primary challenges in life are provision and purpose.

Without employment, most people will simply lose purpose, perhaps the more important of the two.

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Negative. The conclusion we can draw from the relationship between productivity and employment is that while productivity has shown a steady increase over the decades, employment has faltered of late. Clearly there is was a correlation between the two variables which broke down. Just as one cannot argue that productivity drove employment (or vice versa) one cannot argue the reverse is true. Cum hoc ergo propter hoc. Causation does not imply correlation. Of late there is little correlation, negative or positve. No correlation no causation.

The truth is that the cause of unemployment has nothing to do with productivity gains and everything to do with unbridled statism that misdirects resources and the fiat monetary regime under which we exist.

The American de industrialisation experience over the last three decades has its roots in industrial capital destruction caused by artificial suppression (destabilization) of interest rates by the US central bank. Interest rate suppression increases the burden of debt contracted during earlier periods. Capital owners simply responded by exporting remaining capital and jobs to lower wage societies. Immobile luckless labour was not so lucky.

Maybe the real question you should be asking is what has raised the marginal productivity of labour despite labour becoming more productive?

You comment concerning climate change is not remotely valid. The climate has been changing since the earth’s inception ca. 4.65 billion years ago. There is no conclusive evidence (evidence, ones notes, being the basis of science) that there is an anthropogenic signal in the climate. A lot of people may believe something to be true (argumentum ad populum) but that does not necessarily make it true.

“world leading” MIT (argumentum ad verecundiam). What MIT say should be judged on its merits not who MIT are.

One should note find that returns on capital are at a historic low at a time that productivity is at an historic high.

I don’t care what Oxfam say. Their motives are ulterior.

To conclude that the worlds wealth is trapped in an asset bubble (never to be consumed) is laughable. As you have noted the purpose of production is consumption (the driver of production if you like). Must be! It’s a market kind of thing, I guess. Productive capital is (almost always) a blessing- it puts tools in the hands of the unemployed, produces goods and services for society, lowers prices and provides a return for the shareholders – all for more of the same in round number two. How good is that? There is no such thing as a “capital parking lot” where capital is ring fenced in a mythical asset bubble that provides returns to evil misguided capitalists yet somehow does not benefit society with goods, services and employment. The high price of finanical assets has its origin in the destabilisation of interest rate structure (the real asset bubble). One can monetize debt (the Fed’s job) but not direct the progress of the newly created fiat, which flows right back into capital markets and further depresses interest rates.

Q : What forces have driven capital from the productive industrial sector to the financial sector?

The reason the 1% get richer is simply because equity provides a higher return over time than wages increase. Surely no better argument to own equity?

End of comments.

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