Summary: The FM website attempts to show you the future at work today. But sometimes we forecast but forget to update you when it arrives. Consider this post an update to the world terminal’s Arrivals board. Trains are coming; we still have time to prepare.
Excerpts
- Quote of the Year showing America’s broken OODA loop
- Europe tries another solution, but still refuses to see the core problem
- The next wave of automation: the robot revolution
- The Generation Gap is Back (for real this time)
(1) Quote of the Year showing America’s broken OODA loop
OODA: Observation, Orientation, Decision, Action. The key to a nation’s survival.
“you foolish and senseless people, who have eyes but do not see, who have ears but do not hear”
— Jeremiah 5:21
A demonstration of our geopolitical experts’ inability to learn, as their minds are locked into the worldview of our ruling elites. Two failed wars, expanding conflicts across the world, US tactics empowering our enemies — and they cannot even see the failure. From “Can’t We All Just Not Get Along?“, Michael A. Cohen, Foreign Policy, 22 June 2012:
In the view of Peter Feaver, who writes at the Shadow Government blog for FP and teaches at Duke University, alternative viewpoints have been rejected because they’re not very good ideas: “Radical critiques of American foreign policy are known and given lots of air time proportional to their influence. You can’t swing a dead cat without hearing a serious critique of American foreign policy at an academic conference, for example. These views are known, considered, and rejected. It’s not that no one had a chance to know about the movie — they didn’t want to see it.”
(2) Europe tries another solution, but still refuses to see the core problem
Everything the EU has done to date does nothing but buy time, time which they’ve wasted. “The tragedy of the commons at the European Central Bank and the next rescue“, Aaron Tornell (Prof Economics, UCLA) and Frank Westermann (Prof Economics, University Osnabrueck, VOX, 22 Jun 2012 – This cannot be said too often, until they eventually must confront reality.
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Each of these non-standard ECB policies, in isolation, has succeeded in stemming a particular funding crisis. However, with few exceptions, these ECB policies have not been accompanied by structural and fiscal reforms. The lack of reform has been reflected in persistent current-account deficits, which record the excess of spending over income of a country. When private capital inflows reverse in a persistent way, a country should respond by reducing its expenditures, via a reduction in its fiscal deficit, consumption or investment.
Historically, either the country implements the adjustment or the market forces such an adjustment on the country. This pattern, however, is not what we see in the Eurozone’s periphery. With the exception of Ireland, the current accounts of the periphery are still in deficit, almost 4 years since the onset of the 2008 crisis. The persistence of the current-account deficits has been made possible by the continuous expansion of central bank credit in the periphery. As we can see in Figure 4, over 2007-2011, the cumulative current-account deficit in each country is very close to the cumulative increase in central bank credit (with the exception of Ireland).
For more information see the FM Reference Page about Europe.
(3) Demographics — the age wave sparks generational war in America (so far waged by only one side)
“The Generation Gap is Back – Old vs. Young“, New York Times, 22 June 2012
If there is a theme unifying these economic and political trends, in fact, it is that the young are generally losing out to the old. On a different subject, Warren E. Buffett, 81, has joked that there really is a class war in this country — and that his class is winning it. He could say the same about a generational war.
Younger adults are faring worse in the private sector and, in large part because they have less political power, have a less generous safety net beneath them. Older Americans vote at higher rates and are better organized. There is no American Association of Non-Retired Persons. “Pell grants,” notes the political scientist Kay Lehman Schlozman, “have never been called the third rail of American politics.”
Over all, more than 50 percent of federal benefits flow to the 13 percent of the population over 65. Some of these benefits come from Social Security, which many people pay for over the course of their working lives. But a large chunk comes through Medicare, and contrary to widespread perception, most Americans do not come close to paying for their own Medicare benefits through payroll taxes. Medicare, in addition to being the largest source of the country’s projected budget deficits, is a transfer program from young to old.
Meanwhile, education spending — the area that the young say should be cut the least, polls show — is taking deep cuts. The young also want the government to take action to slow global warming; Congress shows no signs of doing so. Even on same-sex marriage, where public opinion is moving toward youthful opinion, all 31 states that have held referendums on the matter have voted against same-sex marriage.
For more information see Demography – studies & reports.
(4) The next wave of automation: the robot revolution
Courtesy of Zero Hedge, Hugo Scott-Gall of Goldman Sachs discusses the next wave of automation. Analysis followed by a faith-based conclusion. Don’t worry; be happy!
Who does automation benefit more? Low-cost producers in Asia or high-value manufacturers in the developed world? In the near term, it’s likely that we’ll see an accelerated adoption of automation in Asia, and in China in particular, as companies there face rising wages, increasing competition and slowing global demand and pricing pressure that necessitates higher efficiency. And to add to it, financing such capital investment is perhaps most convenient (and quickest) in a place like China in the current environment. Wrapping up that argument is the economy’s conscious effort to industrialize and move up the manufacturing value chain. When higher levels of automation materialize, it should lead to a pick up in productivity (off a low base – China has c.90 robots per 10,000 workers compared to more than 300 in Japan). But will it provide a sustainable advantage?
Transforming a factory teeming with people to an automated assembly line of complex machinery is easier said than done. It not only requires highly skilled talent and experience to manage the process (tough to acquire even through global recruitment), but also a much deeper shift in the way the manufacturing process is planned and executed. We think the advantage here lies with the West, together with Japan and South Korea, which is why they should be able to maintain their lead on higher-value exports (which includes robotics), for most of the coming decade. Does this mean manufacturing facilities will move back to the West? Taking cheap labour out of the equation, manufacturing facilities must stay close to end consumers (which is Asia for some sectors like autos, smartphones etc.), having balanced out the transportation costs and IP risks with associated infrastructure costs.
Companies that incorporate automation in their manufacturing process should see the labour intensity of their operations fall at the expense of capital intensity, though this may not be a 1:1 match and the payback could take time – lower asset turn versus higher EBITDA margin. Also, setting up industrial robots (with average life-spans of 12-15 years, but no pension costs!) requires management to have longer-term visibility and sound forecasting skills. Automation should also reduce working capital as production lead times fall, thanks to scheduling flexibility (i.e., if inventories have been built, or demand is weakening, it’s easier to run the machines for fewer hours or even shut them temporarily, at the expense of lower capacity utilization, than to reduce the number of employees – the cash cost of production falls and this advantage should be weighed against debt servicing if any). In essence, automation most likely works for a company with a healthy balance sheet, good demand visibility and superior industry positioning.
Automate and eliminate
Finally, we address the potential impact of automation on human capital. It’s easy to be wholly negative in the current environment and conclude automation would drive structural unemployment, leading to lower disposable incomes and weaker consumption. And this would not be completely wrong – we think the sticky unemployment we are seeing in the US and in Europe has a lot to with jobs permanently eliminated by technology. The average duration of unemployment in the US has never been as high as in this downturn, and this follows the relentless export of jobs to lower-cost countries over the past decade or so, making it particularly painful (and for a period slowing down the penetration of automation). And, ceteris paribus, you could envision a world dominated by a machine-to-machine economy, where most things are done by intelligent technology, leaving only highly skilled people with the lion’s share of the limited jobs. This would lead to further income inequality. Would estimates of global population growth remain the same if we did not need 10 bn people, and if we didn’t have the means to feed them? And could automation then be seen as a driver of globalisation that through its success provokes de-globalisation?
In mankind, we trust
But we take a more positive view than the bleak dystopian one outlined above. The global workforce has been able to adapt to the advent of machines since the industrial revolution, and the subsequent evolution in the types of jobs that a typical economy has to offer. When more and more women entered the workforce in the 1960s and 1970s, particularly after automation in the home, the developed countries could handle the boost that gave to their workforce, since they were transitioning from a physical, manufacturing-based economy to a services-based one. We could see something similar happen with automation too. Twenty years from now, it’s more likely that there will be different sorts of jobs to fill in the gap that technology is creating now. But this will not happen without short-term dislocations, as the current workforce needs to be better trained, not for a particular type of job, but to be nimble enough to evolve along with the changing needs of the world. This will take time, perhaps even a generation, and until then automation could continue to hurt the labour market.
To conclude we think automation is spawned from innovation and technological advancement. Things that the West and the developed world have been very good at. Automation can bring with it a productivity surge for industries that employ it, and those that could potentially employ it. Initially automation is an attractive way of reducing labour costs and the risks associated with labour. However, increasingly it is a more meaningful driver of product quality and process, and therefore an important part of competitive advantage.
Wall Street loves Robots, and wants them everywhere (because rising real wages for the poor are bad):
- “Robots can solve China’s labour problem“, Financial Times, 16 April 2012
Posts about the robot revolution:
- The coming big increase in structural unemployment, 7 August 2010
- The coming Robotic Nation, 28 August 2010
- The coming of the robots, reshaping our society in ways difficult to foresee, 22 September 2010
- Economists grapple with the first stage of the robot revolution, 23 September 2012
- The Robot Revolution arrives, and the world changes, 20 April 2012
What the writer of the article on robot revolution utterly fails to take into account is the fact that the reason why human beings have adapted to the changing conditions of industrial technology in the past is because previous technological changes drove the emergence of previously unexplored sectors of industry that were able to absorb most if not all of the displaced workforce.
The industrial revolution drove large numbers of people out of agriculture but it drove them into the emergent manufacturing sector. The development of automation drove large numbers of people out of manufacturing but it drove them into the emergent service sector. The technology sector itself in the form of the computer industry seemed to enjoy a brief surge as an alternative or adjunct to the manufacturing and service sectors, but that surge did not last long — in part because that sector was not in a position to absorb all the displaced workers (there was no chance that it ever could have) and it quickly became saturated. Unfortunately, as far as anyone can see (at least anyone who’s thinking clearly), there is no new industrial sector emerging which might be able to absorb all the people who will be displaced– and indeed, already are being displaced — by increasing automation, which has even begun to replace service workers as well as manufacturing workers (such as retail stores in which some of the cashiers are already being replaced by completely automated kiosks). At least in fully-industrialized nations, whatever remains of the agricultural sector that has not been automated or outsourced is mostly saturated (and working conditions tend to be poor). The same is becoming increasingly true for the manufacturing sector — and there are signs that the service sector will soon follow suit if it hasn’t done so already, because the service sector by itself cannot possibly absorb all the people who are gradually being displaced. Where are all the people supposed to go? Even if they can afford to train for new jobs — and the increasing cost of higher education means that many cannot — what should they be encouraged to learn and taught to do? Perhaps even more importantly…what can they do that a sufficiently advanced machine could not do just as well (or perhaps better, since machines don’t need sleep and can usually be programmed to deliver more consistent performance than a human)?
Another problematic element in the equation is the fact that technological advancements within the medical field combined with the discovery of petroleum in the early 20th Century helped create a population explosion — and while there are indications that population growth is slowing or even reversing in some parts of the world, it is continuing apace on the overall global scale. Moreover, as medical technology continues to advance, there is every reason to believe that this will enable even more people to survive to adulthood and eventually reproduce. What this appears to create is a recipe for disaster…a population that is expanding while at the same time the number of jobs available which the people can perform in order to earn a living is slowly shrinking (and we haven’t even addressed the question of how we’re going to feed everyone adequately, never mind find enough water for crops and animals as well as people, when it’s estimated that as many as a third of the world’s population is already going hungry).
If anything, it seems to me that perhaps this should be an emerging sector…people who dedicate themselves to investigating ways in which we might at least address (if not necessarily solve) some of the problems which will inevitably arise if the global population continues to expand alongside technology. Blithely assuming that these problems will undoubtedly solve themselves somehow — especially considering the current dominant sociopolitical mentality — seems naive at best.
We’ll all get jobs figuring out how to get each other jobs. I like it!
A triumph to go in the annals of history along with the self-licking ice cream cone and perpetual motion machine!
Well, the only reason people can get put out of a job is because they don’t own the capital they use to produce. Owners can’t become unemployed. For that matter, subsistence peasants with traditional rights can’t become unemployed. The end result of all this, if there is an end result, will be that the more spirited and aggressive among the discarded and the dispossessed will find a way to “get theirs”.
Or, looked at another way, a system of property rights that is subjected to sufficient stress will eventually be undermined. This can happen in a piecemeal, sporadic way through crime, or in a catastrophic way through revolution, depending on the circumstances.
Bluestocking is exactly right that the automation of intelligent work (such as computer scanning of X-rays to reliably find tumors — in fact, better now than human radiologists; or computer automation of scoring for english-language essays, now done better by heuristic Bayesian network programs than by humans) represents something totally new. Previous automation replaced unskilled work with machines, but still left skilled people able to find jobs.
Today, no matter what your skills, it seems highly unlikely that you can’t be replaced with a machine. Engineers are being dumped out of work by genetic algorithms that evolve things like aircraft and building and antenna designs to produce something no human would’ve thought of, but which is much cheaper to build and works better than the human-designed product. In fact, a new Achilles heel of these genetic-algorithm-designed circuits and buildings and machines is that the result sometimes proves so bizarre that the engineers who oversee the process occasionally can’t figure out how the circuit works! It does work, but precisely how, a human can’t figure out. This yields products that work better than human-designed devices, but which humans can’t repair — once again, something completely new.
This is producing a society in which humans find themselves in much the same position as primitive peoples cowering before the gods of prehistory. Today, if a computer program turns down your credit application or judges your college admission essay as unworthy, no human will be able to explain why: the algorithms have become so inhuman and so complex that no human understands what’s going on deep in the Bayesian heuristic network of the machine’s guts.
At for Matt D.’s claim that “owners can’t become unemployed,” sure they can. That was the core of the Great Depression. Factory workers got fired so they couldn’t buy the products the factory produced, and as more and more of ’em wound up unemployed in a vicious cycle, the factory produced less and less income, eventually shutting down. As for “capital,” money isn’t an actual thing nowadays and hasn’t been for more than a century — money today is a consensual illusion. It only exists as long as the society which provides a context for money continues to function. When the society starts to break down, the money vanishes.
The levels of social disruption likely to arise when mass unemployment reaches all tiers of Western society wil surely suffice to break apart our current monetary system as we know it. When no one has a job and most people get money in the form of government debit cards into which you cannot load cash, but can only take money out, is it really money anymore? When many stores won’t take government disability/unemployment debit cards, severely limiting your ability to spend it, is it really money anymore?
Have no doubt that mass unemployment is around the corner. From newly unemployed delivery drivers replaced by Google’s driverless cars to stockboys and supermarkets clerks replaced by robots to soldiers replaced by drones and Big Dog robots to cops and firemen replaced by combination universal surveillance + datamining + domestic version of drones and Big Dog robots to white-collar professionals like graphics designers and journalists replaced by computer programs (did you know there’s now a computer program can take raw data and produce passable local news articles from them?), an exponentially increasing proportion of our population is finding out that they’ve been permanently replaced by machines, and their prospect of getting another jobs is nil. What will happen to the factory owners when the middle class disappears and the financial system comes apart at the seams?
Even scientists’ jobs aren’t safe. New computer programs can start with raw data and discover laws of nature.
If robots are producing all the goods and doing all the jobs, maybe the very idea of “having a job” is something we’ll have to give up. Maybe it would just be more efficient to eliminate money and give everyone a debit card with a guaranteed amount of goods/services that can be obtained from that card per month. These ideas sound crazy, until you look at villages in Greece that have gone back to the barter system and no longer use money at all, or places like Mondragon in the Basque area of Spain, which since 1956 has used an anarcho-syndicalist social-economic worker owner cooperative system of organization. A guaranteed minimum income for all citizens sounds weird until you realize that America already has a system like that in place — just for people over age 67. We call it “social security.” Why not extend it to all citizens, just as other countries have extended guaranteed medical care for all citizens to everyone regardless of age?
(1) “At for Matt D.’s claim that “owners can’t become unemployed,” sure they can. That was the core of the Great Depression.”
Agreed. But in general automation increases the return to capital.
(2) “the levels of social disruption likely to arise when mass unemployment reaches all tiers of Western society ”
(a) These things usually evolve slowly. While automation might get to the point you describe, large-scale mass unemployment, it will not happen soon. There is ample time for society to adjust.
(b) Unemployment will not strike “all levels” of society. The rich need no jobs, except managing their assets — they’ll do just fine.