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OPINION

Robot dangers

Robot dangers
September 3, 2014
Robot dangers

You might think this would be good for shares. After all, New York University's Sydney Ludvigson and colleagues have shown that a big reason for rising share prices since the 1980s has been that incomes have shifted from wages to profits. Holding equities, says William Hobbs at Barclays, "is a call option on human productivity."

However, I’m not sure about this. I suspect that new technologies could be bad for profits and shares too.

I say so for a simple reason. Capital doesn’t just compete with labour. It also competes with existing older capital and it can make this obsolete. "When machinery is first introduced, new methods of reproducing it more cheaply follow blow upon blow" wrote Karl Marx. These later waves of cheap technology, he said, cause older technologies to suffer "moral depreciation" as they can no longer compete against the newer, better equipment. In this sense, technical change destroys capital as well as labour.

Subsequent work has vindicated this view. Bart Hobijn and Boyan Jovanovic, two New York-based economists, have shown that a big reason for the stock market's slump in the 1970s was that investors anticipated that information technology would destroy existing companies, but that beneficiaries of that technology, such as Microsoft, were not yet listed on stock markets. "Major technological change" they concluded "destroys old firms. It does so by making machines, workers, and managers obsolete."

Yale University’s William Nordhaus has corroborated this. He’s shown that "only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers." This is because subsequent technical change competes away the profits earned by earlier innovations. Think of how Apple's smart phones destroyed Nokia’s mobile phone business, or how digital cameras destroyed Kodak.

If you doubt all this, let’s take two other perspectives.

First, profits come from monopoly power. Oil companies make big profits and hairdressers don't because oil companies' high capital requirements act as a barrier to entry which hairdressers don't enjoy. This poses the question: will new technologies be a source of monopoly power or not?

They could be. If they require great expense to install or expertise to run, they'll create barriers to entry. And if they can produce goods with great brand loyalty - as Apple has managed - they will.

However, if the new technologies get cheaper and cheaper, they'll cease to be a source of barriers to entry and become its opposite - a means of destroying profits. Viewers of Mad Men will remember how Sterling Cooper & Partners bought a hugely expensive IBM 360 in 1969 to get a competitive edge on their rivals. Computers then were a source of monopoly power and profits. Today, though, they are so cheap that everyone has them and so they are a threat to profits: as any media or record company will tell you.

"Imagine a robot that costs $5 to manufacture and can do everything you do, only better. You would be as obsolete as a horse" says Dr Smith. But at $5, anyone could buy that robot, so you couldn't make decent profits from owning one simply because you’d face so much competition.

The second perspective is that profits don't come merely from being able to produce goods cheaply. You have to sell those goods. And if millions of people are out of work, who will you sell to?

In theory, therefore, robots aren't good for profits and might be disastrous for them.

So much for theory. Is there empirical evidence here?

Yes. We're already seeing some labour being displaced by technology. Martina Bisello at the University of Pisa points out that the UK is seeing job polarisation, with routine white-collar jobs being replaced by technology; the same is happening in the US.

However, this process has not been accompanied by rising aggregate profits. ONS data show that returns on capital have fallen since the late 90s. This is not merely because of the recession; profit rates were lower in 2007 than in 1997. In this sense, the IT boom has lowered profit rates. Andrew Kliman at Pace University in New York says the same has happened in the US, precisely because of the moral depreciation caused by successive waves of technical change.

This is not a quirk of recent history. Older data tell the same story. According to the standard work on historic economic data (Mitchell’s British Historical Statistics), the UK’s capital stock rose by a factor of almost 11 between 1850 and 1938 whereas profits rose by a factor of less than seven. Ninety years of massive technical progress - the Bessemer process, electrification, combustion engines, telegraph, radios and so on - saw profit rates fall.

The message of this might seem a little dystopian. Not only is robotisation a threat to jobs, but it is also a threat to a lot of existing firms' profits. Of course, it will have also its beneficiaries - such as some producers of robots and those consumers of cheap robot-products if they can keep their jobs and wages - but there'll be big losers to, and not just among workers.

What's at stake here is a matter of utmost importance: how can we ensure that technical progress benefits everyone rather than just a minority, while also encouraging that progress? Like most important questions, the political class is ignoring this.