Rise of the Machines: Downfall of the Economy?

The party was packed with the usual collection of highly polished New York media and business types. (The entertainment highlight of the night for me was a charming duet by Lady Gaga and Tony Bennett.)

It was a great honor to be asked by Bloomberg and BusinessWeek to give an official toast during the event, along with my fellow toastmasters Henry Kissinger, Henry Kravis, and Mellody Hobson. For my toast, I was asked to select the innovation that I thought created the most disruptive change during the last 85 years.

I decided to speak about the microchip—because the microchip may well replace the human race.

Yes, I’m being intentionally provocative here: but it isn’t just because of my nickname (“Dr. Doom”) that I’ve chosen to find the dark shadow in the silver lining of technical progress.

A few weeks ago, Stephen Hawking, the greatest astrophysicist of our time, gave a provocative speech of his own: Hawking suggested that humans should start thinking about colonizing other planets, because eventually artificial intelligence and robots will replace the human race.

It may sound crazy now—but what seems crazy today may not sound so crazy 25, 50, or 100 years from now.

The Terminator: Source: Orion Pictures

This wave of technological innovation began in 1947 with the invention of the transistor. A little over 10 years later, the microchip appeared; and, soon after that, computers followed. From these basic roots, the rate of innovation simply exploded.

We now live in a digital age where personal computers, supercomputers, robotics, and artificial intelligence are everyday features of our world.

All of these new labor-saving technologies are cheap to deploy—and each will likely play a role in further automating and digitizing our economy.

Without further ado, let’s take a look ahead to what many are calling the Third Industrial Revolution.

The Third Industrial Revolution

Source: American Sociological Association

Looking back as 2014 winds to a close, I see that a lot has changed in the world economy this year. For example, there is a new perception of the role of technology. Innovators and tech CEOs both seem positively giddy with optimism. And while it is true that some wondrous opportunities may lie ahead, there are also dangers to be wary of as we look to the future.

Technologists claim that the world is on the cusp of a series of major technical breakthroughs. The excitement in this sector isn’t coming just from information technology. It’s also being generated in the fields of biotechnology, energy technology, nanotechnology, and especially from the manufacturing technologies of robotics and automation.

These new manufacturing technologies have spawned a feverish excitement for what some see as a coming revolution in industrial production.

This “Third Industrial Revolution” will provide many investment opportunities—such as green energy development and new kinds of direct investment in those nations most likely to benefit—as well as the potential for a steep rise in returns.

These are life-changing developments, and the consensus among experts is that we will all witness their impact very soon.

The Coming Manufacturing Revolution

In the years ahead, technological improvements in robotics and automation will boost productivity and efficiency, which will translate into economic gains for manufacturers.

It will also benefit highly skilled workers—principally software developers, engineers, and those who work in material science and research. (If you’re a parent or a grandparent, you should encourage the younger generations to explore any talents they possess in these fields.)

Consumers and individuals should also benefit from lower retail prices caused by lower production costs to manufacturers. In short, things will be cheaper.

The quick growth of smart software over the past few decades has been perhaps the most important force shaping the coming manufacturing revolution. The extraordinary rise of the computer software industry has led many of the world’s best minds to focus on the challenges of developing better, smarter, more efficient computer code.

As software development becomes more “glamorous,” the number of bright youngsters studying software engineering increases, creating a virtuous cycle for the software industry.

In addition to software services, a number of new technologies driving the next manufacturing revolution are just now beginning to be felt. They’re like foreshocks, early tremors of the coming earthquake.

On the vanguard of this revolution we find 3D printing. Sometimes 3D printing is called “additive manufacture,” because the process involves computer-controlled robots adding layers of materials to create new things. (Traditional manufacturing usually removes layers from raw material, for example the way a lathe cuts away metal.)

3D printing and related technologies will open the door to advances in manufacturing that have never before been possible:

  • Mechanical engineers will be able to prototype new products more rapidly. New product designs can be created and tested in days rather than months.
     
  • Manufacturing can be distributed globally to create the greatest efficiencies in marketing and distribution.
     
  • Finally, customization of products for individual consumers can occur at a price point that was never possible in the past. Not only will things be cheaper, they’ll be your way, right away.

A 3D printer printing its own parts

On the plus side of the equation, these changes promise a great boom in productivity. Products will be created more cheaply than ever before. Early adopters of new technology will reap a windfall by perfecting the new techniques. Highly skilled jobs will be created for those educated enough to participate in the new tech-savvy manufacturing world. A few new high-tech manufacturing billionaires may be added to the ranks of the software barons of old.

However, for those workers not fortunate enough to participate in the gains of the new economy, it may feel as though the whole revolution is happening somewhere else. Entire economies risk being destabilized in countries that rely on advanced manufacturing and on service sector jobs. (If you’re reading this, chances are you live in one.)

But remember the dark shadows of those silver linings: with each new gain comes the potential loss of something else.

We know what we have to gain from this automated future. But what, specifically, do we stand to lose?

A Rather Shaky Foundation

In my view, from the economic perspective, the technological forces driving this revolution tend to have the following three downside biases. That is, advances in technology tend to be:

  • capital intensive (favors those who already have money and other resources);
     
  • skills biased (favors those who already have a high level of technical skill); and
     
  • labor saving (reduces the total number of jobs in the economy).

The risk is that workers in high-skilled, blue-collar manufacturing jobs will be displaced by machines before the dust settles at the end of the Third Industrial Revolution. We may be heading toward a future where factories consist of one highly skilled engineer running hundreds of machines—with one worker left sweeping the floor.

In fact, the person who sweeps the floor may soon lose that job to a faster, better, cheaper, industrial strength Roomba Robot!

For the last 30 years, emerging-market economies have increasingly displaced developed-market economies in the manufacturing sector as a base of production. This is a story we all know: the transition from the old industrial powers of Western Europe and North America to the new ones in Asia. But despite this shift, developed-market economies have somehow made up for those losses in their labor markets.

Over the last 20 years, the overall unemployment rate in the United States has hovered around 5% on average—except during periods of economic recession, when it has spiked upward for short periods of time.

In general, however, the loss of those manufacturing jobs has not caused catastrophic levels of unemployment.

How? Well, the short answer is the service economy.

(Of course, this replacement of manufacturing jobs with service jobs has not been equally distributed. Some regions have suffered more than others. For example, the so-called Rust Belt in the upper Midwestern section of the United States has experienced more economic pain than most other regions. But while the local suffering has been great in those regions hardest hit, the overall trend throughout most developed-market economies is that lost manufacturing jobs have been absorbed largely by new jobs created in the service sector.)

In my view, however, there’s no guarantee that this positive scenario—of service-sector jobs making up for lost manufacturing sector jobs—will continue.

In fact, some of the trends mentioned earlier imply that the Third Industrial Revolution will unleash forces that threaten the relatively benign status quo. In addition to the job losses in the manufacturing sector, these trends also threaten the very service-sector jobs that have so far helped us avoid an employment crisis.

To put the coming changes into context, think of what e-books have already done: with a click, you can now download almost any book for about $10 on your iPad or Amazon Kindle.

This is a great service and convenience for consumers. But most of the jobs in the printing and distribution of books—and soon in the newspaper and magazine industry—are already gone. (And so are tons of jobs in the pulp paper industry—though that may come as a relief to environmentalists).

Yet this is all just the tip of the iceberg. The powerful forces unleashed by technology that will radically slash jobs in the future are already upon us. Industries affected will range from health care to retail, education, finance, transportation, real estate, and even government.

One of the affected industries may even be your own.

It’s a Small Step from Offshoring to Automation

Think of the potential risks to service-sector jobs in the context of what I call the “Automated Checkout Economy.” Several decades ago, few people thought that low-paying jobs in the retail sector would be outsourced or eliminated. Technological progress may soon change their tune.

While grocery and checkout jobs cannot be entirely eliminated, at least not quite, technology can assist in drastically reducing the number of human beings needed to fill the remaining positions. A trip into a drug store in New York City, my home for the last several years, will often reveal a single pharmacy clerk watching over four automated checkout terminals, where customers scan and pay for their own purchases. I imagine that you’ve probably seen something similar in your own town.

Other low-wage and labor intensive jobs in retail, such as stocking the shelves of supermarkets with food, will soon be replaced by machines that can do those jobs better and faster than humans could.

This has already begun to happen in traditional brick-and-mortar stores, while automation at online “e-tailers” has gone even further. Giants like Amazon have already built massive robot-staffed warehouses to distribute their orders. One day soon, your friendly neighborhood UPS or FedEx driver delivering those Amazon packages may even be replaced by a drone. And it may be sooner than you think.

Amazon drone: Source: Amazon

In retail, the slashing of middle management jobs has already begun, as computers have become more efficient not just at crunching numbers but at providing managers with the right information at the right time.

Another trend that may result in a decrease in service-sector jobs is something we might call “The Offshoring Pathway to Automation.”

During the first phase of the transition to a truly globalized labor market, New York Times columnist Thomas Friedman and others popularized the narrative of high-skilled jobs being outsourced from developed markets to emerging markets. (Friedman’s book The World Is Flat is highly recommended reading on this topic.)

While this trend continues, it supports potential for a still greater transition.

Think, for example, about the process now in place for offshoring medical services. A patient in New York or London may have his MRI sent digitally to, say, Bangalore, where a highly skilled radiologist reads the scan. However, that highly skilled radiologist in Bangalore may only be paid a quarter of what a New York radiologist would earn for reading tests.

It raises the question: how long before a computer can read those images faster, better, and cheaper than that Bangalore radiologist can?

Such a transition is not far off. The offshoring process has already broken down reading an MRI into a series of simple steps resulting in digital output. That digital output can then easily be turned into an input in a fully automated process. This kind of transition, from offshoring to automation, may become a factor in reducing service-sector jobs in developed and emerging markets in the near future.

Work in the Machine Age: Humans Need Not Apply?

The Third Industrial Revolution also coincides with other systemic changes taking place in the economy. Entire industries in the service sector will have to shrink massively for reasons initially unrelated to advances in technology.

Let’s take two of the most obvious examples: the financial-services sector and real estate.

In the years leading up to the economic collapse of 2008-‘09, market bubbles fueled huge run-ups in the prices of financial assets and real estate. With a bubble in asset prices came an explosion in compensation, causing new workers to flood into those sectors. As the last remnants of those bubbles deflate, job cuts in those industries may become inevitable.

But over time, technology may allow even the jobs in real estate and finance to be first outsourced and then totally eliminated.

Today, hundreds of thousands of back-office jobs in the financial sector are outsourced to India and other emerging markets. But tomorrow, a piece of computer code may be able to generate the same sophisticated analytics that some of Wall Street’s highly paid professionals now create.

Real estate—which is now highly labor intensive, with a plethora of agents and brokers—is experiencing a revolution. 12 years ago, in 2002, I was able to buy my first apartment in New York without a real estate agent by using the online New York Times listings. Today, even more sophisticated online tools reduce the need even further for expensive middlemen.

A revolution is also underway in education, which is also currently a very labor-intensive field.

With the growth of ever-more sophisticated online courses, will we still need hundreds of thousands of teachers in the decades to come? And what will all those former teachers do to earn a living instead?

It becomes possible to imagine a future where the top 100 economists in the world, for example, can provide high-quality and cheap online courses in their field. Those changes, however, would mean displacing the jobs of hundreds of thousands of other economics professors in the process.

Source: Cultus: e-Learning Portal

Indeed, in places like emerging-market Africa, where building brick-and-mortar schools is expensive and where training high-quality teachers is difficult, online courses and cheap tablet computers could gradually begin to replace traditional education, making it even more affordable. Ironically, this would lead to some unemployment, as the demand for highly educated people to fill teaching positions declines.

Governments are shedding labor too, particularly governments burdened by high deficits and debts.

The e-government trend can also lead to labor savings in the way in which government services are provided to the public. You can find tons of public services online and avoid spending hours standing in line in an overcrowded office just to request a few government forms.

Even transportation is being revolutionized by technology. Today a friendly Uber driver or a car-sharing service like Zip Car can replace the need to buy your own car or even rent one. But in a matter of years, driverless cars—courtesy of Google and others—may render the job of a driver or chauffer obsolete.

So, whether it’s retail or finance, education, health care, transportation, or even government, a massive technological revolution will sharply reduce jobs over time. Low-skilled jobs and medium-skilled white collar jobs will be the first to go, as they have always been.

Industrial Revolutions—Past and Future

In order to better understand the future, it’s helpful to take a look back at the past. During the First Industrial Revolution, which began around the same time as American independence from Great Britain, life began to shift away from agriculture toward increasing industrialization. Farmers moved to cities, and farms became industrialized.

Factories became widespread. A factory owner could take a farmer, perhaps a farmer who could not read or write, and give him a job. New methods—like the division of labor—and new machines allowed that farmer to become more productive. In fact, farmers were able to generate more “output” in a factory than on a farm.

But unlike modern automation, the machines needed to be run by a new generation of workers: Men and women needed to “man” those machines.

Productivity increased—and so did wages.

The Second Industrial Revolution, during the end of the 19th century and the beginning of the 20th, was an extension of the first. During those years, there was an explosion in technology and methods of communication. Thanks to the telegraph, the world became “wired” for the first time.

The new advances in technology, however, cut both ways.

Take the case of Frederick Winslow Taylor, a major figure in the Second Industrial Revolution. Taylor, known as the father of scientific management, once wrote that the brawn required for handling pig iron was proof in itself of the intellectual unfitness of ironworkers to manage their own work. This is hardly a democratic sentiment, and it was more or less the common one.

While new “scientific” methods of management increased the productivity of workers, improvements in working conditions lagged behind. (Taylor’s views didn't help matters.)

Perhaps the takeaway lesson is that it’s easier to improve technical methods of production than workers’ opportunities.

But despite these challenges, the Second Industrial Revolution created a higher demand for labor.

As we sit on the cusp of a Third Industrial Revolution, a revolution that is both industrial and digital in nature, it’s not certain that the demand for labor will continue to grow as technology marches forward—unless the proper policies to nurture job growth are put in place.

The world began to change during the first Digital Revolution—during the rise of the Internet in the late ‘90s. Then, the digital divide between those who knew how to use computers and those who didn’t led to an income gap between more-skilled workers and less-skilled workers.

At the extreme, as I mentioned in my introduction, some serious thinkers are even worried about technology not only replacing humans in jobs—but actually replacing humans entirely.

The implications of artificial intelligence, not just for jobs, but human life, are now being pondered by some of the best minds in technology.

There used to be a science fiction term for a state where human beings were no longer able to control technology: It was called “the Singularity.”

In the future, this Singularity may no longer be just science fiction.

Will There Be a Green Revolution?

Of course, there are more optimistic sides of this story. Some of those perspectives show a much rosier picture. The green revolution in technology is a perfect example.

(Jeremy Rifkin is a believer in this view. In his 2011 book The Third Industrial Revolution, he makes a case for his bullish outlook. Rifkin is optimistic about a great many things: green renewable energy, urbanization of structural power plants, hydrogen cells, and an Internet grid for power transmission and distribution.)

These new technologies carry with them the promise of cleaner and more efficient energy.

This objective, of course, could not be more crucial. The search for green energy technology has become a global goal. The evidence of environmental damage, caused by pollution and the burning of fossil fuels, is now beyond question.

To cite just one sobering example of the size of the challenge, a study by the World Health Organization (WHO) recently concluded that one in eight deaths were caused by air pollution. This is especially true in the developing world, where environmental hazards tend to be significant.

As an example, air pollution in Beijing, where senior Chinese government officials live and work, has reached dangerous levels. The pollution in Beijing is now a practical threat to the Chinese economy and to China’s plans for future development.

The Chinese government has begun to come down hard on its domestic polluters by enhancing the power of the state to regulate pollution. In light of the growing pressure to restrict environmental pollution, it seems reasonable to expect that there will be intensified research of green technologies. Hopefully, this research will address the environmental challenges at their root, rather than just fixing the damage of their effects.

Automation and Rising Inequality

While the odds for a green technology breakthrough during the Third Industrial Revolution may be good, it seems very highly likely that serious challenges will follow in the wake of further developments in labor-reducing technologies.

As more and more workers are displaced, governments will need to search urgently for new solutions to the problems of automation.

During the First Industrial Revolution, some of the worst forms of winner-take-all capitalism festered in the newly industrialized cities of Europe and the United States. The rate of social and economic inequality increased rapidly. Despite the political opposition to change, a series of economic shocks ultimately convinced enlightened people in the US and Europe of the necessity of the social-welfare state.

The benefits that workers take for granted in developed markets—restrictions on child labor, pensions, retirement benefits, unemployment benefits—were all created out of necessity.

Enlightened social-welfare policies were ultimately vindicated, not just morally but practically. In places where social reform was not enacted, on the other hand, more destructive forms of change took place. (The most extreme case of this destruction was, obviously, the rise of Bolshevism in Russia.)

Now the concern is that technology, together with other factors, is leading to a sharp rise in income and wealth inequality. There is a further risk that inequality will also lead to social and political instability.

The redistribution of wealth—from labor to capital and from wages to profits—may even undermine growth. This makes perfect sense when we consider that the concentration of wealth in the hands of a few tends to reduce household consumption. In the United States, household consumption makes up more than two-thirds of our total GDP.

The rise in inequality was initially the result of trade and globalization, such as jobs being offshored to emerging markets. However, the technological innovation we’re witnessing now has the potential to seriously worsen that inequality—especially when those innovations are, as we discussed earlier, capital intensive, skills biased, and labor saving.

The view is even more pessimistic when you factor in the winner-take-all effects—also known as the so-called “superstar phenomenon.”

Thanks to these winner-take-all effects, the top earners in any field now get the lion’s share of the compensation. After making a windfall profit, the “winners” are then able to use those riches to influence politicians and write their own legislation, which creates even more inequality.

John Maynard Keynes: Time Magazine Cover: December 31, 1965

In the 1930s, John Maynard Keynes had a more optimistic view of the impact of technology: he argued that eventually we could all work 15 hours a week and spend the rest of our time in leisure—like creating art and writing poetry.

But in the Brave New World of labor-saving technology, it seems, 20% of the labor force will work 120 hours a week while the other 80% will have no jobs and no income.

So the ideal world of Keynes may turn out to become a nightmare.

Despite the rapid rate of change and the many uncertainties that lie ahead, the past can help to serve as a model for the future. Governments have a decided role to play in making that future livable—as they once understood. In that spirit, we must search for political and policy solutions to the coming challenges of the Third Industrial Revolution and promote them where we can.

This is not, after all, the first time we’ve faced such problems. At the end of the 19th and the beginning of the 20th centuries, world leaders stepped up to the plate and came face to face with the horrors of industrialization. Child labor was abolished throughout the developed world, work hours were made humane, and a social safety net was put in place to protect both vulnerable workers and the larger (often fragile) economy.

The Past as Prologue

Former Treasury Secretary Larry Summers observed not long ago that we don’t yet have an Otto von Bismarck or a Teddy Roosevelt or a William Gladstone to mediate the current revolution now underway in the technology sector. The Canadian writer and politician Michael Ignatieff picked up on a similar theme in a Financial Times op-ed called “We need a new Bismarck to tame the machines.”

The references to these political giants of the 19th and 20th centuries are revealing. Otto von Bismarck, the father of the unified German state, is usually credited with the creation of the modern social-welfare state in the 1880s. (He’s also credited with militarizing Germany as he unified it—but let’s stick with his good works for now.)

At about the same time as Bismarck in Germany, British Prime Minister William Gladstone was reforming the most archaic aspects of the British electoral system. Ultimately, Gladstone’s work led to a great democratization and distribution of economic benefits in what was then the world’s leading industrial nation.

Here in the United States, Theodore Roosevelt is perhaps best remembered for breaking up the large industrial monopolies then known as trusts. And we could also add Franklin Roosevelt to the list who, in the tradition of his older cousin, sought to reform the worst excesses of capitalism during the Great Depression.

As we begin the search for enlightened solutions to the challenges that the Third Industrial Revolution presents, some of the overall themes begin to emerge. The first and most important characteristic is that the solution must channel the gains of technology to a broader base of the population than it has done so far.

To make that happen, the solution must have a major educational component. In order to create broad-based prosperity, workers need the skills to participate in the wealth that capitalism generates. That is a major challenge in a world where technology is changing the labor markets at a dizzying and increasing pace.

Workable solutions must address the world as it is, not as we wish it to be.

The way ahead cannot be a naïve “Great Leap Forward”: it must embrace the dynamics and creativity of free markets. On the other hand, while the solutions we must pursue can leverage the ideas of enlightened capitalists, those solutions must not rely solely on the generosity of capitalists to succeed.

That most fragile balance—between the freedom of markets and the prosperity of workers—must be sought and found.

Make no mistake: The machines are coming. The question for us is what kind of welcome to prepare for them.

One Response to "Rise of the Machines: Downfall of the Economy?"

  1. readjerome   November 19, 2015 at 11:09 am

    Insightful and extensive. Any idea what the third industrial revolution will do to democracy? Would the expected unemployment leave a significant number of people poor and politically weak and a mechanised army keep them from revolt? Or is that far-fetched?