If Computers Replace Workers, Who’s Gonna Buy Stuff?

A driverless electric pod car, shown at the Masdar Institute of Science and Technology in Abu Dhabi. Photograph: Bloomberg/Getty Images

In Race Against the Machine by Erik Brynjolfsson, director of the MIT Center for Digital Business and a professor at the MIT Sloan School, and Andrew McAfee, a principal research scientist at MIT’s Center for Digital Business (see the previous blog) the case is made that

…computers are now doing many things that used to be the domain of people only. The pace and scale of this encroachment into human skills is relatively recent and has profound economic implications. Perhaps the most important of these is that while digital progress grows the overall economic pie, it can do so while leaving some people, or even a lot of them, worse off.

On one level the logic of digitization and automation as applied to processes is seemingly unassailable (at least from an efficiency and often from an effectiveness viewpoint). Yet one is reminded of Henry Ford’s move, in January 1914, to double for most of his workers the daily wage rate to $5.00. In large part he did this because he faced high attrition rates and he made the economic calculation that reduced attrition rates would increase efficiency (by holding onto workers who had already climbed the learning curve) and this would more than offset the increase in labor costs.

But apparently Ford also believed that to stimulate greater demand for his product he would need to create more potential customers. Although he had managed to get the cost of a Model T Ford down to about $500, the median per capita income in the U.S. in 1913 was only $354. By 1916 Ford’s profits doubled as his sales, and economies of scale, rose.

Until 1975, wages generally amounted to 50 percent of gross domestic product. Labor essentially held its own through the 1980s and 1990s; in 2001, wages still constituted 49 percent of GDP. But by 2012 they were 43.5 percent—a modern-day low. This is what is in the back of the mind of this correspondent when reading an articles on things like the prognosis for driver-less vehicles from an article by Barrie McKenna in The Globe and Mail:

Imagine a world of driver-less cars and trucks. There would be millions of fewer road deaths, vast savings and cleaner, more livable cities. But there would be something else too – massive job loss.

Advances in robotics and artificial intelligence are already wiping out large swaths of low skilled, mostly male-dominated jobs, according to a new report by the Pew Research Center in Washington, D.C., and North Carolina’s Elon University. By 2025, entire professions, including truckers and taxi drivers, could vanish.

In a worst-case scenario, the relentless drive of automation would create a world where a small group of people are wildly successful – writing computer code and managing the machines – leaving a huge mass of others unable to compete with the robots who have taken their factory and logistics jobs, Mr. Smith lamented.

“The central question of 2025 will be: What are people for in a world that does not need their labour, and where only a minority are needed to guide the bot-based economy?” argued Stowe Boyd, lead researcher at Gigaom Research in New York – one of the almost 1,900 technology experts, economists and futurists surveyed for the report.

Robots are already replacing drivers in certain mining vehicles, Mr. Boyd said, and long haul trucking could be next. He urged policy makers to start preparing for the economic and social fallout of a world where “human work” is being replaced at an unprecedented pace.

(Note: one example of a driver-less truck is by Komatsu: http://www.theregister.co.uk/2012/11/26/autonomous_mining_trucks/

True, there are many practical hurdles that driver-less vehicles must overcome before “massive job losses” occur. Also, new types of jobs will appear over time to replace the ones technology eliminates. But it is possible, even probable, that the pace of automation will out-strip the rate of labor market adjustment, creating a tough transition period of chronic under-employment and stagnant wages for many if not most people.

The question, much like 1914,  is who is going to be able to afford the things and services these automated processes will produce? Or will prices need to fall considerably so that people with much lower incomes could still afford to buy the stuff? Significant deflation is not exactly a garden party either.