What do we do about the technonomy?
Jobs, rising inequality, maybe even recessions and mass unemployment. That’s the potential downside to the technological revolution we are experiencing. Is there hope?
New apps that form part of the sharing economy are good news for consumers, but might they lead to falling incomes? See Technonomy: Are apps killing incomes?
Revolutions in robotics, AI, 3D printing, and the Internet of Things, may transform the economy, but will they destroy jobs, and lead to unacceptable levels of inequality. See The riddle of the technonomy: if technology destroys jobs, how will it grow?
If technology does indeed destroy median income levels, and leads to mass unemployment instead of creating an age of plenty, we may end up with economic depression. Paradoxically, an indirect consequence of rising inequality may be, in the long run, to make the super-rich worse off.
Where lies the solution?
One solution may come from the markets, the other may have to come from governments.
Recently, McKinsey released a report suggesting that the internet is now lowering barriers to entry to such an extent that the big corporates are set to face more competition than ever before, and as a result corporate profits to GDP may fall.
It stated: “From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labour, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013, pushing corporate profits as a share of global GDP from 7.6 per cent to almost 10 per cent.”
But looking forward, it says “While global revenue could increase by some 40 per cent, reaching $185 trillion by 2025, profit growth is coming under pressure. This could cause the real-growth rate for the corporate-profit pool to fall from around 5 per cent to 1 per cent, practically the same share as in 1980, before the boom began.”
It says that in 1980 the ratio of global corporate profits to GDP was 7.6 per cent, this rose to 9.8 per cent in 2013, but that by 2025 will fall back to 7.9 per cent.
So if we are set to see large companies face stiffer competition, where will this competition come from?
In recent years, we have seen a massive explosion in the start-up scene. In 2015, for example, more companies were founded in the UK than ever before. Coupled with this, we are have seen a rapid increase in activities designed to support entrepreneurial businesses, for example in a growing number of accelerators and incubators across the world.
The internet has helped make this possible, emerging technologies, which many of the larger companies do not understand, are creating new waves of disruption. But this time around, no sooner does a new crop of companies disrupt the incumbents in any one industry, then they too are disrupted by an even newer crop. It is innovators dilemma writ large.
But if profits to GDP are set to fall, then by definition wages to GDP must rise.
So that in part is how the markets may come to the rescue and redistribute wealth from the corporate giants to start-ups, in the process reducing the ratio of profits to GDP.
To encourage this trend, governments can look to education. Technology can be a key tool. New products and services such as the Khan Academy, or MOOCs, are set to improve access to high quality education around the world. At a time when access to the best education is becoming more unequal, technology may totally flatten the playing field.
The improvement in education can also help meet a new need. A growing number of companies complain about lack of skills within the labour market in the digital era. Schools could help, for example by putting greater emphasis on learning how to code.
Online learning, providing students across the world with access to the very best teachers, often for free, can also help fix this.
Even so, there is a very real danger that the pace of technological change this time around will be so profound that no amount of education can solve the underlying problem. Technology may become so sophisticated that there is limited need for workers employed in wealth creation activities.
But as a report from Carl Benedikt Frey and Michael Osborne from Oxford University suggests, jobs requiring social intelligence and empathy will be the last jobs to be disrupted by computers.
It seems that we are a long way from robots replacing nurses, carers or counsellors because the consumer of these services wants a human touch. Likewise, entertainers in the business of sports, music, or story-telling, such as actors, may offer a dimension that computers cannot match. See Disrupted Employment – the Return of the Craftsman.
But, if the world needs more carers, and if the world demands more localised live entertainment, who will pay for these services?
If technology creates ever greater inequality, then while people may want better access to nurses, or sports entertainment, they won’t be able to afford to pay for it.
The last decade has seen interest rates across the developed world collapse. It has even seen the evolution of a new form of monetary policy, called quantitative easing. These developments are symptoms of underlying changes, partly charged by technology. At route, record low interest rates are a consequence of what the former FED chair, Ben Bernanke, calls a global savings glut. At least in part, this was created by the surge in corporate profits to GDP. See Money Creation and Society UK.
But now the debate has evolved. More and more economists are talking about a new form of QE, one that involves central banks funding government spending, which could then be in the form of massive fiscal stimulus or tax credits.
In an age of potential plenty, but one that sees mass unemployment and excessive inequality, the creation of money to fund the kind of jobs that people need, but cannot afford, may provide a partial solution. And thanks to technology creating massive unfulfilled production potential, the danger of inflation is low.