Bursting the Bubble

The Great Unravelling: How Digitalisation will change Society

13 October 2016 | by
automation, technology

The digitalisation of industry is a revolution. It will accelerate innovation and drive productivity. It heralds a new era and promises a future of smart manufacturing, customised products and increased coordination between supply and demand.

Some, however, are more cautious about the whole thing. While the Commission presented its strategy to digitise industry and, in essence, support the automation of production, Commissioner for Employment Marianne Thyssen stated that the industrial transition towards a digital revolution entails a “fundamental transformation of the world of work.” How she sees this transformation exactly is not clear. But her statement seems to indicate an awareness of a deep conflict in European policy making, as the eagerness of the Commission to leap forward technologically may be odds with another important driving force of the economy, namely, employment.

The Fourth Industrial Revolution

There are reasons to believe that the current economic transition, which the Germans have termed the fourth industrial revolution, is unlike any we have experienced before. In the past, automation technology used to be relatively specialized and innovation disrupted only one particular sector at a time. Short-term unemployment was indeed a problem. But workers were always able to switch to emerging industries and unemployment never became systemic.

Today, every industry in existence is likely to become less labour intensive as technology is permeating deep into the fabric of the economic system. The technological displacement of human labour is already evident every time we withdraw money from an ATM or check out in self-service lanes in supermarkets. We expedite it with every click of the mouse while shopping online, with every inventory that is computerized and every warehouse operation that is being automated. Farming processes, banking, translating programs, medical diagnostics and transport systems no longer resemble the memories we have of them. Nearly all sectors are changing.

Contingent Economic Relations

Many economic relations are fragile contingencies that collapse with the slightest touch of time. But one principle of modern economics is thought to still stand. Many economist believe that productivity growth through technological progress alone is essential for ensuring rising living standards on the long term. Productivity is the amount of output per unit of input. Labour productivity is measured as output per worker or output per hour worked. Increasing living standards, then, which rise with the tide of productivity, requires using new technologies and techniques of production to create more value while keeping the amount of labour, capital and other resources constant.

This sounds too good to be true. And it is. Technological progress has been accelerating noticeably for a while now, yet, living standards have not been rising. The only way to make sense of this is by recognizing that, among others, the economic laws of Okun and Bowley have been slowly unravelling. Indeed, the proportion of used labour is in decline and median incomes have stagnated since the seventies, while GDP per person has continued to grow.

Firstly, Okun’s Law, which states that an increase in output corresponds to a decline in the rate of unemployment, is no longer an established fact. It certainly was an empirically observed approximation in the past. But workforce participation has been falling for decades as the result of a dynamic process that is intertwined with the business cycle. During a recession, jobs are still as much eliminated as before. But organizations increasingly discover that ever-advancing technology actually allows them to operate without rehiring the amount of labour that was previously necessary to produce profitably. The means that the historically strong relationship between changes in GDP and changes in employment is no more. Temporary labour reductions have been replaced by jobless recovery.

Secondly, real spending on equipment and digital technology has been increasing for decades, while incomes have remained constant. This indicates that Bowley’s Law, which says that the fraction of national income going to labour and capital respectively remains relatively constant over long periods, is unravelling too. The wealth which was generated by the two production factors used to be divided according to their relative bargaining power and reflected the contribution of each input. When the production capacity of machines improved, the productivity of workers operating those machines increased accordingly, making them more valuable and allowing them to demand higher wages. Today, however, technology has decreased the relative importance of human labour, causing the latter to be replaced by the former, thereby transferring the share of income earned by labour to equipment owners.

To be sure, other factors contribute to jobless recovery and stagnant wages, such as weak cyclical demand and the increase in outsourcing and off-shoring. But these are not alternative explanations. Rather, they constitute the consequences of the efficiency gains in capital producing sectors, which can be attributed to the exponential advance of digital technology.

Income and Demand

All of the above is important because workers are consumers. If jobs keep being automated away, it is difficult to see how a modern mass-market economy could continue to exist. Nearly all major industries are geared towards consumer markets. But lower labour-force participation and decreased bargaining power may result in a precipitous decrease of aggregate demand. As incomes stagnate or even decline, a large fraction of the population will no longer have sufficient discretionary income to buy the products and services the economy produces. However, a free market economy, as we know it today, simply cannot work without sufficient demand.

Maybe that is the reason why Commissioner Thyssen is paying close attention to the basic income experiments which are expected to begin next year in Finland and the Netherlands. The Commission is following these projects “with great interest.” Because halting automation is unrealistic and, yes, even undesirable, we may indeed be ultimately forced to look beyond conventional policy prescriptions to excite adequate demand. A basic income may well be one of them.

What do you think?