Tuesday 31/03/2020

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Race against the machine 4.0

Chief Economist

Technological progress usually goes hand in hand with a fear that jobs will disappear. Keynes discussed the concept of technological unemployment as early as 1930. The recent wave of redundancies in the industrial and finance sectors, in keeping with the underlying long term trend, has once again rendered this theme a burning issue. However, as yet there is no irrefutable evidence that technological progress has reduced the overall number of jobs, at least not from a long-term perspective. Will things be different this time around?

If labour is replaced by capital, a substitution effect emerges. If a fixed lump of labour were available, unemployment figures would rise. However, reality is usually significantly less static. Since technological progress gradually brings down the price of products and services, real incomes increase. This in turn creates a demand for new products and services, reducing unemployment. This sums up the compensation effect and explains why we were always prone to the ‘lump of labour fallacy’ in the past.

Who will win the race?

Of course technological change does affect the labour market, particularly the types of jobs available. In this context we often refer to a hollowing-out of the job market, where highly skilled and low-skilled jobs are less easily replaced by technology. Jobs in the middle of the pack have a much harder time holding their ground. But additional education and training generally enabled those affected to find a new place for themselves in the job market once the aforementioned compensation mechanism kicked in. That way, humans could always stay one step ahead in their race against the machine. You might expect this to continue in the future.

But we might be wrong, and things could truly be different this time. In the past, machines would typically take over physical tasks, such as conveyor belt work or diggers. Current developments are increasingly focused on cognitive tasks. It’s been 20 years since computers defeated humans at chess. And last year, a computer beat a human at the extremely intuitive Asian board game of Go - in which there are more sequences of moves than the number of atoms in the universe. We have now entered the era of big data, artificial intelligence and advanced robotics, the so-called fourth industrial revolution. But it remains to be seen who will be proven right. Techno-pessimists, techno-optimists or techno-worriers?

  • The first group, which includes American economist Robert Gordon, feels that the period after the 1970 was a lot less remarkable than the previous 100-year period which could benefit  from railways, steamships, the telegraph, combustion engines and the electricity network. As such he does not foresee a great jump in productivity.
  • The second group feels that we haven’t seen anything yet, and highlights large technological breakthroughs and a swift increase in wealth.
  • Finally, techno-worriers are mostly concerned about unemployment and inequality.

Survival of the fittest

It remains difficult to predict the pace at which this digital (r)evolution will progress, let alone its consequences for our wealth. Still, being one step ahead of the machines seems to be getting increasingly difficult. ‘If you can’t beat them, join them'. There is nothing for it but to embrace technology - provided we offer high-intensity guidance and support for those who fall behind. Given the many responses to the recent wave of dismissals, some politicians are yet to adopt this mindset. It is time for engaged and proactive policy to replace the looks of surprise at each round of redundancies. But also many private companies are still looking on from the sidelines, perplexed. The only thing we know for now is that the digital hawks (countries, sectors or companies) will prove more successful to keep up with the speeding digital train.