Last week I wrote about innovation in the digital economy and some of the puzzling questions we are now wrestling with. Is innovation accelerating or slowing down? Have we stopped solving big problems or are we solving bigger problems than ever before? Is innovation in the digital economy fundamentally different from the industrial age innovation of the past two hundred years?
But, there is no more puzzling and important question than whether the link is now broken between innovation, productivity, jobs and the overall standard of living in the US and other advanced economies. Given the torrid pace of technology advances and new ideas, how come the US is continuing to experience slow economic growth, stagnant wages and high long-term unemployment? Are we now in an economy in which technology and innovation do not necessarily lead to a higher standard of living and quality of life?
“Previous technological innovation has always delivered more long-run employment, not less. But things can change,” is the tag line of an article on the future of jobs in the January 18 issue of The Economist. “Nowadays, the majority of economists confidently wave such worries away. By raising productivity, they argue, any automation which economises on the use of labour will increase incomes. That will generate demand for new products and services, which will in turn create new jobs for displaced workers.”
“Yet some now fear that a new era of automation enabled by ever more powerful and capable computers could work out differently,” the article adds . “They start from the observation that, across the rich world, all is far from well in the world of work. The essence of what they see as a work crisis is that in rich countries the wages of the typical worker, adjusted for cost of living, are stagnant. In America the real wage has hardly budged over the past four decades. Even in places like Britain and Germany, where employment is touching new highs, wages have been flat for a decade.”
Martin Wolf, associate editor and chief economics commentator at the Financial Times focused on these issues in a February 4 FT article. The article was inspired by the recent publication of The Second Machine Age by MIT’s Erik Brynjolfsson and Andy McAfee. The machines of the industrial economy made up for our physical limitations, - steam engines enhanced our physical power, railroads and cars helped us go faster, and airplanes gave us the ability to fly. The machines of the emerging digital economy, are now making up for our cognitive limitations, augmenting our intelligence and our ability to process vast amounts of information. They are now being increasingly applied to activities requiring intelligence and cognitive capabilities that not long ago were viewed as the exclusive domain of humans.
These technology advances are truly pushing the boundaries between human and machines. “The rise of intelligent technologies may cost us dear - unless we understand the dangers,” warns Wolf. “Will clever machines prove beneficial? Or will they be Frankenstein monsters?”
In The Great Decoupling in the US Economy, a December, 2012 blog by Andy McAfee, he points out that for the average American worker, this decoupling goes back to the early 1980s, when jobs were still available, but started to pay less well. By 2001, median income was lagging GDP and productivity pretty badly.
“By the end of 2011, things had become much worse in two ways,” he writes. “First, median household income was actually lower than it was a decade earlier. In fact, it was lower than at any point since 1996. And second, the American job creation engine was sputtering badly. Between 1981 and 2001 the economy generated plenty of low-paying jobs. After 2001, though, it wasn’t even generating enough of these, and employment growth started to lag badly behind GDP and productivity growth.”
What’s going on? Explanations abound. In their 2011 book Race Against the Machine, Brynjolfsson and McAfee argue that this is all about our rapid pace of innovation. As computers and robots get much more powerful, less expensive and more ubiquitious, employers are subtituting technology and capital for labor, thus impacting jobs and wages. A very different view comes from those in the so-called innovation pessimism camp, which believe that digital technology innovations are overhyped and cannot possibly drive the economic growth and job creation of industrial-age innovations.
Others argue that the GDP-based measurements generally used to determine economic performance do not adequately measure the value of intangible assets. We are spending more and more of our time consuming and developing digital goods, yet their value is not well captured in the GDP. We need metrics that better reflect the realities of the digital economy.
In its future of jobs article, The Economist points out that realizing the benefits from technology and innovation takes time, often decades, and varies hugely from industry to industry. “Economists take the relationship between innovation and higher living standards for granted in part because they believe history justifies such a view. Industrialisation clearly led to enormous rises in incomes and living standards over the long run. Yet the road to riches was rockier than is often appreciated. . . For 60 years, from 1770 to 1830, growth in British wages, adjusted for inflation, was imperceptible because productivity growth was restricted to a few industries.”
“Not until the late 19th century, when the gains had spread across the whole economy, did wages at last perform in line with productivity. . . New investments in education provided a supply of workers for the more skilled jobs that were by then being created in ever greater numbers. This shift continued into the 20th century as post-secondary education became increasingly common. . . The current doldrum in wages may, like that of the early industrial era, be a temporary matter, with the good times about to roll.”
Brynjolfsson and McAfee expressed similar opinions in a January 21 FT article. They wrote that in the early decades of the 20th century, “electric power, the internal combustion engine and other advances transformed industry. To John Maynard Keynes and others, they also seemed likely to lead to technological unemployment. But instead, these innovations led to demand for very different kinds of workers - those that used their heads in addition to, or instead of, their hands and their backs.”
“Many societies responded to this demand by investing in education. The US invested especially heavily, and it is no coincidence that it raced ahead in productivity and living standards. At the same time, entrepreneurs invented whole industries that drew on this new kind of workforce. Educated workers found they could demand high wages, which they spent on a wide array of goods and services, completing a virtuous cycle. Instead of technological unemployment, then, the postwar decades saw the emergence of a large, stable and prosperous middle class.”
“People will have important roles to play in the second machine age,” they add. “But the difficulty many companies have in finding the employees they need up and down the skills ladder shows that our education systems are not keeping pace. . . Instead of assuming that human workers are marginalised, or that technology can never destroy jobs, let us instead work to give humans the tools and environment they need to thrive.”
In the end, says Martin Wolf, it’s truly up to us. Realizing the potential of our brave new machines, - and preventing them from turning into Frankenstein monsters, - requires us to support challenging measures that promote human welfare. “The prospect of far better lives depends on how the gains are produced and distributed,” he writes in a February 11 FT article, where he offers concrete recommendations:
- “The new technologies will bring good and bad. We can shape the good and manage the bad.”
- “Education is not a magic wand. One reason is that we do not know what skills will be demanded three decades hence. . . even if the demand for creative, entrepreneurial and high-level knowledge services were to grow on the required scale, which is highly unlikely, turning us all into the happy few is surely a fantasy.”
- “We must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. . . What else is the true goal of the vast increases in prosperity we have created?”
- “We will need to redistribute income and wealth. Such redistribution could take the form of a basic income for every adult, together with funding of education and training at any stage in a person’s life. In this way, the potential for a more enjoyable life might become a reality.”
- “If labour shedding does accelerate, it will be essential to ensure that demand expands in tandem with the rise in potential supply. If we succeed, many of the worries over a lack of jobs will fade away.”
“The rise of intelligent machines is a moment in history. It will change many things, including our economy. But their potential is clear: they will make it possible for human beings to live far better lives.”