Automation is another effect, not a cause, of the real cause of underemployment

Will robots take our jeorbs?

No. Yes. Kind of.

Some people point to robots and automation, and even in the near future, AI, as the root cause, or at least a cause, of unemployment and underemployment. However, I believe it’s the reverse – automation is yet another effect of the real root cause of unemployment and underemployment. The real root cause? Globalization.

Let’s do a few thought experiments.

You’re the CEO of a large manufacturing firm. Everything’s going just swell. Profits are good, your investors and employees are both happy, and you net a nice bonus every quarter.

A robot salesperson comes into your office and says “If you replace half your workforce with my Acme Brand robots, your profits will grow!”

What are you thinking? If you’re risk averse, and lazy, as most large companies are, you’re thinking a few things:

  • My investors are already happy with the level of profits
  • This would sorely piss off my employees
  • This would make me beholden to Acme as a new vendor
  • Would this even work? Robots are new and scary
  • This is change and I don’t like change

You’d probably thank the robotics salesperson for their time and show them to the door. It’s just not worth the risk.

Let’s change the situation up. Now you’re the CEO of a large manufacturing firm. Everything is not going well. Profits are down, your investors are pissed, and you are on terrible terms with your employees due to round after round of layoffs.

The same salesperson comes in, offers a potential solution, and this time, you take it. Why? Because of loss aversion.

In the first scenario, you had some to gain, but a lot to lose, and therefore it just wasn’t worth the risk. In the second scenario, you had some to gain, and nothing to lose, so you took the gamble.

This is what has driven automation – not a search for higher profits, but rather a search for survival. US Manufacturing is much more competitive now, and so many more firms willing to take risks to survive, than it was in the 60’s and 70’s. Why? Globalization.

To spell it out, new entrants from China, Vietnam and Mexico brought in intrinsically lower labor costs as a competitive advantage. This causes prices to drop, your profits to squeeze, and your investors to be unhappy. You, as the CEO, then have to figure out how to get profits back up to the point where your investors are happy. In other words, someone forced your hand on automation – you wouldn’t have otherwise done it.

Why is it new entrants? Why couldn’t, for example, one large company decide to invest in robotics and put everyone else out of business? Because while that may be how we wish our corporations worked, that’s not how they work. Corporations tend to, at least at the larger levels, mimic each other rather than cutthroat compete. This is partially due to risk aversion, and partially due to incest – these large companies end up hiring many of the employees of other companies in their space and vice-versa. This washes out anything too innovative and creates a kind of collusion similar to group think.

Why couldn’t the new entrants bring in robotics as a competitive advantage, then? New entrants tend to be vaccinated from the sleepwalk management of the larger corporations. Here, a different force comes into play – capital. Most new entrants just don’t have the capital to do something as capital intensive as robotics. Large companies have the deep pockets and willing lenders to get the money together to retrofit a factory with robotics. Small companies would have to scrounge to fill a small warehouse with a few robots.

What about trucking? Won’t it be replaced by fleets of autonomous vehicles? Certainly, there’s no third world country somehow making our domestic trucking more competitive. That’s true, but there is an insane amount of demand for things like gasoline, now, again due to globalization. Those costs have, again, squeezed the margins of large shippers like FedEx and UPS, and spurred them into action.

This doesn’t mean robots won’t take our jeorbs. Due to the falling cost of automation, the falling risks associated with it, and more and more managerial comfort with the idea, we may see automation considered in cases where it wouldn’t have been considered in the past. Compared to the impact of globalization, though, I see this being a smaller effect.

Moreover, there are going to be many jobs impacted by automation, but ultimately not taken by robots. This is due to two things:

First, it’s far easier to augment a human with technology than it is to completely replace them. Think of how much benefit we’ve gotten out of radar-assisted cruise control, anti-lock breaks, automatic fuel adjustments for efficiency, and GPS navigation for cars. Each of these technologies kept a human squarely in the loop. Many jobs are going to see automation and technologies give them better tools to do their jobs, rather than outright replacement. And as these tools impact the job, they end up changing it, allowing the human to focus more and more on things that intrinsically require a human (such as interacting in a sociable way with other humans).

Secondly, as more jobs increase productivity through tool use, rather than outright replacement, more of these jobs will pop up. This is due to induced demand.

Again, let’s say you’re a CEO of a manufacturing firm. You recently bought some strength assisting Exo suits for your workers, which makes them all twice as productive moving things around in the warehouse.

Before, you were able to deliver widgets at about $100 dollars per widget. At the price point of $100 dollars, let’s say you had 5 major buyers. Now, because everyone’s more productive, you can deliver at $50 dollars a widget. How many more buyers might you have?

If you have no other information – you don’t know how many more buyers you might have. The demand curve for a widget has nothing to do with its supply curve.

That being said, it’s entirely plausible you’d have 15 major buyers – triple what you had before. This means you’d actually have to hire more workers to reach the new demand. You may only have 6 major buyers willing to buy at the $50 price point, a demand you can meet with your current staff. Or perhaps the number of buyers doesn’t change at all, in which case, because no one likes firing anyone, so long as you have no additional competitive pressure, you’ll probably just ask your staff to do non-value added work like create power points or write blogs until their 8 hours is up.

To sum up – globalization took your job, not robotics. Robotics was just the messenger. And robotics can be a good messenger too, possibly a harbinger of additional employment!

 

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