The Economics of Automation & You

It’s true that many tasks people do in their work will be automated in the future. It’s also true that the only reason for a company to it is to save money.  So where does the saved money, and do the displaced people go?

Firstly, we know what happens, because it has already happened a number of times. It happened when agriculture was automated. Prior to the industrial revolution the vast majority of people worked directly in agriculture, and now it is less than 5% in developed economies. We also saw it when production line labour was replaced with robotics. And even though this time the displacement will involve intellectual labour, the pattern will remain unchanged, and it goes like this…

  1. Company replaces workers and reduces operating costs.
  2. Company must then decide where to distribute cost savings – options include;
  • Increase profit margins
  • Reduce prices and sell more
  • Reinvest funds for growth (New Product / Distribution / Promotion / R &D)

All of which must be considered in a competitive context. Yet, invariably the same thing happens again, and again and again. The new margin gets competed away. Competitors respond and also reduce price to maintain market share either by adopting similar technology or cutting margins. (Monopoly markets and IP protected innovations being rare exceptions)

Car prices are a good example. In the past 30 years due to automation prices have dropped radically. Comparing the same General Motors model large sedan in Australia gives us the following cost in real terms:

  • Price when new – 1998 = $25,077 (96% of average annual income)*
  • Price when new – 2018 = $35,990 (42% of average annual income)*
*Aust Bureau of Statistics.

Mind you, cars today are infinitely better than models from 30 years ago.

Why does this matter for workers? It matters because it tells us that while automation reduces the need for labour, it also reduces the cost of goods. Which means that consumers get to allocate ‘savings’ on other goods and services – often in entirely new markets creating a substitution effect. And this, is the art of being future proof:

We must also substitute ourselves.

To stay relevant, we need to change places like the money does. It may mean we need to develop new skills, it may mean we have to change location, organisationally and even physically. Work will change, work will move, but it will never disappear. To be sure, the transition for the ‘automated’ will be uncomfortable. Just like it was uncomfortable for the 80% of people who could not read in 1800. But here is what would be more uncomfortable:

If we had no possibility to reinvent ourselves. If the worlds education resources weren’t mere keystrokes away and mostly free. If you couldn’t read or write (the most complex intellectual task humans have ever developed – which proves we’re smart enough to learn new skills with effort).

But we know that these things aren’t true. Reading this is evidence in itself that we all have access to the tools we need to cut new ground. The only real question is if we’ll make the investment in ourselves to become what tomorrows market will probably demand.

The UBI hoax

Have you ever noticed how those espousing the virtues of a Universal Basic Income (UBI) will never have to live on a basic income? They’re generally billionaires and academics who’ll never have to live under UBI conditions. We can add Bill Gates, Richard Branson, Mark Zuckerberg and Elon Musk to the list of those promoting the idea of a UBI. Ironic given most of them are building the technology and algorithms to replace human labour and boost their profits. What we don’t hear is any of them proposing a redistribution of income or a billionaire tax.

I’m not suggesting replacing human labour with automation is bad, it’s what we generally do as humans – aim for a more efficient method. We did it on farms, we did it in factories and we’re doing it with Artificial Intelligence. The real question is how do we structure the shift so to capture Intelligence monopolists (the tech company kind) before they pull the biggest bait and switch in human history via the UBI.

How did we get here? For the first time in history we’ve seen the true power of network effects, via near zero cost digital distribution, on a global and commercial scale. This combined with a little bit of luck and good timing has enabled the emergent technology monopolies (Amazon, Alphabet, Facebook, Apple, Microsoft) who have all grown faster than any company in history. They violate anti-trust laws with little consequence because regulators don’t understand how deep their data tentacles run. Oh, and they print money along the way.

How do they cause income inequality? To date their main strategy has been to dematerilize  physical things like stores, printing and production by removing not just the intermediaries, but the production processes that made costs higher, and incidentally, employed people. The reduced cost through digitization and network effects disrupts incumbents who can’t compete because of their high cost legacy infrastructure. As they continue to employ algorithms and robotics, their low cost advantage further ensconces their dominant position so their network spreads quicker than anyone else, creating winner take all platforms.

Why is there no ‘real’ competition in tech? Technology companies have a unique strategy when it comes to burgeoning competitors. They can see who the real threats are, before they become so. Remember, big tech companies have a rare advantage in that they can spy on emerging competitors through people’s phones and on-line activities they administer in their services. This makes it super easy to acquire a potential serious competitor long before they are a size of consequence, and without regulators realising this is actually stealthy anti-competitive behaviour.

Are they really monopolies? Well, it’s very easy for big tech to argue they are not monopolies. Google argues it’s business is advertising – where they have around a 15% share – not search, where they have a 90%+ share. Facebook can’t be a monopoly because they are a social service and they’d be less than 1% of peoples social interactions and as they say, people can always opt out! Or use Instagram and Whatsapp instead (which they of course own). But in reality, they’ve become part of the social and economic fabric, and opting out isn’t really an option. Their greatest trick of all is providing a free product which dominates married with a revenue structure which lives outside of their actual monopoly.

Why UBI is proposed as a solution:

UBI isn’t about incomes – it’s a trick to make people believe that monopoly dominance is an inevitable consequence of automation. If that were true, then the 90% of us who worked in agriculture in the pre-industrial era would not have found an alternative, which we did and we will again.

By espousing the virtues of a Universal Basic Income, it takes the attention away from the real economic problems – technology monopolies and concentration of wealth (the one percenters). The mere idea that companies can continue a profitable march ahead when 40% of their ‘former customers’ become unemployed lacks basic mathematical understanding – read: who’s going to buy their products? It just doesn’t add up economically. If 40% of people are out of work, then these big companies will have to endure a 40% decline in revenue. A basic principal of economics that most people forget is that expenditure always equals revenue. It’s the multiplier effect that helps economies grow.

The promotion of a UBI, is a classic ‘look over there!’ concocted by the wealthy to remove the focus from a long overdue wealth redistribution effort, serious tax reform against tax avoiding multinational corporations, and an anti-trust reaction to split monopolist technology firms. It’s a bit like saying; ‘sorry we got so rich, here’s some economic crumbs to keep you fed, while we sip champagne on our private jets – carry on, proletariat.’  

Now while it is true big companies with heavy automation will make more money with fewer people once AI comes online, we will simply move up the hierarchy to emotional labour – I’ve written about this here, and here. Another thing we must remember is that prices will eventually drop in automated industries – it always does. When cost comes out, competition usually forces prices down – or it does when capitalist economy Governments do their job and keep markets competitive. Hence the importance of anti-trust regulation.

Better options than UBI

The fundamental problem with a UBI is that it doesn’t address the real problem of wealth concentration (the 1%) and structural problems described above. Rather, it says let’s accept it, and instead hand out an inadequate amount of funding to those who are displaced in the short to medium term. All the while, the super rich can carry on their path of global dominance and asset accumulation and give them the license to say ‘hey what are you whinging about, you’ve got your UBI.’ 

People don’t want a handouts, they want dignity. People don’t want the basic human need to create value and to be self reliant to be stolen from them. We all want an economy where we can compete and participate, and if that means busting up a few companies and handing corporate assets to the people to make it so, then it should be done. A capitalist economy has failed if it ever needs a UBI, and communism has won.

UBI also has Orwellian level implications to make us redundant and subservient. It could put at risk the financial safety net we already give to those with physical disabilities, mental illness and various other pensions by providing a cheaper and less suitable substitute. In real terms, we already have UBIs for those who deserve it. And you know what the tax paying populace deserves? A government with the courage to push back against the one percent, to tax them properly and provide infrastructure we can build new industries upon. Even if this means re-appropriating assets from large powerful corporations.

While UBI is a terrible idea, the one thing we should be suspicious of and never forget is that the people pushing for it are also the ones causing it.

Why giving leads to getting

Many years ago I heard a quote from the late great Jim Rohn who said that if you help enough people solve their money problems, then all yours would disappear. At first I thought it was motivational bunk.

But while reading the terrific book Homo Deus by Harari recently I came across something called The Ultimatum Game. It is a famous experiment in behavioural economics which disproves the theory that we are all rational beings when it comes to money and economics.

In this experiment, usually conducted with two people, one of the them is given $100, which they must decide to divide between themselves and the other participant in any way they want. The person may keep everything, split the money, give most away, or keep more for themselves. The other player can do one of two things: accept the suggested division, or reject it outright. If they reject the division, nobody gets anything.

Classical economic theory would suggest that people are rational calculating machines. They assume that most people will keep $99 and give the other person $1. And that, the person would accept the offer of $1 because it is still better than getting nothing. They claim that a rational person would always accept a free dollar. Except that we don’t – and it isn’t irrational.

For the record most people split it 50/50. Some 40/60 or 30/70.

People may think that we reject tiny offers because it is ‘unfair’, they look like ‘suckers’, but it has more to do with the fact that our social structures just don’t operate that way. We humans work on a warm social logic. We know that sometimes we have more and sometimes we have less. We split the labour amongst our tribe and try to collaborate so we all have more through trade and trust. Once we do this the laws of reciprocity set in. We know we are all in it together, and we benefit more through sharing, than we do through gauging. We know this intuitively through thousands of years of evolution. Greedy people and pure suckers, well, their DNA never made it through the many famines.

A practice what I preach. Come join me in Melbourne June 20th, for a Free night where I share ideas I’ve learned in my career, from my new book, The Lessons School Forgot. Drinks on me, and I’ll answering any questions you have about your future.

It’ll be a great night. Hope to see you there.

Stay rad, Steve. 

 

How to future proof your kids

There’s lots of things we can do to future proof our kids. On the top of my list would be this: Don’t condition them to into thinking they’ll get a job when they grow up.

The reason is simple – A job is only one source of potential revenue to sustain life.

This isn’t to say that jobs are bad, just that while they are young we should be introducing the concept of economics. The first concept is that we need revenue when we grow up, and a job is just one source. Imagine asking your kids this:

What will your major revenue source be when you grow up?

Their first question will be, your guessed it – What in the heck is revenue? And this invites an important conversation that opens their minds for the rest of their life. A decent answer might be this: Well, revenue is a word that describes all of the different ways we can get money for helping people. A job is just one of those ways, but there are many more. And some are more rewarding, some easier, some harder. Here are some examples Johnny and Mary:

  • Profits from selling things, or owning a business
  • Commission which can be from selling something for someone else
  • Fees for doing projects
  • Freelancing selling your skills one task at a time
  • Rents for people using things you own – like a building
  • Dividends which is money when you own a portion of a company, Like the toy shops we go to – Did you know you can own part of that toyshop!?!
  • Royalties from letting someone use your idea, like if you drew the first picture of a cartoon character
  • Licensing which is when people pay you to use something you own in another country

The list is endless, unlike the number of jobs which are about to be replaced by AI, Automation and offshoring.

You could explain all the examples above, using just one of their toys, say Lego. Shops make profit selling it. Professional Lego builders work as freelancers. The shop the Lego is sold in is rented by the person that owns  the building. Lego pay licensing fees to Star Wars to make Darth Vader. Shareholders in the Lego company share in profits from people buying lego. You get the pattern.

This will show them many possibilities. Kids are super curious about the world, and they’ll never see money in the same way again. They’ll start to see economics and different ways they can participate. More importantly though, they’ll be thinking about systems, and how to position themselves into owning the factors of production, and not being them. If we do this, we give them a chance at being the architects of their own future, and not a bricklayer in someone else’s.

Blog readers in Melbourne – I’m inviting you as a reader to The Lessons School Forgot – Live – to celebrate the launch of my new book. 

Hope to see you there, Steve. 

Why we should worry less about the robots, and more about ourselves

As if concocted by some kind of Industrial Séance, the past 100 years has turned people in the developed world into a cohort of economic outpatients. We’ve abdicated our entire financial responsibility to institutions who must now provide us with a stable job, a career for life, increasing wages, and skills that are relevant in perpetuity without the requirement of an upgrade. A strange desire given that this has never happened before.

A close look at history any time before the 1950’s, and we can see we’ve never had any of those things as a certainty of life, quite the opposite in fact. The level of stability, of economic growth and the increase in living standards we’ve experience in the past 70 years is unparalleled in recorded history. For all we know it could be a fortuitous anomaly, a once off that we’ve been lucky enough to experience first hand. But we’re not thankful, instead those who’ve been the major beneficiaries are demanding in advance that the good life not be taken away. That the life we live is some kind of right, a standard we are now entitled to, without any heavy lifting required on our behalf. While very few indeed are asking the resources needed so they can get to work on personal transformation.

Automation & robots

This kind of upheaval isn’t new either. Every period of humanity which found itself in the middle of a technological shift, had those who were disenfranchised and displaced. Some even had entire their civilizations destroyed based on technological lag. Given our current global and economic interdependence this is an unlikely outcome, but yes, the technological shift is big, the biggest in many generations, and yes, it’s happening much quicker than all the others have. The challenge with technological shifts, is that there isn’t any lessons on how to deal with them. It’s not in the text book. We instead must rely on those old school skills of ingenuity and adaptability.

But this time, there is one important difference.  For the first time we have a choice on whether or not we adapt. Every other time if we didn’t have the resources at our disposal, coping in the new system wasn’t just difficult, it was nigh on impossible. This time we’ve been given the dignity of choice. We can prepare, we can up-skill, and we can participate in the shift to the greatest period of entrepreneurship we’ve ever known. We can relearn the art of self reliance. We can do all these things, mostly for free.

Hence there are two approaches we can take to sure up our uncertain futures.

The common approach: We can wait for the Government to fix things, hope for a universal basic income, regulate against technology which destroys our industry’s business model, support populist and protectionist policy makers, and pretend inevitable technologies can be stopped to maintain our status quo.

or

The better approach: We can start today, firstly by admitting what might change in our industry, our economy and our future. Then, we can quickly start working with our communities to create an infrastructure (Physical and Informational) which provides all of us access to the tools and skills we’ll need to help shape the future economy. We can lead others and inspire them to believe they can adapt by sharing what we learn. We can meet with like minds creating income producing ideas, and expanding industries we couldn’t even imagine yesterday. We can decide that hoping everything will be Ok, isn’t a plan, and remember that we aren’t the first generation to face a challenge which might effect how we work and live. But mostly, we can sleep better at night knowing we aren’t helpless outpatients, but the architects of the future we want to live in.

New book – The Lessons School Forgot – click here for free advance chapter

The economic future of the Western World

The economic future of the Western World is bright, so long as it doesn’t squander its opportunities. So long as it remains open to the growth of developing nations and we manage to collaborate cross borders. Isolation and protectionism is not the answer, just ask China before it reopened to the world. Yet, all we ever hear is about the impending doom of the middle class and the end of manufacturing.

Abandoned factory USA

While reading my Quora feed I came across a brilliant answer to this question by Balaji Viswanathan:

What is the future of the American middle class in a world where manufacturing can be done so much more cheaply in Asia and Latin America?

About a decade ago, I was chatting with my buddy who was working at Windows Mobile. He was lamenting how the mobile industry was racing to the bottom where everyone was trying to produce $10 phones. Industry experts thought that the future of telephony was ultra cheap commodity. 

A year after that conversation, an American company came with a nice gadget named iPhone that started at around $500 [without contract]. And another company in the same city brought a great competitor in Android. In a matter of months, it was clear that the future of phone market was not down, but up. Apple went on to be the biggest the most profitable company ever. Android became the biggest ever mobile OS.

That is the future of American manufacturing and middle class, if they can focus on out-innovating the world, rather than constantly whining about cheap countries. And the US is still a world leader in manufacturing with the likes of GE, Caterpillar, Dow, 3M, Boeing etc [see more: How does the USA make money despite much less manufacturing?]

There is a whole range of exciting new technology ahead of us – Virtual reality revolution, a 3d printing revolution, autonomous vehicles on land, air and water, robotics revolution, clean energy revolution, space exploration revolution and so on. Just like how Apple changed everything in a span of mere months, there could be enormous new innovations that are to come in the next few years. 

This is probably like being in the 1950s – where everything is exciting and every field is getting rapidly changed. US has all the energy sources, a large market, the biggest labs, the most innovative companies & the best of universities. If you cannot win with all these advantages, there must be something wrong. 

Do you want to build that tomorrow or keep complaining about losing the yesterday?

It’s worth reading twice. And here’s a few more of the so ons:

Internet of things, quantified self, nano technology, molecular manufacturing, genetic engineering, vertical farming, crypto currencies, block chain technology, crowd funding and fintech, wearables, quantum computing, augmented knowledge…. I could continue, but we all know that there’s enough opportunity in this list for every industry known to humanity, and the prices of all of them are dropping – which means the cost of innovating with them is low and the opportunity for value creation is high.

Now lets get excited and lets get going.

Follow me on SnapChat – search ‘Sammartron’ for more business insight.

It's the value we create that matters

Sad little boy

It is possible to earn a lot of money and create very little value for society.

It is possible to earn very little money and create incredible value for society.

So how to do we know when we have it right, for a startup or even life? Here’s my measure – how much would people miss you if you didn’t turn up? And how long would it take for them to notice after you stopped turning up? The more our not being there gets noticed, the more valuable we know our work is. I’m pretty sure the world wouldn’t notice if Wall St took a year a two off. While I’m sure most children will notice the day their mum and dad didn’t come home.

How long would it take for customers to reach out to your startup once you stopped shipping or your software stopped working? It’s an interesting question. And while we often hope to attract a large quantum of customers and scale, I’d rather have 100 people who really cared if I wasn’t there, than a million people who clicked elsewhere the moment I disappeared.

Follow me on SnapChat – search ‘Sammartron’ for more business insight.