Technology and jobs

Is a perverted definition of capital efficiency fuelling unemployment?

One of my favourite economic thinkers is the 19^th century French satirist, Frederic Bastiat. And among my favourite sketches of economic absurdities are those dealing with the sophisticated thoughts of Robinson Crusoe and the profound simple logic of his servant Friday.

One such has Crusoe toiling for days on shaping a single board from a tree to construct his home on the island. One day he walks on a beach to discover a perfectly shaped board that has washed ashore from a shipwreck. His delight at being able to save much work is quickly dispelled when he realises that if he uses the board he will be doing himself out of work. So he turfs the board back into the sea.

I had a similar experience when at a mine consulting site there was talk of imminent retrenchments among the surface cleaners. When their co-workers got wind of it, they set about overturning trash bins and strewing the contents about to ensure that their colleagues would remain needed. The mine management’s response was swift in employing motorised sweepers and retrenching a large number of them.

Whenever one raises the question whether technology is contributing to unemployment, there is a knee jerk dismissive response, the most disdainful of which is that it implies resistance to progress and a denial of all the good things that technology has brought us. That clearly is not the issue, but ignoring the fall out of technology is like trying to ignore that certain drugs have side effects that have to be managed. Similarly, the effect of technology on climate change is today widely acknowledged and being addressed – some would argue not seriously enough.

But greater resistance to the question comes from conventional economics, rooted in a very long held belief that far from destroying jobs, technology in all its forms actually creates more jobs. It has been argued for as long as I can remember that workers displaced by technology would find employment “elsewhere”, albeit after obtaining new skills and additional training. That “elsewhere” or “what” is seldom defined, let alone quantified. Even vaguer is how that can effectively be achieved. But the assumption that technology on balance creates more jobs is in itself false.

Research by the world leading Massachusetts Institute of Technology (see graph here) provocatively suggests that the opposite could be true, pointing to a growing disconnect between productivity and employment. Productivity gains have outpaced employment since the late 1950’s becoming quite pronounced since 2000. While others in the fuller report (see here) have their doubts about technology on balance actually destroying jobs, the theory that it automatically increases employment simply no longer holds true.

Which may explain increasing public insecurity about the pace of innovation. More than half of the respondents to the latest Edelman survey said they distrusted the speed of development in technology. So if technology is our friend, which undoubtedly it is, why is it also perceived to be a threat? An answer most likely lies in not seeing technology in isolation, but in the broader context of the obsession with the holy grail of capital efficiency, which is the conventional understanding of improved productivity. Bear in mind that the basic measurement of capital efficiency is return on investment. Technology is one element of this. The others are maximum returns on capital in the shortest possible time (or profit maximisation and shareholder value criteria); and investment for maximum short term yields. They are all linked.

Ironically, capital efficiency, especially in the short term, and its main tool of profit maximisation is not always technology’s friend. Technology has two steps – discovery, which is finding or developing a new and creative idea; and innovation, which is putting that idea into practical use. It is often very difficult to find capital supporting untested and new ideas. Even in innovation, the focus on profit maximisation could impede research and development. Developing longer term technology improvements could be stilted by the requirement for higher immediate returns on capital. The latter also specifically targets the involvement of labour as a cost. Clearly the behaviour of labour itself can contribute to that momentum.

It is indeed possible to use technology to improve profits without necessarily increasing wealth creation itself. Simply displacing labour will do that. But the perceived threat of technology to jobs will be reduced when it is seen for the most part as being in the interest of customers and the broader public and not simply to maximise profit.

The third part of capital efficiency, that of investment, has perhaps a less tangible link to technology per se, but in ensuring maximum returns in the shortest possible time, it adds to the general milieu of distrust, unemployment, and income inequalities. This is the diversion of money into highly speculative financial markets and the growing asset bubbles in stocks, bonds and property. In the end there is less motive to invest in people and more in assets.

Capital efficiency is the cornerstone of Western economic thought. This is at least partly due to a lingering perception that profits are equal to value added or wealth created, or even that it is the primary enabler of wealth creation and therefore the most important component of GDP. To challenge its paramountcy borders on economic heresy and most mainstream economists will not go much further than calling for some constraint in its pursuit – if that. I must concede that my definition of capital efficiency may differ from the conventional which relates narrowly to production and not more broadly to organisational deployment such as share buy-backs; mergers and acquisitions; reserve hoarding and investment in flighty global capital movements.

So to be clear, capital efficiency is an excellent tool in ensuring best use of resources. But it is not the only one. Indeed, value-added or wealth created is superior to the narrow capital efficiency focus which should never be an exclusive and paramount purpose. That’s very much like putting an athlete on steroids.

Returns on capital go to the owners of capital, a relatively small section of the population, apart from the highly diluted individual holdings in pension and other investment funds. Ultimately there must be a backlash. If Oxfam is correct in its calculation that soon only 1% of the people in the world will own more than half of global wealth, at least partly attributable to the emphasis on capital efficiency, it poses a real threat to the global economic machine.

It means simply that half of the world’s wealth is mostly trapped in an asset bubble, never to spread in consumption expenditure, that translates into demand and that is the real fuel of production. In short, the more machines and technology replace people, the more tenuous the link between production and consumption, and the weaker demand, simply because fewer people can afford to spend.

Even if we had to overcome that in future decades through some fancy fiscal footwork in redistribution, humanity will confront something most old folks quickly get to know. The two primary challenges in life are provision and purpose.

Without employment, most people will simply lose purpose, perhaps the more important of the two.

I don’t believe in “if” anymore.

How hypotheses can cripple national discourse on critical issues.

It seems to be happening more frequently lately: using hypothetical arguments to silence criticism. One of the better known was President Zuma’s suggestion that things would have been better if van Riebeeck had not landed in the Cape. Then there are those peculiar defences of executive bonuses despite poor performances based on the hypothesis that things would have been worse if they were not there. And hypotheses become particularly questionable when used as a veiled threat like “without B.E.E. we would have had a bloodbath”.

Seldom are hypotheses as logical as they appear and even less so do the assumptions that underpin them reflect scientific Newtonian certainty.

So it was with a sense of let down that I saw the technique being used in a vital post budget debate a few days ago, (see Moneyweb report here) featuring a highly respected thought leader and jurist, Judge Dennis Davis, in a spat with another thought leader, economist Mike Schϋssler. The discussion was focused on South Africa’s tax burden, with Schϋssler arguing that we pay a lot of tax and get very little back for it; and Davis countering that this was “profound rubbish” if one considered South Africa as a whole and not only the middle and upper income groups. He then cited a World Bank assessment that South Africa had “the best tax transfer system in the world.”

This assessment has its own context. Apart from experiencing the global problem of massive corporate and other tax avoidance, we have highly efficient tax collection, but being the most redistributive in the world is by no means an accolade, rather a massive indictment. The level of redistribution is never a measure of government success, rather a failure to create the conditions in which people are able to care for themselves. All governments are “redistributive” to some extent, but that extent should be restricted to a minimum.

If “best” means most efficient, then there could be an avalanche of counter arguments. The transactional efficiency of a tax currency is notoriously difficult to measure. In the first instance real measurable value can only be determined in legitimate transaction which means freedom of choice, free moving prices, and alternative suppliers, all of which are absent in government transactions with the electorate. In the second instance, the tangible value of the government’s offering is extremely difficult to measure at the recipient level. Even more difficult is determining the net value after costs of not only collection, but administration and bureaucracy.

So Judge Davis reverted to hypothesis in his assessment of tangible value. He said: “In effect the tax and transfer system has created quite a lot of stability which otherwise wouldn’t be there. Of course it doesn’t go to you (middle and upper income South Africans) but that’s the legacy of apartheid I’m sorry to tell you.” He added: “If the tax and transfer system was to be fiddled with and it failed as a result, political instability could become unbearable.”

So to paraphrase one interpretation: accept the system or face dire consequences.

But to add another equally important hypothesis: the critical yet immeasurable extent to which our highly redistributive government has exacerbated expectations beyond reality and affordability, creating a perhaps even greater threat to national stability.

Even if we accept that the South African government has to be more redistributive than any other in the world, then the question can still be asked whether the beneficiaries of this redistribution are getting value for the money others are paying for. This is the real issue – one that was clearly missed in a facile relapse into rhetoric. The civil turmoil Judge Davis warns about is already upon us – not because of a shortage of tax-payers money to avert it, but mostly because of a failure of government at all levels to do what it is supposed to do with it.

That is not a separate discussion and it is the essence of what irks the average taxpayer and causing extreme frustration on all sides of the income divide. It explains in large measure why South Africa has one of the lowest levels in the world of trust in government among the informed public (17%). So here are a few hypothesis of my own: How much better off would the beneficiaries of tax-payers’ revenue be if:

· The some R60bn in maladministration and corruption annually was spent properly? (It is more than double what the Minister of Finance had to find in extra revenue);

· The R250m spent on Nkandla had been directed to the poor;

· The public service was streamlined to ensure that salaries were far less than the current 12% of GDP, the 6^th highest in the world;

And so one could go on. But as we know, the fish rots from the head and something I wrote in a previous article deserves repeating here: The supreme example of an utterly cavalier view of taxpayer’s money is the State President himself. He has surrounded himself with a cabinet of 35 – one of the largest in the world – bigger by far than the United States (16) and China (25), and each costing about R4m a year. Cut that by half (both the number and their pay) and by sheer example alone you will suppress waste substantially, diverting more to where it is most needed.

Any discussion on the collection and allocation of tax revenue has to start here. It is less about what you have, but more about how effectively you spend it. That is ultimately far more relevant to social stability.

But to return to the main issue: the older (and hopefully wiser) one gets, one learns to appreciate the absolute futility of trying to live a life based on “if”, “if only”, “could of”, “would of” and “should of”. Let’s not muddy discourse with their random use.