Economic impacts of automation

Doomsayers forecast that robots will fully automate and so steal all our jobs – others say ‘bring them on, and the sooner the better’

A gloomy report for the World Economic Forum estimates that technology will create about two million jobs worldwide by 2020 – but displace seven million

This would be worrying enough for the educated and financially secure according to Tim Worstall, a journalist, but alarming if you were without a job or in low-paid, patchy work

Paul Krugman, famous Nobel economics laureate, says: “The average wage in an economy is determined by the average productivity of labour in that economy – if productivity rises, wages rise, and automation increases labour productivity

Hence the barber in Chester earns more than a barber in Calcutta – both are doing the same task using the same gear with the same efficiency but the higher productivity of the alternative uses for UK labour pull up that barber’s wage

Krugman also says that, as automation makes the labour running machines more valuable, so real wage rates rise – and such rises are needed to increase demand for the myriad of things being made by those machines which must be consumed – by people

As ever, others disagree

If two skilled machinists are replaced by an automated machine that only requires one unskilled person to keep it loaded, the alternative jobs for them might be a shelf-stacker in a supermarket or an Uber driver – so the rise in productivity has not led to a rise in average wages

But others point out that automation is more likely to produce ten times the output of the previous two skilled machinists and so require ten unskilled persons to load up – a cheaper product will then result, so many more units will be sold to a lot more poorer people

That way, skilled weavers were replaced by machines and high quality cloth that once only the super-rich could afford became affordable for everyone – likewise, expensive hand-built motor cars were replaced by much cheaper ones made on mechanised production/ assembly lines, starting with Henry Ford’s ‘Model T’

In each case, demand soared, output followed, unit costs dived, selling prices became a lot cheaper and affordable to the masses – almost everyone, whether a customer or supplier, was happy

Conclusions:

  • As stuff on the market becomes cheaper, existing sectors can grow and whole new sectors develop
  • If unit prices drop relative to wages, the effect is the same as if wages had risen – hence, society can become wealthier not by people getting higher wages but through goods and services getting cheaper
  • If automation truly takes over, the price of everything may well drop to zero
  • Everyone will then be able to afford anything with minimal, even zero, amount of work input needed

 

 

1 comment

    • Tamsin Stanley on September 18, 2017 at 1:14 pm
    • Reply

    It’s a fascinating subject, as described by you, and clearly one which will fundamentally alter markets forever.

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