Automation Doesn't Just Destroy Jobs--It Destroys Profits, Too

November 9, 2015

The idea that taxing the owners of robots and software will fund guaranteed incomes for all is not anchored in reality.

Automation is upending the global order by eliminating human labor on an unprecedented scale--and the status quo has no reality-based solution to this wholesale loss of jobs.

Two recent articles highlighted the profound consequences of advances in robotics and AI (artificial intelligence) on employment: four fundamentals of workplace automation and Robots may shatter the global economic order within a decade as the pace of automation innovation has gone from linear to parabolic (via Mish).

The status quo apologists/punditry have offered two magical-thinking solutions to the sweeping destruction of jobs across the entire spectrum of paid work:

1. Tax the robots (or owners of robots) and use the revenues to pay a guaranteed income to everyone who is unemployed or underemployed.

2. Let the price of labor fall to the point that everyone has a job of some sort, even if the pay is minimal.

Neither one is remotely practical, for reasons I will explain today and tomorrow.

Today, let's examine the misguided fantasy that automation/robotics will generate enormous profits for the owners of robots. Here's the problem in a nutshell:

As automation eats jobs, it also eats profits, since automation turns labor, goods and services into commodities. When something is commoditized, the price drops because the goods and services are interchangeable and can be produced almost anywhere.

Owners must move commoditized production to low-tax regions if they want to retain any profit at all.

Big profits flow from scarcity, i.e. when demand exceeds supply. If supply exceeds demand, prices fall and profits vanish.

(Monopoly is a state-enforced scarcity. In our state-cartel economy, there are many monopolies or quasi-monopolies. While eliminating these would lower costs, that wouldn't reverse the wholesale destruction of jobs and profits--it would only speed the process up.)

The other problem the "tax the robots and everything will be funded" crowd overlooks is the falling cost of software and robots lowers the barriers to competition: nothing destroys profits like wave after wave of hungry competitors entering a field.

The cost of automation and robotics is falling dramatically. This lowers the cost of entry for smaller, hungrier, more nimble competitors, and lowers the cost of increasing production. When virtually any small manufacturer can buy robots for less than the wages of a human laborer, where's the scarcity necessary to generate profits?

The parts needed to assemble a $45 tablet are dropping in price, and the profit margins on those parts is razor-thin because they’re commodities. Software such as the Android operating system is free, and many of the software libraries needed to assemble new software are also free.

Automation increases supply and lowers costs. Both are deadly to profits.

Here’s the core problem with the idea that taxing the owners of robots and software will fund guaranteed incomes for all: the more labor, goods and services are automated/commoditized, the lower the profits.

The current narrative assumes more wealth will be created by the digital destruction of industries and jobs, but real-world examples suggest the exact opposite: the music industry has seen revenues fall in half as digital technology ate its way through the sector.

A $14 billion industry is now a $7 billion industry. Profits and payroll taxes collected from the industry have plummeted. So much for the fantasy that technology always creates more jobs than it destroys.

As subscription music services replace sales of songs and albums, revenues will continue to decline even as consumers have greater access to more products. In other words, the destruction of sales, employment and profits is far from over.

Examples of such radical reductions in paid labor abound in daily life. To take one small example, our refrigerator recently failed. The motor was running but the compartment wasn’t being cooled. Rather than replace the appliance for hundreds of dollars or hire a high-cost repair service, I looked online, diagnosed the problem as a faulty sensor, watched a tutorial on YouTube (what I call YouTube University), ordered a new sensor for less than $20 online and completed the repair at no cost beyond a half-hour of labor, which cost me nothing in terms of cash spent.

The profit earned by YouTube was minimal, as was the profit of the firms that manufactured the sensor and shipped it. The sales and profits that were bypassed by using nearly-free digital tools were an order of magnitude higher.

I was recently interviewed via Skype by an online journalist with millions of views of his YouTube channel. A decade ago when he worked in mainstream TV journalism, an interview required costly, time-consuming travel (for the crew or the subject), a sound engineer, a camera operator, the talent (interviewer), editor and managerial review. These six jobs have been rolled into one with digital tools, and travel has been eliminated entirely.

Some will argue that the quality of the video and sound isn’t as high, but the quality of the user experience is ultimately based on the viewer’s display, which is increasingly a phone or tablet. So in terms of utility, value and impact, the product (i.e. output) produced by one person replaces the conventional media product that required six people.

My own solo digital content business would have required a handful of people (if not more) only a decade ago. With digital tools and services, it now requires just one person. Those of us who must work with digital tools to survive know firsthand that what once required a handful of workers must now be produced by one person if we hope to earn even a marginally middle-class income.

Multiply an appliance that doesn’t need to be replaced and a repair service that doesn’t need to be hired, a half-dozen positions replaced by one part-time job, a fully functional commodity tablet that costs 10% of the high-profit brand and you understand why profits will plummet as software eats the world.

These are not starry-eyed examples based on projections; these are real-world examples of widely available digital technologies destroying costs, sales and profits on a massive scale.

Some observers have suggested taxing wealth rather than profits to fund the super welfare state of guaranteed income for all. But the value of assets ultimately rests on their ability to generate a profit. As profits fall, wealth may be more chimerical than these observers believe.

Tomorrow we'll look at the rising costs of human labor and explore why this trend will persist even as labor becomes increasingly surplus.

This entry was drawn from my new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.

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