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Musings Report #44 10-30-15 Automation Doesn't Just Destroy Jobs--It Destroys Profits, Too
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
My New Book: 50% Discount for the Inner Circle
After 15 months of toil, my latest book is now available as a Kindle ebook, which I am offering to the Inner Circle at a 50% discount ($4.95) from Friday, 10/30/15 through Monday, 11/2/15: (list price is $9.95).
A Radically Beneficial World: Automation, Technology and Creating Jobs for All: The Future Belongs to Work That Is Meaningful.
As a reminder, you can download a free Kindle reader for any device, so you can read the book on any digital device--you don't need a Kindle tablet. The links to do so are at the bottom of this page about the new book. (The print edition will be available next week.)
Doom and gloom is popular for a good reason: we all know the current system isn't sustainable, and every Status Quo fix is a half-measure or wishful thinking.
So let's ask: What if we could hit the reset button on the way we create money, work, commerce and community? My book presents an integrated, systemic answer. I think you'll find it a challenging and inspiring read.
This is an excerpt from the first section. You can read the Introduction and first chapter as a free PDF:
Automation Doesn't Just Destroy Jobs--It Destroys Profits, Too
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.
The $45 tablet can be assembled anywhere, and the software can be coded anywhere.
Big profits flow from scarcity, i.e. when demand exceeds supply. If supply exceeds demand, prices fall and profits vanish.
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.
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 need to assemble new software are also free.
Automation increases supply and lowers costs. Both are deadly to profits.
So 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.
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 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 commodity device 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 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. 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.
The Rising Cost of Human Labor
There’s another driver of automation the conventional narrative misses: the rising costs of human labor.
Unlike a human worker, a robot doesn’t require healthcare insurance, worker’s compensation, 401K pension benefits, and all the other costs of labor overhead. A robot doesn’t go on strike for higher wages.
As socio-economist Immanuel Wallerstein has observed, the cost of labor is rising globally as a result of structural forces that are immune to productivity gains, recessions, tax credits or other factors:
1. Urbanization
2. External costs (environmental damage, etc.) that must now be paid
3. Rising payroll taxes as the public demands more services from the state
These trends are especially visible in China, which has seen wages soar, costs of pollution control soar and demands for state services soar.
So where does this leave us?
• Technology no longer creates more jobs than it destroys.
• Profits decline as automation commoditizes labor, goods and services globally.
• Digital and robotic tools are falling in price while the cost of human labor inexorably rises.
• As costs of automation plummet, barriers to entry fall and competition increases, pushing everyone into automation if they want to survive.
As profits fall and jobs are eliminated, the tax base narrows and the state collects less tax revenue. Even the state must automate to reduce costs.
Put all these together and the conclusion is inescapable: the conventional narrative solutions (belief that more jobs will be created than destroyed, guaranteed income for all) are wishful thinking.
The same can be said of calls for the state to hire tens of millions of displaced workers in a supersized make work program—where is the money going to come from as tax revenues falter?
Yes, government can borrow money, but this is not a sustainable way to fund tens of millions of jobs. If profits and job growth aren’t coming back, borrowing money is a temporary stopgap, not a solution.
Summary of the Blog This Past Week
Untangling America from the American Empire 10/30/15
All Hail Our New Lord and Master, the Stock Market 10/29/15
The Federal Reserve: Illusion of Understanding, Illusion of Control 10/28/15
Don't Think the Status Quo Will Save You 10/27/15
Will this Manic Stock Market Rally End in Tears? 10/26/15
From Left Field
Modern art exhibit mistaken for rubbish by cleaners rebuilt in Italian museum -- it is hard to tell the difference...
Let there be light: Handwritten draft of King James Bible reveals the secrets of its creation
propaganda and irrationalism in Roman times and in ours -- interesting parallels..
How Sustainable is PV Solar Power? -- detailed analysis...
Blood glucose control before age 55 may increase your chances of living beyond 90 (via John F.)
Cheaper and Smarter: Blowing Up College With Nanodegrees -- let 1000 flowers bloom...
When Technology Is Too Advanced -- we're wary
Rent is so high in San Francisco that I’m a software engineer and I live in a van -- new normal
The Privatization of Childhood - Childhood has become a period of high-stakes preparation for life in a stratified economy.
America is due for a revolution -- ho hum
The Redistribution Fallacy -- critique of welfare state
The Happiness Industry and Depressive-Competitive Disorder -- new book
U.N. Dreams Big: 17 Huge New Goals To Build A Better World (via GFB)
"The illusion of freedom will continue as long as it's profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater." Frank Zappa
Thanks for reading--
charles |
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