With Richard Davies, Economics Editor at The Economist
If there is a technological revolution in progress, why aren’t we seeing an increase in wages and standards of living? To find out more, Steve speaks with Richard Davies, former economics editor at The Economist, and author of Economics: Making Sense of the Modern Economy.
Wages Are Stagnant Despite Increased Efficiency
Economists are puzzled by the recent lack of wage growth in modern economies despite increased efficiency. Increased worker productivity is a clear offshoot of the impact of technology. But workers themselves haven’t seen any real wage gains from this improvement.
In America, the median inflation-adjusted wage has been stagnant for the last 40 years. Similarly, in Britain, Italy, Germany, and Japan, real wages haven’t risen much at all. This puzzles the economists.
Are Machines Making Workers Redundant?
Richard Davies takes us back to the early 19th century. Back then, textile workers in Britain worried that mechanized looms would replace humans. They smashed machines in what became known as the Luddite movement.
Workers feel that same sense of fear today as computers increasingly replace humans.
Rose-Tinted View Of Innovation
Historically, economists believe technological innovation creates more jobs.
In the 1500s, about 75% of Britain’s population was involved in farming. By 1800, it had fallen to around 35%. Then, after the Industrial Revolution, wages rose sharply. This created a big middle class that demanded household goods and drove up living standards.
Similarly, they point to Henry Ford’s assembly line, which led to higher wages.
But this rose-tinted view does not always play out as expected.
This Time May Be Different
This time around, economists see two trends shaping up. The first is that about 47 percent of all U.S. job categories are at risk of being eliminated, according to the Bureau of Labor Statistics.
The second trend is that even well-paying white collar jobs, such as accounting and legal work, are at high risk of elimination through automation.
On the flip side, hands-on professions, such as hairdressers, artisans, bespoke furniture makers, and firefighters have jobs that are hard to automate.
Disruptive Technologies Upending Older Businesses
Newer technologies are also disrupting age-old businesses. For instance, ride-sharing apps such as Uber have made transportation cheaper and more accessible for consumers. Taxi drivers, especially in places like New York City, are seeing a sharp drop in ridership and wages.
As a result, New York City’s taxi medallions, required to operate in NYC, have dropped sharply in value. In 2013, before Uber and Lyft, these medallions sold for as much as $1.3 million. Now, competition from ride-hailing apps has driven medallion prices down to as low as $160,000!
You can now use an app to call-up a medical practitioner and get diagnosed in the comfort of your home.
This is good news for consumers but bad for service providers.
All this begs the question: what’s the future value of a college degree? Richard believes future trends make a good education even more valuable than before.
Changes In The Investment Advisory Business
Steve sees this impact of technology in the investment advisory industry too. Technology has commoditized many aspects of the business. Experience and subjective judgment, however, cannot be commoditized.
Algorithms can make reasonable predictions on future earnings, dividends, valuation ratios, etc. Only humans can gauge the impact of political changes and other unquantifiable risks. Hence, to be successful, investment professionals will need to marry the efficiency of technology with their own subjective assessments.
We should all be aware of our changing world and prepare ourselves for it. To get a head start and to learn more, pick up a copy of Richard Davies’ book, Economics: Making Sense of the Modern Economy.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: If there is a technological revolution in progress, why are we not seeing the expected benefits for workers? Why aren’t we experiencing the benefits from increased productivity which was expected to raise wages and standards of living? Well, I recently read a well thought through article in The Economist magazine about this very subject and Richard Davies, The Economist’s economics editor, is with me today to discuss this. Hi, Richard, welcome to the show!
Richard Davies: Hi, Steve, thanks so much for having me on!
Steve Pomeranz: So there are somewhat troubling circumstances that rich economies find themselves in and maybe a little embarrassing, too, for their working populations. We don’t seem to be getting those expected benefits from the technology revolution. First of all, what should we be looking for that would convince us that technology is, in fact, improving our lives?
Richard Davies: I think two main things, Steve. The first is increased efficiency in firms. So that would mean that by putting in the same amount of economic input—that could be labor, lands, capital, the number of hours worked—firms should be able to produce more. If we see that, then the second thing we should hope to see is because workers become more productive, they get some of the gains of that improvement. Practically, what we should be seeing is increasing real wages.
Steve Pomeranz: Mm-hmm (affirmative).
Richard Davies: And that’s the thing, as you pointed out, that’s missing. In America, the median wage has actually been pretty stagnant for the last 40 or so years. In Britain, similarly real wages are really going nowhere. This creates a real puzzle for economists.
Steve Pomeranz: Yeah, and Italy and Japan saw hardly any increase at all. Germany as well, so it’s not just one country in particular. It’s really for the most part, the developed countries, perhaps you can say the rich countries. Is there currently a glut of labor? If so, what incentive do companies have to actually replace cheap labor with technology?
Richard Davies: It’s a great question. It goes back, Steve, to one of the early fears with technology. If you go back to the early 19th century, textile workers in Britain, in Yorkshire, Lancashire, in the North of England, were very worried that machines that help the mills help make more textiles would actually cut the number of jobs. What they ended up doing was smashing their machines, and that was something that became known as the Luddite movement.
Steve Pomeranz: Right.
Richard Davies: And, in a sense, we have the same kind of fears today. Which is that as companies have more computers, they have more machines, are they able to substitute workers for those machines. And because of that, we see rising unemployment, also rising inactivity. Which is the state in which workers—those not looking for work and they just fall out of the labor market. That’s very worrying. And also slow down in real wages. So this is the fear. The fear is that machines eventually are replacing workers.
Steve Pomeranz: Weren’t machines supposed to create new industries then?
Richard Davies: Indeed, exactly. Economists tend to have a rose-tinted view of innovation. I did give you an example of Luddite in the 19th century, but really that was the kind of early fear. I guess the classic American example was Henry Ford. Before 1913 and Ford’s factories making the Model T, the workers would move between the cars. The cars were stationary. They would work on the engine, the chassis, the wheels. That meant that a lot of workers were moving around with lots of tools. In 1914 Ford introduced his famous assembly line in which the car moves around between the workers because it’s hoisted up and it’s able to move. That meant that the time to build the Model T car fell from 12 hours to less than 2 hours. So a massive increase in productivity. The important point was the second step, which was that Ford was able to pay higher wages than its competitors. It led to another one of his famous ideas, that workers had to earn enough to afford his product.
Steve Pomeranz: Right.
Richard Davies: That’s really the hope that economists have. Is that productivity leads to these higher wages and those wages are spent, and that creates new product, creates new industry.
Steve Pomeranz: You know, Richard, I was brought up in New York in the 60s and I lived very close to the New York World’s Fair in 1964. I remember the World’s Fair myth of the carousel of progress. Now you may or may not know what I’m talking about. It was this idea that productivity, technology would improve our lives. It’s more in line with this rose-tinted view that you say many economists have. Are we brainwashed or are we just continuing to perpetuate this World’s Fair myth?
Richard Davies: No, I think that essentially the rose-tinted view or the World’s Fair that you mentioned is justified by history. The problem is that history can change. So much of the economic hope is actually based around British history—the move from agricultural economy to an manufacturing one. In the 1500’s, about 75% of people in Britain were involved in farming and agriculture. By 1800 it had fallen to around 35%. This was the Industrial Revolution that you hear people talking about. The point was that productivity, that big increase in the use of machines and factories ,meant that starting in the 1830’s, real wages really did rise rapidly, up about 60% in the following 40 years, and it’s created a big middle class. It created demand for products and so on. So the way that productivity can improve people’s lives does have its basis in history. The problem is that this time might be different. We shouldn’t always be looking backwards, and there are some times that the current way that productivity is working is harming some workers.
Steve Pomeranz: Well you know, it brings two questions to mind for me. First of all, all of this is very difficult to predict. The question is, is there a long lag between the actual creation, or the fact that technology would become ubiquitous, and the actual benefits from that technological progress?
Richard Davies: That’s a great, great question! You really hit the nail on the head. So going back to that historical example of the Industrial Revolution, actually, in the initial years a bit like the Luddites had, people were very fearful. There was this period of disruption, and the wage improvements came about 20 years afterwards.
Steve Pomeranz: Yeah.
Richard Davies: So we might be seeing something like that. I mean, in terms of prediction, I think that’s fascinating. It’s something that economists at Oxford University, Carl Frey and Michael Osborne have done a lot of work on. So they’ve been analyzing which jobs are at risk of being automated and which ones aren’t. They’ve got two really interesting findings. The first, is that this risk of automation is really common. So everybody should know about it and kind of be prepared for it. In the breakdown of jobs that people, for example, at the Bureau of Labor Statistics here in the States use, they reckon that around half of those categories of jobs are at risk of automation by machines.
Steve Pomeranz: Half of the jobs?
Richard Davies: Half of the jobs. Around 47%.
Steve Pomeranz: Are at risk of being eliminated because of machines?
Richard Davies: Exactly.
Steve Pomeranz: Okay.
Richard Davies: And the second, is that it’s not just low scale jobs. The Oxford academics predict that things like accountancy, legal work, flying airplane for example, these are typically middle class and higher paying jobs and are actually quite at risk. And that some jobs that are slightly more low pay for example, hairdressers and firefighters, actually, those jobs are very hard to automate. So this is something that is going to effect a lot of workers, and it’s going to effect workers right across the distribution of skills and learning.
Steve Pomeranz: My guest is Richard Davies, he’s The Economist’s economic editor, and I’m referring to an article that was written in The Economist about the impact of technology. Is it working? Are we getting the productivity out of technology that we have all come to expect? There’s also the thought that these new technologies that we’re experiencing today, this automation, this high information availability in our smartphones and someone, these technologies are actually less transformative than the old technologies, which we were referring to. The electrification of the world, the invention of cars, and also wireless communications. Is it possible that while these are very exciting and lead to a real wow factor, maybe they’re just not having the same effect as those older innovations.
Richard Davies: Of course, that’s entirely possible. One of the problems with economics, in general, is that we have to use the past as our kind of experimentation lab. We can’t really conduct economic experiments. So we look to history and history can change. So it could be that this new, this third technological revolution is different to the previous one. And there are some signs of that. For example, lots of the things that people are making are technological improvements that are essentially free products. So if we think, things like apps many of the things that people have on their smartphones.
Take a concrete example from here in New York, the taxi market and Uber. Uber is a free app. It’s free for me on my phone; for me as a user of taxis, it makes the market work faster. I’m not paying anything extra, in fact, I’m paying less. On the other side of the market, the taxi drivers are having to work harder, there’s more of them competing. So that does increase the overall size of the market. But for all taxi drivers who are in plentiful supply now that Uber is around, they are at risk of seeing their wages go down because the skills that they have are not really scarce anymore. And that’s the key problem.
Steve Pomeranz: We’re starting to see the price erosion of the taxi medallion, which is what is required for a taxi to operate in the city of New York. You have to have this medallion, and some prices for these medallions, they had become very valuable in the past because of scarcity, and some of them go for a million dollars, but I did read an article recently how the price seems to be coming down. So, in effect, that’s reinforcing what you’re saying, is that taxis really aren’t making as much money, it’s harder. So it’s a disruptive technology, and we’re seeing that a lot really, everywhere in almost all industries. Medicine, can a robot replace a surgeon to some degree? But we’re also seeing tremendous innovations in bio-technology that were impossible just a few years ago, and the whole healthcare industry is a burgeoning industry. Is the healthcare industry an exception or maybe an example of how jobs are shifting because of this new technology?
Richard Davies: I think it’s an example. The expenditure of healthcare is increasing so rapidly in the U.S., but also in Britain, because of demographic aging, essentially. It’s a great example, in fact. I think you really hit the nail on the head when you talked about scarcity, and taxi drivers and the medallions. So what we’re seeing there, if we think about what a taxi driver is doing, he’s picking you up and he or she is providing two services essentially. One, is to know where they are going to go drive you, because they know the city. And the second is to drive you there.
What the disruption does, is that essentially the computer and the GPS system is telling the driver how to get from A to B, and that just leaves the driver doing the driving. Now that, simply driving a car, is something that’s plentiful, it’s not scarce. If there is a sort of iron rule in microeconomics, it’s that scarce things have higher prices and more common things have lower prices. And to take it into healthcare, I think the Uber example is interesting. There are new services, for example, that let you on your smart phone, call a medical practitioner. There are new types of medical practitioners that are sort of mobile, that will come to your home, give you an assessment and so on. It’s essentially the same technology, but because the scarcity question is different …so medical practitioners are scarce. The side of the market that is dealing with demands, as I’ve said, because of this demographic shift, because of the aging population, demand is very strong.
If you’re selling a scarce product into a strongly growing market then the technology actually benefits you massively. I think this really illustrates one of the, perhaps, worrying things about the new technological revolution, which is that, it’s the sort of winners and losers story. Some people are going to gain a lot, and others are going to lose out.
Steve Pomeranz: Well, it’s ironic to me that a hairdresser will probably not lose his or her job, but a lawyer may. Which brings up the question of the standard college education today. Do you have any conclusions based upon the value of a college education in this changing environment?
Richard Davies: Yes, I think that college education is going to be absolutely essential. Of course, there are going to be some jobs, sort of artisanal jobs. Things like hairdressing, maybe making bespoke furniture, these kind of things which machines really can’t compete.
Steve Pomeranz: Yeah, made to order furniture.
Richard Davies: Exactly, that kind of thing. So if you’re not the sort of person who enjoys reading and writing, people who want to work with their hands, that kind of stuff. There are still going to be jobs out there, but you really need to specialize and essentially get back to that point of something scarce. For the majority of people though, the best option is to invest, as much as possible, in their education. Because that means you’re going to end up being one of these workers who, rather than competing with the machines, is using machines.
Steve Pomeranz: You know, my own industry has undergone a lot of changes. I’m in the investment advisory industry, and technology has basically commoditized so many aspects of the investment advisory business. One part of that, that I’ve always tuned into, is that a person with experience and understanding cannot be commoditized. Experience cannot be commoditized, and yet there are some new technologies out there which offer a very technological approach to money management using all the latest algorithms available about asset allocation and the like. And is this big question in the advice industry, too, is the business of the individual advisor going to go away and be replaced by machinery?
We only have about a minute left, Richard, what’s your thought on that?
Richard Davies: I think that ultimately the question is no. In brief, I’ll give you a quick example, if you put into an algorithm all the things that investment professionals tend to look at—earnings, potential for future earnings, stocks, it’s all that kind of stuff, potential dividends. It’s going to tell you that some leading emerging markets, for example, Brazil and Russia, look really low price. They look like they are sort of screaming “buy”. But you really need the investment professionals to look at the political situation and to really ask, isn’t now a good time to be investing in kind of risky emerging markets? I think most people are thinking no.
So I think the most likely thing is that combination. You can do your number crunching if you work in finance much more quickly. You can actually, if you spend enough time to get your algorithm right, you can get the computer to sort of spit out a few suggestions for you. Saving you time, playing around with your spreadsheet. But actually the decision which requires experience, which requires wider things that the computer is not going to be looking at, that needs to be taken by a human being.
Steve Pomeranz: Well, I find this all incredibly fascinating, and I hope my listeners have as well. My guest is Richard Davies, he’s The Economist’s economic editor. And by the way, if you’re interested in really understanding how things work and what’s going on in the world, I do recommend The Economist. Richard, thank you so much for spending your time with me.
Richard Davies: My pleasure, thank you, Steve.