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Posts Tagged ‘technology

The future is an unknown unknown

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Humans know how to adapt. We have populated the planet not because we found an agreeable environment everywhere, but because we were able to adapt to the diverse and often hostile environments we moved into. And so it is today. To survive and thrive, we need to adapt to the global forces of our times, from climate change to automation.

Those with the freedom and ability to adapt to these global forces will benefit most. Take automation. Artificial intelligence and robotics now allow most tasks that manual labourers perform to be done without human intervention. One of the most exciting technologies revealed at the end of 2016, from my perspective at least, is an automated washing and ironing machine. Dirty clothes go in on one side and the fully-ironed clothes, folded by tiny robotic hands inside the machine, come out on the other side. Finally those dreary Sunday afternoon ironing exercises will be a thing of the past! Collectively this technology will save millions of productive human hours, particularly for women who in almost every society are still responsible for most home labour.

And yet, this wonderful new technology won’t be welcomed by everyone. South Africans employ more than 1 million domestic workers (or more than 8% of the work force), most of whom are women from poor households. If the cost of this new machine falls considerably in the next decade (and minimum wages continue to rise), we might soon see a significant decline in demand for ironing services. Because poor South Africans do not have the freedom to adapt to these new technologies, unemployment and inequality will likely increase.

There are many other examples. Tesla and other car companies are working on self-driving cars (no need for taxi drivers) and, which is likely to have an even bigger effect, self-driving buses. Truck driving is America’s sixth most common occupation. Or consider McDonald’s most recent innovation: self-ordering counters. No need to employ more expensive and unreliable staff. How long until everything in a McDonald’s restaurant is automated, from food preparation to servicing and cleaning? Amazon has recently revealed its plan to open 2000 automated grocery stores across the US. And then there are the many disruptive digital technologies, which The Economist editor Ryan Avent writes about in his latest book The Wealth of Humans.

The political consequences of these supersonic changes are unknown. As Avent notes, we are the first generation to live through an industrial revolution. There is little in history that tells us how society will react to such rapid changes. He predicts social unrest, unless government or civil society can reform social welfare programs on a massive scale. We have already seen this in South Africa and elsewhere: the democratic process, for many, is too slow and cumbersome. Service delivery protests, the #MustFall-movement and the global shift towards a more nativist conservatism suggest that the voices of those at the bottom of the income distribution will be heard outside the ballot box.

More creative solutions to support those left behind by the benefits of technological innovation and globalisation must be found. One idea is to institute a basic income grant that would give every person in South Africa a monthly stipend. This is no novel idea – Thomas Paine proposed a similar idea in 1797 – but economists are increasingly willing to put the idea in practice: Utrecht, a beautiful Dutch city south of Amsterdam, will next year give several hundred of its inhabitants an annual monthly stipend of 960 euro.

The concern is that people opt out of productive labour if they receive money for free. The consensus, though, is that this is unlikely: the aspirational drive of humans to move up the income ladder will push them to work hard regardless. What a basic income grant does is to make sure the ladder is solidly grounded.

But even a basic income grant won’t do enough. The rapid change will bring about psychological and sociological consequences that are hard to predict. Which social policies to implement, from early-childhood development to adult retraining programmes, in order to combat the technological disruption will be important research questions in the next few years. Creative use of technology, ironically, might be one solution.

Donald Rumsfeld famously quipped that there are known knows (the things we know we know), unknown knows (the things we know we don’t know), and unknown unknowns (the things we don’t know we don’t know). The future used to be mostly unknown knows. With some degree of likelihood, we could analyse the past and make conjectures, following somewhat linear trends, about what the future might hold. Change was incremental; we had time to adapt.

The period of rapid change we have seen since the dawn of the Internet is only likely to accelerate. As a species, we have never been required to adapt this fast, and not everyone in society will have the freedom and ability to do so. This will lead to social conflict. To minimise the consequences of this social conflict, the greatest challenge of the next decade is to enable as many as possible to adapt to the inevitable unknown unknowns of our rapidly-changing world.

*An edited version of this first appeared in Finweek magazine of 29 December.

**As this is my first post of the year, I would like to wish all readers a productive and memorable 2017. Let’s hope this will be a good one.

Written by Johan Fourie

January 5, 2017 at 07:09

How Uber makes the world a better place

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The first thing students are taught in any introductory microeconomics course is that the price of something, let’s say chauffeur services, and the quantity of it that consumers want is depicted by a negative-sloping demand curve. The difference between what consumers are willing to pay for a chauffeur ride (the demand curve) and what the chauffeur asks (the market price), is what is known as the consumer surplus. The bigger the consumer surplus, the better for society.

But even though the idea of consumer surplus is used in many applications, measuring it has always been problematic. That is because, in the real world, demand and supply move together, and it is therefore difficult to establish the exact shape of a demand curve.

That was, until Uber. A team of economists (including Steven Levitt of Freakonomics fame) recently published an NBER Working Paper that uses almost 50 million UberX ‘consumer sessions’ to identify a demand curve for taxi services, and then calculate the consumer surplus that these services generate. A ‘consumer session’ is basically when someone logs onto the UberX app and requests the price for a proposed trip. The consumer either accepts the price and wait for an Uber driver to pick them up, or they don’t, and find alternative transport.

What makes Uber unique is that its prices vary according to demand (for its services) and supply (the availability of drivers). This unfortunately also means that it is not possible to simply calculate a demand curve when the price increases by 10%, because the increase might be the result not of greater demand by consumers for Uber trips, but of lower supply (having fewer drivers on the route). The research team use a clever trick to get around this. Say the algorithm predicts that the price must increase by 1.249. This is then rounded down to 1.2 for the consumer. Other times the algorithm suggests the price must increase by 1.251, but the app then rounds this up to 1.3. It is this discrete difference when the price is essentially the same which the authors exploit using regression discontinuity analysis.

uber_advertIf this sounds very geeky, the results are worth the wait. First, the authors find that demand is quite inelastic (around 0.5). This means that if prices increase by 10%, demand will only fall by 5%. Second, they compute the dollar value of consumer surplus in Chicago, Los Angeles, New York and San Francisco to be roughly $2.8 billion annually. This is more than six times Uber’s revenue in those cities. Put another way, for each $1 spent on an UberX ride at the lowest price, the authors estimate that the consumer ‘receives’ $1.57 in extra surplus. In short, Uber generates massive benefits for society-at-large.

Why does Uber generate so much consumer surplus compared to normal taxi operators? Another NBER Working Paper, written by Judd Cramer and Alan Krueger, suggests that it is because of the higher capacity utilisation rate of Uber drivers: “UberX drivers spend a significantly higher fraction of their time, and drive a substantially higher share of miles, with a passenger in their car than do taxi drivers.” There are four reasons for this. First, Uber’s better matching technology (an app that anyone can download on their phones). Second, the larger scale of Uber’s usage in comparison to taxi companies. Third, highly inefficient taxi regulations which limit the number of routes or time periods taxi drivers can operate. Fourth, Uber’s flexible labour supply model and pricing model which match supply with demand.

South African regulators have had varied responses to Uber’s entrance in the local market. There has been opposition from the taxi industry, sometimes violent. Proponents of Uber, on the other hand, often highlight the entrepreneurial and job-creating opportunities the service creates.

What this research shows, though, is that Uber’s main benefit is the massive surplus it generates for consumers. According to the Levitt research team, one day’s worth of consumer surplus in the four US cities they analyse is worth about $18 million. “If Uber were to unexpectedly disappear for a day, that is how much consumers would lose in surplus.”

Aside from this consumer surplus, Uber services create many positive externalities, from lower congestion and pollution levels to semi-skilled employment to, perhaps more tenuously, greater social interaction and cohesion – I’ve had some fascinating conversations with Uber drivers, and know of one driver that was offered a scholarship by a client. But, most importantly, when regulators and policy-makers debate the pros and cons of Uber and other such services that will almost certainly appear in the next few years, it is worth remembering one of the basic principles of introductory economics: the immense benefits society derives from the additional consumer surplus.

*An edited version of this first appeared in Finweek magazine of 20 October.

Written by Johan Fourie

November 23, 2016 at 08:56

How technology will shape Africa’s future

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Much has been said about the economic future of sub-Saharan Africa. One camp is largely optimistic, claiming that the relatively high economic growth rates of the last decade (even during and after a global financial crisis) is evidence of ‘Africa rising’, a continent slowly emerging from three decades of slumber. Another camp is less optimistic, claiming that this growth was limited to natural resource industries benefiting from rapid Chinese growth. (To put Chinese growth in perspective: even though China grew at ‘only’ 6.9% in 2015, it added $714 billion to its GDP. In contrast, South Africa’s GDP in 2014 was $350 billion. In other words, China added more than two South Africas to the global economy in 2015 alone.)

Both camps, of course, have elements of the truth. Many African countries, some of them very poor, have seen high economic growth rates over the past few years, growth that was and remain essential in lifting many thousands of people out of poverty. But it is also true that much of this growth has been limited to resource sectors that do not have the same spill-overs into other parts of the economy that manufacturing, for example, has. This raises doubts about its sustainability.

In April, the United Nations Economic Commission for Africa published a new report that clearly sides with the more cautious view. African countries are stuck in low-productivity, primary sector exports; the fall in the price of commodities, like oil in the past 18 months, has swelled budget deficits in places like Sudan, Nigeria and Angola. It is likely to have political consequences too.

To combat such vulnerability, the authors advocate ‘smart’ industrial policies to ‘upgrade’ the commodity sectors and promote the ‘development of higher-productivity sectors, especially manufacturing but also some high-end services’. They acknowledge that there are two trends working against such industrial policy action. First, a shrinkage of the ‘policy space’ due to the establishment of the WTO and the proliferation of bilateral and regional trade agreements. Simply put, countries have less scope for raising tariffs or other creative industrial measures than before. Second, the strengthening of global value chains makes ‘nationalistic’ industrial policy less effective. But this does not deter them: ‘There are still many industrial policy measures that can be used. Moreover, if anything, these changes have made it even more necessary for developing country industrial policy-makers to be ‘smart’ about devising development strategy and designing industrial policy measures.’

So what are these so-called ‘smart’ industrial policies? Unfortunately, after spending 156 pages explaining the need for ‘smart’ policies, the authors give us only one page of very vague principles: policy-makers ‘need to identify the ‘right’ policies’; policy-makers ‘need to induce foreign firms to create linkages with the domestic economy’; and policy-makers ‘should pay attention to the possibility of upgrading not just through the development of capabilities to physically produce goods but also through the development of producer services, such as design, marketing, and branding’. So much for practical guidelines!

The authors have missed a golden opportunity to actually think more creatively about Africa’s economic future. Technology is changing Africa’s comparative advantage. Global manufacturing will become increasingly capital intensive as robotics and technologies like 3D-printing (not mentioned once in the report) advance. What we consider low-skilled labour-intensive manufacturing (shoe-making, for example) may, overnight, become high-skilled, capital-intensive (once shoes can be printed), with production switching from countries like Vietnam and Bangladesh back to the developed world. Cheap labour will become less of an advantage as robotics becomes more affordable.

An additional factor that makes manufacturing in Africa so expensive is trade costs. We have few large cities on the coasts with easily accessible port facilities. How can landlocked Zambia compete with similar-sized Cambodia? Zambia has a railroad that goes through two other countries before it reaches the eastern coast of Africa; Cambodia’s capital has a river port that can receive 8000-ton ships. And statistics confirm this: the World Bank calculates that the cost to import a 20-foot container to Cambodia is $930. It is $7060 in Zambia. It is difficult to see how any ‘smart’ industrial policy can mitigate these massive cost differences.

Does this mean Africa is doomed to remain a primary good exporter? Not necessarily. Mobile technology is revolutionising the way Africans do business. It is a technology that negates Africa’s rugged terrain, leapfrogging the need for expensive fixed-line infrastructure. If it can receive the necessary investment, broadband and wireless technologies will do the same. This will allow Africans to provide services to a world that would have been impossible to reach only a decade earlier.

Can services alone propel Africa into the industrialised world? Apart from a few small economies – Singapore and Luxembourg – there is little past evidence that it can. A pessimist may thus proclaim little hope for the continent; an optimist may instead remember that technological innovation has a way to revolutionise existing industries. It is already happening: consider the much higher returns of Ugandan farmers after mobile technology allowed them access to real-time market prices for their goods. Or how Airbnb has empowered middle-income South Africans with a spare room to benefit from the country’s thriving tourism industry. Or how renewable technologies – also completely neglected in the UN report – will affect African countries’ power generation and distribution capabilities, supplanting the need for coal and other minerals.

What is clear is that the image of factories with thousands of low-skilled labourers working 8 to 5 jobs belongs to a previous century. To imagine that industrial policy can somehow transplant that image to Africa in the twenty-first century is fictional. The smartest industrial policy we can hope for is instead a belief that Africans have the agency to shape their own destiny, as long as they have access to the hard (fast and affordable internet and reliable electricity) and soft (IT colleges and programming degrees) infrastructure that will allow them to benefit from the technologies of the future.

*An edited version of this first appeared in Finweek magazine of 2 June.

Our watershed… opportunity

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SlingShot: Could this device make water infrastructure redundant?

SlingShot: Could this device make water infrastructure redundant?

South Africans are gearing up for a tough summer. While loadshedding (the frequent power shortages that plagued the country since 2008) has eased, a new issue came to the fore this week: watershedding. In areas of Germiston and the East Rand, water shortages have been reported and watershedding between 10am and 3pm is on the cards. While the heatwave and drought across the country are the immediate cause of the shortages, there are far deeper structural problems that is likely to make watershedding a common feature of daily life in South Africa in the near future.

This should not come as a surprise. There has been several warnings in the media about the likelihood of watershedding over the past few years, well before the heatwave and drought made the situation acute. On 25 June, Niki Moore wrote the following in the Daily Maverick:

The reason for any potential water shedding is almost a mirror image of why we have load-shedding. Since 1994, millions of people have been added to the water grid with very little thought being given to increasing the capacity of water storage or water intake plants. Combined with mismanagement of water, non-payment for water, huge water wastage through lack of maintenance and neglect, and poor governance through corruption, we are facing a high noon of water shortages that might start affecting us in as soon as a few months.

Well, that was pretty accurate. But watershedding – a shortage of water – is only one concern. The more serious one is the pollution of existing drinking water, which is likely to have serious health consequences. Here is Anthony Turton on the water crisis:

The possibility of major public health crises in the short to medium term is growing and can no longer be discounted. We could soon see a major bloom of toxic cyanobacteria, especially in the light of the increased water temperatures likely to result from the El Nino Southern Oscillation now evident in southern Africa. The growing risk to both companies and individuals needs to be anticipated and understood, so that remedial action can be taken as quickly and effectively as possible.

The reason this is unlikely to happen, he argues, is political:

All available data suggests there is little in South Africa’s water sector to be optimistic about. The level of politicisation has become so high that decision-making is no longer rooted in hydrological realities. Ideology is regarded as paramount, while reality counts only as a secondary factor. The ideological filters in place make it very difficult to carry out any serious technical assessment of water quality or management. In addition, no serious attempt is currently in place to embark on evidence-based policy reforms.

Perhaps the greatest failure of the new order since 1994 has been deteriorating water quality. This has been caused primarily by massive failures in the management of municipal wastewater treatment plants, which have made the State the biggest polluter of water in the country. This looming disaster could have been avoided by more rational and less ideologically-driven policy choices. We need to challenge this approach if we are to re-invigorate our democracy and extricate ourselves from the horns of the dilemma arising from the politicisation of water in a highly water-constrained national economy.

So what can be done about this? The easy but unsatisfactory answer is that local government elections are next year, and South Africans should use this opportunity to demand change. But much of the problem is more systemic and pervasive than local governments can solve on their own; as Turton argues, the “first essential requirement is a new and technically robust national strategic plan for managing, conserving, and augmenting the country’s limited water supplies”. National elections, though, are only in 2018, and it is difficult to envisage dramatic change.

Instead, South Africans will have to find solutions to the water crisis outside the remit of government. This is difficult with a water utility, which is the epitome of a natural monopoly and the reason the state is almost always involved. But just as the case with loadshedding, technology may provide a solution.

Last night, I watched a 2014 documentary about the SlingShot, a device developed by the creator of the Segway, Dean Kamen, to purify water. Much like Elon Musk has created the PowerWall to allow households access to electricity at all times, the SlingShot is a device which would allow anyone able to convert contaminated and filthy water (or even seawater) into drinkable water. The device has been tested in Ghana, South Africa and in several Latin American countries. It has the support of Bill Clinton and the CEO of Coca-Cola.

I’m a technoptimist. I don’t know whether this particular technology will be successful, but as Estian Calitz and I argued in this 2009 paper, technology will allow public goods to be increasingly viewed as private goods, or natural monopolies to be made into competitive industries. Cell phones are a good example, breaking down the need to have large, fixed-line networks that doesn’t make sense to build more than once: i.e. the natural monopoly of Telkom. Elon Musk’s PowerWall, coupled with renewable energy generation, will break the natural monopoly of Eskom. Perhaps Kamen’s SlingShot (or a similar device) will do the same for water.

South Africans have many reasons to be pessimistic about the future. But, as David Landes writes in the Wealth and Poverty of Nations, it pays to be optimistic.

In this world, the optimists have it, not because they are always right, but because they are positive. Even when they are wrong they are positive, and that is the way of achievement, correction, improvement, and success. Educated, eyes-open optimism pays; pessimism can only offer the empty consolation of being right.

Maybe the watershed moment for South Africa is when we realise that the promise of a better life for all lies not in the next elections, but instead in embracing new technologies.

Written by Johan Fourie

November 12, 2015 at 09:44

Our entrepreneurs (and policy makers) need to learn from abroad

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Imagine you’re a young entrepreneur and have built up a profitable IT business. You can expand either by going at it alone, or partnering with a more established, perhaps international firm. Which should you choose?

Sign up with the multinational.

That’s the advice of a new NBER Working Paper ‘Does Foreign Entry Spur Innovation?’ by three US trade economists, Yuriy Gorodnichenko, Jan Svejnar and Katherine Terrell. They find, using a large firm-level dataset of eighteen countries, that foreign direct investment (FDI) have a significantly positive impact on product and technology innovation of domestic firms in emerging markets. In other words, those domestic firms that receive FDI become more innovative over time than other domestic firms.

This isn’t surprising. Trade economists have long argued that increased trade and investment boosts domestic firms’ productivity. Foreign firms tend to bring new innovative ideas, technology and management practices that replace potentially inefficient practices of domestic firms. When SA opened up to the world after the isolation of the apartheid years, the argument goes, local firms’ productivity increased significantly because they suddenly had to compete against more competitive producers.

This was difficult to prove empirically: industry-wide statistics are often too vague to give reliable evidence that FDI has a positive impact, and some firms may close due to tougher competition. But this study uses firm-level data, measuring the size of spillover effects from the international partner to the domestic firm, and documents the impact on innovation instead of noisy productivity estimates.

The authors found that the benefits of FDI don’t accrue to other firms in the industry, but is localised to the domestic firms immediately connected to the foreign firms. They conclude: Simply being in an industry populated by foreign firms generally has a weak, if any, effect on innovation. In fact, if our entrepreneur doesn’t get a foreign partner but his competitors do, he may find himself out of business.

This study is important for policy makers too. Firstly, encouraging FDI is critical to growing an economy. Public (and political) sentiment is often against foreign competition; consider the long (and expensive) deliberations preceding the Walmart-Massmart merger. Let me be unequivocal about this: this study shows that foreign competition drives innovation in domestic firms, making them more competitive and longer-lasting. We need more, not less, of it.

The authors also found, in short, that FDI from rich countries is better. Again, this makes intuitive sense. Firms in the rich world already operate at the technological frontier. Now, for the first time, it has found empirical support. One wonders about SA’s attempts to cosy up to our BRICS partners instead of encouraging investment from our traditional (and still largest) trade partners. If we believe the results of this study FDI from China is less beneficial for SA than from the US or Germany.

Another, perhaps more controversial, finding: because the benefits of FDI only accrue to firms within the supply chain of the acquired domestic firm, it might mean that policies which require foreign firms to have significant local content (for example, a rule which states 20% of a firms’ inputs must be locally made) may be justified. Minister Rob Davies will be happy to hear this.

Global supply chains: the poorest countries are also those with the weakest links to the global network. Source.

But he’ll first need to get foreign firms excited about SA. In late July, he introduced the Promotion and Protection of Investment Bill in parliament as an attempt to do just that. The bill aims to protect and promote investment, but, sadly, falls short. As Webber Wentzel’s Peter Leon argues, it contains few of the protections one would typically find in a bilateral investment treaty. ‘Fair and equitable’ treatment for investors, such as market value compensation in the event of expropriation, are missing.

The rapid growth of emerging markets over the last two decades seems to be tapering off. SA cannot rely on foreign firms entering the country seeking investment opportunities as had happened during the good times. We have to up our game and become more attractive. That means improving all sorts of things, like skills and infrastructure, but the low-hanging fruit of investment bills and secure property rights should be top priority.

*This column first appeared in the 1 October edition of Finweek.

Written by Johan Fourie

October 13, 2015 at 03:36

Michael Jordaan: Freeconomics is the future

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Do you contribute to South Africa’s GDP by reading this post? Traditionally, had I written a letter, I would have required 220 envelopes and 220 stamps to send this note to those subscribed to this blog. It would have clearly registered as a tiny contribution to the country’s GDP? And I would have probably charged you to receive this letter, say R20 per individual, which would also have been recorded in the C or the X of GDP. But when you read this for free on your PC or iPad or phone, is it registered as part of our GDP? No. Similarly, if we search for the telephone number of the local restaurant on Google, or the weather prediction for tomorrow on, has anything been added to GDP? No. How do we measure the ‘free’ goods and services all of us consume everyday? We don’t. But because our utility (or happiness or satisfaction) has increased significantly through these services (I assume it has if you’ve read this far), it could only mean that we are underestimating GDP or, put differently, that GDP is incapable of measuring the vast gains from technological progress we’ve made over the last three decades.

And this process is unlikely to stop. Moore’s law – where computing power doubles every two years – is likely to be true in a much broader sense: the cost of information – books, music and all the other things that we spend an increasingly larger amount of our time on – will continue to fall, halving every two years. Many of these things are already free: road maps, weather predictions, news about cricket scores and elections and Oscar’s murder trial, connecting with that long-lost friend from school, searching for the origin of the word ‘geometric’, listening to music, translating English to French. You get the point. Only a decade ago we were still forced to pay for all these things. Now its free. And that requires new economic models and measurements, because consumers behave differently when, instead of having to pay for a service, they receive it for free.

Call it ‘freeconomics’ says Michael Jordaan, former CEO of FNB and now head of Montegray Capital in Stellenbosch. Jordaan presented his first lecture as new honorary professor in Stellenbosch University’s Department of Economics last night, and captivated the audience with a crash course of the most revolutionary technological changes today (his slides are available here). Much like Malthus had compared the arithmetic increase in food production with the geometric increase in population, Jordaan claimed that the exponential growth in information and, conversely, the exponential decline in the cost of information, necessitates economists to adjust – or perhaps toss and completely rethink – their classic microeconomic models. This new model, he conjectured, is driven by technologies of the digital age, where the marginal costs of services are close to zero, where demand is unconstrained by price and where scarcity has been replaced by the abundance of products and services that are available for free online.

Clearly, the standard supply-and-demand graph needs revision. Quantity does not necessarily increase linearly as price approach zero (or actually reach zero). Free stuff with no marginal cost and nearly frictionless transaction costs can be consumed by billions of people across the globe; one more person watching a YouTube video adds zero cost. According to Jordaan, in the freeconomy, scarcity is replaced by abundance (echoing the sentiments of Diamandis and Kotler in their book by the same name). Yet there are limits, of course, to what we can consume. Jordaan recognises this by acknowledging that the scarcity of time will become our biggest constraint, although that is changing too as improvements in DNA reconstruction and artificial intelligence may result in rapidly increasing life durations. For the immediate future, how we filter the abundance of free information will likely be our greatest challenge – and the ability of consumer goods to ‘save time’ will be extremely lucrative. Hello Google’s self-driving car.

There are many insights to highlight from Jordaan’s lecture, but some of the most interesting discussions came in the question section. Responding to a question about the social inequalities that this rapid technological change will create, Jordaan predicted that we may need to think differently about unemployment in the future. As robotics and AI will replace much of the unskilled and semi-skilled jobs, perhaps, he suggested, a large cohort of people will depend on state subsidies and the free economy for their daily needs, with no need to earn an additional income. The rich will be happy with this social consensus of large redistribution through the fiscal system as long as they can continue to invest in improving technologies for the betterment of all. With more social grant recipients than tax payers, Jordaan suggested that South Africa is already a template of such a society.

Is the future a benevolent Elysium? Perhaps it is, but if the past is anything to go by, radical change will not be as simple as one, two, free.

Written by Johan Fourie

March 28, 2014 at 16:18

Why my job is safe (and, if you read this, yours probably too)

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Another labour-saving technology: goodbye chauffeurs and taxi-drivers, hello millions of hours of additional work time for commuters. Picture taken by my wife Helanya as we drove through Silicon Valley, November 2013. My biggest fear was crashing into it.

Another labour-saving technology by Google: goodbye chauffeurs and taxi-drivers, hello millions of hours of additional work time for commuters. Picture taken by my wife, Helanya, as we drove through Silicon Valley, November 2013. My biggest fear was crashing into it.

I teach economics at Stellenbosch. I don’t consider myself the best teacher there’s ever been (this is backed by empirical evidence on rating scores and faculty rewards), but also probably not the worst either (purely anecdotal and experiential evidence). Some of my teaching is at the postgraduate level – Economic History – but most of it is undergraduate, from a textbook, and mostly replicable by any university that offer second-year Macroeconomics.

And, increasingly, also by online universities that now offer MOOCs: ‘massive open online courses’. Instead of listening to me explain the IS-LM model, students now have the opportunity to sign up for online lectures from the best macroeconomists out there, and listen to these when they want, where they want. MOOCs have been billed as the ‘end of universities as we know it’. See here, here and here. Instead of every university offering mediocre, entry-level courses, why not have one superprofessor at the best university in the world broadcast his lectures to a global audience? Broader access, high quality and for a much lower price.

This is of course part of what I think will be the key question for future generations: the extent which human labour can and should be replaced by robots. In Europe and the US, convenience store staff are being replaced by automated payment points. Instead of call centre operators, I now get calls from recorded human voices selling products (which, incidentally, is much easier to switch off). But let’s remember that technology can be both labour-substituting and complementary: while a harvesting machine will probably substitute a farmer’s need for many workers, a tractor makes a farmer more productive and its acquisition might even require the farmer to employ more people to expand production. To take an example closer to home: technological advancement (like more advanced computers and better statistical packages) augments my ability to do research; speak to any economist older than 50 and they will tell you how they used to use punch cards for regression analysis. Quaint, but extremely time-consuming.

So technological change creates winners and losers. Capital investment (accumulation as Adam Smith called it) make labour more productive, increasing productivity, wages, and therefore living standards. But technological improvement also changes the labour requirement: it often substitutes lower-skilled jobs for higher-skilled jobs. Here is the best example: Tesla’s new manufacturing plant really only requires people for the first 18 months of its operation (to programme the circuit). Thereafter, as soon as production begins, everything (apart from oversight) will be done by computers and robotic arms. Is this the future of car manufacturing? Will the workers in our vehicle manufacturing plants become obsolete? Probably.

This is of course of great concern if you live in a country with an unemployment rate of 40%, a country where every political party fighting in this year’s election hopes to win votes by ‘creating jobs’. What is the solution, then? To ban technological innovation and change? Of course not. To do so would lead to stagnation in productivity growth, meaning a decline in our ability to remain internationally competitive, meaning lower profits for firms, lower incomes and wages, and lower living standards. (Incidentally to the labour economists out there, won’t labour subsidies have the same effect?) But to stick our collective heads in the sand is also not a solution: workers that lose their jobs is not only a political dilemma, but a moral one too. And a difficult one. And then there’s still the additional (and bigger) problem of the 5 million South Africans that are actively looking for work, and another 4 million that would like to work but has stopped looking.

So who is likely to lose to technology? Is my job threatened by the arrival of these MOOCs? Probably not. I would argue that any service job that requires some socialising to be effective – and learning, especially in the social sciences, is a social activity – will be complementary to technology rather than being substituted by it. A course in pure mathematics or machine learning can perhaps be usefully taught online. But any course where context becomes important – where the past experience of the student interacts with the teaching material to create a unique product for all the other students – is unlikely to be substitutable by an online, one-way interaction. A new NBER Working Paper by Acemoglu, Laibson and List supports this view. They investigate the concern that internet-based educational resources (MOOCs) will be ‘disequalising’, creating superstar teachers and a winner-take-all education system that, for example, will put me out of a job. Instead, they find quite the opposite:

We contend that a major impact of web-based educational technologies will be the democratisation of education: educational resources will be more equally distributed, and lower-skilled teachers will benefit. At the root of our results is the observation that skilled lecturers can only exploit their comparative advantage if other teachers complement those lectures with face-to-face instruction. This complementarity will increase the quantity and quality of face-to-face teaching services, potentially increasing the marginal product and wages of lower-skill teachers.

And, I would argue, this is not only true for university professors, but for any service industry. Simple, replicable tasks will be outsourced to robots, but any task that requires context and interaction, and especially ones that require an emotive response, will require humans, and lots of them. The Economist listed a number of jobs that are likely to be replaced by robots. (I wrote about it here.) The top four jobs most unlikely to be replaced are recreational therapists, dentists, athletic trainers and clergy. Context, interaction, emotion. The four jobs most likely to be replaced are telemarketers, accountants and auditors, retail salespeople and technical writers. Simple, replicable tasks.

Technological advancement creates far more winners than losers. Users benefit (hello, smart phones). The inventors benefit (hello, Apple and Samsung). It creates thousands of new job opportunities (hello, app builders) and fantastic incomes (like the 55 people that just sold WhatsApp to Facebook for $19 billion. Even if each employee only had a 0.01% share in the business, that equates to R160 million each). We all become more productive because of it (you might be reading this post on your smart phone on your way to work). Yet the proprietors and employees of the previous technology suffer (Nokia, the South African Postal Service, or the messenger pigeon).

Not only is my job safe, but I will probably benefit from the MOOCs. This dynamic is also true in all other industries: Certainly, some jobs will be replaced by technology, but many others (even jobs that don’t yet exist, or that require only basic skills) will benefit from it. If our high level of unemployment is to fall, then we need to 1) focus our training on those skills that are complementary to the new technology, and 2) ensure that government policies do not obstruct the impact of technological change.

Written by Johan Fourie

March 5, 2014 at 10:18