Automation, From an Economic Point of View

This is an article I wrote for SnoQap. The list of references can be found on their site.


In the next ten years, one out of three American workers (and 800 million globally) are at risk of losing their jobs to new technologies, according to research from McKinsey. Automation, the use of largely automatic equipment in a system of manufacturing or other production processes, and Artificial Intelligence, the development of computer systems able to perform tasks that normally require human intelligence, are going to replace millions in the workplace. Many people are worried about this; while at the same time, many people are looking forward to it. Should we be gloomy or sanguine about our technological future? That depends. When discussing automation it is crucial to understand that (1) we don’t want jobs, (2) it will bring about massive economic disparity, and (3) we must approach this future in an intelligent manner.


Any economics student understands that we don’t want jobs, what we want is the productivity that comes from the job. When it comes to automation, some people get terrified. We have automated away over five million manufacturing jobs in the past two decades - what happened to the manufacturing workers is now going to happen to the truck drivers, retail workers, call centers, fast food workers, and so on and so forth throughout the economy. Tesla has self-driving cars, how long will it be until a company produces self-driving trucks that make truck-drivers disposable? How many times have you called a customer service number only to be answered by a machine instructing you what buttons to push to solve your problem? If you go to a McDonald’s, you can place and process your order through a kiosk without even talking to a person — so why hire cashiers? It is inevitable that as technology progresses, all these jobs will be lost and individuals will be left unemployed. According to The National Bureau of Economic Research, not only do “previous studies for developed countries show negative short-run impacts of automation on employment and earnings”, but also “increased adoption of robots in the US decreases employment and earnings for Colombian workers”. Automation in the US doesn’t only displace workers in the US — it also displaces workers in trading countries. But before throwing up your hands in horror, carry the analysis one step further. Is this a bad thing? Well, Milton Friedman answered this question a long time ago: “If all we want are jobs, we can create any number--for example, have people dig holes and then fill them up again, or perform other useless tasks. Our real objective is not just jobs but productive jobs--jobs that will mean more goods and services to consume.” Jobs will go away, yes, but the productivity and the goods and services that we consume will not. We will enjoy the fruits of our labor without having to do the labor. Automation makes society wealthier because it eliminates work. “Work is sometimes its own reward. Mostly, however, it is the price we pay to get the things we want.” People face trade-offs -- to get one thing, you must give up something else. The more time that an individual spends working, the less time he has to do other things that he’d like to do. Automation is the greatest opportunity in human history; automation cancels the need for dangerous, boring, repetitive work and frees up humanity to do interesting, creative, fun things. Having machines do the work for us while we reap the benefits is definitely a good thing.


Machines will drastically increase our ability to produce goods and services and, therefore, could provide us with a higher standard of living. However, the main issue with automation is the massive amount of income inequality that it will produce. For instance, individuals that have been driving trucks most of their lives will be out of a job - they won’t have an income anymore, but people that are not truck drivers, that still have an income to spend, will benefit because firms won’t have to pay someone to drive the truck anymore, which would possibly translate into cheaper prices for consumers. Automation will make the truck drivers poorer, and the non-truck drivers richer. In the words of John F. Kennedy, “A revolution of automation finds machines replacing men in the mines and mills of America, without replacing their incomes or their training or their needs to pay the family doctor, grocer and landlord.” Putting millions of men out of work will have an impact in the country — and around the world. The economic theory would be for these high-school educated men that have been driving trucks most of their lives to just simply learn how to code and find a new job. In practice, however, it doesn’t work that simply. Millions of jobs will be automated away in the upcoming years and it will leave millions of individuals out of work. This will cause massive income inequality due to the simple fact that humans cannot compete against a machine - machines are faster, more efficient, they work 24 hours a day, 7 days a week, they don’t complain, they don’t ask for salary increases, and they don’t pretend to be sick on Mondays.


But again, before throwing up your hands in horror, carry the analysis one step further. Can we solve this problem? Yes. The best way to confront automation, at the moment, would be with a Negative Income Tax. The Negative Income Tax is a tax system created by Milton Friedman where if you make under a certain amount of money per year you are entitled to a subsidy by the government. Let’s suppose that it is determined that no person shall have less than $10,000 per year. Under the Negative Income Tax system, everyone would be entitled to a $20,000 dollar deductible when paying their taxes. If an individual makes less than $20,000 per year, he or she would be entitled to 50% of the difference. For example, if an individual has an income of $0, after the deductible he’d be left with a taxable income of -$20,000 (negative twenty thousand). Therefore, this individual would be entitled to receive $10,000 (50% of $20,000) as a subsidy. The big advantage of this system compared to other systems of guaranteed income is that the Negative Income Tax does not eliminate entirely the incentive to work. Yes, people will have a base salary of $10,000 if they choose not to work, but under the Negative Income Tax, an extra dollar earned is always extra money that can be spent. A system like this would ensure that the individuals automated out of a job would still have a base salary while they learn the new skills necessary to re-enter the job market.


Automation and Artificial Intelligence are the perfect labor-saving technology. The levels of automation that we are projected to see in the future are unprecedented, but as long as we implement sound economic policies, such as Friedman’s negative income tax, wealth inequality caused by widespread job displacement can be dampened. Imagine having a machine that can build any machine that can do any human labor at the cost of raw materials. This ultimate wealth generation device might be closer than it seems. Under the right political and macroeconomic system, this would cancel any need for people to have to work to survive. The question is: Do we have the right political and macroeconomic system or would there be complete chaos?