ICT,'' POSSIBLE CAUSE OF UNEMPLOYMENT

echnological unemployment

Race against the machine.......''COINED FROM R.A, WASHINGTON

FEAR of displacement from one's job by a superefficient machine is as old as modern economic growth (which is to say, about two centuries old). It is somewhat surprising that there has not been more made of the possibility of technological unemployment during the recent recession and lacklustre recovery. Technological unemployment was widely cited as a problem in the 1920s and 1930s, a time during which productivity was soaring, inequality and unemployment were high, and instability was the norm.
The argument that rapid technological change may be generating labour market problems is given a lift in an interesting new ebook by Erik Brynjolfsson and Andrew McAfee, entitled Race against the machine. The opening chapter attempts to cast the book as a means to understand present high unemployment, which is a little unfortunate; most of current labour market weakness can be explained by weak growth, and weak growth is well explained by weak demand. It is, however, a useful contribution to the discussion of what has gone wrong in the American economy in recent decades.

The stylized facts of that poor performance are increasingly well known. Real median income has stagnated, especially over the last decade. Inequality has risen dramatically, driven by huge increases in top incomes. Employment growth has disappointed. At least some of the blame for all of this, the authors argue, can be laid at the foot of new technology. It's an interesting twist on the themes developed by Tyler Cowen in his ebook The great stagnation. Mr Cowen argues that a major slowdown in innovation is constraining potential growth, while new progress in information technology isn't providing benefits to most workers. Mssrs Brynjolfsson and McAfee tweak the argument, writing that innovation has been gathering pace and having an increasing impact on labour markets. In a nutshell, new technologies are displacing workers faster than the economy can find new uses for them.

I think the most important part of their argument is in their nice explanation of the nature of change in information and communication technologies (ICT). The first thing to understand about ICT is that it is a general purpose technology, like electricity, with the ability to dramatically change business models and boost productivity across many different sectors. The second critical detail is the deceptively rapid pace of technological change. The authors note that when technologies improve in a Moore's Law-like fashion, doubling in power at relatively high frequencies, the huge scale of potential change sneaks up on you. The first few doublings—1 to 2, 16 to 32—seem unremarkable. By the 50th doubling, when you're going from 563 trillion to 1.1 quadrillion, the pace of progress seems almost magical. In this way, developments that seemed impossible a few years ago, like fully autonomous cars and high-quality computerized translation, are now realities, or soon will be. And there's good reason to think that ICT is just getting warmed up.
The book does a good job describing how these developments have played out. Many companies beginning to discover ways to exploit better technology, in ways that often lead to displacement of existing workers (think of the growing ubiquity of self-checkout at drug and grocery stores). A few have become phenomenally successful. Some have done so by discovering profitable new businesses and business models (think of Facebook and Amazon), while others enjoy the fruits of the superstar effect, in which the digitisation of information allows top performers to capture much larger markets than was previously possible. (And of course, ICT also makes it easier for low-cost labour outside the rich world to compete with rich-world workers.) What hasn't happened swiftly enough, unfortunately, is the creation of new businesses, at a pace fast enough to employ the people displaced by new technology.
The authors end up in a relatively optimistic place (indeed, they note that the book's original theme was the bounty that would result from new innovations). And it is clear that ongoing innovation should yield enormous benefits to humanity. In the meantime, however, these developments are likely to be significantly destabilizing.

For one thing, this story implies that certain classes of labourer (and these classes could come to represent quite a lot of the labour force) may face chronic underemployment and the persistent threat of displacement. Those conditions are likely to interact perniciously with existing institutions, like employer-based health care, higher education that is commonly debt-financed, and a relatively meagre social safety net. Even if better institutions provide a cushion against displacement, they note, there's something to be said for the dignity of gainful employment. Chronic underemployment is likely to prove corrosive.
But what else can be done? Somewhere over the horizon, there may well be a socialist utopia in which machines take care of everything, leaving humanity to sit around comfortably playing Angry Birds. In the near-term, however, it would be a good idea positioning the economy to take best advantage of rapid change in technology. The authors recommend education reform and increased educational investment as one response. I think that's a critical part of the solution, but not likely to prove as important as their other recommendation: facilitate, as much as possible, organisational innovation.
Revolutionary new technologies require new business models—new ways of combining labour and capital to turn a profit. In order to encourage new business models, governments need to make it as easy as possible for new firms to open and succeed. That means clearing obstacles to entrepreneurship and immigration of skilled would-be entrepreneurs, improving patent laws, investing in critical infrastructure, and so on. I'd also add that it means a commitment to good macroeconomic policy. The 1930s were a period of great technological innovation, but humanity was unable to derive much benefit from these improvements because the macroeconomic environment was so wretched.
In the end, I find the story of rapid technological change to be compelling. And the recipe to deal with that change would seem to be as much micro flexibility as possible, with a good macro cushion to protect workers against the costs of rapid change. And we can cross that singularity bridge when we get to it.