Efficiency over growth (and jobs)

The hook to every song sung at Davos is “jobs, jobs, jobs.” The chorus of machers on stages here operate under an article of faith that growth can come back, that they can stimulate it, that that will create jobs, and then that all will be eventually well.

What if that’s not the case? I am coming to believe, more and more, that technology is leading to efficiency over growth. I’ve written about that here.This notion is obviously true in some sectors of society: see news and media, retail, travel sales, and other arenas. But how many more sectors will this rule strike: universities? government? banking? delivery? even manufacturing?

As I write this, I’m watching a WEF panel moderated by Reuters’ editor, Steve Adler, with Larry Summers and government and business leaders. They’re discussing growth strategies and so far we’re hearing the same notions we hear elsewhere in Davos, the complete trick bag: spend money on infrastructure, be nice to business, regulate less, reform taxes, reform immigration. OK and OK.

“The problems of job creation are more complicated than that. They are more complicated than wealth creation,” says one of the panelists (operating under Chatham House Rule, so I won’t attribute*). “This is a group that understands wealth creation better than job creation.” He says “there are inherent limits” to the number of people employed in various sectors.

I haven’t heard any strategy yet that reverses the trends underway in the transition from the industrial economy to the digital economy. What will offset the shrinking of vast industries? New industries? Well, we have new, digital industries, but they are even more efficient than restructured old industries. Compare Google’s staff size to GM’s, even now. Facebook serves almost a billion people with the staff the size of a large newspaper. Amazon employes far fewer people than the bookstores it put out of business did. So those new industries will bring growth, profit, and wealth, but not many jobs.

“There are fewer jobs for regular people because those innovations happened than there would have been if those innovations hadn’t happened,” the panelist says. It would be “a delusion” to think that encouraging this innovation will increase jobs.

So what if the key business strategy of the near-term future becomes efficiency over growth? Productivity will improve. Companies will be more profitable. Wealth will be created. But employment will suffer.

I’m hearing no strategies focused on this larger transition in a gathering about the transition. I think that’s because the institutions’ trick bags are empty. They ran an industrial society. That’s over. And the entrepreneurs who will create new companies but also new efficiency aren’t yet in power to solve the problem they create.

I ask the panel whether all this talk of jobs, jobs, jobs is so much empty rhetoric. I ask whether there are other tricks in the bag.

The panelist I’ve been quoting says that there are two sets of economic issues: In the short term, for the next five years, we are dealing with demand and macroeconomic policy. “Employment today has nothing to do with the Kindle,” he says. “It has everything to do with the financial system, deleveraging, and macroeconomic policy.”

It’s in the long term that the issues I’m addressing here come to bear. “For the longer term, we don’t have nearly as good answers as we would like to,” he says. “We are going to have to embrace the idea that we are going to have growing numbers of people involved in the provision of fundamental services to other people, services like health care and education. We’re going to need to make that work for society.”

That is to say, health and education don’t directly create wealth; they are services funded in great measure by taxes of one sort or another. Employing people in those sectors amounts to a redistribution of wealth with the fringe benefit of providing helpful services. Is a service-sector economy the secret to growth? Who pays for that when fewer people have jobs in the productive economy? I still don’t see an answer. This is not an economic policy so much as it is a social policy.

Another panelist says that we will have fewer people and we will need to retrain people throughout their lives for new jobs. I agree. But that doesn’t create jobs (except in schools); it just helps fill the ones we have.

One more panelist, from Europe, suggests that nations here will end up making stuff for the growing economies and consuming middle classes of China, India, Brazil, etc. In a globalized world with maximum price competition, I’m not so sure that’s a strategy for growth, only survival. I’d hate to place my strategic bets on continuing — or returning to — the industrial economy. And at some point, that strategy bumps up against the question of sustainability: is there enough stuff to go around?

Indeed, in a globalized society, we need to look at total jobs, the sum of work and productivity and demand, not country-by-country. The question is: Will jobs on the whole increase in this digital economy?

If instead efficiency increases — and with it, again, productivity and profit — then great wealth can be created: see Google, and the technology economy. But that means the disparity of income and capital will only widen yet more. And it’s just wide enough today to cause unrest around the world. That’s much of what #Occupy_WEF et al is about. That’s what is causing such tsuris and uncertainty on the stages of the world (Economic Forum). That’s what is causing the institutions represented here to fear, resist, and regulate technology in the hopes of forestalling the change it is bringing. There is the root of the disruption we’re witnessing now even in Davos.

* I saw Summers later and he gave me permission to quote him by name. He is the quotable panelist.

  • Andrew Westlake

    There is not a single mention in this article of economic principles; this is very perplexing.

    Believe it or not, nations have been through thus sort of upheaval before. Technologies that increase efficiency and that are disruptive have emerged in the past and the result us always an improvement for everyone.

    We cannot predict what disruptive technologies are ahead. No politician can dynamically adjust for these events. The supplanting of many processes by the Internet is a wonderful example of this; look at the ancient and wrinkled computer illiterate witches that try and mold the way the Internet and it’s users utilise the web. They are completely clueless. Even if they were software developers, there is no way that they would be able to keep up with the pace of innovation, and guide it with legislation.

    The fact of the matter is that thy State is a block to economic restructuring, which in thus age, should happen much faster than was previously possible thanks to the net.

    The best solution therefore is to remove the state from Economics entirely. This means they should not have any power over the nature and supply of money, and should not have any control over business practices that do not directly physically harm other people.

    The Austrian School of Economics is the best solution to this problem. It is the only coherent and scientific school of thought that approaches economics correctly. This is borne out by it’s correct predictions concerning the nature of money, the supply of money and ‘bubbles’.

    The answers to what the future will look like are not going to be found in a comittee or parliamentary session. The future will sort itself out. What needs to be done is to allow the natural corrections, methods and efficiencies to emerge without distortion, interference or outright prevention.

    Finally, when we discuss economics, we must refer unambiguously to the schools of thought we are thinking in. If you do not know what school of economic thought you are representing when you opine about economics, you are in fact doing so with knowing it.

    Familiarise yourself with at least the basic theories of the different schools. This will help you greatly when you make a post like this. At the very least you will be able to characterise the thinking of other people and put their suggestions into context. I assure you that the politicians specialising in economics you engage with in this have at least some idea of the different schools, THIER core ideas and the implications of them. I suggest that you start at the Ludwig von Mises institute, because Austrians have it right.

    This is the only way you will be able to make any sense of all of this.

    • http://itsthe21stcentury.blogspot.com Jim S

      Sorry, but economic principles are not laws of nature. The basic theories of the different schools that you refer to were all developed in a very different environment than we now live in. Not one of them adequately address the consequences of easy global transfer of goods and capital. In addition none of them really have concepts capable of dealing adequately with intellectual property and try to shoehorn it into systems that can’t deal with it. As far as the Austrian School, it hasn’t predicted that much correctly except in the minds of those who agree with it. When it comes to thinking about where we are at and where we are going in economics, it is the schools that are flunking.

    • http://mulderc.blogspot.com Cameron Mulder

      “The Austrian School of Economics is the best solution to this problem. It is the only coherent and scientific school of thought that approaches economics correctly. ”

      You do know that the Austrian school actually rejects the scientific method when it comes to economics

      http://en.wikipedia.org/wiki/Austrian_economics#Methodology_2

      • Andrew Westlake

        It is in fact very scientific. It uses hypothesis and observation to construct its models and make it’s predictions. It is in fact pure science because it works only with what is true, and not what we wish to be true. It accepts mans nature as it is, the nature of money and exchange as they are and then constructs models that precisely fit reality, and which are able to provide accurate predictions of, “what will happen when we do X”. This is the very heart of the scientific method as properly practiced; dealing with reality as it is through hypothsis and observation.

  • http://blog.ericreasons.com Eric Reasons

    Jeff –

    I’m not sure growth and efficiency are at opposite ends of the spectrum. It is certain that the creation of wealth does to equate to creation of jobs, especially in this post-industrial era of disruption. (Of course, it’s important to remember that, in free societies, no company was ever started whose goal was to create jobs. Their goal is to create wealth.)

    Efficiency in one sector should theoretically free up capital, which would free up investment in other sectors. The question for the post-industrial economy, is “What problems 1) need solving, and 2) are people willing to pay to have solved”. Last time the ground shifted this much, (the move from agrarian society to industrial), we created whole new problems, and thus, whole new markets, and thus whole new industries, and this whole new jobs.

    What markets, if any, are getting created with this shift?

    • http://itsthe21stcentury.blogspot.com Jim S

      The answer to your questions are 1.)Too many to list here. and 2.) Almost none by the people who have the concentrated wealth in their hands. You also missed it where Jeff pointed out the essential conundrum that confounds your theoretical scenario. The new systems that are being created, whatever they are (outside of things like service industries) are already so focused on efficiency that they cannot replace the jobs lost from the old ways of doing things.

      • http://blog.ericreasons.com Eric Reasons

        Jim – new systems, particularly disruptive ones, have *always* been focused on efficiency. See: The Assembly Line. Efficiency isn’t the new thing here. I’m feeling around for what *is* the new thing.

        Maybe Tyler Cowen is right and we’ve just picked all the low hanging fruit. I don’t know yet, but I know that in some circumstance, increases in efficiency has led to growth, and in others, not.

  • Harry Schlough

    Eric,
    Your response to Jeff’s observations from the WEF provides a rational, optimistic and solutions oriented context for discussing this inevitable social & economic transformation that has begun.
    Thank you.

  • http://giffconstable.com Giff

    Individual companies in the “tech industry” (although almost every company is becoming a tech company) typically are more labor efficient per dollar, yes, but there are far more of these companies than there used to be so total employment is not insignificant. Small and mid-sized businesses have always been the largest employer base in America, even if the Fortune 500 had the most attention and legislative weight. I think that will increase. A pro-jobs platform really needs to be pro small-business, in all kinds of economic sectors.

    Unfortunately Congress too often gets confused about what small businesses need. Software patents are held up as a way to protect innovators, but in actuality software patents empower big businesses and inhibit entrepreneurs.

    Our regulations should differentiate based on size. Rules necessary for large companies are often silly and debilitating for smaller businesses (you see this cross-sector, from banking to farming and more)

  • http://ppalme.wordpress.com Peter Palme

    It is a transition period indeed and it does have negative impact. Moving from an agriculture based economy to an industry based economy was an example of such a challenging transition. During this time massive jobs were lost while not everyone found new employment or healthy employment.
    In hindsight it created as we see today more wealth.
    Yes facebook or ebay or amazon do not employ large number of people but these new system create new companies that would not have existed witout them. Zynga is now a famous example in connection with facebook but look at the many traders that build their business on ebay and the many ebook authors that create income via Amazon. Another example are services for social media such as group moderations accelsocial would be an example here. Overall and over time new services and new products will emerge and create new jobs. Yes and during this transition there will be unemploxment for some.

    • http://bit.ly/bdnwgC Dan Farfan

      I couldn’t agree more, Peter. I call what you described omni-hop economics. One reason economists are so wrong and so often surprised is their modeling and math doesn’t consider multi-generational effects correctly and it places too much importance on policies politicians (of a persuasion) can make.

    • http://itsthe21stcentury.blogspot.com Jim S

      Unemployment and underemployment for millions. That lasts for years. In a society that has a significant fraction of the policy makers that would like to say “Tough luck.”. How about this? Try to answer the question of “What if Jeff is right? What if high unemployment, underemployment and jobs for many that can’t allow for making a living is the new normal? How can we deal with it?”. Instead of simply dismissing it as an impossibility. McDonald’s is trying to develop kiosks to take orders. They are trying to develop every technology they can think of to reduce kitchen staff. There is technology to replace warehouse workers with robots that need no lights and minimal climate control. Businesses of all types are striving as hard as they can to reduce the number of people they employ. If Company X has 100 employees and their product allows 500 customers to eliminate 5000 jobs, where is the magic that replaces those jobs? There are no hard facts that shows it exists given the nature of modern technology when applied across the board in virtually every business in the modern world.

      • http://bit.ly/bdnwgC Dan Farfan

        “…where is the magic that replaces those jobs?”

        What if the magic is leveling the economies of the world?
        So the software developer in Vietnam and Des Moines can live comfortably on the same wage paid by the virtual company based no where?

        Or worse…
        What is the magic is population control? Yikes.

        I think any way you slice it, the decisions humanity has to make in the next 100 years will dwarf any in the last 100 years.

  • http://Marketingwritenow.com Paul O’Mahony (Cork)

    Jeff has expressed a big issue as well as anyone could express it in a few words, I think. Where are we going to find jobs for people?

    It would be grand if I could feel confident it’ll all turn out right because it did so in the past. Eric Reasons view attracted me for a few minutes – until I thought “why should I subscribe to the view that we’ll create new problems to be solved & all will turn out OK?”. Of course, Eric is right, but, unfortunately, he may be only partially right. I couldn’t afford to let that view give me comfort.

    I think of many who are neither literate nor numerate enough to fit into future technology. In the past, they dug roads & built houses; they did hard manual labour & assembled stuff in factories – but in the “knowledge economy” (or whatever the future will be called) what skills of theirs will be in demand?

    I used to be a bus conductor – that job doesn’t exist any more in Ireland, UK or the “first world”. I was fortunate to have other skills that were in demand. But our policy makers, educators & parents seem to be stuck. Is it 15 or 20% of our citizens that have serious literacy & numeracy disabilities?

    What if too many remain unemployed for so long that they become alienated from the rest of society? What if communities of unemployable people become so angry that they threaten the well being of the rest? What if our society becomes a battlefield?

    Technology has always kept on evolving & occasionally revolutionising societies. I’d bet on that continuing. Jeff is concerned about the consequences. So am I.

    The Vienna School of economics is intellectually attractive – it offer a critique of the Keynesian approach – a radical critique of the status quo. But it’s no more valuable than a set of hypotheses because few would risk turning society into a controlled experiment. Before we discovered whether Hayek & Co were more correct than anyone else, we would have had to struggle for social order – not to mention a shared sense of community. That won’t do.

    For me, if I had to pick one single issue around which to build a coalition, it would be basic educational skills – reduce the proportion of those who are unemployable nil.

    Thanks Jeff, and all who’ve commented so far.

    • Andy Freeman

      > For me, if I had to pick one single issue around which to build a coalition, it would be basic educational skills – reduce the proportion of those who are unemployable nil.

      That sounds nice, but US education politics is basically “give more money to the school system, how dare you suggest evaluating individual teacher performance, and ban guns”.

      • http://ndxtreme.com William Armstrong

        It is a shame.

        I predict something different. I think we become a content society. What does that mean? It means we will be creating videos, music, poems, art, books, and other IP that we export to ourselves, and other countries.

        I look at streaming networks, and see the future of broadcast. I look at the indie artist, and see the future of music. I look at the kindle, and I see the future of publishing. I look at blogs, and see the future of newspapers.

        I see a day when I can have a favorite singer, and my friends may never have heard of them. There will be ten or more million bands, and they can all make a living with a core group of fans. I am thinking under todays economics that each band would need around 20 – 30 thousand fans, individuals that buy at least $50 worth of music and gear a year. That gives them $1 mil a year, minus Amazon/BandCamp/iTunes/Google Music 30% to pay, to pay for business, and leaving them group a goodly chunk of change for themselves. They could easily make $100 grand a year under such a model.

        I picture similar models for many of these industries. Yes, this is simplistic, Not everyone that tries to make a band will make it. Not every on can sing. The biggest lie the music industry sells today is that they pick the cream of the crop to promote. They don’t. They pick the most “mainstream” and then throw them out to dry when they are done. Hasn’t anyone watched American Idol, seen all those talented people and then they “pick” the best one? I am sorry, but they usually don’t pick the best one for me. And ALL of them could be made into stars.

        This doesn’t work towards maximizing profits, however, because the cost of managing two people is more than managing one.

  • http://www.troymcconaghy.com Troy McConaghy

    Here’s a story about new-ish efficiency in banking.

    A couple of weeks ago, I walked to my local bank and asked them what kind of interest rate they could give me on a “high interest” savings account (the kind where you can get your money out in a few days). She said 1.25%. I told her that I could get 2% from ING Direct, an online-only bank. She said she couldn’t give me 2% because they had to pay for buildings, unlike ING Direct. She didn’t mention it, but I realized they also had to pay her salary.

    If you’d like some light reading (a sci-fi mystery novel) that considers the implications of increasing efficiency amid resource limits, check out The Caves of Steel, by Isaac Asimov. It was published in 1954 but is as prescient as ever.

    Indeed, science fiction has imagined many future scenarios. In Terminator, Skynet took over and the robots wiped out all the humans (or tried). In Star Trek, technology enabled everyone to do whatever best-suited their abilities and inclinations, and humanity expanded out into the galaxy…

    • http://itsthe21stcentury.blogspot.com Jim S

      There was a writer named Mack Reynolds who set some of his writing in a future where automation had become so good that the only jobs left were those that needed things that only humans could do or that other humans would accept human judgment about. The employment rate was just over 10%. Not the unemployment rate. Getting a job was decided by a draft and those who couldn’t get one lived on the Negative Income Tax.

      • http://ndxtreme.com William Armstrong

        That was a good book, but you left out the part about those that worked trying to cut those that were unemployed off from having any say in any government. Or the “not mine” mentality of the governments depicted in the story. Or was that a different book?

  • http://mulderc.blogspot.com Cameron Mulder

    This is an issue i have been thinking about ever since I decided to study economics long ago. Personally i find innovation and technological change to be the most amazing thing humanity does. We are continually improving our technology at a faster and faster rate. This has lead to an insane increase in the standard of living over the past couple hundred years. This increase in our standard of living has never been equally distributed. The luddites were not wrong in being pissed about improvements in production. These improvements put tons of people out of work. Lucky for us humanity is rather adaptable and has so far been able to adapt and find useful employment for the vast majority of humanity.

    The issue we have today though is that the rate of technological progress might be faster than our ability to adapt to it. Markets might be created and destroyed in a matter of months or years now compared to what previously took decades.

    If we are unable to figure out policies that ensure useful employment for most people than our current system will hit a wall and it won’t be pretty.

    Now personally i think there are tons of options to deal with this, but virtually all of them are not politically feasible in the US.

    This is honestly a transition period to what will essentially be a non-scarcity based economy. This transition would be the biggest single event in the history of humanity and thus might not be pretty.

  • Steve

    Today, for a change, I spent £1 on a newspaper at a railway station kiosk. I might have spent the money on something else equally labour intensive, such as food from a different kiosk. Or saved it, allowing the bank to lend £10 or more on the basis of that £1 of capital. Of course, if the banks aren’t lending then there will be less demand for labour-intensive industries, but this isn’t really an issue of technological unemployment. When the cycle turns, demand for labour will rise- though maybe not much for well=paid print media writers….

    It’s demoralisng for media workers to lose decent jobs, just as it was for coal miners and ship builders (and print workers) to lose their jobs in the past. It will be hard for many media workers to get better jobs in future. Few will want to join the ranks of growth industries in geriatric care or even SEO cyber-serf grunt work. Yet many of those single-industry communities have never really recovered. Their experience of technology and globalisation has been a lot worse than the media sector because of their geographical concentration.

    Jobs will be created over time- but maybe not ones you’d like. Spare a thought for those who struggle to adapt

  • Peter Meng

    It took me a bit to recall where I’d heard much of this discussion before. Jeremy Rifkin’s book “The End of Work” – 1995. Though not prophetic, it is quite prescient – especially from today’s vantage point. He actually proposes solutions, then and now, most of which focus on changing our perspective to a social one. Combine some of these ideas with social technologies, and intelligent new tools and maybe there are new opportunities for new kinds of jobs – or at least a bit of hope.

  • http://www.facebook.com/rajonspi Rajon Ahmed

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  • http://www.facebook.com/rajonspi Rajon Ahmed
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