A book report and some thoughts concerning employment and inflation.

Following below are several brief excerpts from the book, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies, by Erik Brynjolfsson and Andrew McAfee, professors at the MIT Sloan School of Management. In this book the professors discuss some of the significant benefits and challenges associated with the advent of artificial intelligence. I will insert a few comments (Of course, right?) among the excerpts. I highly recommend this book to anyone interested in gaining insight into how the second machine age (artificial intelligence) might affect work and leisure in the coming years. As an investment manager I believe that some of these insights can be valuable to myself and my clients.

When things are digitized – when they’re converted into bits that can be stored on a computer and sent over a network – they acquire some weird and wonderful properties. They’re subject to different economies, where abundance is the norm rather than scarcity. Rapid and accelerating digitization is likely to bring economic rather than environmental disruption…

Abundance is now the norm with regard to certain “things”. As some of those things gain greater intelligence abundance will likely become the norm for certain services as well. Economic disruption will follow.  In fact, I believe we are already feeling the effects.

Technological progress is going to leave behind some people, perhaps even a lot of people, as it races ahead…Recently we overheard a businessman speaking loudly (and cheerfully) into his mobile phone: “No way. I don’t use an H&R Block tax preparer anymore. I’ve switched to TurboTax software. It’s only $49, and it’s much quicker and more accurate. I love it!’. The businessman was better off. He had a better service at a lower price… The creators of TurboTax are also better off – one is a billionaire. But tens of thousands of tax preparers now find their jobs and incomes threatened.…

Some people will, indeed be left behind. It’s already happening. In The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future, author Martin R. Ford makes a compelling case that a lot of people will be left behind. And, not just assembly-line workers. In fact, he points out that it is likely that “software workers”, the term he uses to represent what might also be referred to as knowledge workers – accountants, lawyers, engineers, financial planners, even radiologists – are likely to be replaced by artificial intelligence before physical therapists or housekeepers. Why? Because robots do not presently have the ability to manipulate matter as well as humans do, or to assess a situation with many diverse characteristics. At present automation is very good at applying algorithms to solve specific problems in a narrow range of possibilities. Humans are better at actions like picking up things and moving about, and also at applying context to a situation. Interestingly, the knowledge-based jobs generally pay the most, so there is a greater financial incentive to replace them with automation.

DARPA is asking the robotics community to build and demonstrate high functioning humanoid robots by the end of 2014. According to an initial specification supplied by the agency, they will have to be able to drive a utility vehicle, remove debris blocking an entryway, climb a ladder, close a valve, and replace a pump. These seem like impossible requirements, but we’ve been assured by highly knowledgeable colleagues – ones competing in the DRC (DARPA Robotics Challenge), in fact – that they’ll be met…

Oh, oh… now even the physical therapists and the housekeepers, and drivers and plumbers may lose their jobs.

The innovations we described… have all appeared since 2006, as have countless other marvels that seem quite different from what came before. One of the reasons they’re all appearing now is that the digital gear at their hearts is finally both fast and cheap enough to enable them. This wasn’t the case just a decade ago…

The point here is that change is accelerating. Knowledge and technology are building upon knowledge and technology. And the rate of change is not linear, it is exponential. Also, the costs associated with digital technology tend to fall. Rapidly. Computing power goes up as the cost goes down. Automation is changing, and will continue to change our world in ways that most people do not anticipate, and likely sooner than most people realize.

I’m very optimistic about the benefits that we, the people of Earth will derive from increasing knowledge and technology. I’m hopeful that we will use it wisely. I’m confident, however that the authors of these two books are correct in asserting that rapid and accelerating technologies will bring economic disruptions. Likely, the nature of employment will continue to change, and for a period, probably an extended period, full employment will be elusive for many people. Continuing unemployment and/or under employment and the decreasing costs of things and services will mitigate against significant general inflation.¹

A final note: As hopeful as I am about the ultimate benefits of artificial intelligence, I must acknowledge that the risks are also great. If you are inquisitive about this and if you feel brave you should read James Barrat’s new book, Our Final Invention: Artificial Intelligence and the End of the Human Era. Here is a Woody Allen quote that he uses to introduce one of the chapters:

“More than any other time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction.  Let us pray we have the wisdom to choose correctly.”

¹ Many experts (and non-experts) have predicted that the various stimulus efforts enacted by the Bush and Obama administrations and the Federal Reserve to combat the Great Recession of 2008-2009 would lead to significant inflation. This has not been the case. It has now been six years since the Great Recession ended and inflation in the United States is still below its historic norm. In our view the accelerating development of and use of automation is one of the principal reasons for this lack of inflation.

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