Robotics and economics: parallel universes

While the Federal Reserve has pointed to a shortfall in demand for low inflation and high unemployment, the impact of advances in robotics and cloud computing is somehow still being ignored.

Watching Janet Yellen’s press conference last week and then the arguments about monetary policy that ensued, it became clear that we are living in parallel universes.

Apart from causing a brief flurry of pricing adjustments with her statement that rates would start rising about six months after bond purchases ended, which was sooner than consensus had (wrongly) assumed, the new Fed chair was invited to speculate about why inflation and employment were still falling short.

There are still 10.5 million unemployed in the US and inflation is 1.1 per cent. This is after almost five years of zero interest rates and more than $US3 trillion worth of money creation by the Fed.

She said, in essence, that it comes down to a shortfall in demand caused by cautious households and businesses -- still traumatised by the financial crisis -- as well as fiscal consolidation. “Monetary policy has tried to do what we can to offset that.”

Paul Krugman, in a blog post yesterday, is even more specific: it was that “the ‘pivot’ of 2010 -- when all the Very Serious People decided that the danger from debt trumped any and all concern for job creation -- was an utter disaster, economic and human.” The title of the post was “The Crime of 2010”.

All of which may be true, but nowhere in Yellen’s press conference or Krugman’s blog, or any economic analysis that I can find, does the word “robot” appear.

It seems the worlds of economics and technology are parallel universes, never intersecting.

Well, hardly ever. Nobel prize winning economist Wassily Leontief famously said 30 years ago: “The role of humans as the most important factor of production is bound to diminish in the same way that the role of horses in agricultural production was first diminished and then eliminated by the introduction of tractors.”

This is now happening. Not only are sales of robots increasing faster than employment, the range of things that machines can do is also increasing and broadening rapidly.

It’s not just mechanical automation: software development, mass data collection and automated machine-to-machine communication via the internet are also replacing humans in a variety of service industries, including finance and media.

Moreover technology has become a significant force for consumer price deflation, bringing about a second wave of labour cost arbitrage on top of the shift of manufacturing to China and other emerging countries over the past 20 years.

In fact robotics is likely to have more of an impact on employment in emerging countries than in the First World. For example, the world’s largest private sector employer, Chinese manufacturer Foxconn, has built a big robot R&D and manufacturing facility in Taiwan and is now working with Google on developing a new robotics industry.

Not only will Google and Foxconn shift Foxconn’s own manufacturing towards automation, but they also will fast-track global production of robots.

Robotics, cloud computing, big data and the internet of machines are at least as important as the shortage of demand in causing low inflation and high unemployment around the world.

You would think some of this might have found its way into the Federal Reserve’s analysis, or for that matter any modern macroeconomic analysis at all.

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