(This essay was published in Hong Kong Economic Journal on 21 January 2105.)

 

Many today believe the world has entered the Third Industrial Revolution, where technological improvements in robotics and automation will boost productivity and efficiency, implying significant gains for companies.

 

These advancements have three biases: They tend to be capital-intensive (favoring those with financial resources), skill-intensive (favoring those with a high level of technical proficiency), and labor-saving (reducing the total number of unskilled and semi-skilled jobs).

 

The pundits speculate the economic impact on the job market will be significant, and present serious social and political challenges for society in terms of growing inequality and the provision of safety nets to mitigate the consequences of disruptive technological progress.

 

History has shown capitalist markets and business enterprises are incredibly efficient at turning technological advances into profitable businesses and providing incentives to discover new technologies. They succeed because companies that compete successfully with each other to provide benefits for clients are rewarded handsomely. This is the wisdom of Scottish economist Adam Smith. But there is a downside, which was first emphasized by Austrian economist Joseph Schumpeter – creative destruction.

 

New technological advances render old technologies obsolete. New creations destroy old things. They make livelihoods difficult for those who rely on yesterday’s technology and produce yesterday’s products. Obviously some protection for yesterday’s generation is necessary and desirable on economic considerations alone. Incentives to create new things will be dampened if the downside consequences of destroying old things cannot be mitigated. The Third Industrial Age presents several inherent challenges along these lines.

 

First, in today’s world it is uncertain whether demand for labor will continue to grow as technology marches forward. Will enough new jobs, especially well-paying ones, appear when the full impact of the new technology is felt? If not, there will be serious dislocations and worsening inequality.

 

Technological advances in the Second Industrial Age, which lasted from the mid-19th century to the third-quarter of the 20th century in the West, made it possible to provide semi-skilled workers with well-paying jobs. This was the era of the assembly line introduced by Henry Ford. Technology then was not skill-intensive and had an important income equalizing effect. It led to the rise of the middle-income class.

 

Today there is the nagging worry that new employment growth, especially in the service sector, might not produce well-paying jobs for semi-skilled workers in the way the old manufacturing industries once did. The proponents of the coming M-shape society long foretold the hollowing out of the middle-income class.

 

In the past thirty years, the manufacturing base in the industrialized West has been shifting to the new emerging economies, especially Asia. But if the impact of the Third Industrial Revolution continues to spread globally, then Asia’s Second Industrial Age might end swiftly within two generations. The 21st century might not be Asia’s century after all.

 

Foxconn, which produces Apple iPhones and other consumer electronics, plans to replace much of its Chinese workforce of more than 1.2 million people with robots. And soon enough, voice-recognition software will replace the call centers of Bangalore and Manila. Hong Kong’s encounter with the old manufacturing era lasted only one generation before it became a service economy.

 

Second, the rapid development of smart software is transforming the old service economy as well. The “on-demand” economy has arrived as computer power joins hands with freelance workers. If Uber starts to do business in Hong Kong, both taxi-drivers and taxi-companies will be shaken up and the only thing protecting them will be the regulatory hand of the state.

 

Uber’s business model need not reduce the total demand for drivers, it could even increase the volume of services demanded by reducing transportation costs, but the jobs would be transferred to a new class of freelance workers causing serious disruption to established patterns. Perhaps within a decade, driving as an occupation could be decimated if driverless cars become a reality – courtesy of Google.

 

In the West, the Second Industrial Age was also an era when most workers were protected from unemployment, penury in retirement, and health and safety risks either by the welfare state or their employers. In the on-demand economy, such risks would be pushed onto the individual. This will be even more likely if on-demand services are organized across national borders.

 

Continuing worker protection in the Third Industrial Age would require transnational corporations to undertake social responsibilities in distant foreign lands on issues that they have only begun to become aware off. Local governments accountable to local citizens might be persuaded to outlaw incursions by these companies outright, with detrimental economic consequences for local customers. New approaches have to be found to mitigate the economic and social risks associated with hiring overseas freelance workers. Governments are usually poorly informed and incentivized to regulate these fast-moving activities properly.

 

Third, the new technology has a winner-take-all effect that is driving the rise in income and wealth inequality. This may not necessarily pose an economic challenge for society, but it is likely to provoke social and political concerns. Not surprisingly, unionists and politicians on the left are calling for protectionist measures to resist these changes. But in a networked digital economy, economic value will quickly flow to areas with the least resistance.

 

Our future presents at least two challenges: economically it is about good jobs and socially it is about safety nets. Which industries will be the employment growth areas in the new, technology-driven future? And can they provide social safety nets?

 

Employment in industries experiencing slow technological progress, like education, will increase faster than employment in industries with rapid productivity growth, like telecommunications. The reason is industries with slow productivity growth will have to hire more workers in order to increase output commensurate with industries having rapid productivity growth. Their employment growth will be even stronger if over time the demand for products in slow productivity growth industries rises faster than incomes grow, as in education.

 

For two thousand years education has experienced very limited productivity growth – since the time of Confucius. In addition, the demand for education has risen faster than incomes have grown. The education sector has to hire ever more teachers to meet growing demand. Investing in education of course also helps people to acquire the requisite skills to secure good jobs in the new technology-driven economy. Education will naturally become a major employer in the future economy.

 

Technological progress is highly uneven across industries. Health care has experienced rapid technological progress, but employment has not fallen due to two other effects. The demand for health care has risen rapidly with income growth and also because more diseases can now be successfully treated.  With the coming ageing of the population all over the world, health care would also become another major employer.

 

Investing in education cannot be a solution for all people because it is mostly effective when applied to younger workers and students. Older workers have less incentive and ability to acquire new skills. They need a different solution. The social welfare state was the 20th century’s answer, but a public safety net is no longer a practical solution as most governments today are running fiscal deficits and burdened with huge public debts. Even Hong Kong’s substantial public resources will be insufficient, as there are too many calls on public coffers.

 

In addition, governments have a poor track when intervening to meet social needs. First, they are overly diversified and not sufficiently specialized in any single task to be competent at it.

 

Second, they require immediate results, especially in democracies, and are too myopic to deliver successful social programs given the long gestation these require for design, adoption, and implementation.

 

Third, they find it hard to abandon any program because these immediately create many new constituencies that lobby for their continuation regardless of their impact or cost.

 

And fourth, social needs are hard problems to solve in themselves. There are so many overlapping constituencies that it is difficult to set specific goals and targets.

 

Thirty years ago the late management guru Peter Drucker argued in favor of deploying non-profit corporations to tackle hard social problems by converting them into sustainable opportunities. These non-profit corporations would direct themselves to a single objective. Through specialization they would develop competence over time just like highly-efficient for-profit business enterprises. They would breakdown difficult problems into several easy ones with fewer constituent parts, each capable of being solved.

 

These non-profit corporations would compete against each other. Sources of funding would be a combination of matching subventions, private donations, and customer payments. The government’s role would also be indispensable and provide an essential regulatory and monitoring framework and some matching subventions.

 

This Third Sector of non-profit corporations has grown rapidly in the recent past and will almost certainly become the most important employer in the coming technology-driven era. Both education and healthcare should properly be in the Third Sector. These corporations must stay focused when tackling social needs and become more efficient and competitive like their counterparts in the for-profit sector to create more good jobs.

 

For-profit business enterprises will also play an important role in the Third Sector, either by providing donations to support Third Sector enterprises, purchasing their services, or directly organizing their activities as corporate social responsibility actions. They must stay efficient and profitable to fund growth in the Third Sector.

 

There is, therefore, a path for addressing the economic and social challenges that will arise from the economic upheavals of the Third Industrial Age.

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