Capital - July 2017

CAPITAL

Summer 2017 edition

Productivity Incentives Rise of the Robots An Interview with Mr Foster!

THIS ISSUE OF CAPITAL IS DEDICATED TO MR FOSTER. ECONOMICS SOCIETY WOULD LIKE TO THANK HIM FOR ALL HIS HELP AND WISH HIM THE BEST AT HIS NEW SCHOOL.

EXCLUSIVE INTERVIEW WITH MR FOSTER: First we’re going to play an economical game of ‘Would You Rather’... so, would you rather live in a deflationary economy or a communist, unproductive state, and why?

SF: *hesitates* That’s a really good question. I would rather live in a deflationary economy because I think it would be a shorter term problem than the structural issues associated with a communist state.

SF: I think I would be okay with Adam Smith never living. I think someone else would have come up with it. You’ve got to remember that Adam Smith didn’t create economics, he was just the first person to study it as a discipline, and so we were trading thousands of years before Adam Smith. He was just, maybe not even the first, but one of the first economists to formalise it, and so the loss of Adam Smith would have just meant that someone else would have come up with it.

Secondly, would you rather have another global financial crisis or for Adam Smith Which economist do you to have never lived, and look up to most and why? why?

SF: That’s a really good question. I’ve got a lot of time for Stiglitz. Inequality is a subject that I’m very interested in and one that is very topical and current, and has been high up on many politicians’ and economists’ economic radars for a long time. Stiglitz has been writing about inequality for quite a long period – he’s quite modern and accessible so I can read and understand him unlike some of the economists at university whose work I find quite opaque and difficult to get into.

What’s your view on how the ‘Invisible Hand’ affects productivity?

SF: I think it makes a huge difference. Ultimately, resources in the majority of markets are not really determined by the interaction of supply and demand…

We have a model that works very well in a set of very unrealistic, hypothetical assumptions, and in reality most markets are very different from that model – resources aren’t necessarily allocated using the ‘invisible hand’ in real life, but market forces in general and the pressure of competition, I think, have a significant impact on productivity in many industries. One of the things economists are very bad at measuring is improvements in the quality of products that we consume and how that affects our standard of living. It’s market forces and, indirectly, the ‘invisible hand’ that have led to improvements. The classic example of this is smartphones… You know how Nokia has brought out this 3310 and thought ‘it’d be great’, and people have tried and thought ‘oh my god it’s rubbish, I can’t go back to this’, but a 3310 was at the time the centre price as a

cheap smartphone is now.

So, if not to do with price, in terms of quality and productivity relating to the quality of products being produced, I think it’s very important.

vice effective in terms of my motivation.

If you could only buy one thing for the rest of your life, what would it be?

SF: Ooo if I could only buy What economic theories and concepts have you been one thing for the rest of my life…. able to apply to your daily life?

You can keep everything you already have but you can SF: That’s a good question. only buy one more thing, *thinks for a while* I have and you can keep buying it previously used commitment devices… So an aspect if it runs out. of behavioural economics SF: Does it have to be a suggests that you might physical thing? be able to use some sort of monetary commitment to It has to be something that motivate you… so I have can be bought – it must be found that in my persontangible. al life if I make a financial, but also to some extent, an SF: Okay, well if it has to be emotional commitment to something, I’m very likely to tangible then it would be a follow it through. So, I have bike. I would be happy for a very long time. If I was alpreviously given money to lowed a service it would be someone and told them to withhold it from me unless travel; in terms of my consumption, travelling is the I stopped a bad habit for a certain period of time and, thing that I most enjoy and with the charity cycle I did, if I didn’t have the opportuit was important to me that I nity to travel, I think I’d be stumped up a bit of cash and significantly less happy and have much less utility. put that in, because then I felt committed to the cause.

I find the commitment de-

PRODUCTIVITY

WHAT IS PRODUCTIVTY?

BY E L A TA N D O N & BHUMI KANABAR

Productivity is an integral economic metric across the global economy. It is arguable the most crucial determinant of long-term economic growth. As a supply side indicator, it defines the efficiency with which inputs are combined in an economy, in order to produce output. Often, we measure productivity as output per worker hour, or, output per hour worked.

‘Total Factor Productivity’ is the true measure of productivity, which encompasses all factors of the productivity equation. In the long run, as Krugman says, productivity is a central determinant of living standards. When productivity rises in an economy, this decreases costs per unit output for firms, increasing competitiveness. This subsequently generates higher profits and leads to a virtuous cycle of economic growth. If Britain can improve its productivity, then trend growth of national output will rise.

Productivity growth has been lacklustre in the UK since the crisis, even compared to the G7 average. Thus, our situation has been dubbed the “productivity puzzle”. In the news and in the media, our productivity has always been described as being a ‘sore’ point in the UK economy.

The UK economy is the 9th largest in the world, comprising 4% of the world GDP. In regards to GDP growth, job creation and unemployment, the UK is one of the strongest EU countries.

But despite all its prosperity, the UK’s productivity has been almost flat lining since 2009. This ‘puzzle’ is not just unique to the UK; many other developed countries also have low productivity levels such as Italy and Germany.

Our low rate of capital investment has definitely led to some of this shortfall. In fact, economists have repeatedly forecast a rebound in productivity since the crisis hit, due to the recognition of this cause, but have been repeatedly disappointed. Hence, many more theories have surfaced and no one is really sure what is right and wrong…

So, whatever the cause of the slump, whether it’s investment, mismeasurement, misallocated resources or secular stagnation - productivity is a priority for UK policy makers.

“PRODUCTIVITY ISN’T EVERYTHING, BUT IN THE LONG RUN IT IS ALMOST EVERYTHING. A COUNTRY’S ABILITY TO IMPROVE ITS STANDARD OF LIVING OVER TIME DEPENDS ALMOST ENTIRELY ON ITS ABILITY TO RAISE OUTPUT PER WORKER.” - PAUL KRUGMAN, THE AGE OF DIMINISHING EXPECTATIONS (1994)

To what extent does political instability affect a country’s economic productivity?

BY EMILY JOLLIFFE

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country’s economic growth is influenced by a large number of factors - some better documented than others.

Many economists have argued that one of the most significant of these is the political climate within a country. Political instability is the propensity of a government collapse either because of conflicts or rampant competition between various political parties, so although it might seem apparent that for a country to experience rapid growth, there needs to be a stable government or leader in place in order to provide a solid framework and basis for expansion.

Political instability is regarded by economists as a serious barrier to peak economic performance.

It is likely to shorten the horizons of policy makers and lead to sub-par, short term macroeconomic policies.

O

ted the interest of several economists. In a recent paper, Jong-a-Pin (2009) finds that higher degrees of political instability lead to lower economic growth.

Secondly, looking at figures on private investment, Alesia and Perotti (1996) show that socio-political instability generates an uncertain politico-economic environment. This raises risks and thus reduces investment. Political instability also leads to higher inflation as shown in Aisen and Veiga (2006) - mainly because political instability disrupts long term economic policies conducive to a better economic performance.

Throughout war-torn countries where civil unhe widespread phe- rest has been prevalent for nomenon of political decades, it is incredibly diinstability in several fficult for the economy to countries and its negative take off, especially when there is a very weak govereffect on their economic nment in place. The lack performance has attracof a strong power in place n one hand, the uncertainty associated with an unstable political environment may reduce investment – one of the strongest theories surrounding productivity decline in the UK – and the pace of economic development.

On the other hand, poor economic performance may lead to government collapse and political unrest. Irrespective of political regimes, if a country does not need to worry about conflicts and radical changes of regimes, the people can concentrate on working, saving, and subsequently investing in capital and private investment.

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to pass policies and push through legislation results in very slow economic progress, thus the productivity of the country will be very low.

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nterestingly, some people see political stability as something that not only prevents any form of change, but also demoralises the public. Less emphasis is placed on innovation and ingenuity - many seek change in all sectors of life (politics, business, culture) in order to improve through better opportunities. So, political stability can result in complacency and stagnation that prevents competition and this can be applied to everything: political systems, education, business, innovation, even arts. In this case, political stability refers to the lack of real competition for the governing elite. Some economists argue that this breeds abuse of power and corruption, thus decreasing a country’s economic productivity.

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n example of this is the communist country Vietnam,

which has one of the most volatile economies in Asia. Its economy was relatively stable in the 1997-2006 period, with low inflation, a 7 to 9 per cent total output expansion annually and a moderate level of trade deficit. Despite the political stability, Vietnam was unable to cope with the 1997-8 Asian financial turmoil. From 2006, both public and private sector firms began to experience structural problems, rising inefficiency and waste of resources. Inflation recurred, peaking at an annualised 23 per cent level for that year. In terms of some Asian command economies, they may do well in terms of attracting foreign direct investment, because stability means a predictable political environment, but other aspects of the society might suffer because of complacency, lack of competition, and opacity. India’s economic performance in the first 30 years of the post-independence era, which epitomised political

stability, exhibited a 3.5% per cent level of economic growth, the lowest in the last sixty years. In contrast, in the last 20 years, when India experienced four Prime Ministers, industrial growth rates jumped to double digits, something that had never been seen before.

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o, although political instability will always have a massive effect on the economic productivity of a country, I would argue that generally it has a more negative effect, because it is difficult to pass through legislation without a strong executive in place who can increase the economic performance or a country. Despite this, it is also interesting to examine the examples where this is not the case, most famously the USSR. Originally, the Soviet Union experienced rapid economic growth, however it too reached stagnation and economic decline, despite the very stable political situation. Therefore, whatever view you take, political instability affects a country’s economic productivity to a very large extent.

The productivity puzzle; can the manufacturing sector’s rapid growht help eradicate the productivity puzzle?

BY PAYAL GOR AND JANIKA PATEL

Since the 2007–08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. There were relative improvements in 2013, but whole-economy output per hour remained around 16 per cent below the level implied by its pre-crisis trend (in 2014).

Even taking into account possible mismeasurement issues and secular changes in some sectors, this shortfall is large — and so we have a ‘productivity puzzle’.

Measures of productivity are increasingly necessary as they can be used to estimate an economy’s ability to grow in the future without resulting in excessive levels of inflation or inflationary pressures. This is particularly important as the Monetary Policy Committee can use this to help aid decisions for the economy in terms of monetary policy (manipulation of interest rates).

So why is this the case? There are almost as many theories on why Britain’s productivity isn’t performing brilliantly as there are people commenting on the fact Britain’s productivity isn’t performing brilliantly.

“There are deep-rooted structural problems in our economy that have dampened productivity - from skills shortages, to infrastructure bottlenecks and limited growth finance,” said Suren Thiru, the head of economics at the British Chambers of Commerce.

Productivity is a key indica-

tor of wage growth and this is because if businesses produce more with less capital, then they technically have more money to invest in expanding their firm or fund pay rises for their staff. Therefore, regulation on things like minimum capital requirements for banks reduces bank lending and raises the cost of investment and so some economists believe this could be a reason for the productivity puzzle. “More jobs are clearly a good thing for the people who get them, but much of the increase in employment in 2015 came in areas like accommodation and food services, which add little to the productivity statistics,” said Sproule.

“Productivity improvements require UK businesses to invest for the long term,” said Andrew Ninian, director of corporate governance at the Investment Association. He suggested the way firms spend their cash and where they choose to invest determines how productive they are – “this means investors can play a fundamental role to help improve UK productivity and support long-term investment.”

Productivity is presumed to be growing in the manufacturing industry as manufacturers are taking a lot of action in terms of investment in machinery, technology and research & development.

This investment in new tech and R&D means that there is an increase in productivity growth as

the output per hour can be increased as machinery and technology can be proven to be more efficient.

Although, the UK manufacturing industry seems to be pacing ahead of the productivity of the UK, it is ranked 9th globally in terms of highest productivity growth. This shows that globally the UK is not doing well in terms of productivity growth despite the government’s increasing concern and investment into new initiatives to try and tackle the UK’s productivity puzzle. In the future, it is predicted that the UK’s economy can boost is manufacturing productivity and slowly transition it into industry 4.0. This is the name given to a manufacturing sector that is based all around ‘smart factories’.

It is possible that the UK’s manufacturing sector can set the lead trend for the UK economy in increasing its productivity growth. However this would ultimately require the support of the government to aid industries and sectors to transition to this new advancement in productivity growth with the use of technology.

All in all, the UK still has a long way to go in order to solve the productivity puzzle and firms must find ways to keep their business confidence and take part in the investment of capital goods in order to increase the productive capacity of the UK as a whole and let it thrive in the wake of Brexit.

PRODUCTIVITY IN CHINA BY YASMIN FAIRNINGTON

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ue to China’s export led economy, one might expect that China’s productivity would be significantly high. However China’s productivity has fluctuated in the last 30 years. China experienced high levels of productivity and output before the Asian financial crisis. However, Beijing is now sliding into the “middle income trap”. China is facing rapid wage increase, which increases the cost of production of Chinese firms, increasing unemployment and thus decreasing productivity. As well as this, foreign firms will no longer outsource their work to China due to the rising wage costs. There is also a declining number of new workers, meaning that the quantity of workers will decrease, thus decreasing output. Currently, labour productivity growth in China is the slowest since 1999 after the Asian financial crisis. During this time public enterprises cut millions of jobs. This inefficiency and falling labour productivity has caused wages to fall, thus hindering China’s capacity to transform into a consumption-led economy.

This graph shows that China’s labour productivity has remained w between 1996-1999 during the Asian financial crisis. Productivity peaked during 2007 to over 12% however this figure decreased to around 6.5% in 2015.

This facing chart shows that China’s labour productivity was only $7,318 per worker in 2015 compared with US, which had an annual labour productivity in 2015 of approximately $100,000.

In China, average productivity growth fell from 12% a year between 2003 and 2007, to less than 9% between 2008 and 2012. Although growth is still strong,

China’s GDP per worker is only 17% of the USA’s. The increase in China’s labour productivity from 2009-recent years is due to heavy over-investment, such as through Foreign Direct Investment. An example of this is through the creation of SEZs (Special Economic Zones, which aim to attract TNCs to outsource their companies here through the use of incentives such as tax exemption). China’s productivity has increased due to a massive expansion of private enterprise, and a shift of labour out of agricultural work and into more productive, mechanised jobs in industry.

Although China has experienced periods of high economic growth, this doesn’t necessarily correlate to a rise in productivity. For example, an increase in employment and investment in infrastructure, such as factories and roads, would increase the size of the economy. But these may not have been put to good use, and there has not been a correspondence with productivity of labour. Harry Wu is an economist who agrees with this view; he has found that since 2007 productivity has dented growth by about 0.9% per annum in China. In contrast, researches at the World Bank think that productivity added nearly 3% a year to growth from 2000 to 2010, they also found that it is 40% lower than in the 1990s, possibly as a result of the Asian financial crisis. These researchers from the central bank found a strongly negative correlation in China between growth in lending and productivity, as one increased the other decreased. Therefore it is an indication that state-owned banks, which dominate China’s financial sector, are not paying out enough credit to the country’s most successful companies, and the economy is increasingly consuming more and more capital.

PRODUCTIVITY IN ZAMBIA

BY GEORGIA BENSON

The Zambian Institute for Policy Analysis and Research has recorded that productivity in Zambia’s formal sector to have declined by 3 percent a year, between 2008 and 2012.

The construction industry experienced the largest decline in productivity, both in the informal and formal sectors. It fell in productivity by 12.9 percent a year (between 2008 and 2012).

Other industries showing decline include wholesale and retail trade, repair of motor vehicles and manufacturing.

despite government investment. Most roads link factories and firms, being utilised by TNCs only. This leaves rural areas untouched and isolated. In 2001, it was recorded that only 20,117 km out of the total 91,440 km of road used was paved in the country.

There is also limited supply of airlines. Until 2009, Zambian Airways was the sole provider, holding a monopoly and hence pushing prices high. These weaknesses have limited the development of firms in Zambia by restraining Zambia is a landlocked their ability to cluster and country in central Africa, grow in size. and so requires a high level of transport technolo- By contrast, transport gy both within the country technology in the capital and to others in order to city of Lusaka has improeconomically prosper. ved. The country’s main airport is Lusaka KenneThere are many limita- th Kaunda International tions of the national trans- Airport. In 2015, the goport present. Rail routes are vernment began a threelong and time-consuming, -year airport expansion used for goods rather than and improvement scheme, human transport. Interna- spending 360 million US tional networks often lay dollars. Road projects have idle, such as the connec- also been introduced, such tion to Malawi beginning as ‘Link Zambia 8000’. This in the isolated area of Cha- aims to develop internatiopati. Additionally, the road nal highways and an effinetwork is not far-reaching cient road network to link

Lusaka to many of the neighbouring countries.

Improvements have a strong correlation to investment and growth. The Zambia Development Agency announced that there had been a 20% increase in foreign direct investment inflows in the first half of 2016 compared to 2015. This indicates an increase in the number of international companies setting up and investing in the area. As investment and international connections increase, firms within Zambia are expected to grow in size and cluster in order to benefit from the scale. This will lead to an increase in the productivity of the Zambian economy in future years.

Slowdown in Global Productivity

BY TAMARA JACOBS

Since the calamitous financial crisis of 2008, global productivity has not quite been the same. While the recovery process from the crash is almost at an end, with most developed economies having more-or-less attained their pre-crash levels of growth and GDP, it is clear that the damage done to productivity is irreparable – at least for now. Global productivity has been progressively weakening over several decades, not just since 2008, and for the future, economists do not predict an optimistic alternative.

The widespread slowdown in labour productivity growth has been a consequence of weakening investment in machinery and equipment, which slowed across all G7 economies in the post-crisis period. Although spending by businesses on intellectual property products, particularly research and development, has been more resilient, this too has slowed from pre-crisis rates. The weakening of growth in recent years has also had a negative impact across sectors, with the sharpest declines in manufacturing, information and communication services, and in finance and insurance. Among OECD countries, labour productivity in manufacturing slowed most markedly in recent years in the Czech Republic, Finland and Korea. In business sector services, the slowdown was most notable in Estonia, Greece, Latvia and, to a lesser extent, the United Kingdom.

Rapid and unprecedented changes in technology have cost jobs in less up-to-date sectors, hitting lower skilled workers hardest. There is a need for an increase in investment in capital and retraining schemes and for governments to help such workers through targeted education programmes, in order to help solve productivity problems and create more inclusive and sustainable growth. The incessant technological advances of the 21st century have perhaps come too fast, without allowing markets, economies, governments and workforces the time to adjust. For investments in digital technologies to be viable, firms need to simultaneously reform many business processes and equip workers with new skills to accompany the changes in technology. Without this happening, the combination of new technology and a workforce with insufficient skills will create new inefficiencies. Only now are companies emerging with new business models for goods and services in fields such as transportation, energy, and healthcare.

Truly reinventing fields such as banking and education will take more time.

The persistent decline in productivity growth can also be seen to be the product of an ageing population worldwide. With breakthroughs in health-care services, the quality of life in many OECDs and MICs has seen vast improvements and life expectancy is at an all-time high. At the same time, there is a global trend of lowering birth rates, meaning that in the long-run, there will be less young people to support the expanding elderly population. With an ageing population, there is a smaller workforce consisting of young people willing and able to work, thus causing labour productivity to dwindle.

The head of the IMF, Christine Lagarde, in a speech to policymakers at the American Enterprise Institute in Washington, has warned in April 2017 that living standards, which countries all over the world have worked to improve since 2008, will fall if governments do not take urgent action to raise productivity levels by investing in education, cutting red tape, and incentivising research and development. “Leaning back and waiting for artificial intelligence or other technologies to trigger a productivity revival is simply not an option.”

It is clear that we cannot simply wait for innovation to drive up productivity growth from the doldrums. “One thing is clear: we need more innovation, not less. Market forces alone will not be able to deliver that boost, because innovation and invention are to some degree public goods.”

In the UK, productivity growth has too, been sluggish for years and is behind most other big economies, prompting Chancellor of Exchequer, Philip Hammond, to pledge more investment in infrastructure and other areas with a £23billion national productivity investment fund. Other countries are also taking similar action.

However, only time will tell if an increase in government investment and action to tackle this long-standing issue will prove successful as we move into the tenth year since the 2008 crisis.

Solow’s Theory - Is technology the solution to increasing productivity?

BY DAVINA GAMI

With the technological revolution in progress, the economies suffering from low productivity levels thought a solution would be to kick-start their productivity. From the graph, we can see that productivity did increase for a short while at the start of the revolution, from 1997-2004. However, the plateau from then on shows the failure of technology to stimulate productivity. This situation is known as the Solow’s or Productivity paradox. Robert Solow first described the concept in 1987 as how ‘you can see the computer age everywhere but in the productivity statistics’.

secondary sector production processes meant firms’ costs were lowered and their relative efficiencies increased, so productivity rose.

Another reason could perhaps be that technological systems may not be easy enough to be used by workers, therefore productivity would not increase. An example of this would be the fact that although there is the technology to paint walls digitally, it is too complex and expensive for the average painter to use.

But people working in the digital economy sector, such as Andrew McAfee, have said that technology does increase productivity, though The first reason for this the- only following a long-time ory is that new technologies lag. This is partly because it may have advantaged some will take time for people to firms and industries and adjust to the new developdisadvantaged others. There- ments as well as the fact that fore, the multiplier effect it takes time for the expenwas small; for example, auto- siveness of technology to go mated conveyor belts in the down.

Hence, overall, technology will increase productivity, but not immediately; it may take years, decades, or even our generation’s lifetime for us to see the full impact, and it is also dependent on whether firms will be accepting and using the said technologies. And finally, of course the fact that workers may be displaced by the new technology could be a major factor in decision-making, considering how damaging this would be to the UK’s low unemployment levels.

Refugees and how they affect our economy

by Izzy Mason

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recent lecture at the London School of Economics, given by Professor Collier and Professor Betts (Oxford), highlighted just how essential the use of both economics and policy are in alleviating some of the struggle faced by refugees, particularly in regard to finding employment and hence boosting the country’s productivity.

These ideas are the main focus of their recent book entitled “Refuge: Transforming a Broken Refugee System”. One of the areas discussed was the “Jordanian Model”. When visiting a refugee camp in Jordan, Professors Collier and Betts were also taken to visit a state of the art construction zone that lacked workers due to its isolation. This meant that firms had failed to invest

to production there.

There was a clear opportunity to match the job opportunities on this site with the high levels of unemployment by the refugees living in the camp.

However, at the time – due to unemployment among Jordanians – legislation was in place that prevented these Syrian refugees from working.

Colliers and Betts worked with the Jordanian government to create new legislation which stated that the new jobs would be shared in the ratio 7:3, refugees to Jordanians. Next, there needed to be an incentive for international firms to invest in the site to create job opportunities. To do this, the professors worked with Brussels to remove trade barriers that were in place with Jordan. This allowed firms to invest, creating thousands of jobs for both the Jordanians and for the

Syrian refugees.

Their work highlights the importance of combining political and economic policy for a humanitarian gain. By removing barriers faced by refugees, and creating economic connections with other countries, they were able to not only put to greater use the infrastructure that Jordan had previously invested in, but additionally, to help refugees break out of the cycle of poverty that they were bound to by both their original situation, and by Jordanian law.

Professors Betts and Collier hope that through their work, and through the message of their book, other countries will be incentivised and be inspired to carry out policy such as that in Jordan, and allow for dignity and autonomy to be returned to refugees through employment.

The link between productivity and standard of living B Y N I K I TA NAIK

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e are accustomed to linking a country’s standard of living to its GDP output, unemployment, income and inflation, but it is not as widely known that standard of living is directly linked to a country’s productivity, with faster productivity growth leading to an increasingly better standard of living. When considering countries with a high standard of living, well-developed first world countries are highligh-

ted. With further research it becomes clear that the top 20 most productive countries in the world also enjoy a high standard of living.

A determinant of standard of living is a country’s ability to produce goods and services, clearly highlighting the relationship between the two. One definition of productivity is the rate of output per unit of input, in layman’s words the more efficient the whole economy is the more productive it is. With most economies functioning with a profit-motive businesses are forced to become as efficient and productive as possible in order to lower costs of production. As our per capita production increases, it allows our per capita consumption of goods and services to also increase (in other words: when we produce more, we consume more).

Here we see productivity linking with the other more well-known determinants of standard of living.

An increase in efficiency lowers costs of productions for businesses, which can have two effects: 1.

Decrease the retail price of the good or service, making it cheaper for the consumer, which in turn will increase demand for the good or service or/ and 2. Increase the wages of the employees due to the increase in profits.

Either effect is beneficial for standard of living: allowing consumers to get more for their money or simply have more money to spend. The overall effect of an increase in profit allows the business to reinvest in their business (in the form of their capital and workers), successfully meeting the requirement for standard of living: producing goods and services.

Yes, unemployment levels, inflation, income and economic growth all affect standard of living, but they can all be influenced by standard of living, making it clear that a country’s productivity really does dictate its standard of living.

RISE OF THE

R O B O T S

Will robots replace UK workers by 2030?

BY SHANIKA PATEL

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tudies have showed that almost 250,000 public sector workers could lose their jobs to robots over the next 15 years.

Websites and artificial intelligence “chat bots” may replace 90 per cent of Whitehall’s administrators by 2030. This would help save as much as 3 billion pounds per annum.

In fact, nurses and doctors could also fall victim to the machine takeover as they have shown that they have the ability to outperform humans at particular medical diagnoses and routine surgical procedures, as well as being more efficient at collecting information.

The wholesale and retailing sectors will take the largest hit, as this sector currently employs the largest proportion of the UK’s workforce. Manual and routine tasks are more susceptible to automation, while social skills are relatively less automatable. However, this could be seen as a positive point; even though it will eliminate some existing jobs, it could also enable some workers to focus on higher value, more rewarding and creative jobs, removing the monotony from some of these jobs.

Another factor to consider when looking at how many jobs the robots will take over, is gender, which plays a significant role. 35 per cent of male jobs were identified as being at high risk against 26 per cent of female jobs. This is because women tend to work in sectors that require a higher level of education and social skills, and therefore they would be less in jeopardy of losing their jobs than men, who are in demand in sectors such as manufacturing, building, and transportation.

Britain cannot afford to ignore the huge changes that will occur in the coming years.

“If we don’t retrain Britain’s workforce with the skills they need for the future we are likely to end up with a society where a small number prosper while many are left behind,” said Joe Dromey, senior researcher at the IPPR. Such a rapid advance in the use of technology may seem controversial, and any job losses must be handled sensitively. But the result would be public services that are better, safer, smarter and more affordable, as well as the beginning of the closure of the UK’s productivity gap.

“If we don’t retrain Britain’s workforce with the skills they need for the future we are likely to end up with a society where a small number prosper while many are left behind.”

THE RISE OF THE ROBOTS IN THE MANUFACTURING INDUSTRY;

CAN HUMANS MATCH ROBOTS?

BY SHREYA PATEL AND RITU RAJ

Imagine coming into work one day and finding a robot doing your job (well, as of yesterday). You’d likely be worried about losing your job, unsure of whether you would even find a similar job that hadn’t already been taken over by robots, and generally troubled by your future employment prospects (…or maybe you’d just be happy to have your work being done for you!). The advancement in technology around the world threatens the existence of the labour force. Robots are taking over our everyday lives and we don’t even realise it. Worries of job loss have been spurred by recent trends in automation; otherwise known as “the use of technology or robotic equipment to handle manufacturing or other processes”.

We all know that robots boost productivity and make the smallest tasks like a visit to the shops quicker. But maybe this level of productivity could be reached by people.

People are incentivised by money and want the best for themselves. It can be argued that emotions bring out the best in people, pushing them to work harder and making them more productive. It can even be said that people are incentivised to work harder due to the competition they face due to the rise in robots who could someday take their jobs.

Yes, maybe people with incentives are better than robots, but the people who fall under this category are outnumbered by the rest of the population. Maybe in the short run, robots are expensive, but however in the long run, robots are undeniably cheaper, mainly due to difference between the output per robot compared to the output per worker. As well as this, for the people with incentives, many more jobs will be opened up due to the never ending innovation in technology. In reality, it is impossible to accurately compare the two. However, an increase in robots seems to be boosting economies worldwide and are the way forward. In order to cater for the new generation as well as the ageing population, I believe that robots will be better than people with incentives.

It is estimated that around 47% of workers in America and about half of the jobs

in Britain are at risk of being automated. Thus, millions of workers are potentially susceptible to ‘technological unemployment’ – the process of technological change causing a loss of jobs. Such jobs include transport jobs such as taxi drivers who could be substituted by driverless cars, and office jobs such as receptionists or jobs regarding sales and services, both of which could be substituted by simple robots. Between 1995 and 2002 there has already been a loss of 22 million manufacturing jobs, despite an increase in industrial output of 30%, pointing clearly to rises in automation.

There are also worries of job polarisation, which is the decline of middleskill jobs, while at the same time the expansion of low-skill and high-skill jobs. The routine work of manufacturing can be broken down and done by robots. Inevitably, this leads to a two-tiered workforce, with both the top high-paid tier and bottom low-paid tier doing non-routine work such as architecture or cleaning. Evidence of this can be seen in the graph below, which shows a stagnating trend in routine cognitive and mental work since the 1980s.

However, there is also a valid argument as to why these predictions may be untrue and perhaps why such worries should be put to rest. Although the rise of robots in manufacturing will most likely cause unemployment in this particular industry, it will lead to greater employment in other industries. Automation essentially lowers the production costs of manufacturing firms which, in turn, lowers the prices of their products.

This basic economic principle means that consumers will have more money available to spend on other products in the economy, leading to increased demand for these products. Labour is a derived demand, meaning that greater demand for other products causes the producers of these products to hire more labour. In this way, we can see that rather than replacing workers, robots and automation simply cause them to learn new skills, and act to reallocate labour to where it is most needed. Furthermore, the rise of robots could in fact create jobs specific to this new field of technology such as the maintenance or creation of robots.

Despite the potential for robots to take over certain jobs, there will always exist jobs which require more than just a machine including hairdressers and counsellors, to name just two. Moreover, despite automation in the past, employment has remained relatively stable and unaffected .While the types of jobs are different, the quantity of jobs is the same. Although the current case of automation is arguably much further widespread than it has been previously, and so it would be safe to say that some serious retraining of workers may be required in the future to combat the imminent technological unemployment in declining manufacturing sectors.

The Fourth Industrial Revolution:

Will our society become replaced by robots and should we be worried?

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obots have served as literary device since the early 20th century. From Pixar’s WALL-E, to ‘The Terminator’, authors and writers have used robots to speculate over the future of technology and artificial intelligence. Not only are the robots in films able to perform human tasks, they are also able to do things that humans can’t, for example exploring space, potentially replacing the need for humans; yet, they are menacing, threatening and emotionless. For years, the threat posed by robots seemed empty and perhaps even unrealistic, but

BY TOLU AKINYEDE

the way taxis and automobiles replaced horse drawn carriages at the end of the nineteenth century. Many economists argue that the same is According to a PwC already happening. It report, 30 per cent of seems that an ineviUK jobs are at a high table part of any ecorisk of being replaced nomic cycle, for old, by artificial intelligence in the next 15 years. inefficient norms to be substituted with more In the US, this figure efficient and modern is estimated to be sigalternatives and whilst nificantly higher, at 38 humans are not at risk per cent. In some sectors, almost 50 per cent of being completely replaced, the similariof jobs could be lost ties are still there. The to robots. One of the world has already seen most obvious sectors a similar cycle play is retail. However, the out in the form of the threat is largely indisIndustrial Revolution. criminate, with jobs Again, there were conin industries such as tourism, finance, who- cerns that jobs would lesale and fast food also be wiped out, but in fact, after the Indusbeing at risk. trial Revolution, productivity in countries Many parallels have generally improved, as been drawn between time has proven that the myth of a ‘robot invasion’ is one that needs to be taken more seriously.

did standard of living and competitiveness.

The same cannot be said for the UK’s current situation…

In the long run, robotic automation could have a drastic impact on the economy.

The threat of rising unemployment and falling wages posed by robots could lead to a fall in consumption, as consumers have less purchasing power to buy goods and services, leading to a decline in economic growth.

for robots has created new highly skilled jobs, which will not be targeted by robots (at least for the foreseeable future). The newly created jobs are likely to be more rewarding and creative, reducing the monotony from regular jobs.

In February 2017, the Reform Thinktank released a report which stated 24,000 GP receptionists and 90,000 NHS administrative posts could be replaced by robots, saving the UK more than £1.7bn. Robots Too often, econowill also force govermists focus on the ne- nments to address gative impact robots problems that our have on the economy; society already faces, however, there are far such as education and more positives of ininequality. As mentiotroducing robots into ned before, robots are the economy. Whilst it capable of performing is true that robots are many human tasks, so more likely to replace now more than ever, low skilled workers, it is vital for humans the increasing demand to start focusing on

their comparative advantages; or, the skills which are unlikely to be replaced by robots like non-cognitive skills. Similarly, with a large percentage of jobs being at great risk, the rise of robots will only further fuel growing inequality, making it crucial to solve the problem.

Whilst writers may not have correctly depicted real life robots on the silver screen, they weren’t far off in predicting the impact robots will have on the economy. Whether the consequences are positive or negative, robots are bound to have monumental impact on our lives, and will require us to rethink our economic and political systems, if we are to fully reap the benefits of this new technological advancement.

Robots and the

FUTURE OF FASHION A s the rise of the robots dawns on some of the largest industries, rids millions of their jobs and leaves the uk workforce questioning ‘are our jobs really safe?’, one cannot help but wonder… what will be the future of fashion?

The UK online fashion sector has grown 258% in 5 years. according to IMRG Capgemini, the fashion category outperformed all other e-retail sales categories, making it the best performing segment across commerce. Whilst this sounds like great news, the rise of the digital age has brought dramatic changes to consumer behaviour and spending, leading retailers to dramatically alter sales strategies or to take on an entirely new approach.

But why is change such an issue?

For some the results have been rewarding, however, for many retailers the future seems uncertain and blurry.

Figure 2.

Average number of stores regularly used for clothing shopping Figure 1

by Omozusi Inegbeniki

The chief executive of one fashion retailer said “The arrival of digital is the equal of the late 1970s for supermarkets. The change in fashion has been radical and it has been brought about by the combination of digital, double-dip recession, the crisis in the high street and the UK being over-shopped”. These radical changes have led to uncertainty around trading and growth strategies for firms. The major side effect of the digitalisation of the retail industry is the change in consumer mentality. Shopping on the high street is no longer seen as a leisure activity as shopping online is a faster and easier alternative. Furthermore, consumers are no longer limited to the few stores on major high streets, they have access to a

wide array of stores through the click of a button. Hence, consumers are fickle and always on the pursuit for a bargain and can easily substitute items for cheaper options. This has drastically reduced brand loyalty.

Reduced brand loyalty means in order to generate the most profit, firms must either already have a name for themselves or simply stand out the most.

This has created a highly competitive ‘market share game’ in which only very few firms can come out on top.

This highly competitive nature of the retail industry has led firms to adopt more innovative sales strategies in order to attract more consumers and maintain that attraction.

Additionally, digitalisation has exacerbated the saturated nature of the fashion industry. Rather than growing as a sector, some retailers are growing at the cost of other retailers.

Consumers would therefore be attracted to the internationally known brands meaning that as the largest firms are doing better than ever before, the small businesses are forced to close down.

One must therefore wonder, is there any room for new businesses and will the fashion industry become solely dominated bby the biggest names?

How robots influence the economy and the main effects

BY CHANTELLE LEVY AND BRINA HORVAT

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n the last 10¬¬0 years, we have seen huge technological advances. Although technology has been wonderful in many ways, there are also negative consequences, for example, on unemployment – Oxford University carried out a survey where it was suggested that 47% of world’s jobs will be wiped out in the next few decades.

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he development of robots aligns with that of current technology, which is accelerating faster than ever before, with new creations massively affecting economic decision-making. With this in mind, technology progress has a positive effect on both microeconomic and macroeconomic objectives.

The efficiency and productivity of robots offer amplified benefits on both aggregate supply and demand. Productivity rates may rise as production of consumer goods no longer require the assistance of as voluminous humans, causing human capital labour to be used and valued elsewhere. This is also present in service-based industry such as in restaurants where ‘multi-tasker bot, from Momentum Machines, can make (and flip) a gourmet hamburger in 10 seconds’. Therefore, this makes robot technology more cost-efficient, as it requires only the initial investment rather than the continuous salary of a worker.

These reduced costs of production can be very beneficial from a macroeconomic perspectives, as they cause a rise in investment by firms, resulting in a subsequent increase in consumption, therefore shifting aggregate demand outwards, (as shown on the diagram – from P1Y1 to P2Y2). This outward shift has had a consequential effect of boosting economic growth, which is highlighted as the chief ob-

A

jective of the UK economy. nother key advantage of robot technology is that it increases the flexibility of the workforce meaning it is easier to adapt to the fluctuations of the economic cycle. For example, in a boom, machines can operate at a higher intensity, rather than having to pay workers higher wages to suit the rising demand for goods and services. Similarly, in a recession, robots may be turned off if electricity costs are too high to meet demand and supply and whilst their existence abolishes any necessity to make workers redundant. And finally, robots don’t need incentives, and so no bonus salaries are require to improve production – both in terms of quantity and quality.

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n fact, robots have even advanced into the creation of emotional robots that could be used as companions, further promoting isolationism in the world. This can be proven with the example of Japan, where there is an overall positive attitude towards robots and they are sometimes used as pets. There is a solution of the problem of jobs being taken away by robots – for example, a guaranteed income for all citizens; something that is almost impossible to achieve politically. In a free market approach, everyone would be given a minimum income so that they would be able to interact with the market and if, for example, they need to buy a car, they have the money to find one on the private market, and with that, they must get the money to spend on it. In conclusion, although robots have been massively beneficial, they could lead to the loss of many jobs in the UK.

INCENTIVES

What is an incentive and can it have a negative impact?

BY HENNA SHAH

An incentive is something that encourages someone to do something. Governments all over the world use the concept of incentives to encourage and promote economic activity, in order to sustain a good quality of life for its citizens. Incentives influence people’s behavior, and positive incentives reward people financially for making certain choices or for behaving in a certain way. Disincentives are negative incentives – for example, a parking ticket could be coined with the term “disincentive”, as people are punished people financially for making certain choices and behaving in a certain way. Furthermore, sometimes, applying incentives in order to maximise efficiency can cause other negative impacts on society.

When a company wants to encourage productivity among its employees, one option available is an employee incentive program. Employee incentives describe a system of rewarding success and effort in the workplace by allowing employees to earn prizes or recognition, for example, giving bonuses along with their earnings. These rewards make employees feel more valuable

and can incentivise them to work harder, longer hours and overall increase productivity.

The government, too, aims to minimise unemployment.

The government at times provides an incentive for the public to attain a higher level of education through free training or grants. Some economists may look at this in a positive light, as it enables people to gain a degree or qualification, making it easier to become employed and thus reducing unemployment. In turn productivity and economic growth would increase as people have more money to consume goods. However the rise in employment in higher skilled jobs can lead to inequality so some economists may look at incentives negatively. The result in inequality can lead to social friction.

It can be a factor in precipitating riots or higher crime levels.

The increase of production arising as a result of various incentives can also lead to negative environmental effects. In order to sustain farming, the government subsidises farming. Subsidies relate to money, which su-

pports farmers’ income and protects them against things like big changes in market prices. This security and the money attracts farmers to work and production of goods carries on and stays at a relatively constant price for consumers. However, this mass production of goods can have negative impacts on the environment. An excess in supply could lead to wastage of goods, which are often dumped, harming the environment. The soil could also weaken in nutrients and produce poorer quality goods.

Even small incentives, like offers for consumers in supermarkets can affect the economy. The offers may attract customers, causing an increase in demand and could potentially lead to inflation. Incentives are important in motivating people to welfare loss and maximise efficiency, however they can have some negative impacts on society mainly being inequality. Since inequality is a large issue some economists source the root of the problem to incentives and therefore look at it in a negative way.

When Economic Incentives Backfire BY ARIANA RAHMAN

Economists put great stock in incentives. If the stakes are raised, the argument goes, people will have greater incentive to think harder, ask for help, or do what is necessary to get the job done. Firms often rely on fines and rewards to encourage employees to work as well as possible.

Bonuses are commonly used to reward high performance, and by using incentives like this, companies can produce more efficiently, therefore reducing production costs. The result is either an increase in profits or a reduction in prices for consumers.

Although they play a crucial role in the success of a business, incentives can also backfire, by diminishing the very behaviour they’re meant to encourage.

An interesting example of an incentive is when six day-care centres in Israel began fining parents for late pickups.

The number of tardy parents doubled – the fine seemed to have reduced their ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as simply a commodity they could purchase.

Many other experiments such as this show that rewarding self-interest with economic incentives can have the opposite effect when they undermine what Adam Smith called “the moral sentiments”. The psychology of humans in a situation like this stems from people’s desire to be esteemed by others and to be seen as ethical and dignified. For exam-

ple, rewarding blood donations is an example of an incentive that may backfire, because it suggests that the donor is less interested in being altruistic than in making some extra money. In this way, incentives go wrong when they offend or diminish our ethical sensibilities.

Attempts to appeal to both self-interested and ethical motivations at the same time, is difficult. We are yet to fully understand why the parents in Israel did not respond positively to the fine but a simple 5p tax on a plastic bag managed to reduce plastic bag usage by 85% in the UK, less than a year since it was imposed.

In consumer behaviour, it is a common conception that the

higher the stakes, the more likely you are to get something right.

However, Richard Thaler’s found the opposite to be true. Thaler called a list of products which varied depending on the frequency of the purchase the “Binmore Continuum”. This included things like milk and bread - twice a week - and homes, cars, career choices and spouses which were not more than two or three per lifetime for most.

He found a trend; the small things we do often enough to learn to get it right, but when it comes to mortgages or careers we don’t get many opportunities to learn. Because learning takes practice, we are more likely to get things with low stakes right.

Therefore, if learning is crucial, then as the stakes go up, decision making ability is likely to go down.

Within businesses, employees’ incentives can also backfire in a number of ways. An executive can announce that the bonuses of the salespeople will double for every new customer they bring in. In some cases, this may be an ef-

fective incentive, maximising the salespeople’s ability. In other cases however, this incentive may be poorly planned.

This may happen if the problem does not lie in the motivation of the sales team, but the actual product or service itself.

The product or service may not be compelling to consumers and instead, what the new incentive plan has done is assign blame to the sales team. The original goal to sell more, may instead result in the sales people looking elsewhere for fairer pay for their efforts.

In another case, incentivising workers to do something which may go against their values may also backfire.

Group practices commonly reward doctors for seeing more patients.

Incentivising employees to increase productivity is certainly necessary.

Yet, in several surveys, the result is a temporary jump in compliance, and then, a slow decline to where the level was at the beginning, and often even lower. An incentive plan such as this sends the message to the doctors that, unless financially incentivised, they

won’t do their best. In order see more patients, less time must be spent with each which may compromise their practice of good medicine. The money lost for spending more time with a patient can be interpreted as a ‘tax for doing the right thing’.

In the long term, the quantity of output may increase, but, the downside is that the quality will then decrease.

In a lot of situations therefore, the problem wasn’t the incentive itself, but the way the incentive was implemented. When incentives are used effectively, they can undoubtedly push a company far, far ahead, and increase output by improving productivity.

ARE FIRMS DRIVEN SELFISHLY BY THE PROFIT MOTIVE?

BY DOROTHY CHAN

Have you ever gone to the gym knowing that the sheer agony you’re experiencing will be justified by that more athletic body you desire? Or have you ever trained yourself to study with so much conviction, solely banking on the thought that once you finish the last few strokes of your sentence, you can Usain Bolt downstairs to your fridge and allow yourself to devour that slice of cake that you so deserve? If you have found that this works for you, you have mastered the way of working because of incentives.

An incentive is simply ‘something that motivates or encourages someone to do something’. Economic incentives are no different.

They are put into place to encourage certain behaviour according to the rational consumer, and usually involve money. A positive economic incentive for the buyer involves coupons, freebies or discounts.

A negative economic incentive would therefore be fines and tickets – a disincentive. Businesses use economic incentives all the times, for instance restaurants use ‘buy-one-get-one-free’ deals to influence people to choose their restaurant, and government employees like police officers use speeding tickets to discourage people from choosing to speed and encourage them to drive safely instead.

In this way, firms are assumed to be ‘self-interested’ and motivated by the maximisation of profit, a definition of this ‘incentive-theory’ is given by Laffont and Martimort from ‘The Theory of Incentives’ as: “The essential paradigm for the analysis of market behaviour by economists (…) where economic agents pursue, at least to some extent, their private interests.” Hence, a negative connotation has sprung, whereby firms would maximise profit at the expense of its workers or buyers, often deemed as ‘unethical’ and often exploiting their desperation; whether that be for work, or high demand for the good or service.

However, Sydney Chapman expresses an argument to consider the ‘sordidly driven’ firms in another light, displaying his views in “The Economic Journal”. Chapman excuses this perceived behaviour of the firms by switching the point of view, arguing that, ‘as consumers, we must all try to buy in such a way as to get equi-marginal returns from our purchases per unit of expenditure to make the best of our incomes. But it would be ridiculous to say that we thereby prove ourselves to be sordidly driven.’ He firstly encourages the reader to think of what Marshall called the “normal man” thinking not of the ‘philanthropist nor of the whole-hearted self-seeker’. Here, the normal man would naturally be interested in persistently improving his work layout, and would exercise similar powers of selection, based on rational preferences. Therefore, Chapman feels the negative epithets that follow the profit incentive to be harsh, and strongly believes that what firms really strive for is efficiency, as part of human nature; where profit is then derived.

“I should say, in nine cases out of ten. His real meaning would be that in the main he strove after efficiency, and naturally assumed that in the degree in which he attained it he would make more money.

Pecuniary gain, I should hold, only figures, more or less according to his nature, in the complex of his motives: but it goes without saying that he would not be so foolish-and indeed so regardless of his duty-as to do what it was not worth while doing from the point of view of results. Efficiency implies this.”

So whilst firms may not ever be altruistic, Chapman has given us a different view of human nature within the business mechanism, and has given us some hope in these capitalist-led economies that individuals may not be entirely horrible and greedy! All in all, it’s quite simply every man (or woman) for himself.

But Primark, we still don’t trust you.