Artificial Intelligence to Trigger Second Industrial Revolution

Technology optimists do not deny that automation will prove disruptive in the short run. They point out, however, that historically periods of rapid technological change have created more jobs than they have destroyed and have raised wages and per capita income in rough proportion. The AI revolution may be different, but there are good reasons to believe that a resilient, adaptable economy will again vanquish the spectre of technological unemployment. An analysis, for Different Truths.

We may be on the cusp of a “second industrial revolution”, says an IMF working paper released recently. It has been predicted on the basis of advances in artificial intelligence and robotics. The authors have concluded, “automation is good for growth and bad for equality”. The real wages fall in the benchmark model in the short run and eventually rise, but “eventually” can easily take generations, the paper warns.

The implication is expressed in clear terms even in the title ‘Should we Fear the Robot Revolution? (The correct answer is Yes)’ of the paper authored by Andrew Berg, Edward F. Buffie, and Luis-Felipe Zanna. Having analysed the implications for inequality and output, the authors foresee a transformation in the labour market due to the automation underway.

“The factory of the future will have only two employees, a man, and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.” Warren Bennis, the management consultant, has been quoted saying in the introduction of the paper. It has noted the growing perception that advances in artificial intelligence (AI) and robotics will radically transform the workplace in upcoming decades. Robots load, unload, retrieve and send out products with minimal human supervision at Symbolic LLC’s automated distribution centers.

AI programs have already started working as paralegals, accountants, and teaching assistants, and self-driving vehicles may soon eliminate millions of jobs held by truck, bus, and taxicab drivers. Uber aims to be driverless by 2030. Robots staff more assembly lines each year, kiosks are replacing cashiers at fast-food restaurants, and Watson recently co-authored a song. The list goes on, with each week bringing a new or imminent application of smart machines.

According to estimates by Frey and Osborne (2017), Chui, Manyika, and Miremadi (2015), and the World Bank (2016), anticipated advances in automation threaten 45-57% of all jobs in the United States. The White House’s Council of Economic Advisors projects that automation will affect 83% of jobs paying $20 an hour or less.

The sense that we are on the cusp of a robot revolution has sparked a lively debate among economists, journalists, and technophiles about the likely impact of automation on growth and the distribution of income. Broadly speaking, there are two camps with starkly different views of what the future holds.

Technology pessimists fear that we are headed toward an economic dystopia of extreme inequality and class conflict: “Without ownership stakes, workers will become serfs working on behalf of robots’ overlords in a new form of economic feudalism” (Freeman, 2015). Summers (2016) shares Freeman’s vision (if not his colourful language), predicting that the prime-age employment rate for American males will drop below 2% by mid-century in the absence of an aggressive policy response.

In this backdrop, the authors of the paper have analyzed the situation on four models. In the first model they have presumed that the robots do everything; in the second, robots cannot do everything; in the third, the robots do not substitute skilled labour; and in the fourth, adding a non-automatable sector.

The premise of this paper is that we are in the midst of a technological inflection point, a new “machine age” in which artificial intelligence and robots are rapidly developing the capacity to do the cognitive as well as physical work of large fractions of the labour force.

The paper concluded that optimists may be wrong this time because it is different from all earlier technological advances which opened more doors than they closed. In the benchmark model, they observed that robots are close substitutes for human workers, combining with them to produce labor services. These labor services then combine with traditional capital in production function to produce the final output. Even a small increase in the level of robot productivity can increase output enormously.

The basic mechanism is that the introduction of more productive robots initially lowers the wage and raises the return to both robots and traditional capital. Large quantities of traditional capital have to be accumulated before a scarcity of human labour raises wages and the return on capital declines to normal levels.

All this is thus very good for output, though it is also very bad for distribution. For the real wage, understanding the dynamics is critical; the short run–which can last for generations—is very different from the long run. At first, the real wage is likely to fall in absolute terms, even as the economy grows.

Eventually, the real wage will rise above initial levels, but there are two distributional problems. First, “eventually” can take a long time, typically 20 to 50+ years in our baseline calibrations. Secondly, even in the long run, the labour share declines substantially and overall inequality rises.

Moreover, a technological revolution such as examined by the authors has profound implications for the international division of labour and prospects for developing countries. The introduction of robots is by no means limited to frontier economies. For example, nearly full automation of China’s iPhone factories is apparently underway, with a benchmark of 30% replacement by robots by 2020, while technology is threatening call centre industries in places such as India and the Philippines.

The paper suggests an appropriate policy response in place to handle the new situation we are moving towards.