The impact of technology – The Fourth Industrial Revolution?

Amazon has opened a shop in Seattle with no checkouts and customers who do not pay on leaving. Instead, with the appropriate app to link the shopping to an Amazon account, all that is needed is to go round the store, put items in a bag and scanners and sensors do the rest. After leaving the store, payment is debited from your account. There are no queues and no cashiers.  So successful has it proved that more have been opened. It already has three in Seattle and one in Chicago and plans ten by the end of 2018, 50 by the end of 2019 and, according to some press reports, 3,000 such shops within three years.

Electric cars have also been in the news over the summer, with a focus on how they will reduce the environmental damage from driving. What has been less well-publicised is their possible impact on the demand for workers in the factories of the future. Electric cars are easier to manufacture than current ones because their mechanism has fewer moving parts than the internal combustion engine. This means both that fewer workers will be needed and those on the manufacturing process will be less skilled, making it easier to outsource manufacture to other countries. However new technology in the motor industry could, potentially, have an even greater impact with the arrival of driverless vehicles. Uber is already looking into driverless taxis and black cab and white van drivers could become a distant memory in the same way that stokers on railways are no longer with us and blacksmiths are a rarity.

A robot is being developed, based on technology used in the NASA Rover to explore Mars, which will drive itself round battery chicken sheds, measuring the chickens by sight and checking their temperatures. This machine is likely to be popular if farmers face a shortage of labour after Brexit since they will replace human workers.

There is considerable dispute over the numbers and what the future will look like. Some suggest traditional, full-time jobs will decline and there will be an increase in remote working but overall, there will  be little impact on the number of jobs. Others argue that the impact will be positive, with new technology creating more jobs than are lost. They suggest there will be a much greater need for workers to develop, build and maintain the new technology and there will be some areas such as the care industry (growing because of an ageing population) where more human workers are likely to be needed to care for patients. McKinsey, a worldwide consultancy form,  recently predicted that robots will have the same impact on the global economy as the development of the steam engine, adding 1.2%pa to global growth by 2030.

A report by the World Economic Forum (The Future of Jobs, 2018), one of the more optimistic forecasters, has suggested that 42% of the world’s jobs will be done by machines by 2022, up from 29% today. It also estimates that although 75 million jobs will be lost by 2022, 133 million new jobs will be generated, resulting in an additional 58 million jobs. They see losses in administration, clerical, manufacturing, construction, legal, and maintenance sectors but increased demand for those in data analysis, management, computing, architecture, engineering, sales, education and training. Different numbers come from PWC, a worldwide firm of accountants, who predicted in July that about 7 million jobs will be lost by 2020 because of technology but 7.2 million will be created. They see losses in manufacturing, transport and public administration while the increases will occur in healthcare, science and technology and education.

Others are less optimistic. During the summer, Andy Haldane, the Bank of England’s chief economist, made the news by predicting that the impact of artificial intelligence could be more disruptive than previous industrial revolutions and would lead to widespread job losses. He argued that previously machines had replaced labour doing manual tasks whereas increasingly machines, because of developments in AI, are undertaking tasks previously thought to be beyond them. Mr Carney, the Governor of the Bank of England, suggested that the latest industrial revolution would threaten 10% of jobs in the UK and, while some workers would benefit from being more productive and earning higher wages, others, losing their jobs,  would not easily be able to find employment providing a reasonable standard of living and would need to be able to access education and re-training throughout their lives.

However the big issue will be that the people filling the new jobs are unlikely to be those losing the old ones. How society copes with this will be a major issue for the future.


The Causes of the Financial Crisis

INTRODUCTION: In a recent editorial (September 8th), the Economist suggested that  the financial crisis of September 2008 will be regarded as one of the defining  events of the early 21st century, alongside 9/11.Hence the importance of knowing  what caused it ten years ago and preventing another similar crisis

For most people, the story  started in August, 2007, when BNP Paribas, a major French bank, stopped customers withdrawing money from three sub-prime, largely US-based mortgage investment funds. (Sub-prime mortgages are those to less financially secure borrowers). By doing this, BNP Paribus was implying that money invested in these funds might not be repaid. Banks rely on borrowing from other banks via the inter-bank market. The BNP action cast doubt on the stability of the banking system and made banks less willing to lend in this market, causing increased interest rates and a lack of liquidity, despite central banks trying to offset this. As the inter-bank market froze, more financial institutions such as TSB, Bradford and Bingley, Lloyds, Alliance & Leicester and HBOS, found themselves in difficulties and confidence among banks fell further. A month later the reality of the crisis reached British high streets when Northern Rock suffered a “bank run” –  the first in the UK for 141 years – after doubts were cast on the BBC over its solvency. It had invested heavily in the sub-prime market and the value of its assets fell as house prices fell in the USA. Then, ten years ago on 15th September, 2008, Lehman Brothers, the fourth largest investment bank in the US collapsed and the world entered the worst financial crisis for decades.


FUNDS SEEKING A HIGH RETURN – An early cause  can be traced back to  the late 1990s when vast quantities of money from Asian countries with large balance of payments surpluses were invested in the USA and Europe, seeking high returns. This increased the supply of money, reduced interest rates and  discouraged saving. It also encouraged banks and other financial institutions to look for areas with a high rate of return, particularly in the booming housing market and to lend to mortgage borrowers. This caused large increases in house and share prices and helped create the asset price bubble which preceded the crisis.

THE RISE OF NEW FINANCIAL PRODUCTS – As the quantity of loans increased, there was a huge expansion of new financial products particularly CDOs (collaterised debt obligations), which were intended to spread risk but ultimately made it worse. They work as follows: imagine a bank makes five loans of $200,000 each to housebuyers at 5%, guaranteed by the value of the houses. It finances this by bundling them together into a bond (called a CDO) and selling it for $1m (5 x $200,000), paying 3%, thus making a profit, and uses the money to lend again. This process is securitisation – transforming a stream of cash payments into an asset.  To understand the concept, think of a butcher taking different types of meat (mortgages), mincing them all together and making sausages (CDOs) from the mixture. In theory, the CDO was safer than individual loans since, if a bank made one loan and it failed, it lost all the money but, with a CDO, where it had a slice of many loans bundled together, one individual loan failing was relatively insignificant. The CDOs were involved in long chains – banks might buy CDOs, then re-bundle them into new CDOs and sell them to other financial institutions who sold them again with borrowed money (sometimes from the original institution) financing many of these transactions, like the butcher then taking the sausages and mixing them together to make different sausages from the mixture.

SUB-PRIME MORTGAGES – A significant component  of the CDOs were sub-prime mortgages  which had increased during the early 2000s since they provided a higher return. Although offered to low-income households, they were regarded as a safe investment since housing markets were booming and if the borrower defaulted, the lender would re-possess the property and sell it at a profit. There was a failure of ratings agencies to properly assess the risk of these new financial products in the USA, which were highly-rated, because they focussed on the credit risk (the risks arising from non-payment) rather than the liquidity risk (the risk of not being able to sell the CDO).  This was combined with a lack of awareness by government regulators of the possibility of a financial crisis since they focussed on CDOs spreading risks and did not anticipate the possible risk of a housing collapse.

When the US sub-prime market collapsed, due to rising interest rates, deemed necessary to reduce inflation, and falling house prices, the CDOs, despite their high rating, were seen to be risky and quickly depreciated in value. They  became illiquid since no one wanted to buy them, so their holders were unable to sell them to realise even part of their value. Simultaneously banks became reluctant to lend to other banks holding CDOs in their assets and first Northern Rock and then other banks failed. However because the original mortgages had been converted into CDOs and often re-bundled into other CDOs, it was not easy to tell which assets were safe and which were not, and therefore all such products were assumed to be risky, the institutions which held them were avoided by lenders and liquidity in the financial system evaporated. Because these products were bought and sold  by financial institutions in USA, Europe and Asia, the crisis spread quickly between the continents.

LOW BANK RATIOS – Banks need a balance between the loans which they make and their share capital and liquid reserves which can be used in case any of their loans fail. In the approach to the crisis, their leverage ratios (loans:capital) increased greatly, meaning that they were supporting their loans on a much smaller base. Lehmann Brothers, for example, had a ratio of 35:1. When the housing market fell, the banks wished to build up their capital by selling the properties on which the loans were based. However the increased supply of housing onto the market further reduced house prices and the value of the sub-prime mortgages, making the crisis worse. It should be noted that it was much easier for a US mortgage borrower to abandon their property without a financial penalty than in the UK. What many sub-prime borrowers did when they could not afford the higher interest rates and house prices fell below the value of their mortgage  was to drop the keys back to their lender and move into rented accommodation. It was then up to the bank to try to sell the house and get their capital back.

POOR REGULATION – Another contributory factor was the level of regulation of the financial sector. Authorities such as the IMF focussed on how securitisation reduced risk and global bank  reforms aimed to make it easier for banks to lend. in the UK there was also a change in the financial regulatory framework. Previously the Bank of England had been responsible  for the regulation of the banking system and the operation of monetary policy. Following the election of the Labour Government in 1997, Gordon Brown, created a three-way structure involving the Bank of England, the Treasury and Financial Services Authority. The FSA was responsible for maintaining confidence in the financial system, preserving financial stability, protecting consumers and reducing financial crime. The move from a single body regulating the financial system to a tripartite arrangement possibly hindered a speedy response to the crisis.Subsequently, in 2013, the FSA was replaced by the Financial Conduct Authority which is responsible for regulating 56,000 financial services firms to protect consumers, protect financial markets and promote competition).

THE SOCIAL CLIMATE – There has been much media attention in the last ten years blaming the crisis on the greed of bankers, earning enormous salaries and bonuses from their activities. . The FT, in a series of articles on the crisis talks of “Massively leveraged investment banks engaged in socially useless trading of huge volumes of complex credit securities.” However it is not only bankers who were keen to make money. Housebuyers borrowed more than, in retrospect, was sensible and even everyday savers  used their savings to dabble in financial products they did not understand in a bid to obtain a higher return.

Then, on 15th Sept 2008 Lehman Brothers filed for bankruptcy protection. It was not the first chapter in the financial crisis but its size and the probability that it would be allowed to fail, can be regarded as the moment when the crisis became apparent. Within two weeks of Lehman’s collapse the global interbank money market had frozen, creating fear of economic collapse in the USA, Europe and Asia and the Dow Jones Index experienced its largest drop since the September 11 attack in 2001.

Inflation in Venezuela

It is difficult to be precise about the rate of inflation in Venezuela since the government has significantly reduced its publication of economic data.  The Economist recently quoted a current rate of 46,000% per year, other estimates put it closer to 100,000% and the IMF estimates it will rise to 1 million per cent by the end of the year! The impact of such a rate mirrors what happened in Germany in the 1920s, Hungary in 1946 where inflation at one point reached 150,000% PER DAY, and Zimbabwe’s two episodes of hyperinflation in the last ten years. In Germany, workers were paid twice a day, and given breaks to buy things before prices went up even further, using wheelbarrows and suitcases to carry their money to the shops. Although the Venezuelan president, Nicolas Maduro, has blamed opposition activists, officials in Washington and criminal gangs for the hyperinflation, independent observers suggest it is caused largely by the government printing money to pay its budget deficit, currently running at 30% of GDP. Ironically in Venezuela today, almost everyone is a millionaire but 4/5 of the population live in poverty and their average weight is falling because they cannot afford enough food. There are reports of shoppers falling ill because the only meat they can afford is discounted because it is no longer fresh.

The effects of such high levels of inflation on the metro in Caracas (capital of Venezuela) epitomise the problems caused by hyperinflation. The metro, built in 1983, was once heralded as a sign of the efficiency and progress of the economy. It was highly efficient and ran on time. The price of a ticket was fixed at 4 bolivars by the government which now equates to only a tiny fraction of 1p but, even if they wanted to, travellers cannot pay the government has run out of the paper needed to print them so all the ticket machines are marked as being out of order and people travel for free. However the journey is unlikely to be trouble-free. Demand has risen since people cannot afford taxis or fuel for private cars and the system now transports 2.5m people a day, three and a half times the number it was designed for. Only half the trains are working. Despite there being 11,000 workers officially employed, there is a shortage of workers since pay is only around 50p per week.

In Venezuela at present, it is more profitable scavenging for food in rubbish dumps than working. Output is falling for the third successive year and, despite having rich reserves of oil, which should make Venezuela one of the richest South American economies, oil production, which accounts for 95%  of export earnings in the country and a quarter of gross domestic product, (total output of the country) fell by a half between January 2016 and January 2018. Venezuela has been unable to stop a six-year-long production decline, caused by inadequate investment, US sanctions and a lack of skilled workers who have left the country for a better standard of living elsewhere.

There was even a shortage of banknotes which are imported. Last year the banks were forced to limit cash withdrawals to the equivalent of one US dollar a day. Increasingly, transactions are made electronically but those trying to make even a medium-sized purchase via a debit card found that many screens in shops or on their phones were too small to handle the large number of zeros needed. One of most popular television programmes, a Venezuelan version of “Who wants to be a Millionaire”, was abandoned because of the fall in the value of the currency – were it being broadcast today, the top prize would be worth 13p!

To solve the problems caused by hyperinflation, the government has raised the minimum wage by 3,500%, and  President Maduro has announced plans to reduce the government’s budget deficit (the amount the government borrows) from 30% of GDP to zero by increasing VAT and the price of fuel, which is currently very heavily subsidised, therefore admitting implicitly that high government borrowing and the printing of money was a key cause of the hyperinflation. In addition, in August, the government devalued the currency from 250,000 to the US dollar to the black market rate of 6m to the dollar and then introduced a new bolivar, converting 100,000 old bolivars to 1 new bolivar. However the future does not look promising since the value of the new currency fell by 18 % on the black market in the first two weeks after devaluation.

A confusing week for economists

This week has seen a considerable amount of contradictory economic information. On the positive side, employment in Britain reached a record high in the three months to April, 2018, with an employment rate of 75.6%. Unemployment has remained at its current low of 4.2% and the inactivity rate, those people, such as students, of working age, but not in the labour force, is also at a record low. Retail sales grew by a record 4.1% in May

However the rate of increase in earnings, which we would expect to be high given the low unemployment figures (as suggested by the Phillips Curve), has dropped from 2.6% to 2.5%. In real terms, the rate of growth in real earnings was only 0.1%, implying that future consumption growth will be low.

Other disappointing news was an announcement from Land Rover that they are moving production of the Discovery from the UK to Slovakia and news that Poundland and House of Fraser have collapsed, putting thousands of jobs at risk. However even these news items are not clearcut. One of the reasons behind Land Rover’s actions is that, once production has moved out of the UK, the site will be used to produce new, more high-tech, more expensive hybrid and electric models and the decline in traditional retailing is happening as on-line purchases increase, creating delivery and warehouse jobs.

However possibly the most disappointing pieces of news were firstly the latest data on manufacturing output for April, showing the fastest fall for 6 years and secondly, the deterioration in the UK’s trade deficit which grew by £1.6bn to a deficit of £9.7bn, the worst monthly figure since October 2016.

Possibly the best way to evaluate the data is to look at what the markets thought and they were pessimistic, thinking that the weakness of the economy will make an interest rate rise less likely and therefore sterling fell in the foreign exchange markets.

Productivity and the Economy

By definition, productivity is the measure of output per unit input. Inputs include labour and capital while output is typically measured in revenue. Between July and December data shows that output per hour rose by 1.7% – the fastest rise since 2005. However, part of the rise was due to the fact that the number of hours worked has fallen. Labour productivity grew by 0.7% in Quarter 4 2017 and it was the second quarterly increase in a row leaving productivity at 1.8% above its peak in Quarter 4 2007 (before the financial crisis). However, the output per worker and output per job only grew by 0.1% showing that there has been a fall in the average hours worked. The fall in average hours worked also suggests that workers incomes are stagnating and so due to inflation, their real incomes may be falling.

Productivity plays an important role in the economy as there are many benefits that come with higher productivity. If a firm is more productive, it will have lower costs of production as they are able to produce more goods and services in a set amount of time. This means that the firm can become more competitive, assuming ceteris paribus, the lower costs of production means that a firm can decrease their prices. This decrease in prices can lead to an increase in demand and mean that UK goods and services could become more competitive in global markets. This can also lead to an increase in revenue for the firms and so these can be reinvested back into the firm to make it even more productive. These benefits can also lead to economic growth as output increases due to higher productivity, which in turn brings benefits to the country. If workers are receiving higher wages – as they work the same hours to produce more output meaning that a firm’s costs of production lowers and so firms are able to afford wage increases – this can also cause a further shift outwards of AD due to the multiplier effect. If a worker receives a pay rise, he will then spend some of his extra income on goods and services and so this in turn increases AD.

So the big question that occurs is why is the productivity in the UK so low? It has been a question that is very hard to answer. New machines and technology can make workers more productive, however companies’ capital spending is only 5% above its pre-crisis peak, compared with a 60% increase over the decade after the 1980s recession. This could explain a reason as to why productivity in the UK has remained so low as workers haven’t got the capital they need to become more productive. Another reason that could have caused low productivity is that firms have been retaining relatively (unproductive) workers rather than investing in machines. Helen Miller from the Institute for Fiscal Studies commented that “changes to state pensions and benefits are likely to have contributed” showing that people have been more willing to work in this financial crisis compared to other recessions. Therefore, firms have avoided large costs by investing in machinery and have instead increased the number of workers in order to meet demand. This is supported by the fact that the UK now has the highest employment rate since 1971 at 75.3%. With real pay (after accounting for inflation) down 0.2% in 2017 compared to the same time in 2016 – it shows that it is easier for firms to increase workers due to a low wage demand as inflation is not at a high rate relative to wages. This means output becomes more labour intensive which often have a lower productivity.

The blog also mentions that the government imposed an apprenticeship levy, with the idea to increase skills and training workers receive and this can in turn increase their productivity – the workers can develop the skills needed to produce more goods/services in a set period of time. The scheme was introduced in 2015 and aims to create 3 million new apprenticeships by 2020. However, in January 2018 there were 25,400 apprentices in training compared to 36,700 a year earlier showing that the scheme may not be as effective. However, this is focusing on human capital rather than physical capital such as machines. In some industries, such as construction, it is easy to run an apprenticeship scheme and train labour but in the services industry it has proven much more difficult to provide apprenticeship training. This supports the idea that it is easier to increase and improve labour than capital as the government have focused on encouraging firms to increase apprenticeship programmes. In the long term it is more important to focus on increasing capital than it is labour. This is because as technology advances, capital becomes more advance and so it can aid workers to produce more goods/services in a set amount of time. It is also more important than an increase in skilled labour as if you increase capital – the worker can become more productive too and so produce more goods and services. However, an increase in skills doesn’t affect how productive the capital is and so there may be a limit to how productive a worker can be without an increase in the capital available to them. An increase or improvement of capital means that LRAS will shift outwards and the sustainable output of the economy will increase.

The UK productivity is only above one other G7 country. All of the other G7 countries have a higher GDP per hour worked than the UK. This is shown in the graph below. Here you can see that the UK is the second lowest country despite all being at the same rate in 2007. There has been a slow down in labour productivity in the G7 countries, however there seems to be a higher slowdown in the UK. The UK’s nominal productivity gap in output per worker terms narrowed from 16.9% in 2015 to 16.6% in 2016, compared with the average for the rest of the G7. Compared with the rest of the G7, the UK had below average real productivity growth in both output per hour and output per worker terms in 2016. The UK has the largest gap between pre-downturn productivity trend and post-downturn productivity performance was 15.6% in 2016 which is double the average of 8.7% across the rest of the G7. This shows that the UK has suffered a larger productivity problem compared to the other G7 countries.


Lower productivity levels are detrimental to the UK. If the economy remains unproductive, it will not be able to benefit from lower average costs (unless wages remain low) as firms won’t be able to produce as much as more productive firms in the same time period. This means that UK goods will be less competitive on a global market – due to that prices of UK goods will be higher as costs of production remain higher due to lower productivity. This could worsen the balance of payments as exports remain low, and result in lower Aggregate Demand as the balance of payments is one of the components. The higher priced goods are also bad for UK consumers as demand for goods and services will fall due to the high prices. This means that there will be little, if any, increase in output and employment as demand levels remain the same. Higher prices, and lower demand, will mean that businesses retain lower profit from sales. This means that they don’t have as much money to reinvest into the firm which could be spent on training or capital in order to become more productive. The government will also not receive an increase in tax receipts if productivity remains low, as firms will not be selling as many goods and services and so the amount of Value Added Tax and Corporation tax that they receive won’t change.

Low productivity also means that workers wages will not rise as much as the firms cannot increase wages due to a lower demand and profit. This also means that the government will receive less tax receipts from VAT and income tax. Economic growth is also impacted by low productivity. This is because without an increase in productivity the Long Run Aggregate Supply curve will not shift outwards and so the sustainable output for the economy will not increase.

What does the future hold?

“Accurate predictions” and “economists” are not words which always go together and the longer the time period, the less accurate are predictions likely to be. Last year, it was predicted that driverless cars would soon be with us and we would be summoning our driver-free Uber with as little worry as ordering a take-away via Deliveroo. However, following the death of a 49-year-old woman in Arizona, as a result of a collision with an Uber vehicle being driven in autonomous mode, (with a human behind the wheel), both Uber and Toyota have suspended trials and a number of American states are reviewing their attitude to trials of driverless vehicles.

A worry which has been with us for longer is the impact of technological progress and more recently AI, on employment prospects. Keynes, in 1930, during the Great Depression, wrote an article predicting a 15 hour working week by 2030. For him, this was not a worry since he suggested that the average person would be significantly richer in 2030 than in 1930, since businesses would still be producing goods and services and workers enjoying their increased leisure. However, he did raise the possibility of technological unemployment where the fall in demand for labour from technological progress was greater than the increased demand for labour needed to produce new goods and services. Trying to estimate the costs and benefits of new technology in terms of employment has been a problem since the Luddites in the 19th century – English textile workers and weavers who destroyed machinery which they thought would take their jobs away. On the other hand, technological optimists see the arrival of robots as an advantage since they will allow tedious, repetitive jobs to be undertaken by machines while the humans focus on rewarding, creative areas.

Examples support both views. The rise of online shopping is a cause of the decline in high street retailers. However internet shopping has created jobs in warehouses for workers to fulfil orders and among van drivers. But, in the future, will the goods ordered be collected from the shelves by robots and delivered by drones? What will happen to the number of workers in supermarkets if the technology used in Amazon’s cashless store becomes more widespread? There is a consensus that the types of jobs most at risk are those which are routine and repetitive while the safest are those which involve creativity, judgement and manual dexterity. An area which should be secure, and in which the UK is currently strong, is the creative sector, which covers such things as advertising, film and television programme making, architecture, and fashion, employing two million people and contributing over 5% to GDP. One might also think that teaching is a safe occupation since, so they tell me, it involves judgement, empathy and creativity. But if the school of the future is based round individualised learning with students working in large open-plan spaces, supported by “facilitators”, will so many people be needed? How long before we get the department blog generated with no human involvement? How do we take account of the jobs which have not yet been created?

What is clear is that there will need to be resources put into re-training existing workers to allow those who have lost their jobs to move into new areas and, more importantly, those entering school in September, will need to be taught to be adaptable and creative so they can learn new skills, rather than being trained in the skills in use today.

Olen niin iloinen

For those of you who do not speak Finnish, a clue to the meaning of the words above might be found in the following questions.

What happens on 20th March 2018?

Answer – UN has declared it to be World Happiness Day

What do Norway and Burundi have in common?

Answer – they both dropped in the UN World Happiness Report. Burundi dropped to bottom place while Norway dropped out of the top slot to be replaced by Finland – hence the Finnish comment “I am so happy”.

The Report ranks 156 countries by their happiness levels, and, this year, it also looked at 117 countries by the happiness of their immigrants, with Finland coming top in both rankings.

The top and bottom 10 are recorded below. A sample in each country are asked to score their happiness on a scale of 10 (most happy) to 1 (least happy) with Finland scoring 7.6 and Burundi 2.9. In order to identify the reasoning behind the score, the report also looks at economic strength (measured in GDP per capita), social support, life expectancy, freedom of choice, generosity, and perceived corruption. The biggest loser was Venezuela, dropping 2.2 on the scale, which is little surprise considering the state of their economy. This year the study also looked at the happiness of migrants,

It is worth a warning note about the numbers – the difference between the top 6 countries is only 0.191 on the 1 – 10 scale.

The world’s happiest – and least happy – countries 2018 World Happiness Report
Happiest Least happy
1. Finland 147. Malawi
2. Norway 148. Haiti
3. Denmark 149. Liberia
4. Iceland 150. Syria
5. Switzerland 151. Rwanda
6. Netherlands 152. Yemen
7. Canada 153. Tanzania
8. New Zealand 154. South Sudan
9. Sweden 155. Central African Republic
10. Australia 156. Burundi