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.

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Government proposes energy drinks ban for children – BBC News

High levels of sugar and caffeine have been linked to obesity and other health issues.

Source: Government proposes energy drinks ban for children – BBC News

Energy drinks contain high levels of caffeine and sugar. A can of Monster, for example, includes 160mg of caffeine and 55g of sugar. Such high levels can create physical and mental health problems for consumers, these are known as ‘private costs’. However, excessive levels can also create spillover costs for third parties, for example, lower productivity at work or increased pressure on the NHS. These costs are known as external costs or ‘negative externalities’. The problem is that the market tends to ignore these costs resulting in an inefficient allocation of resources. In order to reduce consumption, the government has a series of options. Recently we have seen the introduction of a sugar tax, which should increases firms costs and lead to higher prices. However, the government has decided they need to take more direct action on energy drinks by using an alternative means of intervention, regulation. Approximately 68% of buyers of energy drinks in the EU are aged 10-18, so the UK ban is likely to have a significant effect on firms revenues and profits. One issue for the government is that, unlike a tax, which raises revenue, regulation needs enforcement, which creates administrative costs. There is also an alternative view, that consumers should be free to make their own choices. However, that, in my view, is a difficult case to make when you think about the relentless efforts of the marketing departments at Red Bull et al and the fact that so many of the buyers are children.

Pesticide found to harm bees faces ban across EU

The European Food Safety Authority (Efsa) has concluded that neonicotinoids harm bees to the extent that an outright ban could be imposed. Clearly, we can conclude that the external costs of production, neonicotinoid is an insecticide used in farming, are so high that the socially optimal level of output is zero. Bees are important “as they pollinate three-quarters of all crops”. In recent years their numbers have plummeted and studies suggest that neonicotinoids are a significant cause. Expect any regulation or ban to increase costs to EU farmers. It will be interesting to see if the UK will adopt such measures, post-Brexit. If not, it could mean that British farmers see tariffs levied on any exports to the EU. I suspect, under current Environment Minister, Michael Gove, the UK will look to follow Efsa guidance.

Read the original Guardian article here.

Falling Share Prices – Causes and Effects

This week has seen major falls in share prices across the world with $6 trillion being wiped off world share values.  America’s Dow Jones index dropped 5.2%, Japan’s Nikkei index fell 8.1% and the UK’s FTSE index fell 4.7%, the lowest it has been for 15 months, while in Japan and America the falls broke records for the size of their drop since October 2008.

The initial reason for the fall was, paradoxically, good US economic data as their service sector boomed and wage levels grew at the fastest rate since the start of the decade. This good news meant that it is now more likely that US interest rates will rise sooner and by more than had previously been anticipated. Mark Carney reinforced this view when he expressed similar sentiments about the future of UK interest rates.

Although a rise in interest rates has been expected for some time as the world economy’s growth accelerated, the reminder that it might occur soon has come as an unpleasant shock. The scaling back of QE by central banks is expected to reduce the ability to borrow cheaply, some of which has financed recent purchases in shares. Financial investors expect that the forthcoming rise in interest rates will reduce company profits, therefore reducing the demand for shares. Simultaneously existing shareholders might be encouraged to sell quickly before prices fall further, thereby increasing the excess demand. In addition, the economic uncertainty was increased by the fall in the value of bitcoin by approximately 50% since the state of the year.

Economists are trying to decide whether we are currently experiencing a “correction” or  are entering a bear market, where prices fall by more than 20%. The “correction” proponents believe that shares are over-priced in terms of their price compared to their earnings – the price:earnings ratio – and therefore the fall was due. However there is concern that the behaviour of investors, whether in shares, currencies or commodities, sometimes leads to markets over-shooting since falls (increases) in price encourage selling (buying) which further reduces (increases) the price.

According to economic theory, the fall in share prices might lead to a negative wealth effect (the idea that consumption is determined by one’s wealth as well as one’s income). However, given that many shareholders are in the upper income brackets, their marginal propensity to consume will be low and therefore the effect will small. More significant might be the general impact on consumer and business confidence from the media reports about the falling share prices. As Keynes wrote in his General Theory,  “animal spirits” outweigh the  “weighted average of quantitative benefits multiplied by quantitative probabilities.”.

Big pharma, the NHS, and ‘price gouging’.

Over the past couple of years, the news has reported several incidents of sudden and rapid price hikes in medicines bought by the NHS. Drugs are often patent protected, which, put simply, means that firms are legally protected from another firm reproducing their product. Patents are a barrier to entry that helps to increase monopoly power. They do, however, provide benefits, insofar that without legal protection firms are unlikely to conduct the highly expensive research and development process to develop new drugs if another firm can simply come along and copy their idea. Without the high R&D costs, the rival would be able to charge a lower price and so the ‘creator’ stands to make large losses. Consequently, firms would not invest in R&D and we, the consumers, would not benefit from the advances in medicines we have seen.

On the other hand, firms can exploit this legal protection and monopoly power by charging very high prices to earn abnormal profits. These profits can be reinvested to develop new drugs, as Big Pharma will point out, or returned to shareholders in the form of dividends. However, the consequence of high prices, is, of course, lower consumption, and given the nature of the product, this can have a significant impact on consumer’s health.

The NHS is a very large organisation, Britain’s largest employer, with an annual budget of approximately £122bn. This should give it monopsony power when it comes to buying drugs, approximately £15bn of the budget, countering the monopoly power of the large pharmaceutical firms, such as Pfizer. However, reports suggest that the NHS is not getting value for money and is a victim of ‘price gouging’ – the process of suddenly increasing prices to exploit market power and increase profits. Probably the most famous example of price gouging is when Martin Shrkeli bought a patented drug used to treat AIDS and then increased the price by 5500% overnight. The process of extracting a larger ‘slice’ of wealth without creating new wealth is called rent-seeking. He is not a very popular man.

The UK government can take action to deter firms from this practice, which often takes place when a patent expires and the firm can change the name and distribution chain, a process known as ‘debranding’. Recently, Flynn and Pfizer have been fined for their decision to increase the price of an epilepsy drug by 2000%, although this is being contested in the courts. Further regulation is being discussed by the government and may be processed in the near future.

Given the funding issues the NHS currently faces, an increasing medicines bill creates an unwanted opportunity cost and means that cuts in other areas have to be made. Big pharma does need to make a profit to recoup high R&D costs and fund new medicine development, but how much is enough?

Read the original article here.

Oil and the UK Economy.

The price of crude oil fell from $114 a barrel in June 2014 to $27 in January 2016. This fall  had significant impacts on both the North Sea oil industry and the UK economy more generally. In the early 1980s, when North Sea oil production was at its peak, the energy industry contributed over 10% to UK GDP but by 2014 this had fallen to 2.8%. It is worth noting that, unlike Middle East producers, those extracting oil in the North Sea face high costs because of the weather and also because many of the easy-to-reach (and therefore low-cost fields) have been exhausted. Employment in the industry was 440,000 at the start of 2014, fell to 375,000 in September 2015 and is now around 300,000. If this continues, the skills of workers will be lost and many of the firms which make the infrastructure necessary to extract oil will close down. Government revenue from corporation tax and the other taxes levied on oil production has dropped sharply from a peak of over £30bn in the mid-1980s to an estimated £0.9bn this year.

The decline in the oil price and in the North Sea oil industry has had a significant impact on parts of Scotland and particularly on Aberdeen, the “oil capital”. When oil was first extracted, it became a boom town with low unemployment, rapidly rising wages and house prices as workers moved in to the area and new businesses set up. However, in recent years, the picture has been different with oil companies laying off workers, incomes and house prices falling and unemployment rising, an example of a local multiplier effect with local businesses supplying the oil industry, hotels, restaurants, taxi companies, etc suffering from the decline in the oil industry, the loss of income of its workers and the decline in foreign businesses and workers in the area.

However things might be changing. The price of crude oil has been rising steadily and is currently (Jan 2018) around $70 and there has been an increase in investment in the industry with firms starting new projects, supported by an inflow of private finance. This optimism is based on the  feeling that the recent low crude oil prices marked the bottom of the cycle and we are now back into a period of increasing oil prices, hence making many postponed projects  profitable.

The reasons for the rising oil prices are an interesting exercise in the economics of supply and demand. We have seen cuts in production orchestrated by OPEC combined with increased demand across the world economy because of higher world growth. There is also speculation which is further increasing the price. However this might be optimistic since US shale production is likely to increase, prompted by the higher prices and a positive economic environment under President Trump.

So what will this do to UK consumers who are already seeing higher prices for petrol and diesel? Will the higher prices feed through into firms’ costs, thereby increasing inflation or will the price rises tail off as US supply depresses prices and the OPEC production restrictions are broken by some of its members, eager to cash in on the higher prices?

Technology and unemployment

For many years people have worried about the rise of the robots and artificial intelligence. Science fiction writers have envisaged situations where robots gradually gain more intelligence and power until they are able to take over the world and whichever other planets feature in the story. Less exciting, but more immediately relevant, economists and politicians have also concerned themselves with the impact of the robots on society and particularly on the demand for labour. During eras of major technological change, it was predicted that the rise, firstly of steam, then electricity and more recently the computer, would lead to massive unemployment. Keynes, writing before the Second World War, predicted that new technology would drastically reduce the working week and we would have to tackle the problem of how to occupy our time with a 25-hour working week. In 1979 Fiat produced a now-famous advert for their new Strada (https://www.youtube.com/watch?v=-fXV6KzhBbM ) under the slogan “handbuilt by robots” which showed the construction of the car in a spotless factory without humans, with everything done by robots.

A recent report, “The Future of Skills: Employment in 2030” by NESTA, an innovation charity, paints a relatively attractive future. They suggest that while 20% of the labour force is currently working in occupations which are likely to shrink, about 10% are in occupations that are likely to grow as a percentage of the workforce. Re-training will be necessary for the former, either to cope with the way their existing job has changed or to allow them to join the latter group. These industries include those working in teaching and education, hospitality, leisure, health care, and other jobs which require workers to deal with people, such as care for the elderly. Another group which will do well are those working in occupations which require higher-order cognitive skills such as psychologists. Those possessing creativity and communication and problem-solving skills will do well while those in jobs which can be more easily adapted to robots and artificial intelligence, such as those involving routine calculations and basic manufacturing skills will be lost. If you are seeking advice as to how to invest your portfolio, it is already possible to put all the necessary information such as your attitude to risk, how much you have available to invest and for how long and a computer algorithm will devise your optimal portfolio.