The Problems of Change

Last year Mckinsey & Company issued an interesting study on the impacts of automation on the global economy, the following is a direct link to where you can download the PDFs:

For an effective summary of the main thrust of that report, The Verge does a pretty good job: The Price and Volume Problem

Whilst however well intended, “futurology” is a mugs game because in the event things often turnout very differently, a bit like the famous; “No battle plan survives first contact with the enemy”, we simply just don’t know all the factors which will combine in the future. However working from what we do know from the past 30 years or so, automation in terms of robotics for the ‘physical stuff’ and AI (Artificial Intelligence) for the data crunching, will most certainly have a dramatic impact on the jobs market as existing jobs will disappear never to return again. In time new jobs and occupations will appear but not at a fast enough pace in the short term to stave off substantial social upheaval.

It is important to understand how this process works and the broader impacts up and down the food chain, it is by no means simple and to understand this better, it is worth looking at how globalisation has worked up until now. Originally it was a case of shifting production and its accompanying environmental ‘evils’ to lower wage, lower environmental quality countries in order to provide cheaper products exported back to Western economies.

But along the way something else happened which that not having to deal with trade unions and such like vested interests the Western companies could develop superior and more automated processes. The consequence is that those jobs originally exported changed dramatically along with their supply chains so that these manufacturing jobs can never be repatriated.

A prime illustration of the problem is to consider making smartphones, there is no way that this manufacturing could be moved from the Far East whilst the existing technology is used. Not only does the whole ecosystem of component manufacture and supply chain exist there but the Western consumers would not accept the kind of product price increases that would follow by trying to manufacture in higher wage economies. Only if there is a major leap in technology that changes everything in terms of needing fewer components all produced and assembled automatically, could it be possible and even so, the number of jobs such an operation would create would be very few.

Price too is a major factor because China and India are now the main growth markets for sales of mobile phones and they are not prepared to pay the amount of money demanded in the West for “top spec phones”, the manufacturers have been caught in a downward price spiral, all the way to the bottom. Any brand can only be considered a “success” in this market if it is shipping in the high millions of units quarterly, so tight are the margins that only ridiculously high volumes can make it pay which of itself is very dangerous because a sudden change in “fashion” could see the whole industry wiped out, globally.

Dealing With Expectations

Although perhaps a dramatic, even over dramatic thing to write, when it comes to manufactured products, being produced in the West, they can only be based on radically new technologies which can be produced by totally automated processes. There are two main reasons for this the first of which is that the current manufacturing base has significantly shifted to the Far East but more than this, off the back of their export success, they have transformed from mainly agrarian societies to quite sophisticated urban ones and in the process created an affluent middle class. Whilst such a middle class in percentage terms may be small compared to their domestic population, numerically they are equivalent to the whole of the UK population

The second reason in Western terms is more significant and that is the expectation that at least economically, people here expect things to “get better” and still haven’t latched on to the notion of radical change and their personal responsibility to deal with it, they seem to think that the State should ! This is best illustrated by the current attitudes both in the USA and the UK where both economies have generated lots of jobs but mainly they are low skilled and come with low pay, people are not happy with having such work as opposed to not having work at all, it seems.

The majority of people seem hooked on the idea that “Big”, be that Government or Corporations have a duty to look after them, what is missing is the concept that they themselves should be ‘leaders’ and the captains of their own destiny and look after themselves. Even in the USA, the “American Dream” long ago lost its connection to the self motivated and self reliant individual that marked the rise of the USA as the global power it is today.

The Psychological Difference

In simple terms there is a major difference between countries like China and India where people not only hope that their lives will improve but delight in these changes as they happen, psychologically they are on an upward trajectory. In comparison in the Western economies that peaked some 30-50 years ago, the expectations are on a downward trajectory with as yet no clear signs of bottoming out. Historically and although they would not see it in these terms, they have awarded themselves “pay rises” in terms of health, welfare and education services which are provided by the State through taxation. These liabilities, a bit like a personal mortgage, were taken on in better times and people expect them to not only continue but also improve however increasingly the economy that supports this is under a high degree of pressure.

Although it may seem unfair to say, there is a certain unrealistic flakiness about people’s expectations in many ways and it often expresses itself oddly. An example being in the UK that some people object strongly to the amount of money paid in to the EU each year but ignore the fact that we are spending four times that amount annually in paying interest on UK Government debt. This debt comes about because of the gap between what the government collects in taxes and what it spends and there are two remedies, reduce the services that the State provides and/or increase taxes. People are happy for either of these remedies to be applied providing it is NOT THEIR SERVICES that are cut and it is NOT THEM WHO PAYS MORE TAX !

It would be fair to say that politicians haven’t helped too much either by constantly refusing to acknowledge the need for change and instead just promising more or as in the case of Corbyn and Labour, promising economic nonsense. In the end the political classes will do nothing and just wait for the crash to happen when people may be prepared to accept some level of personal sacrifice if not acknowledging any personal liability for events.

Looking Ahead

It would be ridiculous to pretend to know exactly what will happen and over what time period plus what other factors come into play. If there were in effect a sudden collapse of the existing commercial environment only those countries with highly centralised “control economies” or those with very high levels of social cohesion are likely to be best able to ride out such a transition so we must hope for something more gradual.

In dealing with a situation where many jobs disappear over a short time span will require a substantial change to tax and benefits policies, most European countries with their established welfare and tax systems will be better placed than the USA where such things are pretty sketchy at best. The US though has other issues concerning sharp divisions within society, Donald Trump didn’t create these, they were already there but he did ride them in order to get elected to Office and he doesn’t appear to be the person to bring people together. So given the “American Jobs” slogan that promises lots of highly paid jobs, what happens when these start disappearing in a blizzard of automation with no immediate prospects of alternative employment ? How will America manage such a change ?

China will have to confront major issues because there too people have built up their own expectations of what the future should look like and it is very much a pact between the governed and the government that these should be fulfilled. However China’s remarkable growth from a cheap manufacturing base to genuine innovators has come with the creation of substantial environmental problems so it may well be able to keep a high level of economic activity by just focusing on its own problems. This too points to another issue which is that China with its majority not being “middle class” and therefore more price conscious consumers, is unlikely to ever be the engine that drives the global market in the same way the US has since WWII a still does today.


It is not crystal ball gazing to state the obvious that major change is coming because obviously it is but we cannot accurately predict the how and the when but it does mean that certain things are probably true: In terms of protecting the UK best, leaving the EU is probably not a bad move because it will be easier to build the required social cohesion to adapt to change than remaining part of a dithering compromise.

Apart from trade wars that turn into actual shooting ones as the biggest threat, the next one is the global dominance of a handful of US companies like Amazon, Google, Facebook etc. These pan national enterprises unchecked by democratic institutions and free to play loose and fast with their taxes but more importantly to set their commercial objectives based upon their “desires” alone, need to be held in check.

Globally if governments had any sense, they should work collaboratively to negate corporate tax sheltering so that there is no longer any advantage for any business to keep money offshore to avoid tax nor any practical advantage in locating head offices away from their “home” country, they will get taxed the same. The other main area is to create a system of internet based cross border sales that ensures that all taxes are set up and triggered by every internet sale. Used intelligently this could not only ensure that taxes are paid but also the system could be a tool in stopping illegal or contraband traffic.

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