Sunday, April 15, 2012

The Second Economy—the Jobless One

There has been much discussion about changes in technology and what that might mean for the future of the economy and the future of society. As more and more tasks can be accomplished by machine, where will the jobs come from? W. Brian Arthur brings some focus to this issue in an article in McKinsey Quarterly: The Second Economy.

With the term "second economy" Arthur refers to all the tasks that can be carried out by machines using digital information.

"Business processes that once took place among human beings are now being executed electronically. They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn’t seem particularly consequential—it’s almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one."

We all can think of examples of transactions that once required human intervention, but now take place via computers exchanging information. Arthur uses as an illustration all the processes that are triggered and carried out automatically every time we swipe an ID card at an airport check-in machine.

Arthur contrasts this second, or digital, economy with the physical economy where people and physical objects are manipulated.

"....all across economies in the developed world, processes in the physical economy are being entered into the digital economy, where they are "speaking to" other processes in the digital economy, in a constant conversation among multiple servers and multiple semi-intelligent nodes that are updating things, querying things, checking things off, readjusting things, and eventually connecting back with processes and humans in the physical economy."

A comparison is made, matching this revolution to the industrial revolution in scale and in importance. If the industrial revolution formed the skeleton and muscular structure of the economy, then the digital economy is forming the neural network connecting and driving the body parts.

What is of concern is the size of this second economy and its continued evolution and growth.

" about two decades the digital economy will reach the same size as the physical economy."

"It is a deep qualitative change that is bringing intelligent, automatic response to the economy. There’s no upper limit to this, no place where it has to end."

The lack of employment opportunities for humans in this second economy is striking. An article by Bill Davidow in the Atlantic puts this issue in perspective. He compares rates of employment per unit economic output for companies that are predominantly in the physical economy with those that dwell mainly in the digital, second economy.

"The Gross Domestic Product for the United States in 2011 was around $15 trillion. There are a little over 130 million non-farm employees. So each worker adds a little over $100,000 to the domestic output. The numbers are quite different for a Google employee. Google has a little more than 32,000 employees and its $38 billion in revenues means it generates about $1.2 million per employee. The numbers are similar for Facebook."

"Walmart has some two million employees, and annual sales of around $200 billion. Given that many work part-time, I figure that the company has sales of around $100,000 per employee. With 56,000 employees in 2011, Amazon generated a little over $800,000 per employee."

There is a rather stark conclusion emerging from these numbers.

"In the past, every million-dollar increase in economic output generated on the order of ten jobs. In the future, in the productive Second Economy, it may generate only one or two."

Arthur places this eventuality in historical context.

"For centuries, wealth has traditionally been apportioned in the West through jobs, and jobs have always been forthcoming. When farm jobs disappeared, we still had manufacturing jobs, and when these disappeared we migrated to service jobs. With this digital transformation, this last repository of jobs is shrinking—fewer of us in the future may have white-collar business process jobs—and we face a problem."

Arthur has defined the fundamental issue for society as it moves forward: we have produced an economy that continues to create wealth, but the mechanism by which wealth is shared is breaking down.

Increasing income inequality eventually becomes unsustainable, both economically and socially. People must have money in order to spend money.

This is not the type of problem amenable to a market solution. Ultimately, it is the responsibility of the voters to demand of their government actions that will produce the type of society they desire. They had better start worrying about this issue. It is not likely to go away on its own.

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