Monday, July 24, 2017

Limits to progress, economic growth, and capitalism?

FT has more on the challenges facing retail in the US from the e-commerce market,
Credit Suisse estimates that as many as 8,640 stores with 147m square feet of retailing space could close down just this year — surpassing the level of closures after the financial crisis and dotcom bust. The downturn is hitting the largely healthy US labour market — the retail industry has lost an average of 9,000 jobs a month this year, according to the Bureau of Labor Statistics, compared with average monthly job gains of 17,000 last year.
The dramatic flurry of retail stores construction in the US has been a major contributor to this disruption,
PwC estimates that there is about 24 sq ft of retailing floorspace per person in the US, compared with 11 sq ft in Australia — the only other developed country that comes close to the US — and between 2 and 5 sq ft in Europe.
Amazon with less that 10% of US retail sales forms nearly 40% of US retailing valuations, 
The online giant’s shares are now worth $477bn, more than half as much as the rest of the listed US retailing world... Online-only purchases account for just over 10 per cent of all US retail sales, but the share is growing quickly.
And this is true not just of retail, but also in hotel and travel industry,
Priceline and Expedia are now valued at a combined $114bn, almost as much as all the hotels and hospitality groups in the S&P 500, or the airlines.
On labour intensity in retail, this is a stunning statistic,
Goldman Sachs estimates that ecommerce companies only require 0.9 employees per $1m of sales compared with 3.5 for a bricks-and-mortar store, and the sector is on course to lose about 100,000 jobs this year. This may be small compared with the overall retail economy — which employs almost 16m — but it is likely only the beginning of a broad, accelerating trend as even more shopping migrates online.
I have three observations.

1. One of the things that we tend to assume with development and economic growth is that it is always good and brings progress. In the long-run, or the general equilibrium, adjustments are made and losers compensated, it is assumed. However, there is little basis for this assumption. It is a faith-based argument. As Tyler Cowen has written recently, the pain and suffering associated with Industrial Revolution, was far from transient and tolerable. And unlike the 1700s, such adjustments are most likely to be even less acceptable. 

In general, there is nothing to suggest why automation should be accompanied by all the required labour market adjustments. In fact, what if in the future there are less human beings engaged in the work-force? There is no sound basis for the optimism of the techno-optimists. 

In the circumstances, being more cautious with the wholesale adoption of unqualified automation, even if it appears against progress, may not be that bad an idea. Public policy may need to more specifically explore the options to protect and keep meaningfully engaged those most vulnerable to labour market displacement from such trends. If we can exercise restraint on human cloning, we can as well be cautious on the adoption of driverless cars.

2. There is nothing to support the belief that economic growth of this generation and a couple earlier is the natural order of things. It is well-acknowledged that the growth spurt since the late nineteenth-century has not only been unprecedented but also outside the norm for centuries of human existence, and there is therefore nothing to suggest that it should continue. 

In fact, an empirical assessment points to a secular trend of stagnating incomes across the developed world. The Times points to an MGI analysis of 2016 that found 81% of the US, 97% of Italian, 70% of British, and 63% of French populations fall in an income bracket with flat or declining incomes over the last decade.

A world where economic growth is just enough to sustain living standards, while difficult to accept for our generation, should not signal doom. On a historic sweep, even if we are able to sustain the current living standards, with marginal and very gradual increases, it may be a big achievement. The far less desirable, but more likely eventuality (than another century of growth similar to the past century), is a decline in living standards.

3. Finally, this raises more questions about the sustainability of free-market capitalism. What if the inexorable dynamic of the market forces playing themselves out is a world without adequate work to support the billions and results in meaningless lives and pitiable suffering? On a 40-50 year horizon, I see no reason why this scenario is any less less plausible than the widely accepted argument that the "dictatorship of the proletariat" will eventually end up in an centralised and authoritarian system like in the Stalinist Soviet Union.

Update 1 (25.07.2017)

This - India won't allow driverless cars - is good public policy! 

1 comment:

Karthik Dinne said...

There are similar concerns regarding driverless cars and brick making machines (which you posted earlier). People just don't seem to recognise the damage they can cause. Advent of computers in the past wasn't painful doesn't mean that it won't be painful in the future too. Economies with small %age of people in driving profession may not feel the damage but it definitely does damage countries like India where car driver profession (along with security guards and construction workers) is one of the important mechanisms behind labour mobility from rural to urban India. Any one who cautions regarding these are dismissed as Luddites.

As Lant Pritchett asks, regarding driverless cars - Why are the world’s scarcest economic resources devoted to economizing one of the world’s most abundant economic resources (people)?