Automation Doesn’t Just Destroy Jobs–It Destroys Profits, Too

The idea that taxing the owners of robots and software will fund guaranteed incomes for all is not anchored in reality.

Automation is upending the global order by eliminating human labor on an unprecedented scale–and the status quo has no reality-based solution to this wholesale loss of jobs.

Two recent articles highlighted the profound consequences of advances in robotics and AI (artificial intelligence) on employment: four fundamentals of workplace automation and Robots may shatter the global economic order within a decade as the pace of automation innovation has gone from linear to parabolic (via Mish).

The status quo apologists/punditry have offered two magical-thinking solutions to the sweeping destruction of jobs across the entire spectrum of paid work:

1. Tax the robots (or owners of robots) and use the revenues to pay a guaranteed income to everyone who is unemployed or underemployed.

2. Let the price of labor fall to the point that everyone has a job of some sort, even if the pay is minimal.

Neither one is remotely practical, for reasons I will explain today and tomorrow.

Today, let’s examine the misguided fantasy that automation/robotics will generate enormous profits for the owners of robots. Here’s the problem in a nutshell:

As automation eats jobs, it also eats profits, since automation turns labor, goods and services into commodities. When something is commoditized, the price drops because the goods and services are interchangeable and can be produced almost anywhere.

Owners must move commoditized production to low-tax regions if they want to retain any profit at all.

Big profits flow from scarcity, i.e. when demand exceeds supply. If supply exceeds demand, prices fall and profits vanish.

(Monopoly is a state-enforced scarcity. In our state-cartel economy, there are many monopolies or quasi-monopolies. While eliminating these would lower costs, that wouldn’t reverse the wholesale destruction of jobs and profits–it would only speed the process up.)

The other problem the “tax the robots and everything will be funded” crowd overlooks is the falling cost of software and robots lowers the barriers to competition: nothing destroys profits like wave after wave of hungry competitors entering a field.

The cost of automation and robotics is falling dramatically. This lowers the cost of entry for smaller, hungrier, more nimble competitors, and lowers the cost of increasing production. When virtually any small manufacturer can buy robots for less than the wages of a human laborer, where’s the scarcity necessary to generate profits?

The parts needed to assemble a $45 tablet are dropping in price, and the profit margins on those parts is razor-thin because they’re commodities. Software such as the Android operating system is free, and many of the software libraries needed to assemble new software are also free.

Automation increases supply and lowers costs. Both are deadly to profits.

Here’s the core problem with the idea that taxing the owners of robots and software will fund guaranteed incomes for all: the more labor, goods and services are automated/commoditized, the lower the profits.

The current narrative assumes more wealth will be created by the digital destruction of industries and jobs, but real-world examples suggest the exact opposite: the music industry has seen revenues fall in half as digital technology ate its way through the sector.

A $14 billion industry is now a $7 billion industry. Profits and payroll taxes collected from the industry have plummeted. So much for the fantasy that technology always creates more jobs than it destroys.

As subscription music services replace sales of songs and albums, revenues will continue to decline even as consumers have greater access to more products. In other words, the destruction of sales, employment and profits is far from over.

Examples of such radical reductions in paid labor abound in daily life. To take one small example, our refrigerator recently failed. The motor was running but the compartment wasn’t being cooled. Rather than replace the appliance for hundreds of dollars or hire a high-cost repair service, I looked online, diagnosed the problem as a faulty sensor, watched a tutorial on YouTube (what I call YouTube University), ordered a new sensor for less than $20 online and completed the repair at no cost beyond a half-hour of labor, which cost me nothing in terms of cash spent.

The profit earned by YouTube was minimal, as was the profit of the firms that manufactured the sensor and shipped it. The sales and profits that were bypassed by using nearly-free digital tools were an order of magnitude higher.

I was recently interviewed via Skype by an online journalist with millions of views of his YouTube channel. A decade ago when he worked in mainstream TV journalism, an interview required costly, time-consuming travel (for the crew or the subject), a sound engineer, a camera operator, the talent (interviewer), editor and managerial review. These six jobs have been rolled into one with digital tools, and travel has been eliminated entirely.

Some will argue that the quality of the video and sound isn’t as high, but the quality of the user experience is ultimately based on the viewer’s display, which is increasingly a phone or tablet. So in terms of utility, value and impact, the product (i.e. output) produced by one person replaces the conventional media product that required six people.

My own solo digital content business would have required a handful of people (if not more) only a decade ago. With digital tools and services, it now requires just one person. Those of us who must work with digital tools to survive know firsthand that what once required a handful of workers must now be produced by one person if we hope to earn even a marginally middle-class income.

Multiply an appliance that doesn’t need to be replaced and a repair service that doesn’t need to be hired, a half-dozen positions replaced by one part-time job, a fully functional commodity tablet that costs 10% of the high-profit brand and you understand why profits will plummet as software eats the world.

These are not starry-eyed examples based on projections; these are real-world examples of widely available digital technologies destroying costs, sales and profits on a massive scale.

Some observers have suggested taxing wealth rather than profits to fund the super welfare state of guaranteed income for all. But the value of assets ultimately rests on their ability to generate a profit. As profits fall, wealth may be more chimerical than these observers believe.

Tomorrow we’ll look at the rising costs of human labor and explore why this trend will persist even as labor becomes increasingly surplus.

This entry was drawn from my new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.

Get a 25% discount on my new book this week only: A Radically Beneficial World: Automation, Technology and Creating Jobs for All: The Future Belongs to Work That Is Meaningful. The Kindle edition is $7.45 this week, a 25% discount from its list price of $9.95.

The print edition is $25, but there’s a $10 discount this week through my publisher’spage for the book: you must use the codeTL6PDA4D to get the $10 discount. Note this does not include shipping, and requires making the purchase through Createspace.

Here is the link to the book’s listing,     Introduction     and Chapter One(free PDF).

A note of thanks to those who buy a book:As an independent writer, book sales are a substantial part of my income. Unlike many other authors, I receive no funding from any university, foundation, think-tank, shadowy C.I.A. front or government agency. Thank you for throwing caution to the winds and buying my work.

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  • Mr. Smith I have a question for you, are you selling any signed copies of your hardback version and the first editions? If so that will be something I am more interested in personally. Thank you, for the work you do!

  • In other words, “We’re fucked!”

    In all seriousness, though, while this dude might not be required to give his vision of a solution, it would be nice to see one. Pointing out a problem is perfectly fine, but it also helps to have a solution, if possible. I hope that we see one in the next article.

  • November 9, 2015 The Re-enserfment of Western Peoples

    The re-enserfment of Western peoples is taking place on several levels. One about which I have been writing for more than a decade comes from the offshoring of jobs.

  • November 9, 2015 Another phony payroll jobs number
    by Paul Craig Roberts
    The Bureau of Labor Statistics announced Friday that the US economy created 271,000 jobs in October, a number substantially in excess of the expected 175,000 to 190,000 jobs. The unexpected job gain has dropped the unemployment rate to 5 percent. These two numbers will be the focus of the financial media presstitutes.

  • Steven

    The essence of this post is even more indisputable now than it was when Karl Marx first advanced it 150 years ago. But, as they say, the devil is in the details:

    o – “Monopoly is a state-enforced scarcity.” There are natural monopolies and oligopolies all over the place; just ask your power company or Bill Gates. Or read JK Galbraith’s “The New Industrial State”.

    o – “But the value of assets ultimately rests on their ability to generate a profit.” – that may be true for those who OWN those assets or derive ‘economic rent’ from them, like CEOs and
    stockholders. But it sure as hell understates the case for those dependent on the goods and services those assets produce. (“They know the price of everything and the value of nothing.” O Wilde)

    H. Kissinger is reputed to have referred to the bulk of the general public as “useless eaters”. To some degree, at least when it comes to Kissinger’s bosses, he may have a point if the only purpose of these as “useless eaters” is making their employers more money. But it would be equally fair to refer to
    those bosses, today’s 1%, Wall Street and its banks, as ‘less than useless (in fact positively harmful) cannibals’.

  • livefromTX

    I won’t be buying your book because the ideas you present, while valid, don’t justify the expense. I can get the same information from myriad other sources, which entirely supports your premise. Doing research, aggregating information, and drawing conclusions based on that information used to require immersing yourself in a library, poring over multiple sources, taking copious amounts of notes before doing some handwritten drafts. Then it all had to be typed, proofread, and corrected before sending it to an editor for more proofreading, fact checking and corrections. Now it can be done in an afternoon by anyone with an internet connection.

  • Sarastro92

    There’s a Luddite twinge to this article. The problem isn’t robots — potentially they provide higher productivity and in future years augment population decline. The real problem is a stagnating economy and eroding effective demand from a pauperized workforce. The robot scare is a smokescreen. There are actually very few true robots at work, about 27,000. The size of the US workforce is about 165 million, though only 147 million have full-time jobs.

    Wall Street loves this kind of talk. It let’s them off the hook for destroying the US economy… yeah, blame robots instead of predatory banks and equity funds.