Economists tend to take the positive relationship between innovation, employment and rising living standards for granted. The discovery and generalization of the wheel, steam or electricity offered means of economizing the use of labor via the automation of processes, while creating new jobs through the expansion of the economy. For most of the twentieth century, investments in education provided pools of workers with the required skills for the newly created jobs and social reforms that helped spread the benefits of industrialization in the society. Yet recent developments challenge the traditional view of creative destruction. In a context of rising unemployment and inequalities added to stagnating real wages, innovation is now considered more threatening to employment than ever.
What if the machines we build could do just about any job, and could do it better, quicker and cheaper?
The notion of “technological unemployment” can be dated back to J.M. Keynes who compared it to a “disease” for society as early as 1930. Mechanization, automation or process improvement remove tasks from workers and even destroy tasks altogether thanks to new technologies; those typical labor-displacing technologies directly decrease the number of available jobs but also make available goods and services cheaper. In theory, and based on historical evidence, this triggers a rise in consumption due to the newly available purchasing power, an expansion of the economy and a virtuous circle that leads to job creation.
In 1900, 41 percent of Americans worked in the agricultural sector; by 2000, it was only 2 percent. Similarly, the proportion of Americans employed in manufacturing has dropped from 30 percent in the post–World War II years to around 10 percent today – partly because of increasing automation, especially during the 1980s. But overall, new sectors, especially in services, offered new employment opportunities that sustained the growing demand. Consequently, economists so far have dismissed the possibility of structural long-term unemployment due to technology.
However, recent empirical evidence shows that rapid technological change has been destroying jobs faster than it is creating them, shaking the faith in technological progress. In The Second Machine Age, Erik Brynjolfsson and Andrew McAfee, two MIT professors, show that for the first time since the end of WWII, productivity and job creation rates do not grow at the same pace. The two authors call this unprecedented situation “the great decoupling”. Depending on the economic sector, technology has decreased or even eliminated the need for many jobs and left many unemployed. Some categories seem to be more hit than others: In 2013, Frey and Osborne from Oxford University concluded that jobs are at risk of being automated in 47% of the occupational categories into which work is customarily sorted; this is the case in particular for accountancy, legal work, technical writing or various white-collar occupations.
As those are jobs traditionally occupied by the middle class, there is a clear economic risk for this part of the population. Beyond the traditional income divide, Brynjolfsson and McAfee point out that new technologies tend to favor “superstars” and polarize society between the digital winners and the digital losers.
This polarization of the workforce and the growing inequality pose major challenges to policy makers and elected officials. What is coming next? How should they react?
It seems there is something different about the current changes, but it’s too early to know for sure. At least three major scenarios could describe the future as we see it today.
A first approach can be called the “Luddite Fallacy”, in reference to nineteenth century English textile artisans who destroyed some machines to protest against the new labor-displacing technologies. The fear that the industrial revolution was about to leave all workers unemployed turned out to be unfounded; as many times before, the economy was going through a transition, another Schumpeterian cycle of creative destruction, that announced a new era of growth and job creation. If this were the case for us now, no radical policy change would really be needed; however, the need for strong social nets would remain, to provide for the growing level of inequalities.
An opposite scenario would be the one imagine in Aldous Huxley’s Brave New World. Is it impossible to imagine a world dominated by machines? Is it crazy to think of a society in which economic progress and employment have diverged for good? As an example, autonomous cars still seemed a very distant dream ten years ago. But in recent years, Google’s autonomous cars have logged thousands of miles and demonstrated exceptional safety records. Is there an area of the economy that can remain machine free?
A sensible middle way suggests that people should adapt and learn to work with the machines and not against the machines. It might sound quite reassuring to frame the debate in those terms, but this should not prevent governments and organizations from thinking ahead about the type of responses they need to pro- vide to this unprecedented political and economic change.
Indeed, the current transformation not only challenges our way of thinking about society, it also questions the system and the institutions currently in place: do we have the right education system to train engineers and software developers, and to retrain those who are at risk of being left on the side of the road? How do we take care of those who are unable to adapt?
The overwhelming scientific consensus is that the world is warming because of the greenhouse gases that humans are emitting into the atmosphere. Even more troubling, the scientific consensus judges the problem to be getting worse each time they examine the growing mountain of data.
On average, global temperatures have risen about 0.8 degrees Celsius since 1900. The 2013 report from the Intergovernmental Panel on Climate Change projects that global temperatures could rise 2 degrees Celsius (3.6 degrees Fahrenheit) by the end of this century, and perhaps by 4 degrees or more.
Many experts see even the lower bound of a 2 degree rise as dangerous, increasing the risk of droughts, flooding, extinctions and deadly heat waves. Rising temperatures will raise sea levels, lead to greater desertification, harm some of the world’s major agricultural regions, and lead to the spread of disease.
There’s little disagreement on warming and some of its dire consequences.
What do economists think?
Agreement is less clear, however, on the economic consequences of climate change. All serious economic studies find significant costs, but they divide on the costs, difficulties and urgency of mitigating action.
The landmark work in measuring the economic impact of climate change is the Stern Review, by British economist Nicholas Stern. Commissioned by then-Chancellor of the Exchequer Gordon Brown in 2005, the review was published in 2006.
Stern’s conclusion was that without action, the costs of climate change will be equal to losing 5 percent of global GDP each year in perpetuity. If some of the more drastic potential impacts of climate change are considered, according to Stern, the cost could rise to 20 percent of global GDP. To mitigate the dramatic economic impact, Stern proposed that 1 percent of global GDP each year be invested to avoid the worst impacts of global warming.
Some environmental economists were very critical of Stern’s conclusions. Yale economist William Nordhaus, the originator of the integrated assessment models that economists (including Stern) use to assess the costs of changing climate, argued that the Stern Review did not withstand scrutiny: “The Review’s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are more consistent with today’s marketplace real interest rates and savings rates.”
Nordhaus himself tackled the overall economic costs in his book, The Climate Casino. He did substitute assumptions “that are more consistent with today’s marketplace real interest rates and savings rates.” To Nordhaus’ own surprise, he reaches a fairly similar conclusion to Stern. As Paul Krugman has written, Nordhaus’ only difference is “slightly raising the amount of global warming that we should, in the end, allow to take place.”
Stern has altered his own judgment since the 2007 report, viewing the more recent scientific evidence as making his own conclusions too timid. “This is potentially so dangerous that we have to act strongly. Do we want to play Russian roulette with two bullets or one? These risks for many people are existential.”
More recently, the Risky Business Report examined specifically the economic impact of climate change on the U.S. Former New York City Mayor Michael Bloomberg, former Treasury Secretary Henry Paulson, and founder of San Francisco-based hedge fund Farallon Capital Tom Steyer chaired a committee of business and political heavyweights who commissioned the report from economic research firm Rhodium Group.
Risky Business offers some sobering conclusions: large-scale losses of coastal property and infrastructure (“by 2050 between $66 billion and $106 billion worth of existing coastal property will likely be below sea level nationwide, with $238 billion to $507 billion worth of property below sea level by 2100”); extreme heat threatening labor productivity, human health, and energy systems; and shifting agricultural patterns and crop yields, with likely gains for Northern farmers offset by losses in the Midwest and South.
What can be done?
The key driver of climate change is the increasing concentration of carbon dioxide in the atmosphere. Most economists engaged in climate issues agree that the best solution is to put a price on carbon, either through a carbon tax or through a cap-and-trade system.
Paul Krugman explains why putting a price on carbon is the optimal solution:
“Efforts to reduce emissions can take place along many ‘margins,’ and we should give people an incentive to exploit all of those margins. Should consumers try to use less energy themselves? Should they shift their consumption toward products that use relatively less energy to produce? Should we try to produce energy from low-emission sources (e.g., natural gas) or non-emission sources (e.g., wind)? Should we try to remove CO2 after the carbon is burned, e.g., by capture and sequestration at power plants? The answer is, all of the above. And putting a price on carbon does, in fact, give people an incentive to do all of the above.”
Although the fight against carbon emissions along many “margins” makes sense, both Krugman and Nordhaus recognize that the single biggest factor driving carbon concentrations is coal-fired power plants. Action on those – such as direct regulation rather than an emissions tax – would make an enormous difference.
The challenge, however, is not just to enact taxes, cap-and-trade systems or emissions regulations in one or several countries. Climate change is a global problem (we all share one atmosphere), and any solution will need to be global.