I’ve seen a few articles in the press recently which explore the seeming contradiction between the ailing economy and soaring corporate profits. This article in the New York Times tells how Harley-Davidson is doing a great job of generating profits even as motorcycle sales fall for the third year in a row.
The reason for this is, of course, obvious. Corporations are using both automation and offshoring to reduce labor costs. As significant revenue growth becomes harder to attain, they are squeezing their workers to generate as much profit as possible from the sales they have.
That strategy makes perfect sense for any individual firm. The problem is that collectively businesses are destroying the market for their products and services by destroying their customers. After all, any one company’s workers are customers for many other businesses. As all businesses follow this strategy, the decrease in market demand for products and services will ultimately overwhelm any gains in profitability from cutting costs. The reason is that nearly all consumers derive their income directly or indirectly from wages.
I think that one of the greatest dangers to the economy will arise when new technologies make it easier for small businesses to employ the strategies (automation, offshoring) that are now routinely used by large corporations. Once this happens—and I think the development of automation and offshoring services for small business is an obvious entrepreneurial opportunity—the impact on both unemployment and aggregate demand may be quite dramatic.
When consumers in the U.S. finally fall off the edge of the cliff, where will demand come from? The reflexive answer is always “from consumers China and other emerging economies.” There are a few problems with that: (1) workers in China and other low wage countries don’t make very much and, therefore, have less to spend. (2) Those low wage workers have a very strong propensity to save, rather than consume. (In China the saving rate may be as high as 30%, and consumer spending is only around a third of GDP v. 70% in the U.S.) (3) It would be extraordinarily naive to think that the Chinese government will not manipulate things to insure that the vast majority of sales in China go to Chinese companies (in many cases companies using technology transferred from the West as part of China’s industrial policy.)
The fact is that we are very far indeed from a place where consumers in countries like China are going to pick up the slack when consumers in America and the rest of the developed world finally fail to get the job done. And there’s yet another problem: While China has benefited from globalization, it is by no means immune to the impacts of automation. In the long run factories and other business in China will also automate, and unemployment will become a serious problem. In fact, this is already occurring in industries like textiles where automation has been progressing at a rapid rate.
The bottom line: the world has a serious problem with too much production capacity and too little demand. That problem will only get worse.
Given that, it is possible to make some fairly logical predictions about how business and technology investment may be directed in the future. In my book, The Lights in the Tunnel, I included an appendix that discussed trends that may develop in the next decade or so. Here’s what I wrote:
If projections for consumer spending remain unoptimistic, many businesses are likely to hold back on general technology investment as they wait for a more sustainable recovery. As a result, we may continue to see relatively low levels of venture capital flowing into start-up firms for some time. In the midst of this, it may become evident that one of the few bright spots is the market for new technology products that result in immediate cost savings. We might see venture capital increasingly begin to flow to start-up companies that are focused on labor-saving technologies such as robotics and artificial intelligence. Some of these new ventures might focus on embedding intelligence into the enterprise software used by large corporations, while others create tools that can be used in small businesses via Internet interfaces. Significant effort is likely to be put into machine learning technology, so that automation algorithms can be easily taught to perform a variety of jobs. Because automating the jobs of relatively unskilled workers often requires high capital investment in mechanically complex machines, it may well be office and knowledge workers who are the primary initial targets of these new technologies.
In other words, in the face of tepid demand, we may see relatively less investment in technologies that create or expand consumer markets, and more in technologies that focus on cutting costs and destroying jobs. (Obviously, there are exceptions, but keep in mind that Apple is just one very unique company). If that trend plays out it seems likely to create a self-fulfilling,vicious cycle.