TECHtonic Shifts

Zoltán Cséfalvay

TECHtonic Shift

Kairosz Kiadó • Budapest

2018

TECHtonic Shifts

Copyright © by Zoltán Cséfalvay, 2018

Original title: A nagy korszakváltás

All rights reserved.

Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (Electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the both the copyright owner and the above publisher of this book.

The publication of this book was supported by

Pallas Athéné Domus Animae Foundation

First Edition

Translated by: Bence Gáspár and Zsolt Beke

Typesetting: Zoltán Cséfalvay

Cover design: István Őri Kiss

E-book: Bulaja naklada, Zagreb, www.bulaja.com

I originally intended this book to be a diary about my days at the OECD. However, as the entries mounted up I soon realised that we are experiencing a great transition. When does a new era start? Once our old notions do not work anymore, or if using them becomes so forced that we begin losing touch with reality. We continue to employ the concepts of the epoch of globalisation such as international trade, labour productivity or the SME sector, although they apply less and less to the world of robots, giant digital corporations, new global value chains, user networks hundreds of millions strong and dynamic start-ups. Perhaps we can better understand the transformation around us if we adopt a different perspective and start out from what we see, i.e. the features of a new age.

The author has been the ambassador of Hungary to the OECD and the UNESCO in Paris, France, since 2014. Previously, he served as Minister of State for Economic Strategy in Hungary. He has worked as research fellow in Budapest, Vienna, Munich, Heidelberg, and Cardiff. He was professor of economic geography at Andrássy University Budapest, and has been lecturer at Kodolányi College in Hungary for two decades.

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Technology has transformed the tempo of change from nations to individual lives. Zoltán Cséfalvay does us a great service by connecting technology to both society and politics, and as such makes technology a central part of history, both in the past and going forward. His ability to align technology with a range of other human activities makes this an exceptionally important book.

— George Friedman, Chairman of Geopolitical Futures and author of the New York Times Bestseller: The Next 100 Years: A Forecast for the 21st Century

An exuberant romp on the theme of technology, but with many excursions into history, politics, business, and culture. Don’t plan to read this book from start to finish — just dive in.

— Catherine L. Mann, Chief Economist of the OECD

This is a truly comprehensive and sophisticated primer on the coming hybrid age of technological evolution and its worldwide impact, especially on the Millennial generation.

— Parag Khanna, best-selling author of Connectography: Mapping the Future of Global Civilization

CONTENTS

Introduction

1. Enter Pepper, the robot

2. Globalisation shot in the heart

3. It’s the technology, stupid!

4. From the gilded age to the golden age?

5. Twenty years that turned the world upside down

6. Race for the users

7.The myth of the sharing economy

8. When we all become free-riders

9. New barbarians at the gates?

10. The stone age didn’t end because we ran out of stones

11. Moore and Eroom

References

ACKNOWLEDGEMENTS

I am grateful to my wife, Anna Mária Bartal, for her help and patience with this work as a critical first reviewer of this book. I would like to express my gratitude to my son, Kristóf Cséfalvay, for the long discussions that opened my eyes to the shape of the world emerging today. I thank my daughter-in-law, Kathryn Hedrick, for her great help to edit the English version. I am also indebted to the OECD for the exciting intellectual atmosphere that facilitated the writing of this book.

INTRODUCTION

AT THE DAWN OF A NEW ERA

There is almost complete consensus about the fact that we are living through a mind-bogglingly rapid series of technological changes. Whichever large transformation we regard this period to be in the series of industrial revolutions, it is clear that the following have appeared:

–   new technologies (e.g. robotisation, 3D printing, Big Data, Internet of Things);

–   new principles of economic management (e.g. services based on online platforms);

–   new consumption patterns (e.g. consumption based on sharing in a community);

–   new employment models (e.g. self-employment, gig economy);

–   new battlegrounds (e.g. in the automotive industry and the hotel industry);

–   new generations (e.g. Millennials and Generation Z);

–   new myths (e.g. post-capitalism, sharing economy, radical market capitalism);

–   new dynamics (e.g. start-ups, open innovation ecosystem).

On the flip side of the coin, the data shows that the major economic development of the past decades, globalisation, which started in the 1980s, has lost its momentum. This is indicated by the gradual decline or stagnation of economic productivity and the growth rate of international trade since the turn of the millennium, while the same has happened to the growth rate of the global economy since the 2008 financial-economic crisis. In parallel, the negative features accompanying globalisation have become increasingly apparent. Since the turn of the millennium, income and regional disparities have continuously increased all over the world, and there is an ever growing rift between the vanguard, i.e. the innovative countries, companies, regions and occupational groups capable of rapidly boosting economic productivity, and those incapable of such momentum.

This book is based on a sole basic thesis: while the period between 1980 and the end of the 2000s was the era of globalisation, the 2010s ushered in a new age, the age of technology. The work seeks to ascertain the following main points:

–   What does this transformation entail in the economy, employment, the operation of companies, state economic policies and everyday life?

–   What does this new era mean for the various regions in the global economy, the developed and emerging countries and for Central and Eastern Europe in particular?

–   How does the leading professional think-tank and multilateral standard-setter of the global economy, the Organisation for Economic Co-operation and Development (OECD) interpret and assess this transformation, and how are all these reflected in everyday debates in Paris, the city that hosts the OECD?

This new era, like earlier ones, produces its own winners and losers. For Central and Eastern Europe, it is a key question how the region could become a winner in this new era. The first step towards this is familiarising ourselves with the main characteristics of the new age.

NEW TECTONIC RIFTS

Robotisation, automation and digitalisation can very soon radically transform the structure of the global economy we know today.

–   Although fears like the robots are coming and they will take away our jobs have mostly dominated public thinking in developed countries, developing countries are the most likely to be dramatically affected by these changes. This is because the jobs where robots can truly replace humans were precisely the ones that were relocated to developing countries in the course of globalisation. For example in South East Asia, hundreds of millions of people have escaped absolute poverty, in fact, many have reached the gateway to middle-class prosperity. Robotisation and automation may put an end to this trend, which threatens tens of millions of jobs and also economic convergence that slowly starts to gain traction. The first sign of this is that in developing countries the convergence model — a remnant from the age of globalisation based on importing technology, and as preconditions for that, the opening up of the markets, foreign direct investments and the liberalisation of the economy — seems to fail. The new era may launch a wage competition between robots and humans in which developing countries will be unable (and unwilling) to keep up. Without having reached the group of upper-middle-income countries through industrialisation in the age of globalisation, the only option left for them is deindustrialisation and the strengthening of the service sector.

–   One of the advantages of the new technologies is that they may reintroduce industrial production to developed countries and consumer markets with automated plants requiring relatively few but highly skilled workers. To put it plainly, the jobs that were relocated from developed countries to developing ones in the course of globalisation will never return. In fact, new jobs will only be created in industrial production if the workers are able to compete through training and skills with the requirements of operating robotised plants.

–   Another large challenge facing developed countries is that automation and digitalisation are increasingly part of services as well, already jeopardising millions of low-skilled, routine jobs. During globalisation, developed countries compensated for losing industrial jobs with the service sector. However, due to this sector’s nature, the pace of productivity growth here is lower than in manufacturing. This is one of the reasons behind the erosion of the lower middle class. In the age of technology, due to robotization and digitalisation, a huge number of routine jobs requiring low skills may altogether disappear from the service sector in developed countries.

As a result of the transition into a new era, the challenges facing developing and developed countries are the two sides of the same coin. Developing countries confront the problem of premature deindustrialisation, whereas developed countries encounter the issues of excessive deindustrialisation.

NEW GLOBAL VALUE CHAINS

One of the greatest innovations of globalisation was the establishment of the system of global value chains — from planning and purchasing through parts production and assembly to sales and servicing — uniting many countries, companies and facilities in a production and value creation network. By contrast, in the age of technology:

–   the focus of value creation is gradually shifting towards digital technology and content within global value chains (and, in parallel with this process, value creation is becoming detached from a concrete geographical area);

–   technology creates another opportunity for producing near the consumer market as the complexity of the products diminishes, and production becomes unique, small-scale and tailor-made;

–   global value chains are becoming democratised, as owing to digital technology, the chance to create and operate them is open to smaller enterprises as well (in contrast to the age of globalisation when this was the almost exclusive preserve of transnational corporations).

In short, in this age of technology, value creation focuses on intangible assets and services, while global value chains become virtual, shorter and more democratic. Developing countries stand to lose in this transformation, however, developed countries will not automatically become winners either.

NEW CONSENSUS ABOUT THE FUTURE OF JOBS

In the age of globalisation, the seemingly incontrovertible consensus was that robotisation, automation and digitalisation will mainly affect simple, routine physical and intellectual tasks and occupations. However, due to technologies, such as artificial intelligence, Big Data analysis, the Internet of Things, augmented reality, and 3D printing, it has become clear that robots are already capable of taking over non-routine physical and intellectual tasks from people too, and they will be even more able to do so in the future. The unwritten rule of the age is simple: what can be automated, will sooner or later be automated. The following will remain for humans:

–   tasks requiring creative intelligence (innovative, critical thinking and problem-solving) or

–   social intelligence (cooperative skills and communication).

Regardless of what doomsayers might suggest, the spread of robotisation and automation does not necessarily entail the mass loss of jobs and occupations. Still, the jobs, occupations and tasks remaining for humans will be radically transformed in the near future. The real question is, how much are we prepared for the transformation of occupations from the perspective of training and skills? How can we win the race between technology and training?

AWAITING NEW ANSWERS

Creative and social intelligence are not distributed evenly across society, therefore in the future many people can be at a competitive disadvantage relative to technology and robots when it comes to wages. There are several policy solutions to these challenges, which are, however, mostly at an experimental stage. As always, these have two versions: one socialist redistributive and a free-market variety:

–   taxing robots or their owners, which can finance the basic income (for the masses losing their jobs due to a lack of skills), which may be universal or subject to conditions;

–   increasingly becoming the owners of robots, which may take the form of collective ownership (ownership by the state, a cooperative society or a small community) or robots may become individuals’ accumulated assets;

–   trusting our comparative advantages, i.e. developing our skills and competencies — creative and social intelligence — robots will never be able to match. This can also manifest itself in state-sponsored training programmes and education reforms or the independent and lifelong learning of individuals.

These solutions may now seem futuristic. Yet it is better to be prepared for the changes early, before they become an intractable heap of problems.

A NEW GROWTH PARADIGM

Just as the development of global value chains was the great innovation in the age of globalisation and the driver of economic growth, an innovation in economic management appeared in the age of technology: the digital platform. To employ a notion from economics, the key to growth is the two-sided market with the following features:

–   on the two sides of the market, at the supply and the demand, there are two different products or services (in contrast to traditional markets where supply and demand meet for a specific product or service);

–   the two different supplies and demands are coordinated by a digital platform through algorithms and the management of large databases (e.g. Google’s search engine provides information to users on the concepts and websites that are searched on one side, while providing an opportunity for advertising to the other side);

–   the digital platform is interested in having as large a network of users as possible on both sides (supply and demand), since the growth of one network reinforces the growth of the other, albeit to different degrees;

–   it attracts user groups with cross-financing (usually preferring the more price-sensitive network, with perhaps even a free-of-charge model);

–   it maintains its own market management rules and control system in order to ensure the operation of the platform and keep the users on the market;

–   it is highly efficient, since it focuses on digital products whose marginal cost of production, storage and distribution, i.e. the cost of an additional unit of a given product, is almost zero.

It is typical of the dynamics of change that we have got used to the world of GAFA (Google, Amazon, Facebook, Apple), and the new stars of the platform economy, the large corporations denoted with another acronym, NATU, i.e. Netflix, Airbnb, Tesla and Uber, are just round the corner. In fact, giant Chinese platforms, such as Baidu, Alibaba, Tencent and Xiaomi (or BATX), are also rising at breakneck speed.

NEW PRINCIPLES OF ECONOMIC MANAGEMENT

The emergence of digital platforms launched five dramatic changes:

–   access instead of ownership;

–   service instead of industrial product;

–   increasing the efficiency of the market instead of the productivity of production/manufacturing;

–   platform instead of company;

–   self-employment instead of employment by companies

have been put in the forefront.

The more or less openly proclaimed aim of digital platforms is to transform everything, even traditional industrial products into (digital) services. And they seem to be winning this competition against the traditional economy, due to three large advantages:

–   First, they make market transactions much more efficient, i.e. the coordination of mass supply and demand is made much smoother through sophisticated algorithms, large databases and huge user networks (rather than making production and manufacturing more productive, which is expected from robotics and automation in the age of technology);

–   Second, by virtue of being able to link large supply and demand quickly and cheaply, platforms drastically reduce market entry costs in certain areas. So much so that markets have opened up to large masses of individuals without the involvement of traditional companies;

–   Third, by providing a major boost to market efficiency and the reduction of market entry costs, digital platforms draw value creation towards themselves within service chains.

The order of the economy is once again merciless: those that are able to perform a specific task in the value chain more efficiently, will sooner or later be in an increasingly dominant and controlling position within the chain. Industrial manufacturers and large brand companies traditionally occupied this position. Now as the platforms are able to operate and organise the market much more efficiently than the companies of the traditional economy, platforms believe that their time has come. Digital platforms will soon become a force of economic and social organisation similar to factories in past industrial revolutions.

NEW BATTLEGROUNDS

Digital platforms transform into services everything which they come across. The automotive industry and the hotel and hospitality industry will come next. For example in keeping with the car as a service principle, we can already see a range of platform-based solutions:

–   ride-hailing service (e.g. Uber, Lyft);

–   car-sharing systems (e.g. Zipcar, autolib’, Car2Go);

–   carpooling (e.g. Zimride, BlaBlaCar, Carpooling.com);

–   private rental (e.g. RelayRides, Drivy, Tamyca).

Some, such as ride-hailing platforms, threaten existing markets and businesses, while others, such as carpooling and car-sharing systems, open up new markets.

The other great challenges affecting the automotive industry, driverless cars, are also attributable to digital technology. Despite the increasing weight of the electronics included, the most value, roughly 70%, is added to a car by car manufacturers. However, in a future of driverless cars,

–   the share of traditional car manufacturers may drop to 40% with respect to value added, while

–   40% of the value added will be provided by the manufacturers of the hardware necessary for unlimited mobility based on digital connections (e.g. Apple, Samsung), and by companies producing software vital for managing huge databases and geographical positioning (e.g. Google, Tesla, telecommunications companies); and

–   20% will come from platforms providing and organising mobility (e.g. Uber, Zipcar, Car2Go).

This is more than just a mere change in proportions: in the case of the autonomous car, the largest profitability and marginal profit will be reaped by the software producers and the companies providing the related digital services and content, while traditional car manufacturers may be stuck with low profitability in the new car manufacturing model.

The platforms that appeared in the hotel and hospitality industry, home hotels (e.g. Airbnb, HomeAway, 9flat.com) and service platforms linked to tourism (e.g. EatWith, ToursByLocal) have dramatically reduced the costs of market entry for individuals, making the market accessible directly and cheaply. Their shared feature is precisely the fact that they eliminate the traditional market participants. This is because these platforms will always have a competitive advantage over corporate actors (e.g. hotels, travel agencies), since:

–   individuals temporarily provide others access to their unused assets without hoping for the return on equity expected on the market;

–   the provision of access does not have fixed operating costs (unlike in the case of companies); and

–   these activities are often not subject to taxation.

The current battleground is regulation. The traditional and mostly heavily protected sectors such as cabs and accommodation rely on state regulation. Meanwhile, digital platforms cite user reviews and their market clearing and organising role, i.e. reputation.

NEW GENERATIONS

Perhaps the most distinct boundary between the age of globalisation and the age of technology is reflected by the culture of the different generations.

–   The archetypes of the age of globalisation were the ruthlessly performance- and success-oriented, materialistic and slightly hedonistic yuppies driven by a desire for profit, who usually worked and earned their wealth in the financial sector.

–   By contrast, Millennials (those born between 1981 and 1995) and Generation Z (those born after 1995) are perhaps less materialistic than yuppies, and much more open towards community solutions and thus also platforms based on sharing.

Of course those who expect to see the demise of capitalism on every corner, regard the members of the new generations as the gravediggers of capitalism. However, the major difference lies in technology and its use. Millennials and members of Generation Z are true digital natives, having grown up with technology, and for them global and mobile communication is part of everyday life.

However, global interconnectedness is more than a mere hobby or pastime, as it is also crucial for the work and career paths that await them in the age of technology. While previous generations followed several — subsequent — occupations during their lifetime, Millennials and members of Generation Z already perform a variety of earning activities concurrently, and they will increasingly enter onto a range of different career paths at the same time. This "slasher" working lifestyle, as it is often used in discussions in France, is less secure but more free and flexible than earlier ones, and it is not only enabled by technology but also forced.

NEW MYTHS: THE DEATH OF CAPITALISM

Just like at the onset of globalisation in the 1990s, new myths are created during every period of transition. As we push farther and farther into the age of technology, myths are springing up all over.

–   Visions based on ideologies — we might say naturally — expect the death of capitalism.

–   Illusions based on romantic dreams envision a future built on shared access.

–   Pessimists envisage an unprecedentedly extreme form of capitalism on the market.

Ideologists believe that the fact that we can access an increasing group of assets and services for free in the digital economy (e.g. Google, Gmail, Chrome, Skype) is the harbinger of capitalism’s death. This is attributable to four factors:

–   near-zero marginal cost, according to which in the case of digitally produced or digital-content products (e.g. music, video, software, e-book), the production of an additional piece is basically near zero after the one-off development costs are recouped;

–   the logic of the long supply curve, which means that in the case of these products, not only the production of an additional piece will be near zero, but also its storage and distribution costs, which paves the way for a long, practically unlimited, supply, and at the same time democratises the production of digital goods (e.g. YouTube, e-books);

–   due to the near-zero marginal cost, the democratisation of the production of digital goods and 3D printing technology, in the future, we can be the producers and consumers of the products at the same time in an increasing range of fields from energy supply to everyday objects;

–   robots and automation make production so efficient that social prosperity can be provided to everyone even without work and jobs in today’s sense.

This argument may seem logical at first sight: if the production, storage and distribution cost of something is almost zero, if it can be acquired for free as it has no market price, we can hardly speak about productive capitalism. If we can be the producers and consumers of several products at the same time, we need neither the market nor capitalist corporations. In other words, according to ideology-based myths, we are at the doorstep of a new world in which the market’s dominance will be challenged, and, much to the delight of ideologists, even if anti-globalisation movements were unable to achieve this, we can finally bury capitalism.

The adage that there is no such thing as a free lunch will fall into oblivion, having been defeated by technology. The only problem is that nowadays the giant digital platforms that sell their services for free are listed companies worth hundreds of billions of dollars, with annual profits of tens of billions of dollars. It seems that the economy functions differently than anti-capitalist myths desire.

NEW MYTHS: THE SHARING ECONOMY

Illusions based on quixotic dreams don’t go this far: they forecast that a new type of economy and society will be born, based on sharing, shared access and the shared and cooperative production of goods and services. The common characteristics of these solutions are that:

–   they directly connect individuals offering and those seeking goods (peer-to-peer economy);

–   individuals offer their unused or underutilised assets and skills, and share them or their use — temporarily — with others (sharing economy, on-demand economy);

–   the goods and services offered are used by not only individuals but also some kind of cooperative community (collaborative consumption);

–   the supply and demand created by individuals are matched by digital platforms based on large databases and sophisticated algorithms (platform economy); and

–   the main users of shared solutions are the Millennials and members of Generation Z, who, as the illusion would have us believe, are less materialistic than earlier generations.

This reasonable argument seems to be logical at first sight too: if digital platforms lower the barriers to market entry so much that millions of individuals can enter into economic transactions with each other directly, then this is not only cheaper and faster than the traditional market solution but also eliminates the need for capitalist companies. The Paradise of Sharing beckons.

One of the problems with this vision about the sharing economy is the same as with the myth about the death of capitalism: the ruthlessly profit-driven digital platforms in the background. And what at first sight might seem the sharing of assets or shared access to them, such as car sharing (e.g. Zipcar, Drivy, Car2Go) or accommodation or home sharing (e.g. Airbnb, HomeAway), is actually nothing else but a short-term rent between individuals. The sharing economy is basically not about the sharing of ownership, but the coordination of the knowledge of market participants, i.e. the masses, and thus the increasing of market efficiency. Platforms have not replaced capitalism with a new, sharing economy, on the contrary: they have made the market and the market economy even more efficient.

NEW MYTHS: RADICAL MARKET CAPITALISM

Finally, according to pessimists, platform companies will simply monetise the utopian dreams, for example the hope for a future sharing economy. They argue that by managing the market much more efficiently than before and radically lowering the barriers to market entry, platforms actually:

–   marketise human interrelationships (e.g. BlaBlaCar’s paid-access carpooling system instead of stopping for hitch-hikers as a favour);

–   guide jobseekers into casual self-employment without the social safety net (e.g. Uber, Amazon Mechanical Turk, TaskRabbit);

–   establish unprecedented monopolies and empires driven by the economics of networks (e.g. GAFA, NATU, BATX);

–   make people vulnerable through the large databases compiled about users knowing everything about us (e.g. digital dictatorship, big data = Big Brother).

Nevertheless, the vision of radical market capitalism seems to be blown out of proportion. Despite being a strong contender, the platform economy has not defeated the traditional economy anywhere, it has merely supplemented its rival in most areas. Those in the lower, low-skilled segment of the labour market, used to find poorly paid and casual work anyway, platforms at least make their access to demand faster and simpler. Due to network effects, platforms do grow rapidly, but on account of the fast-changing technology, the monopolies of the digital economy are more ephemeral than earlier. Although we leave behind a huge data trail on digital platforms, enabling the projection of human behaviour through correlation analysis, this is a far cry from companies compiling knowledge about us reflecting causal relationships. We should never forget that the technologies, and thus also the world of platforms, have been developed by humans, therefore their future progress will also be shaped by human society.

NEW DYNAMICS

Finally, the age of technology promises to inject a new dynamism into the economy and society. Not least because this period can make innovation much more open, democratic and larger-scale than today. With respect to innovation, we are prone to overestimating:

–   the role of research and development and, in parallel with this, underestimate business solutions and the role of introducing new products to the market (although the essence of innovation is actually the way an idea reaches consumers in the form of a product, which requires entrepreneurs);

–   individual discoveries or entrepreneurial success, and at the same time underestimate the performance of the teams behind the innovations (although most innovations are devised by a small team the size of a start-up);

–   the role of large enterprises and at the same time underestimate small start-ups, sometimes merely because they are small. However, evidence suggests that large enterprises, entrapped by their previous success, can only be expected to deliver incremental innovation, while radical, disruptive innovation is almost exclusively done by start-ups.

Yet digital technology, and unlimited, global and mobile communication pave the way for abandoning the elitist attitude towards innovation, which developed in the mid-20th century. The future belongs to a mass, bottom-up innovation process open to everyone. As we all know, the greatest virtue of innovation is that it instils an unparalleled dynamism into the economy and society. Of course, this in itself is merely an opportunity, the realisation of which requires:

–   competition (because the more intense the competition, the more companies are forced to succeed on the market through their innovations, not only their monopoly, and the more opportunities there are for start-ups with radical innovations);

–   a flexible labour market (because it can manage, through mobility, the dynamics of the loss and creation of new jobs due to technology, i.e., to employ the words of Joseph Schumpeter, it can handle creative destruction);

–   good education (because without it there is no human capital that could create innovations for the international market, and because without it the skills and competencies necessary for competing with robots and automation are not established).

The countries that create the conditions for this — competition, flexible labour market and good education — as early as possible will be the winners of the age of technology. Globalisation is coupled with, among other things, the territorial outsourcing of economic activities, often to countries competing with their cheap labour force. Therefore this is frequently a zero-sum game that the Central European region can hardly win, unless it wishes to remain an outworker forever. By contrast, the development and application of technology is a positive-sum game. In a nutshell: while globalisation is about substituting one person’s work with the work of another living in another region of Earth, the age of technology promises the chance of turning technology into a supplement to human work and a means for creating new value. It is vital for the convergence of the Central and Eastern European region to use new technologies and the new technological period for creating new value.

According to the dictum of the Nobel laureate economist, Paul Krugman, from over two decades ago, productivity isn’t everything, but in the long run it is almost everything.[1] In the long run, prosperity can only be increased by boosting productivity, i.e. the new value produced per employee. And the key to increasing productivity, and thus also the dynamism of the new age, is innovation. The 20th century was the age of the welfare state based on earlier industrial revolutions, redistribution in the welfare state and John Maynard Keynes. The 21st century will be the era of innovation, innovative entrepreneurs and Joseph Schumpeter.

NOTES

[1]  Krugman, Paul (1997): The Age of Diminished Expectations. MIT Press, Cambridge, Mass, p. 11.

1.

ENTER PEPPER, THE ROBOT

I WILL NOT TAKE AWAY ANYONE'S JOB...

In its own way, Pepper, the barely one-metre-high humanoid robot, told the truth. In late May 2016, at one of the panel discussions of the OECD Forum, in Paris, with a somewhat mechanical voice and overly humble gestures, Pepper declared the following: I want to reassure everyone that I will not take away anyone’s job or replace it. My goal is to make people’s life more efficient.

These two sentences, by way of a reassurance, were uttered exactly 95 years after Karel Čapek’s play, R.U.R., premiered in Prague, with the subtitle, Rossum’s Universal Robots. In this play, Čapek not only was the first to use the word ‘robot’ in almost its modern sense, but he also defined thinking about robots for a long time. In his drama, the robots created by humans, or, more precisely, the Rossum company, initially eagerly help people and serve their needs. But later a human rights movement launches a fight to free them, and over time robots gain the upper hand. In fact, they almost completely obliterate humanity.

Just like Pepper, Julien Seret, the marketing director of the firm that developed the robot, tried to reassure the audience that his company had created Pepper driven by a desire to provide new services and achieve innovative goals in education rather than to substitute human work.[1] There was a real success story behind this, since Aldebaran, a French robotics start-up established in 2005, became one of the global leaders in developing humanoid robots in barely half a decade. In 2012, with a view to international expansion, the Japanese telecommunications giant, SoftBank, acquired a majority stake in the firm. In the autumn of 2015, Pepper made its debut in front of the general audience in a Carrefour supermarket on the outskirts of Paris, as a playmate for children, and as an information source for adults.[2]

And in 2016, SoftBank opened its first store in Japan with only humanoid robot employees.[3]

Pepper is not alone, as over 4,000 of this version have been produced, and 7,000 have been marketed from a similar but smaller type, Nao. As the robots are being sold for under USD 2,000, SoftBank projects that sales and leases will soar. The designer, programmer, and developer of Pepper and Nao, Bruno Maisonnier, is even more optimistic. According to him, robots will sooner or later become almost like family members, and will fundamentally alter the way we think about life and work. Let’s not forget the first mobile phones, how heavy and clunky they were, and yet, how far they have come. The same can be expected in robotics, too.[4]

ROBOTS ARE RISING INEXORABLY IN INDUSTRIAL PRODUCTION

In its own way, Pepper told the truth, as humanoid robots that are toys and assistants at the same time are not very likely to threaten a large number of jobs. Not even in the supermarkets like Carrefour, since the self-checkout machines undoubtedly make the work of more cashiers redundant than these playful robots offering advice. Pepper told the truth, but only in its own way. Its mushrooming peers, industrial robots, especially in the automotive industry and electronics, not only augur a new future, but they can already create a whole new world.

According to the International Federation of Robotics, sales on the market for robots have been continuously rising since 2010, by an average of 17% annually. While in the second half of the 2000s (and also in 2010) 120,000 industrial robots were marketed each year, in 2014 this figure was 230,000. Before anyone would think that the use and spreading of industrial robots is characteristic of developed countries competing with high wages, we should take a closer look at the statistics from 2014. 70% of the sales are concentrated in five countries, in the following order: China, Japan, US, South Korea and Germany.[5] In 2014, the market was dominated by China with its low wages and a labour supply of hundreds of millions of workers. Close to 60,000 new industrial robots were installed in that country, while only 20,000 were put to use in fifth-ranking Germany.[6] All in all, more than half of the 230,000 robots sold in 2014 were purchased in Asia, primarily in China, Japan and South Korea. According to the forecasts, these trends will continue to strengthen, and the International Federation of Robotics expects 400,000 new robots in 2018, with 150,000 in China alone.

Table 1:     Number of industrial robots 2014 (actual data), 2018 (prognosis);

(thousand)

Source > International Federation of Robotics (2015): World Robotics 2015. Industrial Robots. Executive Summary. pp. 13-26., Table 2. Estimated operational stock of multipurpose industrial robots at year-end in selected countries. p. 21.

The picture is similar if we take a look at the robots used in manufacturing, since in 2014 there were almost 1.5 million industrial robots in the global economy, with the most in (see Table 1): [7]

–   Japan (296,000);

–   North America (US, Canada, Mexico: 237,000);

–   China (189,000);

–   South Korea (177,000); and

–   Germany (176,000).

Estimates foresee 2.3 million industrial robots by 2018, with the ranking being manifestly altered. Most industrial robots will be in China by that time, followed by North America, Japan, South Korea and Germany.

In Central and Eastern Europe, robots spread relatively slowly. The only exception is the Czech Republic where there were around 10,000 robots in 2014, and their number is expected to rise to 18,000 in 2018. This is probably not because Karel Čapek, the famous Czech sci-fi writer, came up with the word ‘robot’ roughly one hundred years ago.

THERE IS NO SUCH THING AS A COINCIDENCE

It could hardly be a coincidence that almost on the same day in late May 2016, three news items about robots made the rounds in the global business press that will fundamentally transform our world. In a report by the South China Morning Post published on 21 May 2016, Xu Yulian, the head of the government’s publicity department in the Kunshan region, west of Shanghai, divulged something highly sensitive: "The Foxconn factory has reduced its employee strength from 110,000 to 50,000, thanks to the introduction of robots."[8] This is not just any company, as the Taiwanese Foxconn is one of the largest firms in the world by employee numbers. It has close to 1 million workers in its factories in China alone, and it produces devices like the Apple iPhone and iPad or Samsung Galaxy.

But just days later, Ed Rensi, the former USA CEO of McDonald’s, had an embarrassing slip of the tongue as well. The scene was the morning show of Fox Business Network, and Rensi complained about the federal government’s plans to raise the minimum wage. He claimed that due to these plans, it would be cheaper to employ robots instead of humans in the fast-food chain.[9]

Finally, on the same day, 24 May 2016, the CEO of the German sportswear manufacturer, Herbert Hainer, announced in an official press release that they had started building the Speedfactory, operated almost exclusively by robots, near Ansbach, Bavaria. After the successful pilot line, they were ready to launch mass production in 2017.[10] The firm’s director of communications also told Fortune magazine that a similar Speedfactory using robots would be built in the US in 2017.[11] This is not just any company, either. Adidas markets over 300 million pairs of sports shoes every year, and in the past 30 years almost all were produced in China, Vietnam or Indonesia. However, now, production can return to the major consumer markets, i.e. Europe and the US, with the help of robots.

FOXCONN: ONE MILLION WORKERS OR ONE MILLION ROBOTS?

Of course, there are unique business decisions and considerations behind each news item. The charismatic CEO of Foxconn, Terry Gou, announced his ambitious programme to employ one million robots in his factories over three years in the summer of 2011.[12] But why this figure? This is all the more surprising, as at the time of the announcement, a total of 20,000 industrial robots were used in Foxconn facilities. The answer is simple and at the same time tragic. First, the programme announced with much fanfare is based on elementary mathematics: if Foxconn employs one million workers in its Chinese factories, one million robots will replace them. Analogous to the famous Chinese Terracotta Army, a Robot Army will take the place of the workers in Foxconn’s factories. Second, sad facts underlie the elementary mathematics: in 2010, due to the stress caused by the inhumane working conditions and the exploitative overtime work, nearly 20 people committed suicide within the walls of Foxconn facilities. Since Foxconn is a producer for prestigious companies like Apple, Samsung, Nokia or Bell, there was no way a worldwide scandal could be avoided. In its editorial, The Economist, a weekly, was quick to note sourly, robots don’t complain.[13]

Therefore the world watched curiously, or rather sceptically, what would come of the three-year plan. Mainly because this plan also tried to answer the question how emerging countries could overcome their double hurdle. For a long time it seemed that this hurdle is not harmful at all, in fact, it may even produce favourable effects. China successfully utilised the opportunities arising from globalisation, attracting industrial low-skilled mass production from developed countries. This was clearly based on the almost unlimited labour supply and the very low wages, which initially amounted to one-twentieth of the US or European level.

Yet by the early 2010s it turned out that this happened too rapidly and effectively. In the large wave of globalisation, i.e. in the past decade, while China exhibited an annual growth of sometimes 8-10%, wages kept increasing, too, rising to triple their initial level by the end of the decade). From a macroeconomic perspective, this is positive for domestic consumption, but it clearly continues to reduce China’s competitiveness in wages. Sooner or later mechanisation or using robots may become cheaper than using human labour.

On the other hand, the other hurdle, technological progress, weighed ever heavier on the country in the 2010s, raising a multitude of questions. If robots do take over simple assembly production tasks, as foreseen in Foxconn’s grandiose three-year plan, the situation of the newly redundant workers becomes an issue. These workers have only just escaped extreme poverty, and set out, or felt that they had set out, on the road towards middle-class prosperity. What happens if this convergence process falters because beyond a point higher wages cannot compete with technology, or, more precisely, industrial robotics?

MERCILESS RULE

It seems that in contrast to globalisation, the Great Transition and the age of technology imposes a cruel rule on emerging countries: they either keep industrial wages low, and then industrial jobs will remain, or raise wages until employing robots in production becomes more profitable, and all the industrial jobs will disappear (even low-wage ones). However, the real problem is that technology, or, more precisely, information technology dictates the pace of progress. And the pace of progress in information technology is determined by Gordon Moore’s law, according to which the performance of microprocessors doubles every two years. In other words, the price of microprocessors offering the same performance is halved every two years. The average price for a simple industrial robot is around USD 35,000, and even today, they are more competitive than the wages in some emerging countries. What happens if — as it seems inevitable — the price of industrial robots continues to drop?

Foxconn, and partly also Chinese leaders, recognised this problem in their own way. Can proactive action solve this issue? Can China spearhead robotisation in the spirit of the classic saying, If you can’t prevent change, embrace it? After many sectors, for example the textile industry, have moved on from China, can the most robotised industries, car manufacturing and electronics, be retained? Furthermore, despite the fact that the number of industrial robots employed is rising rapidly every year, and in this respect China will soon become a global leader, robotisation is still in its infancy in China. The density of robots in the economy is indeed a much more accurate indicator than the total number of industrial robots. With regard to the number of industrial robots installed per 10,000 employees, the ranking in 2014 was as follows: South Korea had 478 industrial robots per 10,000 workers, Japan had 314, Germany had 292, the US had 164 and China, lagging far behind, had 36.[14]

It is no coincidence that when word got around that the work of 60,000 employees became redundant in one Foxconn facility due to the use of robots, the company published a thoroughly quixotic statement: We are applying robotics engineering and other innovative manufacturing technologies to replace repetitive tasks previously done by employees and through training, also enable our employees to focus on higher value-added elements in the manufacturing process, such as research and development, process control and quality control.[15] We shall see. It is nonetheless certain that we seem to have received an answer to one of the greatest questions of the decade, namely whether robots will take away jobs. We could say that it has already begun. In China.

I WOULD RATHER BUY A ROBOT

THAN PAY 15 DOLLARS PER HOUR

Almost at the same time when Foxconn made its announcement, in another news item Ed Rensi, the former head of the US division of McDonald’s, merely sought to protest against the planned raising of the minimum wage. Against the federal government’s intention to introduce a uniform minimum wage much higher than the current 7.25 dollars per hour. However, Rensi proposed regulation at the state level, and that the minimum wage should be differentiated by sectors.

This was plain lobbying characteristic of large corporations. Yet Rensi’s angry outburst in Fox Business Network’s morning TV debate instantly became a soundbite: It’s cheaper to buy a $35,000 robotic arm than it is to hire an employee, who’s inefficient making $15 an hour bagging French fries. Then he added perhaps the most precise economic explanation for the age of technology: Franchising is the best business model in the United States. It’s dependent on people that have low job skills that have to grow. Well, if you can’t get people a reasonable wage, you’re going to get machines to do the work. It’s just common sense. It’s going to happen whether you like it or not. And the more you push this it’s going to happen faster.[16]

This is highly unusual from the former head of a company that was among the winners of globalisation, and the global expansion of which coincided with globalisation. The olden days are far gone when in 1954 Ray Kroc peddled the five-spindle milk shake-mixing machine, the Multi-Mixer, developed by himself, and wandered into a hamburger stand run by Maurice and Richard McDonald in San Bernardino, California. On 15 April 1955, McDonald’s opened its first fast-food restaurant in Des Plaines, Illinois. Barely 15 years later, in 1972, in Des Plaines, the same place where it all started, the two thousandth McDonald’s was inaugurated. One year later, in 1973, the three thousandth restaurant was opened in Woolwich, a north-eastern district of London, then in 1978, the five thousandth was established in Kanagawa, Japan. McDonald’s arrived to Budapest in 1988, to Moscow in 1990 and, one year later, to Beijing in 1991. After that, in the 1990s, driven by the great wave of globalisation, it appeared in Morocco (1992), Saudi Arabia (1993), South Africa (1995), India (1996) and Pakistan (1998). McDonald’s has become a veritable empire: it is present in 119 countries of the world with over 35,000 fast-food outlets, serving 68 million consumers each day.

THEORIES FOR A SUCCESS STORY

Inspired by the relentless expansion of the fast-food chain, George Ritzer, a professor of sociology at the University of Maryland, coined a new concept, McDonaldization[17] for the process by which the principles of the fast-food restaurant are coming to dominate more and more sectors of American society as well as of the rest of the world.[18] According to Ritzer, the fast-food chain’s success can be attributed to four, interrelated principles:

–   Efficient business management, an important element of which is predictability and the introduction of technologies independent from humans instead of technologies serving humans (e.g. McDonald’s, at least on paper, fulfils orders in a predictable timeframe, 60 seconds, which is due to good organisation and mechanisation.

–   Standardisation at the level of not only the products but also the most basic consumer needs (hamburger patties have been predictably identical all over the world since 1955: their fat content is under 19%, their weight is 45.36 grams, out of which 7.08 grams are onions, and their diameter is 9.84 centimetres).

–   Focusing on quantitative service instead of quality, on serving large masses at the same time and with the same food, i.e. mass products (the names of the meals, such as Big Mac or Supersize, already emphasise quantity).

–   Winning over consumers with clear, widely understood values, such as being fast, cheap and clean.

All in all, despite the fancy name, this is nothing more than the application of the rules of mass production we have all known since Henry Ford, and their extension to consumer-oriented services, and often to places in the world where these principles are not part of everyday life.

The rapid global expansion of McDonald’s also inspired Thomas Friedman, a Pulitzer Prize-winning journalist and the author of several bestsellers on globalisation, who went as far as devising a security policy theory from these figures.[19] Without any trace of modesty, he quickly named his theory, penned in a 1996 New York Times editorial, The Golden Arches Theory of Conflict Prevention.[20] In his 1999 bestseller on globalisation, he formulated a sort of basic rule from simple statistics: No two countries that both had McDonald’s had fought a war against each other since each got its McDonald’s.[21] Of course, this is not because people in both countries love Big Mac so much that they don’t even want to fight each other anymore. According to Friedman, these countries don’t wage wars against each other because when one of them becomes a McDonald’s country, this indicates that the country has become so deeply integrated into the global economy that the chances of it engaging in armed conflict with its neighbours are radically reduced.

McDONALD’S AND THE GREAT TRANSITION

The fact that in his famous May 2016 interview, Ed Rensi did not use the arguments of globalisation when lobbying for lower and sector-specific minimum wage shows that we now live in the age of technology. In the 1990s and 2000s, he would have presumably argued for lower minimum wage stating that otherwise the company would move its activities outside the US, as McDonald’s did partly, through its global expansion. Instead, in 2016 he listed explicitly technological arguments, such as mechanisation and robotisation.

The crude statement that it is cheaper to use a robot worth USD 35,000 than to employ people for 15 dollars an hour formulates three pieces of basic logic characteristic of the new era.

First, it refers to the race between technology, in this case represented by robots, and humans and human work, with respect to costs. If technology progresses and robots become cheaper at this pace, the