This is the second post in a little series considering the left-field consequences of the 4th Industrial revolution (4IR). There are several technology trends leading to breakthroughs in productivity across many industries, and I think these will have knock on implications. Guided by the insights from members of the Bestem Network, I am concerned to know if we are investigating along the right track more than demonstrating that we “are right”. As in the last post, I am only going to briefly touch the upside possibilities of 4IR because information on this is now widespread and easily found.
What a year 2020 was. It gave me both time to reflect on some angles of 4IR and showed samples of the types of situations and responses that might arise in the future. Rather than write a large piece covering every aspect, I am writing a small series, each post looking at aspects in isolation. This post deals with productivity, remote working, and the effect on public finances.
One common definition of productivity is the amount of output for every unit of human activity put in. Traditionally this has been calculated as GDP added per hour worked. There are lots of reasons to argue that the measure is no longer appropriate and you can read some of my previous deliberations here [LINK]
If you subscribe to the belief that we’re consuming and exploiting too much of the planet’s resources, and combine this with the productivity arguments of 4IR then it seems that we will either end up drowning in a sea of products we don’t need while killing ourselves, or there will be a lot of idle labour capacity.
The positive argument resulting from this is that it will free our species from needless drudgery, will increase artisan production and lead to a life of increased leisure. Some people advocate the requirement for universal basic incomes, of which the UK Government furlough scheme could be an example. These arguments are not new as this letter to Personal Computer Weekly in 1978 demonstrates.
Autonomous vehicles reduce the requirement for physical presence of humans in dangerous or expensive locations (think of remote inspections or inside nuclear sites), it also reduced the need for drivers (commercial and private) while increasing the utilisation potential of vehicles. This will lead to reductions in labour in direct driving roles but also indirect such as driver training, motor insurance, parking lots, and staffing of road-side café. [LINK ]
Economy moves on-line
During the pandemic activity has migrated on-line. Online shops require less people in the supply chain than high-street retail, and with the rise of robotic pickers and packers perhaps will need even less in the future. This article talks about this in the context of Ocado. [LINK]
There are many arguments concluding that much economic activity will move on-line. There is, however, an imbalance between the numbers of producers and consumers. Between sellers and buyers. Here the productivity arguments become even stronger. For example, consider a video game like “Among Us” (which is now played by over 60m people daily). It only took 185 people 3 years to write, and far fewer to keep it running. There is not much employment created by this and a concentration of money from the many to the few. [LINK]
There are 350million players who use fortnite, that game is published by Epic games. The entire company employs a mere 700 people. Epic games are backed by KKR private equity. [LINK] [LINK] [LINK]
In a more professional sphere, after a massive growth spurt, Zoom still only has 2,500 employees (which is double what it had last year). It is used by 300 million meeting participants each day. [LINK] [LINK]
Who remembers Linden labs? [LINK]
Education may change
In a more traditional setting, on-line education has been a lifeline for schools and universities. However, if this type of delivery becomes normal – consider a class recorded for Physics 101 by (say) Richard Feynman. It would never need to be re-recorded. Maybe Khan Academy has this right, maybe a career in teaching is not what it used to be, maybe education will not be enough to differentiate you once many more people have access and get smart? [LINK] [LINK]
What about the other issues?
While the fourth industrial revolution will see technologies such as self-driving, self-analysing, remote working, remote control, and robotic automation become more prominent. We may see a rise in purely digital products and services – such as computer gaming – where the entire value chain exists only within computers, and consumption and delivery are not dependent on co-location.
If labour requirements are permanently reduced (and not replaced with new roles – there are arguments that this time it may be that way) then we are faced with issues of wealth distribution that free markets won’t be able to solve. There are arguments that 4IR requires a more interventionist central control to organise behaviour, set societal objectives and to distribute resources. The pandemic response may have revealed how this sort of thing may operate. [LINK]
This is all very good and well. I can envisage the upside of productivity as well as the potential problems it will engender. The arguments are well rehearsed and not yet solved. But what about second order consequences?
Central taxation reductions
All governments have endured a hit to their finances during the COVID-19 pandemic. Borrowing from future to fund today’s spending only works if governments can capture the tax revenue associated with future growth.
We have recently proved that we in a world where many can work from anywhere, hold meetings without travelling and remotely operate large plants and machinery. This is not new but since COVID it has become normalised and now widespread. The physical property of the company may only be a TEAMS server in the Bahamas and workers can be located wherever they wish to be.
So how do you tax this activity? How and where can you collect payroll taxes? Where is the economic benefit created? Whose rules and laws apply? How can a government even know what is happening within its borders?
Automation in transport, manufacturing and logistics are also likely to increase pressure on labour tax revenue.
Will we see restrictions on commercial data, handling, and transmission across borders like we have seen for personal data with GDPR regulations? It’s not unheard of – in the oil industry some geological data was prevented from leaving countries for years, forcing exploration activity to establish a physical presence in country.
Commercial property taxes and rents
Until recently landlords and local government were able to extract rents and rates from physical businesses that wanted to be located where the crowds came. Recently, local governments have even borrowed large sums to buy the properties on the high streets. They are speculating in the properties for which their previous role was to sweep the street and collect rubbish.
They do this to rent them out, trying to exploit the difference between their cheap borrowing and the return from commercial rents. So that they make enough money to pay for the street sweeping and bin-emptying that they used to charge for explicitly. They have an inbuilt advantage over private landlords because buildings left empty force the landlord to pay rates, but these just recirculate inside the finance dept of a local authority. Perhaps this will end in tears for the public (and risk-free profit for financiers) when they need to refinance and interest rates are higher and vacancy has increased? Surely there must be a better way to fund public services? [LINK]
Working from home seems likely to reduce the requirement for prime office space not only leading to worsening public tax receipts but also reductions in income for pension funds and insurance companies who own the buildings – just at a time when returns on other forms of assets are also falling, and insurance playouts are increasing. [LINK]
The pandemic saw an accelerated rise in on-line purchasing and home delivery (which is often less expensive due to lower labour costs and lower property taxes). This means retailers are going bust, rents are not being paid and rates are on hold. This causes another of problem for public revenue which means spending must be reduced, borrowing increased or new methods of taxation found. [LINK]
The end of the freelancer?
In Europe at least, workers within traditional employment structures (and public sector workers most of all) have been better protected by the government. Self-employed, freelancers and small company directors have not been supported well. [LINK]
In recent years we have witnessed the fragmentation of work and a slow reduction in the number employed in professional classes. The world of private commerce seemed to be dividing into successful owners (and financiers) and jobbing workers, with a rise in zero-hour contracts and “gig” work. [LINK]
One of the attractions of freelance work for some was the flexibility it afforded in terms of working from home, this benefit seems likely to become more available to traditional office employees in the future. Policy is likely to shift towards increased taxation of small owner-managed companies and freelancers. The benefits from freelancing are being eroded. [LINK]
Will there be a rebalancing in favour of a stable employment contract and the re-rise of big employers, or will the welfare state make new arrangements with its citizens to enable flexible, part time working? What will this mean for personal finance and the unintended consequences of “prudential lending” that have forced many to rent properties they could easily have afforded to buy? [LINK]
The role of the state and its relation to private commerce
Our elected government has been willing to incur large debts and restrict personal freedoms to protect lives during this pandemic. This brings into question, perhaps, the lack of spending up until this point for other preventable causes of death such as seasonal flu and driving motor cars. Though one has to be careful not to downplay the seriousness of the current pandemic, the argument may be extended that intervention should increase in the future. [LINK]
Governments have stepped up to support rail operators, aviation, provide furlough schemes and give grants to the performing arts. The narrative of the free market and the accepted arguments for roll-back from state activity in commerce we’ve seen for the previous half century will likely be revisited. [LNIK]
I have noted many more articles about the collective response of public services, the requirement for us all to contribute (and not try to dodge taxes) if we want potholes filled in and have a medical service that works. We have even seen large corporations such as Tesco return COVID rates relief payments without obligation because it was “the right thing to do”. [LINK]
Perhaps we are moving to a phase where more collective responsibility will be shown, and individualism will be less valued. Perhaps we are moving towards basic universal income. Perhaps we are changing our relationship with tax and with state spending? Perhaps companies will revise their arrangements with workers? [LINK]
The UK government continues to make overtures about investing public money into science and technology research through an industrial strategy. [LINK]
We’ve seen government intervention in the hospitality sector on the grounds of public health. Perhaps it will not be “the right thing to do” to spend a universal income on gambling and drinking? Will it be “the right thing to do” to compromise your health at the expense of the nation’s taxpayers? Where will the new boundaries for state intervention in private life be drawn? How will the people who control business take steps to voluntarily increase their tax bill? What will all this mean for basis of competition and fiduciary duty to shareholders?
If we are to see wide-scale automation, movement of economic activity on-line and a substantial rise in remote working for those that remain employed, there will implications for tax, wealth distribution and state intervention which are likely to follow. Organisations may wish to consider how to set up systems of work that enable innovation, so they are not be left behind by these advances.
Scenario planning might consider wider societal responsibilities as well anticipating changes in rules, regulation, worker expectations, less flexible labour markets and competition from state-backed entities (possibly publicly owned). They may also anticipate changes in expectation from the public as regarding corporate citizenship and modifications to taxation systems.