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1 March 2016 CFA Institute Journal Review

The History of Technological Anxiety and the Future of Economic Growth: Is This Time Different? (Digest Summary)

  1. Servaas Houben, CFA

Throughout history, people have held an ambivalent view of technological progress. Worries about technological progress tend to fall into three categories: the substitution of capital for labor, the moral implications of progress, and progress slowing down and resulting in stagnation. The authors provide a historical assessment of each of these categories and conclude that although short-term disruptions to certain labor classes could occur, in the longer term, technological progress benefits humanity.

What’s Inside?

Most economists agree that over the long term, technological progress results in economic progress, whereas in the short term, it might result in unemployment because of the substitution of capital for labor. Some economists describe the decisions around technological progress as a “prisoner’s dilemma” in that competitive countries would be foolish to not incorporate technological advances even if doing so makes everyone worse off in the short term. For example, in the 19th century, Russia chose not to improve, and its economy and military were outpaced by countries that modernized, such as Britain. Thus, according to some, it is in the best interest of each nation to modernize, whereas for the world as a whole, modernizing might not be ideal. The authors nonetheless conclude that technological progress is beneficial, especially when considering the increased time to enjoy high-quality and low-cost leisure goods.

How Is This Research Useful to Practitioners?

Industrialization produced a change in labor demand from activities that were substitutes for capital to activities in which capital and labor were complementary. Instead of using labor as a tool by itself, workers were managing machines, and these workers had to be supervised. Furthermore, a new area called “product development” required labor input as well. Hence, the authors conclude that the impact on total labor demand has been limited. Another change was the reduction in transactions based on personal relationships because the introduction of institutions, such as banks and insurance companies, reduced the need for interpersonal transactions.

The Industrial Revolution in the United Kingdom resulted in less demand for some types of labor, such as that used in the low-capital and low-productivity domestic cotton industry. But the effect was limited to just one generation because workers moved to other industries or emigrated to North America. Although the advantages of technological progress are questioned during periods of economic hardship, such as the Great Depression, economists today agree that although the short-term effects may not benefit everyone, the longer-term effects improve the well-being of workers.

The authors consider the moral implications of technological progress, specifically with regard to the alienation of labor. Interestingly, this fear was not solely a concern of such left-wing revolutionaries as Karl Marx, who described workers as being treated like physical subjects. Adam Smith also warned that the side effect of performing repetitive, dull tasks was a loss of intelligence. Supporters of slavery in the south of the United States would have said that the wage-slavery system in the north of the United States was not much different from the form of slavery they sanctioned.

Making predictions about the future of technology and the impact on the economy is difficult. The authors are skeptical that the world is approaching a limit on technological progress. For example, the growth of global scientific networks provides opportunities for the development of new tools and products. The authors conclude that they expect a future in which there are more inexpensive basic goods (food, clothing, and housing) and more leisure time, with increased levels of income inequality. Leisure-related investments and boutique products (which only the new upper class can afford) might be interesting areas for future investment.

How Did the Authors Conduct This Research?

The authors use a wide range of literature to create their story line and support their conclusions.

The effect of technological progress on wages varies across regions and economic classes. It remains unclear at which point during the Industrial Revolution the benefits for the economy as a whole trickled down to the working class. In the early years of industrialization, working conditions were poor and child labor was common. Because factory work required discipline, these conditions resulted in a lack of variety and personal control. The leveling of fines and locked factory gates removed the flexibility that workers had enjoyed and resulted in a clear separation between work and home.

Today, there seems to be more concern about the lack of a clear separation between work and leisure. Less clear separation between work and leisure also requires more flexibility from workers and results in an increase in contract firms, which match employees to jobs, and in nonemployer businesses (the sharing economy), such as Uber and Airbnb. Greater flexibility could result in more gender equality in earnings and choices regarding work location but raises the expectation that employees will always be accessible and imposes uncertainty for longer-term planning.

Machines developed during the Industrial Revolution were substitutes for labor strength, not intelligence or senses. In the future, when artificial intelligence can attain these characteristics, the economic impact of technological progress might be different.

John Maynard Keynes predicted in the 1930s that future generations would struggle with how to occupy their leisure time because trends had shown a significant decrease in working hours. The increase in leisure time today has resulted in a reduction of stress, but it also could limit people’s attainment of self-realization through a career. Furthermore, technological progress has allowed leisure to be attained at low costs, which makes it available for many people. But the increase in leisure time is unevenly distributed as illustrated with the US population: Those with less education have increased their leisure time, whereas those with more education are working the longest hours. Part of this pattern is the result of higher unemployment among the less educated because their jobs are easier to automate.

Abstractor’s Viewpoint

The authors provide a complete historical overview of the effects of technological progress on different aspects of labor. They assess the effects in both a historical context and the current work environment as well as compare the effects in North America and the United Kingdom. An interesting change was the decrease of work/life flexibility during the Industrial Revolution and then the increase of flexibility in the current age. The authors clearly outline humanity’s struggle with technological progress and note that some aspects of labor have been negatively affected. Nevertheless, the overall impact of technological progress has been very beneficial to society as a whole.

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