The Lights in the Tunnel Automation Accelerating Technology and the Economy of the Future_3 pot

Acceleration / 45 CopyrightedMaterial–Paperback/Kindle available @ Amazon Astheir computers got fasterand faster, the quants wereabletodomoreandmore.Theycreatednewexotic derivativesbasedonstrangecombinationsofthings.They could magnify the reward (and risk) of a security. They could invertit,soyougainedifthesecurityfellinvalue. Theycouldeventrytocapturetherewardifaninvestment increasedinvalue,buteliminatetheriskifitwentdown— oratleasttheythoughttheycould. Ashousingpricescontinuedtoclimbduringthebub- ble, the subprime loans were packaged into mortgage- backedsecuritiessothattheycouldbetradedlikebonds. This had become standardpracticeformortgages. How- ever, in addition to that, new types of derivatives were createdbasedonthepackagedsubprimeloans.Mostnot- able were “collateralized debt obligations” (or CDOs), which attempted tosiphonoffthelowest risk loans and repackagethemintoasecuritythatcouldbemarketedasa high quality investment. These new derivative securities werethensoldtobanksandfinancialinstitutionsallover theworld,withtheunderstandingthattheywereverylow riskinvestments. Whenthesubprimeborrowersstarteddefaulting,the valueofthemortgage-backed securitiesplunged,andthe derivativesdidnotworkasexpected.Inmanycasesitwas difficultorimpossibletocalculatetheirvalue.Inaddition, financialinstitutionshadengagedinmanyothercomplex interrelationships based on exotic derivatives that were intendedtohelpmanagevariousrisks.Allthisledtoun- certaintythatcausedvaluestofallevenmore. Theresult THE LIGHTS IN THE TUNNEL / 46 CopyrightedMaterial–Paperback/Kindle available @ Amazon wasthedownfallofBearStearnsinMarch2008,andthe globalcrisisthatfollowed. The point of this, of course, is that it would have beenimpossibletocreatetheseweirdderivativeswithout accesstoverypowerfulcomputers.Ifthesubprimecrisis hadoccurredinearlieryears,itwouldcertainlyhavebeen a far smaller event. It’s worth noting that the meltdown startedin2007.Aswearenowin2009,weknowthatthe powerofthecomputersonWallStreetdeskshasroughly doubled,evenasthecrisishascontinued. Exoticderivativesare,ofcourse,nottheonlyexam- ple of the dramatic impact of advancing computer tech- nology on financial markets. On October 19, 1987, the stock market fell a staggering twenty percent in a single day.Therewasreallynospecificnewseventorotherfac- tor thatmighthaveexplainedthesuddendrop. Manyof the people involved in quantitative technologies on Wall Street at the time believe that the crash may have been precipitated by computer programs that traded autono- mouslyinthehopeofproviding“portfolioinsurance”for biginvestors. Asthisis beingwritten,articlesare appearinginthe pressregardingtheuseofextremelyfastWallStreetcom- putersthatallowtransactionsto beexecutedinfractions ofasecond. Thispractice,known as“flashtrading,” has quicklyattractedthenoticeoftheSecuritiesandExchange Commissionandmayresultinnewregulation. Astheseexamplesshow,wecanexpectthattherate ofchangeandthevolatilityofnearlyeverythingaroundus will be somehow amplified by the incredible increase in Acceleration / 47 CopyrightedMaterial–Paperback/Kindle available @ Amazon ourabilitytocompute.Wecanalso certainlyexpectthat thisdramaticallyexpandedcomputationalcapacitywillbe focusedincreasinglyonautomatingourjobs. Laterinthischapter,we’lllookinmoredetailatsev- eral specific advancing technologies and how theymight impact the job market and the economy in general. But first,let’snowturnfrommachinestohumanbeings.Isit possiblethatwecansomehow“outrun”computerssowe canallkeepourjobs? Diminishing Returns In1811,EnglandwasinthemidstoftheIndustrialRevo- lution. That year, a group called the Luddites formed in Nottingham. The Luddites consisted of skilled textile workers who felt threatened by the introduction of me- chanical looms that could be operated by low-paid, un- skilledworkers.Theytooktheirnamefromamannamed NedLudwhohadreportedlydestroyedoneof thesead- vanced looms. The Luddites’protests grew into outright riotsanddestructionofmachines.TheBritishgovernment finallyenactedharshmeasuresandthemovementcameto an end in 1812. Since then, the word “luddite” has, of course,evolvedintoasomewhatderogatorytermforany- oneopposedtotechnological progressorillequippedto dealwithnewtechnologies. Economistsgenerallydismisstheideathatadvancing technology will ever permanently displace humans and thereby continuouslyincreasethe unemployment rate.In otherwords,mostmainstreameconomistsfullyacceptour assumption at the beginning of this chapter. (Not the THE LIGHTS IN THE TUNNEL / 48 CopyrightedMaterial–Paperback/Kindle available @ Amazon “2089” version; the never one.) Those who have raised concerns in more recent times are dismissed as “neo- Luddites.” Economists have also formulated something calledtheLudditefallacytohelpexplainwhytheconcerns of neo-Luddites are wrong. We’ll look at this in a little moredetaillater. Obviously, England is now a modern country, and the vast majority of workers still have jobs. The British peoplearenowfarbetteroffthantheywerein1812.So weretheLudditeswrong?Orjusttwohundredorsoyears tooearly? Weknowthattechnologyhasadvancedtremendously since1812.Whatabouthumanbeings?Haveweadvanced aswell? In termsof basicbiology, we areessentially un- changed. Little if any biological evolution takes place in onlytwohundredyears.Still,doesn’titseemlikelythatthe average British worker today is far more capable than a typicalworkernearlytwohundredyearsago? Let’simaginewhatlifewaslikeforanaverageEnglish personin1812.Asitturns out,it’seasytoget somein- sightinto this becauseCharlesDickens was bornin that exactyear.Dickensdrewonhisownexperiencesandob- servationsasachildwhenhelaterwrotehisfamousno- vels.Hisdescriptionsofaharsh,poverty-strickensociety and an environment made filthy by the soot from coal- burningindustryarewellknown. InOliverTwist,Dickensdescribesthemiserablelifeof anorphanboyduringtheIndustrialRevolution.Herehe expresseshisfeelingsasthestarvingOliverisgivenscraps ofmeatthathadfirstbeenofferedtoadog:“Iwishsome Acceleration / 49 CopyrightedMaterial–Paperback/Kindle available @ Amazon well-fed philosopher, whose blood is ice, whose heart is iron;couldhaveseenOliverTwistclutchingatthedainty viands the dog had neglected.I wish he could have wit- nessedthehorribleaviditywithwhichOlivertorethebits asunderwithalltheferocityoffamine.” 15  Clearly, the average British worker is far better fed today.Weknowtheenvironmentisalsomuchcleanerand more healthy. The literacy rate in Britain today is pur- portedtobeashighas99percent.It’shardtoknowwhat itwasin1812,butaround50percentmightbea decent guess—andofcourse,theabilitytoreadandwritewould havebeenhighlyconcentratedintheupperclasses. In 1812, there was essentially no public education available in England. The government did not begin to investsignificantlyineducationuntil1870,andattendance was not compulsory until 1880. Obviously, the average workertodayisfarbettereducatedthanheorshewould havebeenin1812. Givenallofthis,wecansaythat,duetodramaticim- provementsinlivingconditionsandeducation,anaverage worker today is certainly more capable and able to per- form more complex, high-level tasks than a worker in 1812.Buttherealquestionis:canweexpectthatkindof improvementtocontinueinthefuture? Thefollowinggraphshowswhatanaverageworker’s abilitytoperformcomplextasksmightlooklikeoverthe pasttwohundredorsoyears.Thegraphicisjustanintui- tiveestimate.Itisnotbasedonanyrealdata.However,I suspect that most people would agree with the general shapeofthegraph,andthatisallthatreallymatters. THE LIGHTS IN THE TUNNEL / 50 CopyrightedMaterial–Paperback/Kindle available @ Amazon  Average Worker’s Ability to Perform Complex Tasks         I’vechosenanarbitrarypointonthegraphtoindicate theyear1812.After thatyear,wecanreasonablyassume thathumancapabilitycontinuedtorisequitesteeplyuntil we reach modern times.The steep part of thegraph re- flectsdramaticimprovementstoouroveralllivingcondi- tionsintheworld’smoreadvancedcountries:  Vastlyimprovednutrition,publichealth,andenvi- ronmental regulations have allowed us to remain relativelyfreefromdiseaseandreachourfullbio- logicalpotential.  Investmentinliteracyandinprimaryandsecond- aryeducation,aswellasaccesstocollegeandad- vancededucationforsomeworkers,hasgreatlyin- creasedoverallcapability.  A generally richer and more varied existence, in- cludingeasyaccesstobooks,media,newtechnol- ogies and the ability to travel long distances, has probably had a positive impact on our ability to comprehendanddealwithcomplexissues. Luddites riot - 1812 Time Average Human Capability Acceleration / 51 CopyrightedMaterial–Paperback/Kindle available @ Amazon Thedegreeofimprovementthatwehaveseen,how- ever,islargelyrelatedtothelowlevelatwhichthingsgot started.In educationinparticular,weseemtohavehit a ceiling—andmayactuallybeseeingsomeevidenceofde- cline.IntheUnitedStates,themediaisrepletewithacon- tinuingparadeofstoriesabouttheongoingcrisisinboth primaryandsecondaryeducation. IntheU.S.,wearenotevensurewhattheactualhigh schoolgraduationrateis.Apaperpublishedin2008bythe NationalBureauofEconomicResearch 16 pointsout that “Dependingonthedatasources,definitions,andmethods used, the U.S. graduation rate has been estimated to be anywherefrom66to88percentinrecentyears—anasto- nishinglywiderangeforsuchabasicstatistic.Therangeof estimated minority rates is even greater—from 50 to 85 percent.”ArecentlypublishedstudybytheNationalCen- terforEducationStatistics 17 showedthatover14percent ofadultsintheUnitedStatesmaylackbasicreadingskills. Itseemsselfevidentthatifasmanyasathirdofourchild- renareunabletograduatefromhighschoolandupto1/7 of ourpopulation fails to achieve basic literacy, then we arenotsucceedinginsignificantlyadvancingthecapability oftheaverageworker. Even the earlier trends toward improved nutrition andpublichealthhave,inmanyways,turnedagainstus.In mostWesterncountrieswenowhavearagingobesityepi- demicamongtheadultpopulation,and—mostdisturbing- ly—alsoamongchildren.Whileadvancesinmedicinecon- tinue,manyofthesebreakthroughsseemtoprimarilyim- pact the health of retirement-age people. The overall THE LIGHTS IN THE TUNNEL / 52 CopyrightedMaterial–Paperback/Kindle available @ Amazon healthofouryoungerpopulationisstagnantor, insome cases,perhapsevendeclining.Inrecentyears,oneofthe fewpositivestoriesinthepublichealthandnutritionarena hasbeenthedeclineinthesmokingrate. While the last graph was just an estimate, here is anothergraph 18 thatisbasedonactualdata:  TheaveragemathscoreonSATtestsadministeredby theCollegeBoardhasremainedessentiallyflatforthepast 35years.Thegraphforaverageverbalscoreslooksvirtual- lyidentical.College-boundstudentsthattaketheSATare, ofcourse,probablyaboveaverageinturnsofworkcapa- bility.Itseemsprettyclearthat,intermsofincreasingthe capabilityofouraverageworkers,wehavealreadypicked thelow-hangingfruit,andwearestrugglingjusttomain- tainthingsattheircurrentlevel. Atthispoint,weshouldhaveaprettygoodsensethat if computer technology continues to progress at the ex- Average SAT Math Scores 1972-2007 0 100 200 300 400 500 600 700 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Year Average Math Score Acceleration / 53 CopyrightedMaterial–Paperback/Kindle available @ Amazon traordinaryratewehaveseenintherecentpast,thenhu- man workers will not be able outrun machine capability. Youcanseethisvisuallywiththetwographsbelow: Human Capability v. Computer Technology            Whilethesetwographsarenotbasedonanyspecific data,wehaveshownprettyconvincinglythattheirshapeis moreor lesscorrect.Weknowthatthelower(computer technology) graph currently lies somewhere below the human average capability graph. And we know that the technology graph is increasing at an exceptionally fast geometric pace.Whatelsedo weneed toknow? Clearly, thelinesseemverylikelytointersectatsomepointinthe future. *    * IfyouarefamiliarwiththewritingsofThomasRobertMalthus,this graphmaylookfamiliartoyou.In1798,MalthuspublishedhisEssays on thePrinciple of Population in which he argued thatgeometrically in- creasinghumanpopulationwouldoutstripsociety’sabilitytoproduce food. In Malthus’ version of the graph above, the top (diminishing returns)linerepresentsfoodproduction,whilethebottom(geometric) Capability to Perform Routine Jobs Computer Technology Human Workers Time THE LIGHTS IN THE TUNNEL / 54 CopyrightedMaterial–Paperback/Kindle available @ Amazon The continuing advance of computer technology alongageometricallyincreasingpathandthediminishing returnsfrominvestmentineducationseemtomakeavery strong case that the average worker—and perhaps many above-average workers—are in clear danger of having theirjobsautomated.Next,let’slookatsometrendsand specifictechnologiesthatshowexactlyhowthisislikelyto happen. Offshoring and Drive-Through Banking Automationandoffshoreoutsourcinghaveoneimportant thing in common: they are both driven by technology. Obviously,itisthevastimprovementinourcommunica- tionandinformationtechnologiesthathasenabledmany service-oriented jobs to be relocated to low-wage coun- tries. WhenIwasgrowingupinthe1970s,Ioftenhadthe opportunitytoseedrive-throughbankinginaction.This, ofcourse,wasbeforetheintroductionofATMmachines. Atypicalbankdrive-throughwassetupwithtwoorthree lanessothatmultiplecustomerscouldbehandledatone time. If you used the lane closest to the building, you   linerepresentspopulation.Hebelievedthatthetwolineswouldinter- sectandresultinwidespreadfamine.Malthus,ofcourse,turnedoutto be wrong largely because he failed to anticipate the technological progressthatwouldoccurinfoodproductionandprocessing.Sodoes that mean the graph above is just another “Malthusian” prediction whichisalsodestinedtobewrong?Onethingtokeepinmindisthat Malthusinessenceplacedhisbetagainsttechnology;thegraphabove assumes exactly the opposite. We should also acknowledge the un- happypossibilitythatMalthusmightstillbevindicatedinthefuture, especiallyifclimatechangehasahighlynegativeimpactonagriculture. [...]... continues to drive relentlessly toward the total elimination of jobs What we are seeing is clear empirical evidence of the geometric increase in the power of computer technology Traditional Jobs: The “Average” Lights in the Tunnel All the attention being focused on new jobs being created by technology tends to distract us from the reality that the bulk of the job types in our economy have remained... being shipped to India and to other countries This trend will only grow, and as I have pointed out previously, where offshoring appears, automation is often likely to eventually follow The automation of software jobs is tied closely to the field of artificial intelligence When most of us think about artificial intelligence, we are quickly sidetracked into the world of science fiction We think of the. .. game of chess requires creativity within a set of defined rules, then could not something similar be said about the field of law? Currently there are jobs in the United States for many thousands of lawyers who rarely, if ever, go into a courtroom These attorneys are employed in the areas of legal research and contracts They work at law firms and spend much of their time in the library or accessing legal... with the teller through a standard cash drawer If you were in one of the lanes further out, however, things were far more interesting You sealed your money, paperwork, checkbook, etc into a plastic cylinder and then dropped the cylinder into the provided opening The cylinder then traveled through an underground tube— propelled I think by some sort of vacuum mechanism— until it reached the teller She then... for human interaction Currently, U.S demand for radiologists continues to expand because of the increase in use of diagnostic scans such as mammograms However, this seems likely to slowas automation and offshoring advance and become bigger players in the future The graduating medical students who are now rushing into radiology for its high pay and relative freedom from the annoyances of dealing with... Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 68 knowledge worker represented the best path to a prosperous future The advent of offshoring has increasingly called this proposition into question Today, offshoring is impacting knowledge workers across the board Jobs in fields such as radiology, accounting, tax preparation, graphic design, and especially all types of information technology. .. technology. ”19 This is one of the reasons that I did not include offshoring in our tunnel simulation We could have simulated an offshored job as an average light flickering out in one part of the tunnel and then another somewhat dimmer light appearing elsewhere However, our simulation was intended to show what would happen over the long run as automation gradually increased As technology continues its relentless... direction And perhaps they are touching or somehow entangled with other objects Building and programming a robot that is able to recognize the sunglasses in any possible configuration and then Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 66 pick them up, fold them and put them back in their case is so difficult that we can probably conclude that the housekeeper’s... out of the ordinary, such as a tumor It is also much easier and more profitable to partially automate the radiologist’s job There would be little point to building a housekeeping robot that could only clear up some of the clutter in a home On the other hand, if you can automate 20 percent of the radiologist’s more routine work, then you can immediately eliminate one out of five radiology jobs None of. .. represented the leading edge of what was technically possible Drivethrough banks provided a useful convenience to customers and also often offered extended hours of operation The point I am making here is that offshoring is really a precursor of automation Offshoring is what you do Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 56 when you have some technology, . Drive- throughbanksprovidedausefulconveniencetocustom- ers and alsooftenofferedextendedhours of operation. The pointIammakinghereisthatoffshoringisreally a precursor of automation.  Offshoring is what you do THE LIGHTS IN THE. voice -automation technology. ” 19  Thisisone of the reasonsthatIdidnotincludeoff- shoring in our tunnel simulation.Wecouldhavesimulated anoffshoredjobasanaveragelightflickeringout in one part of the tunnel and then. in some cases,perhapsevendeclining. In recentyears,one of the fewpositivestories in the publichealth and nutritionarena hasbeen the decline in the smokingrate. While the last graph was