“Every leap of civilization was built on the back of a disposable workforce, but I can only make so many…” – Niander Wallace, Blade Runner 2049
A portfolio for the future
For many, the ever more apparent global economic upswing serves only to temporarily obscure the complications that will blight our future. They fear that the implacable march of the robot workforce, and artificial intelligence, will further displace and disadvantage the already disadvantaged. The electoral upheaval of the last few years, in some part a function of the already widening gap between cities and de-industrialised heartlands, therefore represents a mere taste of what is to come. Below we explore what lessons we can infer from past technological change, and how investors can benefit.
Winners and losers
It’s worth reminding ourselves that this isn’t the first time humankind has squared up to significant technological change. 150 years ago, Britain went through its own period of technological upheaval in the form of the first Industrial Revolution. The widespread adoption of new technologies ranging from the steam engine to the spinning jenny led to a radical transformation of Britain’s socio-economic structure. As with today, there were visceral reactions against technological change, as the threat of mass unemployment and lower wages loomed large.
However, this is an area where economic logic and historical experience line up nicely. Theory dictates that while technological change may lead to workers being displaced in one industry, this doesn’t necessarily lead to net job losses for the economy in aggregate. If the workforce is flexible enough, redundant workers will eventually be re-employed in other industries, and the economic “pie” should have meanwhile expanded, as the new technology allows the available workforce to do more with less.
When it comes to wages, the standard economic framework suggests that the long-run wage rate for a worker is a direct function of his/her productivity. Therefore, productivity-enhancing technologies should serve to increase, rather than depress, real wages in an economy. The UK’s own historical experience attests to this – average real wages were stagnant throughout much recorded history; it wasn’t until the Industrial Revolution that real wages (and living standards as a consequence) began to grow consistently.
However, real wages only tell us part of the welfare story, and hence are of limited value in fully assessing the pros and cons of technological change. Innovations of past and present have given us finite beings the precious gift of time. Not only has both our median and average life expectancy soared, but what we can do with that time – where we can go, how we can communicate, the choices we have available – has multiplied out of recognition. As an illustration, imagine a person who arrives home from work at 7pm, puts a load of clothes into the washing machine, dishes in the dishwasher, orders a dinner from a local restaurant and then spends half an hour researching and booking an overseas holiday. By 8pm, dinner arrives, ready to be eaten on a clean plate, the laundry is done, and a trip to some far flung country is organised and paid for. How long would all this have taken 100 years ago? Even 20 years ago? These massive time savings are not only available to the privileged elite, but anyone with a dishwasher, washing machine and internet access.
Even taking these less tangible benefits of technological change into account, we are safe to argue that related outcomes varied substantially between industry and worker groups. The mass adoption of the spinning jenny, for example, led to mass unemployment among hand weavers not just in Britain but in its colonies as well. New and evolving technologies such as artificial intelligence and robotics would very likely come with similar side-effects – the importance of social safety nets, continually refined to ensure the adaptability of a workforce faced with these ever changing job requirements, cannot be overstated. At the same time, a society’s social contract must be made flexible and robust enough to ensure that the gains from innovation are optimally distributed. The relevant point here is that democratic societies have the means to ensure that the benefits of technology are widely shared by the many rather than just the privileged elite – we aren’t yet pre-destined for a Blade-Runner-style dystopia.
We are of course unable to see how the workforce will evolve amidst these threats to large chunks of existing employment. New jobs and industries are continually popping up that our forebears would probably not be able to recognise as gainful employment – from app design to, dare we say it, investment strategy. We see no reason to think that this won’t continue to be the case.
For investors, if this cycle has reminded of us of anything, it is that even amidst all kinds of apparent structural deformities, growth is the normal setting for the world economy. Capital markets can oscillate wildly around this central trajectory, but over time the forces of growth and inflation tend to be harder for asset prices to resist. The ever-changing political discourse can be influential here, but again most of the time it is simpler than that; the companies that will continue to dominate investment portfolios are forged in the white heat of global competition. They have generally survived and flourished due to their ability to find a way to adapt and grow profits under a variety of political and economic regimes. Some were of course tougher than others – we would not welcome a return to the 1970s. However, more often than not, continuing investor faith has been handsomely rewarded since the US railroad companies came cap in hand at the end of the 19th century.
The exchanges on which these companies are quoted reflect this ever-changing world as it happens. A US index of stocks that was dominated by railroad barons at the end of the 19th century is dominated now by technology titans, selling products and services that would inspire a religious terror in many of our ancestors.
For investors looking to benefit from these widely feared advances, we’ve noted before that the global technology sector represents a type of focused call option on future human productivity – one that we still feel is attractively priced at the moment. However, more broadly, innovation and its adoption is the ultimate force that drives corporate profits higher in aggregate – essentially a bet on the inventors of new technology and its wider adoption. The stock market indices will adapt to the brave new world, and reward the faithful.