CHAPTER 2: LITERATURE REVIEW
2.7. The Economic Consequences of Adopting Automation Technologies
2.7.1. Inequality and the Return on Capital
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The fundamental characteristic of an automation technology is that it allows for the set of tasks within the production process that can be performed by capital to be expanded (Acemoglu &
Restrepo, 2019). With time this will reduce labour demand and place downward pressure on employment and wages (Lane & Saint-Martin, 2021:30). Furthermore, due to the displacement effect increasing output at the same time, the share of labour in national income will reduce, effectively decoupling wages from productivity gains (Lane & Saint-Martin, 2021:30).
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return on capital can be higher than economic income and output rates, indicating that once capital is constituted it may reproduce itself faster than output increases (Piketty, 2014:571).
In response, economic growth can be encouraged by investing in knowledge creation, education, and non-pollutive technologies. However, these initiatives will not raise growth rates above 4-5% per year, and Piketty (2014) predicts it is likely that the return on capital will be higher than income and output growth rates for most of the 21st century (Piketty, 2014). In contrast, Simon Kuznetz believes that the balancing forces of technological progression, competition, and growth will, in later stages of development, result in reduced levels of inequality (Piketty, 2014:1).
Traditionally, high levels of capital concentration were predominantly a consequence of inherited wealth and its accumulative effects, as the return on capital was often prodigious.
But, in the years that followed the end of World War II, inherited wealth lost much of its importance and, for perhaps the first time in human history, efforts through study and work became a surer way to reach the top of local hierarchies. From this process the term democratic modernity was born. It implies that inequalities which are based upon an individuals’ talents, skills, and efforts are more justified than real income inequalities (Piketty, 2014:241).
The total income inequality in any society is equal to the sum of labour income equality and capital income equality. A society will become more egalitarian as these two factors become more equally distributed (Piketty, 2014:242), with capital income inequality always having a greater influence than labour income inequality (Piketty, 2014:244).
Labour income inequality is the result of mechanisms that include the combination of the demand and supply for different skills, the educational system, along with various other institutions that influence labour market operations and determine wage outcomes (Piketty, 2014:243).
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Capital income inequality is the consequence of a combination of processes which include investment and saving behaviours, gift giving, inheritance, and other financial and real estate market operations (Piketty, 2014:243).
The rise and adoption of socially liberal ideologies throughout the 19th and 20th centuries lead to more societies striving towards primarily egalitarian ideals. This pursuit can also be partly attributed to the industrial revolution which occurred in the late 18th century up until the mid- 19th century. Subsequently, governments worldwide started rapidly increasing investment in the general education, welfare, and health of their populations as they needed able and healthy labourers to design new technologies and work in production lines, and soldiers to fight in war trenches (Harari, 2019:52).
However, the large-scale adoption of modern automation technologies may potentially threaten these egalitarian ideals. Today, digital technologies are prone to generate demand- side economies of scale (via network effects), i.e., consistent with Metcalfe’s law, the value that consumers extract out of digital goods networks increases as the number of consumers (active users) raise. Even though this process grows economic activity, it can also lead to increased market concentration through the rapid formation of monopolies (Amazon, Facebook, YouTube). Demand-side economies of scale are also considered more significant than traditional supply-side economies of scale, wherein costs decrease with higher output (Fernández-Macías, 2018:12). These engendered oligopolistic winner-takes-all markets are partly the consequence of digital technologies that have become ever more accessible (Fernández-Macías, 2018:16).
Furthermore, the demand for low-skilled labour is contracting faster than the demand for high- skilled workers is rising (Brynjolfsson and McAfee 2012), suggesting that companies are becoming increasingly able to achieve similar or higher productivity and output rates with a smaller workforce. Firm profits therefore accrue to the owners of the companies’ capital and a smaller group of highly skilled labourers, further aggravating existing levels of inequality (Brynjolfsson & McAfee 2014; Le Roux, 2015:3).
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To take full advantage of technological developments, higher levels of human capital are required to ensure newly adopted technologies are utilised effectively. The skills required to make efficient use of a new technology are generally accompanied by a wage premium, and in response, the demand for low-cost access to higher education will increase (Le Roux, 2015:3). Considering the present levels of high unemployment and inequality, along with low levels of (investment in) human capital, this is particularly relevant in the South African context.
The impact digital automation has on inequality must not be underestimated as there are no reasons to believe that the outcomes of the introduction of automation technologies (accrued profits, displacement effects, productivity effects, generation of new labour-intensive tasks and occupations) will be distributed evenly across different sectors, regions, industries, and socio- demographic groups (Lane & Saint-Martin, 2021:32).
Similar to how changes in the demand for certain groups of labourers can bring about inequality, so too can changes in the demand for different production factors. When a technology replaces human input in a production process whilst complimenting other production factors, such as land or automation capital, the owners of the production factors stand to gain that which labourers have lost (Lane & Saint-Martin, 2021:41).