The Deflationary Nature of Robotics
Robotics is going to change the world in ways we never imagined.
When these start to enter the economy on a large scale, things will be radically different. Before diving it, we have to be clear there is no forecast this will happen immediately. While the industry is moving at fantastic speed, we are still in the infantile stages.
That means we are likely looking at 5 years before we see mass production reached. By 2027, a guess of a few million robots makes sense, depending upon when the exponential progress point starts to slow. If it carries on, this will push the production back even further.
With that out of the way, get ready for deflation (technological) like you never imagined.
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Technology Is Deflationary
The interest in robots is the fact that is could, eventually, replace labor. With many countries facing demographic issues, there is obviously a built in need.
Most people follow the idea of a robot replacing a human, putting forth a cost savings. This is pretty straight forward.
Here is where people can embrace the most evident aspect. If we remove the labor rate, replacing with a robot that cost a dollar or two an hour, we could see how the cost of producing something is drastically reduced.
The same is true in the services realm.
What is a robot could mow and edge your lawn? How much more cost effective would this be?
At this point, it is impossible to predict where all this will go. The point to grasp is that replacing humans will provide a cost savings for the product or service.
Naturally, we cannot have a discussion about technology without having some exponentials.
Localized Production
The 1980s and 1990s saw what most refer to as globalization. This was the outsourcing of manufacturing to countries with lower labor costs, primarily China.
Here we are back to discussing the above scenario.
If China reduces its labor rate by replacing humans with robots, the products would cost less to produce.
The question then becomes, what other cost savings are there.
One of the things about building stuff in China is that it has to be shipped. For something like semiconductors, it isn't a big deal. When the product is an automobile, that can get a bit costly.
Robotics is going to allow for the production of goods on a localized basis. Why pay for shipping? It is easier to set up a plant near where the products are consumed as opposed to the other side of the world.
Removing the majority of transportation costs is extremely deflationary. It is one of the benefit of localized production (most likely regionally).
Supply Chain
Our tendency, unless we work in manufacturing, is to look at a product as a single entity.
The reality is most products are a series of smaller products. In other words, some company is selling its product to the manufacturer.
Using the automobile example, someone makes the tires. Another company does the seats. Windows are yet a third. Spark plugs come from a 4th entity.
You get the point.
What happens when each of these products experiences something similar as to what was describe above? The net result is these companies are able to offer their product for less, further reducing the cost.
Of course, this is compounded if dealing with something that is on its own S curve like battery technology.
Department Elimination
The piece that I want to cover here is auxiliary employees who are no longer necessary. At a minimum, these departments could be reduced.
For example, if the majority of the company is robots, do you need an extensive HR department? The answer is no. You also could likely get rid of the majority of legal, at least those who deal with worker related issues. Those who write policy and are responsible for overseeing the implementation can be gone. Robots are simply programmed with whatever is needed.
Consider the costs that companies incur to maintain people. Heck, even the coffee service can be eliminated.
Just think in the savings from not having to buy so many safety glasses since, after all, robots do not have eyes.
All of this means organizations are going to be much leaner in spite of having massively higher output. Costs such as healthcare, workman's comp, and other benefits are eliminated.
Ultimately, all of this makes many products commodities. The net result is massive downward price pressures.
Eliminating the labor costs are just one part of the equation. As we can see, there are many others.
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The danger that I see is that all that increased productivity and profitability goes to the 1% as prices of products and services do not decrease and fewer people have full time employment and disposable income. Should be an extremely interesting next few decades.
100% agree with this point. These are great talking points but if there's one thing we know, it's that the upper echelon of humanity wants to stick it to the people who are not as fortunate as they are in any and every way possible.
Yeah, we've seen it already... productivity has risen by so much over the last few decades and yet prices are either steady or rising... and the minimal wage has barely budged.
The minimum wage concept has been parasitized for sure. It's used now as a tool to push inflation to even higher heights than it should be. Those pushing for 15$, 20$ or higher for the minimum earnings are short sighted, thinking that it will lead to better outcomes. It also hurts small businesses because only the bigger companies can shoulder the burden of an increased wage.
It goes back to corporate greed, ultimately. The companies make more and more record profits, yet cry poor because of that same parasitization of the economic process. We need to somehow force them to get back to a sound money concept, where debt isn't encouraged. So many other things to say along this direction!
Maybe... but the minimum wage has been stagnant in the US for decades but inflation has been continuously rising. I would have guessed that corporate profit contributes more to inflation than the minimum wage rates, but I honestly don't know.
Honestly... if it were up to me... I'd just end the stock market.
Corporations doing everything possible to increase shareholder value means they are highly incentivized to keep wages as low as possible, costs as low as possible, avoid paying as much tax as possible and lobby governments to produce policy that keeps them extremely profitable.
Of course though, now that pensions barely exist and everyone's retirement is linked to the stock market, it doesn't really seem possible - and it would be harder for industry to raise money to build new factories, etc... but I'm sure we HAVE to come up with a better solution than we have now because it's completely unsustainable to keep going in the direction of ever-increasing wealth inequality.
This is the problem. The problem is not corporations themselves. The problem is, whenever government exerts control over the business sector (any business sector), it is just a matter of time before corporations co-opt the decision-making power and get the government to enact regulations that entrench the status-quo corporations and lock out would-be competition -- a process known as regulatory capture.
Here's a potential solution I encourage my students to evaluate and critique: transfer all regulatory power and authority in the U.S. to the individual states.
Under that scenario, if Jeff Bezos wants to get legislation enacted to hinder all would-be competitors, he has to bribe (or otherwise influence) 50 state legislatures and 50 governors, instead of just a handful of powerful D.C. politicians.
All it takes is one hold-out state to provide fertile ground for a would-be competitor to take root. Under the current system, regulatory capture is endemic and impossible to stop.
Oh. That's interesting...
I've never thought of giving the states control like that... I definitely can see how smaller industry entrants could thrive in individual states... and I guess to a degree the US already has that with several states/cities banning ridesharing apps for example.
I guess the potential unintended consequences it could make the US less efficient for industry that gets economies of scale from operating nationally... a railroad company might get all the approvals to run East to West, build all the infrastructure, and then a competitor gets them banned in a middle state which disrupts the entire business case.
Incumbents might have an advantage because they have the resources to lobby 50 states whereas a new entrant wouldn't have the resources to compete.
I know that monopolies and oligopolies are the ideal scenario for corporations, and it's hard to think through all the consequences to see if individual state laws would help or hinder that process... I think I'll have to sit with it a while... I imagine industries would be affected very differently.
This is already a risk under the current system. California already enacts stricter standards on many products, such as automobiles.
The problem is when the federal government enacts anti-competitive regulations, there is no "safe haven" free from those anti-competitive regulations.
With a decentralized regulatory system (i.e. federalism) it only takes one holdout state to 'prove' to the others that their policies are substandard. By contrast, a substandard federal policy never gets challenged, never gets 'proven' to be wrong, never gets repealed, never gets corrected, and the incumbents never get challenged.
Incumbents currently only have to lobby a handful (or fewer) of powerful politicians. And they don't have to spend 50x the resources to get their way. They merely have to threaten to spend some percentage more than their would-be competitors might be able to spend. And, whereas the would-be competitors are still merely "would-be" that means the potential competitors have very little to gain (with any degree of certainty) and thus have zero (or negative) incentive to wage any sort of lobbying fight against the entrenched incumbents.
Some states' laws will encourage competition, some will hinder it. The problem with the current system is that it is guaranteed to only hinder competition, because the powerful incumbents need only control a small fraction of the decision-makers to solidify their anti-competitive agendas.
And, to the casual observer, it is often made to look like the government is actually protecting its citizens, rather than harming them.
Here is how I teach my students to think about government regulation:
Truly free exchange by definition involves a willing buyer and a willing seller.
As long as there is no fraud or coercion involved in a given transaction, both parties believe they will be better off as a result of the transaction (otherwise one or both would just walk away).
Furthermore, as long as there are no negative externalities associated with the transaction (i.e. there are no costs to society that are not borne by the parties to the transaction) then society is better off as a result of the transaction having taken place.
Every government regulation STOPS willing parties from engaging in free exchanges that they would otherwise have participated in (absent the regulation). This means that each and every regulation is KEEPING society from being better off, UNLESS the regulation is effectively causing true negative externalities to be properly borne by the transaction participants.
As such, the ONLY justifiable regulations are those that properly cause negative externalities to be borne by the parties to the transaction. All other regulations merely stifle increases in societal well-being.
I don't trust the federal government to do a good job of performing that regulatory function.
I also don't trust a majority of state governments to do that either.
However, I do trust (at least moreso than any current alternatives) a system wherein individual states are forced to complete against each other, via their own regulatory policies, to attract and keep citizens and businesses.
This is absolutely fascinating and has definitely opened my eyes up to a new way of thinking about regulation.
How would you think about scenarios where states affect other states with their policy? For example, one state allowing factories to pollute an interstate river that negative affects farms in states downstream? Or one state allowing factories to pollute the air that negatively affects the health of the citizens of a neighbouring state?
I guess it would also mean that each state might need governing bodies like NHTSA? Or I guess states could basically say 'if this vehicle is fine in California or Texas or X, then it's fine in this state'?
My point about the incumbents was that they are usually richer than new entrants and could lobby 50 governors whereas a new entrant might not have the resources to do so... could this create monopolies? I guess I'm thinking of a scenario where something like a new airline wanted to operate in the US, or anything that needs to operate in multiple states to establish economies of scale.
At its core, pollution is a property rights issue. Those who have their life, liberty, or property damaged by another should have the right to adequate compensation. As such, robust property rights solves this issue at the individual level, i.e. the damaged parties recover their losses from the polluter(s). BTW, that property-rights solution by itself solves the negative externality problem. As the damaged parties receive compensation for the damages, the polluters are forced to bear the cost of their pollution and will either scale back production accordingly or find innovative ways to mitigate the pollution.
If there is a federal government, its core mission should be to simply ensure that the individual states do not interfere with each other's rights. This was the original intent of the 10th Amendment and the Commerce Clause.
10th Amendment:
Commerce Clause (Article I, Section 8, Clause 3):
The original intent of the Commerce Clause was obliterated by the Supreme Court in 1942 in Wickard v. Filburn. In that case, the Supreme Court ruled that the federal government's 'right' to regulate interstate commerce under the Commerce Clause extended to the activities of a small wheat farmer in Ohio even if his wheat was intended solely for his own consumption (i.e. as feed for his own animals and seed for future planting), because the combined (potential) effects of other small wheat farmers acting in a similar manner could (potentially) exert "a substantial economic effect on interstate commerce" by affecting the national price of wheat.
The result of that court case was unfettered and unrestricted regulation, by the federal government, of every aspect of commerce, thus shattering the restrictive intents of both the 10th Amendment and the Commerce Clause.
It is highly likely that states would form associations wherein they would mutually agree to certain standards, much the way they currently do with respect to transportation issues (see AASHTO) and reciprocity for handgun licensing and engineering licensing.
This is a perfect example. Every state would be able to regulate the aircraft that are allowed to operate within their respective borders. As such, regional associations would likely form, thus ensuring public safety without giving federal bureaucrats and politicians sweeping powers.
In fact, I have asserted to my students that the reason we do not have flying cars as a normative mode of personal transportation today is because of the FAA. I came to this conclusion after reading Where Is My Flying Car? by. Dr. J. Storrs Hall.
In the book, Dr. Hall quotes Federal Air Regulations Part 91, section 1443, paragraph (c) and points out the fact that
Under a federalist system, where each state sets its own air travel regulations, the state of Texas could set up its own regulatory system wherein would-be innovators with respect to flying cars could be relatively free to experiment with various ways to solve that need, and be assured of at least one extremely large regional market (i.e. the state of Texas) for their resulting product.
In fact, I have commented to my students that the state of Texas could revolutionize personal air travel by simply declaring a moratorium on all FAA regulations within the state of Texas, adopting their own set of common sense regulations, then broadly announcing and advertising that
Although no state has ever (to my knowledge) pre-empted federal regulations in quite this way, it is not all that different from the states of Colorado and Washington (in 2012) deciding to ignore federal criminal laws related to cannabis.
This all makes a lot of sense to me! Thank you.
One thing that super annoys me about the EPA (although there are many things) is that those small trucks common in Japan are not allowed in the USA because their not efficient enough for their wheelbase size - despite being way more efficient than vehicles much larger. I would love it if a state could simply ignore that regulation and then other states could access the data.
Same with flying cars. I don't want flying cars crashing into my house... but I'm perfectly happy with Texas allowing them and working out all the requirements to make them safe and trustworthy - giving other states valuable data before making their own decisions. That passage about the maintenance paperwork is absolutely fascinating... how much innovation has been lost/not followed because of similar such rules?
I wonder if this would actually make the American people less polarized as national political figures wouldn't matter as much as individual state Governors...
If the vast majority of all government power resides at the individual state level, and if citizens are free to flee oppressive states, then no oppressive state government will be able to remain so for very long.
I require my students to read the first 29 pages of Frederic Bastiat's essay The Law. In that essay, Bastiat says:
In other words, strip the government of its powers and limit its powers as Bastiat suggests, to "the collective organization of the individual right to lawful defense" then there is no reason to fight or struggle over who holds that power, as long as they are effective at combatting true injustice (i.e. violations of an individual's life, liberty, or property). That is because we will have stripped away the government's power to inflict injustice, i.e. to "legally" violate individual's rights to life, liberty, and property.
Bastiat refers to such government-initiated injustice as legal plunder, which he defines as follows:
I've never ever thought of USA states having so much power before and how that could play out. I really appreciate your time and effort with this... I'm not sure I deserve it, but I appreciate it.
Obviously it can be difficult for poorer people to flee an oppressive state, it does take resources to move interstate... but hopefully you'd see other states potentially enticing people away from oppressive states with resources or services to potentially help prove their success? Maybe?
You've mentioned using the law both individually and a state level a couple of times... how would people get fair trials? Assuming judges in a state are biased towards that state, or polluting factories have more legal resources than individuals, etc? The legal system is a huge part of this solution, but it doesn't necessarily always work fairly (at least not currently)... (which isn't a reason to not try this solution at all, I'm curious if there is a way to think about this).
Although this is true, it is the threat of people moving that will be the primary deterrent. States will know that their most productive citizens can leave and they will foster policies to protect against that. Poor people will thus benefit even if they can’t easily leave.
It’s similar to local grocery store prices. Most customers don’t go to multiple stores comparing prices, but the fact that some do and anyone can generally forces the local stores to maintain competitive prices.
Oh, that's a really good point. I keep forgetting to factor in the threat or the potential of eventualities to incentivize good outcomes.
This would be the same as under the current system. Trials are already local, due to the constitutional requirement for a “jury of peers”.
The difference being that if a state is known to have a corrupt judiciary, that will be reason enough for productive members of society to leave, thus creating a strong incentive to not have a corrupt judiciary.
It's true that trials are already local, but that's potentially part of the bit I'm struggling to get my head around...
In a scenario where factories in one state are polluting the waterways required by farms in downstream states, the crime of affecting the property/liberty of the farms would fought in the factories state... and if that state has corrupt government and therefore corrupt judiciary, then the farmers won't really stand a chance, especially if the factories have the resources to delay, counter-sue, etc until the farmers run out of resources, especially since it can often take 4+ years to even get to trial.
Or would you imagine the farmer's state would take up the matter on behalf of the farmers and make it a state vs state fight?
Sorry, I'm not trying to nitpick, I'm just trying to get my head around this block/bias that I have against the current justice system.
What a great comment exchange I need to read it more :D thanks for the reply I’ll catch up on it!
Agreed, so many great concepts here.
When things are digitized, prices go down.
I can see how that works in theory... but I think what tends to happen is that costs go down when things are digitized, but those cost savings don't always get passed onto the consumer.
Groceries should be cheaper since staff don't have to put stickers on every item and ring up every item into the register themselves, but my understanding is that households are paying as much or more for groceries as ever.
Are you paying more for music? Computers? How about telecommunications? Photography? Information? When was the last time you bought a road map?
How about smartphones? They came down in price? Data plans? Text cost?
Technology by definition is deflationary.
There are many factors in pricing, most of which gets overlooked. Regulation, taxation, supply chain disruptions.
The entire world felt that kick the last few years as the global economy was shut down.
That's exactly my point... I don't think we can say that technology is deflationary because there are so many factors in pricing. It should definitely reduce costs to corporations... but whether those savings get passed onto consumers is a whole different discussion.
Again, if it was true, you would expect household grocery expenditure to be significantly cheaper than in the 1970s, or the 1940s - and I'm just not sure that's happened.
I think you could say the same for cars.
In 1967 a new Ford Sedan cost $2,199 which is about $20,086.33 today. I'm sure Ford has so many more robots and process efficiencies now, but the average new car price now is around $43K.
Technology is just one piece of the puzzle and I don't think it can cause deflation just by itself.
We most certainly can. I just gave a list of technology products that have all gone down in price.
Lets look at more. Compare these to 1990:
Hell look at the cost of digging a hole with a backhoe compared to doing it by a shovel.
Now when you see prices going up, like with food, that is not because of technology. Technology demonetizes, dematerializes, and democratizes. Anything the digital realm has touched in the last 40 years has followed that pattern.
If you want to isolate on food, since 1940, have wages gone up? Did real estate price increase? How about the cost of regulation?
Certainly there are reasons for this. When you have areas that were 80K people in 1950 and now there is 1.9M, real estate is going to increase since there is no more land (as they say). That shows up in rents. Of course, real estate taxes always go up too.
Then we have regulations. Surely we want things such as pesticides monitored, both the production and destruction. Environmental factors are important. Yet there is a cost to that whether it is on the creation of the product or the wages paid to the inspectors. Since this is desirable, we pay the price.
So yes Excel reduced the cost of a spreadsheet to a corporation but it doesnt change the scenario when it comes to the other factors.
As I said, technology is naturally deflationary. Other aspects of society, not so much.
I think I'm really struggling with this as a concept... and maybe it's product-specific.
Obviously food is way, way, way, way more automated now than in the 1990s, both with fresh produce and processed-food. The economies of scale for farms now in comparison is far more efficient, but you're right, there are a ton of other factors involved in pricing.
Televisions are absolutely cheaper... but mobile phones are harder to compare - we might be spending as much or more on the devices themselves and data... but these devices do so much more than in the 1990s and need way more data.
Again, even though automotive factories are way more automated than in the 90s, cars themselves are still a decent percentage of people's expenses... but again, they are safer, more efficient, etc.
I guess where I'm struggling is if technology is deflationary, and I'm sure you're right that it is, but there are other factors like wages, protections, real estate, etc are not deflationary, then how much is the overall effect will be?
Can robotics cause overall deflation if other factors are too inflationary? I guess the real question is... will robotics positively impact my life?
Yes. There are many pieces and it is hard to grasp.
Take the car mentioned. If we look at the sticker price (price paid), then we see prices went up. How can this be if technology is involved?
To me, this premise starts with the fact we are not dealing with the same thing. A car in the 1970s, like a Chrysler Cordoba got around 15 miles per gallon. What do cars get today? 30? 35? 40?
Then we have the safety features. There is no way to compare shatterproof windshields, abs braking systems and collapsable fender, all which save lives.
Next we have the features. These cars do not even compare to the older vehicles.
Finally we have the life of a car. I am old enough to remember when you sold a car at 50K because the value would drop like a rock as you got near 100K. This is because they would be dead by 125K or 150K. Today, an entry level Kia will go 200K without breathing hard.
So there is more on the car than basic transportation. We also have a host of other non-technological factors in automobile production. Companies are not digital entities. They have other costs that do not follow the technology curve. This is where things start to get messy.
But when we isolate technology products, or services that became digitized, we see this full force. I will write an article about an industry that most of us are familiar with some pricing estimates over the last 100 years. It really exemplifies how things went.
Two questions there.
The latter is depends in part due to the speed of entry. We have no idea until these become mainstream. What we can say is it will generate abundance in many areas, forcing downward pricing. If this happens at the pace I think, this will come at the expense of jobs, something that is highly contested and, also my view, we as society are not prepared for.
Robotics is likely going to be outpaced by AI. This means the white collar jobs are likely at risk first. Dexterity, spatial recognition, and other factors are difficult to master.
So a lot of this depends upon time. If we are looking at a 30 years window, then less impact. On the other hand, will it happen over the next 10? That is also up for debate.
The other factor is how widespread it becomes. If we see robotics entering the entire supply chain, then most of the inflationary forces are diminished. There could be some supply/demand in balances of course, but those will be isolated.
Another factor in robotics is localization. This can remove many expenses such as transportation due to making the product locally.
And to throw another technology monkey wrench in, do not overlook the material sciences. That holds the potential to alter the makeup of materials, opting for more abundant/less costly materials for different things.
A classic example, the cost of copper is not (less) relevant in plumbing world where PVC piping is used.
It's honestly so interesting!
I guess realistically technology is deflationary, but companies will also try to keep prices high.
Whether through innovation, differentiation, collusion, monopolies though technology or regulation, etc etc.
On top of everything you mentioned there will also be the impacts of climate change, technology advancement may be disrupted by extreme weather events or shifting priorities... forecasting the future has surely never been so murky.
Thanks again for the chat, as always you've given me a lot to think about.
Another way of looking at it, think of this interaction in 1985. How much would it have cost?
If we were communicating, back and forth, it would likely have been by phone. Being in two different cities meant long distance charges. There was a per minute rate within each country domestically. If we were dealing international, it was even higher.
So a "discussion" over 10 minutes cost anywhere from a a buck or two to a ten spot. I recall ads for $1.19 per minute on some international calls.
If we used letters, there was paper, envelops, and postage (all which I am sure went up in cost). Yet, we are interacting with none of those costs, leaving aside the fact it would have been a two week turnaround through the postal systems.
Oh absolutely... completely agree with that. Cheaper, more efficient, quicker, all the things.
The wild thing is... we pay $96 for our monthly mobile family phone (& data) bill and another $76 for our internet data... so I'm sure that's more than a average family's telecommunications and home entertainment bill in 1985 (allowing for inflation)... but again... it's not really comparable because we get so much more value... so technically it's amazingly deflationary, but as a percentage of disposable income, maybe not so much... but then maybe we're also not spending as much on drive-ins, bowling, bars, etc as people did in 1985. It's really hard to compare.
It blows my mind that for centuries a son would have a very similar life to his father... and now I can't even compare my life to how it was 2 decades ago.
I think you listed a lot of things why big companies are excited for robots. We've seen how companies are all about savings and increasing their sales. I've seen some companies outsource their work to other countries just to cut costs. So robots that are just one big purchase, and should cost less over time compared to humans will be very exciting for them.
Moravec’s paradox is in play here.
https://en.wikipedia.org/wiki/Moravec%27s_paradox
As such, I’d say we are a long way from robots doing yard and house work.
Machine learning doesn’t have this limitation.
As such, it’s the white collar jobs that are more likely to be automated. Even then, though, the automation will simply allow humans who know each knowledge “space” to be more productive in that space.
Bits are a lot easier than atoms so, yeah, AI will blow robotics away.
Robots are at the point of replacing tasks, something that AI was focused upon for much of the last decade. It will take a while before they can start looking at jobs in totality.
All this robotics is just coming in to increase the stability and monetary value of the companies. I just hope this minimum wage work out and help on the inflation