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Photo: Bloomberg
Photo: Bloomberg

Cafe Economics | The robots are coming

Robots are quite different from the usual forms of physical capital or machinesthey can act as substitutes for labour

The past couple of weeks have seen news reports that the two largest private sector banks in India will be using robots in their operations. Robots are also making their presence felt in car assembly lines in some parts of the country.

India is still new to the game. The International Federation of Robotics says that five countries—South Korea, China, Japan, the US and Germany—account for most of the industrial robots sold across the world.

In a recent speech that was bursting with big ideas, Singapore deputy prime minister Tharman Shanmugaratnam said India is in a race against demography as well as against intelligent machines. In other words, it will have to figure out how to create jobs for the millions who join the labour force every year at a time when robots are becoming adept at performing a range of human tasks.

The question of what machines do to human workers is not new to economists. David Ricardo wrote about it at the dawn of modern economics. He said in the early years of the 18th century that he was convinced the substitution of machinery for human labour would harm the interests of workers. The debate has raged on through the decades—and has now got a new life in the age of robotics.

Most of the popular discussion is not useful because it focuses on job losses in one industry rather than the impact on the economy as a whole.

In a very fine blog post that seeks to dispel some of the more extreme fears about mass unemployment, Bank of England economist John Lewis asks why average real wages had increased since the Industrial Revolution if machines were necessarily bad for workers.

The economic debate has actually been a nuanced one. I tried to give an overview of the main issues in an article published in this newspaper in April 2014 (goo.gl/8kKMw8). One of the seminal papers on whether technical change drives down wages was written by John Hicks way back in 1932. He argued that a lot depends on the extent to which technical change is “capital-biased" or “labour-biased". Other economists such as Roy Harrod and Robert Solow have also written about these themes.

The point is that the effect of machines on labour depends on the nature of technical change. Some variants are beneficial to labour while others are not. It is wrong to blindly bet on any one result.

What about robots? The standard production function in economics assumes that capital is combined with labour to produce output. The two factors of production are thus seen as complements. But robots are quite different from the usual forms of physical capital or machines—they can act as substitutes for labour.

As Andrew Berg, Edward F. Buffie and Luis-Felipe Zanna point out in a new essay written for the International Monetary Fund: “If we assume that robots are almost perfect substitutes for human labour, the good news is that output per person rises. The bad news is that inequality worsens, for several reasons. First, robots increase the supply of total effective (workers plus robots) labour, which drives down wages in a market-driven economy. Second, because it is now profitable to invest in robots, there is a shift away from investment in traditional capital, such as buildings and conventional machinery. This further lowers the demand for those who work with that traditional capital." They then make their model more complex by dividing labour into skilled and unskilled workers.

What does this actually mean? Consider the two ways our commuting is changing—Uber and driverless cars. The former makes the taxi driver more efficient. His increased earnings will create demand in other parts of the economy. The latter makes the taxi driver redundant. It is much the same when you consider the difference between traditional machines and robots.

Or let us take the banking example. People of a certain vintage will remember the angry protests by bank unions when the Reserve Bank of India first began to push for bank computerization around three decades ago. There was widespread fear of job losses. It is now clear that nothing of the sort happened—and now every bank desk has a computer on it. But the introduction of robots may have a radically different impact on employment in the long run, though it is still very difficult to say for sure.

Finally, an apocryphal story laden with delicious irony, that I first read in a Financial Times column by Martin Wolf. The manager of a large automobile factory in the US was showing the union official around the new assembly line dominated by robots. “They will not be going on strike," said the manager. The union official quickly retorted: “Yes, but they will not be buying your cars either."

Niranjan Rajadhyaksha is executive editor of Mint. Comments are welcome at cafeeconomics@livemint.com

Read Niranjan Rajadhyaksha’s previous columns at www.livemint.com/cafeeconomics

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