How do we make America great when we don’t make anything?

How do we make America great when we don’t make anything? The Role of intangible capital in our economy.

by Scott Dennis

Recently Microsoft founder Bill Gates reviewed a new book looking at the expanding role of intangible assets in a global economy driven by the technology sector.  He takes time to mention that the authors

“..don’t act like there’s something evil about the trend or prescribe hard policy solutions.”

Although his review was meant to bring attention to this economic trend the Freudian slip by Mr. Gates should cause people to ask if an economy built on intangibles is good for people or not?

Capital that cannot be touched is not new, for instance value in branding has been part of the modern economy since the start (think Colgate or Cadburys) and patents which are essentially just ideas spelled out on paper were widely used in 19th century France. The question that leads to concern is when value of a company becomes almost entirely intangible how can its true value be measured? Let’s use Toyota as an example an auto manufacturer that still lives in the standard economy because it follows the following economic logic:

The total cost production increases as supply increases because it takes a certain fixed amount of labor and materials to make the cars. The labor and materials are a type of capital inherently required to make Toyota cars.

Now imagine that Toyota was originally conceived as a brand of computer software, perhaps a large amount of resources are put into the initial launch of their product but the cost of production does not increase as supply increases because unlike cars each additional unit of software costs virtually nothing to produce. In today’s economy it is likely that the Toyota brand as a software company could very well be more valuable and in a shorter time frame than the company that has produced high quality tangible automobiles.

At this point let’s stop to consider that with the cost of capital requirements for production diminishing and only one (Exxon Mobil) of the top highest valued companies in the world actually working with a normal cost to production ratio in 2018, is this a good trend for our economy and if so who benefits the most?

The first thing that may come to your mind as you compare the tops ten list from 1998 to 2018 is how much human capital (labor) would be needed to run the 1998 group versus the top ten of today. With the exception of Amazon the top companies in 2018 employ roughly half the amount of people than in 1998, although the majority of the Amazon employees work in minimum wage warehouse positions with no union representation.  Even from an investors point of view this new configuration seems like it creates a lack of equilibrium because the most successful investors has always had a mix of profitable operating companies with predictable valuations due to ownership of capital (warehouses, machinery etc.) in order to buy up shares when the market slumps; this is a simplification of Warren Buffets “two buckets theory”.  With the new economy – investment dollars are “sunken”, that is to say if things go bad there is no capital to sell in order to offset your losses. Certainly there are synergies, faster scaling and overflow opportunities with intangible companies

but the concern for workers is that the underlying business plan for these companies is to create and support a network of more and more gig economy platforms, eliminating jobs that provide security and real wage growth.

Certainly Uber and Lyft are good for a sector of workers but our whole system cannot be supported with this model.

If the role intangibles assets companies are going to change the equilibrium of our market economy what role does labor have in the valuation of intangibles?

Labor organizations need to find their footing in the form of political power and legal reform when it comes to dealing with the new economy.  There needs to be a firewall between the speculative stock of companies over leveraged in intangibles and public funds that support communities or even private ones that sustain colleges.  The overwhelming wealth gap needs to be addressed in terms of tax reform. If these companies are holding billions in cash it’s a clear indication that the system is warped, cash is simply a vehicle to purchase goods, services or build more capital not to horde. It is clear that intangible companies are not contributing enough to the community that makes their business possible.

Scott Dennis writes for the Blue Collar Think Tank

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Robots and Forbidden Fruit

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By Scott Dennis September 13, 2016

Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution…” –Stephen Hawking

There is a good chance that you are reading this article on a device that despite not existing just two decades ago you now find hard to live without. This technology gives you unparalleled access to a global market, a few clicks and your product is at the door in a few days or maybe a few hours; what could possibly be wrong with this level of convenience? Our culture is unique in that no group of human beings has ever had to cope with this level of social evolution brought on by technology, not even those who witnessed the dawn of the industrial revolution. Facing this reality many in the working class are instinctually asking, is the pace of change moving at the speed of progress or like a game of three card monte dealt out by sleight of hand?

A common graph used by economists when discussing the impact of automation on the working class looks very much like a fork in the road. It describes the labor force as being more productive yet receiving less wages relative to that productivity. The productivity line in the chart describes how efficiently anything coming to market is being produced, automation is key to making this output more streamlined when compared to the cost of production. The disconnect for workers is a how their take home pay and benefits do not grow and in many cases contract on average despite increasing revenues due to this improved productivity that they keep hearing about. This simple data set is the first step toward understanding what working class people in industrial societies are grappling with and how robots could be picking the forbidden fruit of human labor, their jobs.

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Despite the massive implications of technological disruptions with the workforce and its secondary effects, the scholarly field studying this crisis is relatively small. These economists focused on working class issues are creating reliable mathematical models to understand the scope of technologies effect on labor. Leaders in the field such as Dr. Daron Acemoglu from MIT remind us that there have been many dire but incorrect predictions about technology creating widespread unemployment, beginning with Milton Keynes in 1930 and noted economic historian Robert Heilbroner in 1965.

There are many complex concepts employed in the economic research on this topic such as “Endogenous response of technology”, “Productivity Effects”, “Homotheticity” and the “Balanced growth path” (BGP) for the economy.  The concept that working class people can be most concerned with is the ability of capital to create more highly skilled jobs when automation is introduced. Many of the models do prove that technology creates jobs loss and income inequality in the short run but that in the long run equilibrium returns due to the historic habit of new more complex tasks being created for workers, the point being that humans would have an advantage over technology in these cases. These studies also suggest that external pricing forces can slow down the need for capital investment in automation. In a recent paper Dr. Acemoglu states that “Under reasonable conditions, there exists a stable balance growth path in which the two types of innovations go hand in hand.”

The mission for an initiative like the Blue Collar Think Tank is to place a spotlight on this last point, are the working class living under “reasonable conditions?”

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The connectivity to the market place that we all enjoy through our smart devices, puts enormous logistical pressure on the supply chain to work a smoothly as possible. There is a leaning toward optimization in this sector that acts as an example and cautionary tale for many other areas where labor still has a foothold. In the ports the changes are already taking place with automated container carriers and robot trucks that move cargo around the freight yard without the help of a longshoreman. Massive warehouses hum with activity twenty four hours a day with just a skeleton crew. How about your friendly neighborhood delivery man? There are robotics teams around the country that are very close to rolling out robots to replace them, that would equate to over half a million good paying jobs when one accounts for all the companies involved including the US Postal Service.

What new positions will be opening up to create the equilibrium predicted by many economic models when entire classes of labor are forever occupied by automatons

that require no sick time or maternity leave? This time predictions of wide spread unemployment may come to fruition because of two realities that did not exist in the past. First is the imbalance between stakeholders within today’s corporations, shareholders dominate the corporate landscape, labor holds few of the cards and most of their rights as employees have been stripped to increase profit margins. Secondly is the rise of artificial intelligence (A.I.), which is the game changer in terms of the theory of equilibrium being found in the creation of complicated tasks. Algorithms with ever increasing intelligence have the ability to tip the balance between labor and capital, supplanting an ever growing spectrum of job categories.

The good news is that technology is a tool that can only be as harmful or helpful as we allow it to be. Effective solutions begin with education of the workers affected by technological change. For every corporation involved with extensive automation labor leaders need to identify the managers or committee that make the decision on capital that can lead to automation running too far ahead of new job creation. In this era we cannot afford to wait for the market to create the change needed, working class strategies must be generated and implemented by policy makers working in the interest of citizens, not just corporations.

Scott Dennis writes for bluecollarthinktank and @bcthinktank

The Factory of the future will have Two Employees

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Robots at my door

Scott Dennis-New York

8/22/2016

“The factory of the future will have two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.” -Warren G. Bennis

Having been in the position to hire and fire employees, I have always wanted to judge my own career by the amount of new jobs created to help people support their families. A loss of a job through firing, lay off or just the churn of employees finding new opportunities are disruptive to a person’s life but are part of the normal cycle of the capitalist market place. What happens when this equilibrium between labor and employer comes out of balance? This is what the world is facing in the form of ever-more sophisticated technology. The reality of this Pandora’s Box is affecting your families and friends and employers themselves are now realizing that they cannot control it.

“How can median incomes decrease in countries with gross domestic product and over-all productivity sky rocketing?”

Robots are not waking up with the goal of taking your job, at least not yet. The transition of workers lives in the late 19th and 20th century has seen the standard of living increase in countries embracing technology, labor has generally been made far more productive with income levels creating a healthy middle class in the modernized world.  However the relentless drive toward optimization in the private sector today are using robots to move the cost of labor into the profit margin on a dramatic scale. Even in environments with strong unionized workers, such as the auto industry and longshoremen on the waterfront in America, new technology that has already been seen displacing workers globally is on pace to cut down the need for human assets in blue collar sectors in American cities with ports and heavy industry. In my career I have witnessed the future of a dock workers life as I compared the amount of longshoremen working the Port of Newark or Oakland compared to the relative quiet of a new container terminal in Amsterdam where robots move cargo without the need for their human counterparts, doing away with their wages, pensions and liabilities.

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If you do not know anyone in heavy industry perhaps you believe that this wave of technology is someone else’s problem. The World Economic Forum suggests that in the short term over five million jobs in the administration field such as accountants, sales people and an array of positions in healthcare will be affected. This challenge that labor is facing differs greatly from globalization in that when a country loses a factory to an overseas competitor, people somewhere are getting the work albeit at a lower relative wage. Jobs lost to robotics force labor not to just another job but another occupation since the function of their position is eliminated completely from the market. These shifts due to technology have a number of secondary effects such as income inequality which has become more acute as economic growth continues in an upwards trend with a perverse downward trend in employment. How can median incomes decrease in countries with gross domestic product and over-all productivity sky rocketing? These paradoxes are being created by a third force wedged between labor and employer, robotics and technology and its applications will soon be out of the control of white collar managers. There is a great need for creative strategies  from sectors spanning from technology to faith leaders to offer some positive options for workers that policy makers can carve into legislation.

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Scott Dennis has had a twenty year career in transportation and labor negotiation and is also the founder of Blue Collar Think Tank. scottdennis@bluecollarthinktank.com @bcthinktank

Robot Image courtesy of ShutterStock