Social Implications of a Computerized Society Economic Impact

Social Implications of a Computerized Society Economic Impact of Computers Instructor: Oliver Schulte Simon Fraser University

Topics • • • Offshoring Automation The Productivity Paradox Natural Monopolies and Network Effects The Attention Economy

Concerns • The introduction of computers in the workplace generated many fears – Mass unemployment due to increased efficiency – The need for increased skill and training widens inequality - the earning gap • New trends still generating fears – Offshoring of jobs will lead to mass unemployment Offshoring company, Lou Dobbs on outsourcing

OFFSHORING

Globalization and Employment IT supports work location flexibility –even across borders • Outsourcing - a company pays another company to build parts for its products or services instead of performing those tasks itself • Offshoring - moving business processes or services to another country, especially overseas, to reduce costs • Inshoring - when a foreign company employs domestic workers (e. g. offshoring for a German company means inshoring for U. S(. • Almost 5% of U. S. workers are employed by foreign companies

Discussion Question • Are you worried about the effect of offshoring in our own job prospects? • Should be government do something to protect jobs for Canadians, e. g. , require Canadian companies to “hire Canadian”?

Discussion Question • How would you look at offshoring from the four different perspectives? What issues would each framework raise? Consider the differences for the national and the global perspectives 1. Classic market competition (Smith) 2. Marxist critique 3. Keynesian demand-side economics 4. Schumpeter innovation and enterprise

AUTOMATION

Flexibility and Job Churn • Between 1993 and 2002, roughly 30 mill U. S. jobs were opened and closed each year. • There is a net increase of about 18 mill jobs. • Mark of a flexible economy.

Examples of Job Losses • A successful technology eliminates or reduces some jobs. – Example: milking machines reduce need for milk hands. – Reduction of workers in agriculture – Computers have reduced the need for telephone operators, meter readers, midlevel managers. • Old industries/services: Technology leads to productivity gains. – Recall: Productivity = output/time.

Winners and Losers from New Technology + Technology or Capital Owners win: Can produce the same or more with lower costs. + Customers benefit from lower prices. + Society benefits from higher productivity. + Workers gaining new job opportunities (e. g. , in IT) win. - Workers losing their job lose EI.

Mitigating Losses Individuals may lose jobs (e. g. , milk hands). Economists’ answer: • retrain them to do jobs that are needed. • Temporary “transfer” of wealth to laid-off workers. • Question: does that happen enough in actual politics? • Question: What if the job is more than a way to earn money, e. g. a way of life (logging in B. C. , fishing in Quebec). • “The market does not respect lifestyles. ”

Discussion Question • Do you think there is too much flexibility in our economy (too much “hire and fire”)? Or too little?

IMPACT OF COMPUTERS

Job Losses that may have come from computer technology • Number of bank tellers dropped by 37% between ‘ 83 and ‘ 93. • Telephone operators dropped 60% between ‘ 70 and 2002. While longdistance callls increased from 9. 8 bill to 94. 9 bill. • Digital cameras: Kodak laid off thousands of employees.

Job Gains that may have come from computer technology • • • 1996: 100, 000 new internet-related jobs. 1 1997: 109, 000 jobs in cell phone industry. 1998: 242, 000 jobs in chip-making industry. 2004: 10. 5 mill jobs in U. S. IT. 2005: $1 trill spent on IT worldwide.

The Impact of Technology Unemployment rates fluctuate • Growth of computers has been steady, while unemployment has fluctuated widely. Hard to argue for connection one way or another. Changing Skill Levels: • The new jobs created from computers are different from the jobs eliminated – The 3 Ds: dirty, dangerous, difficult • Skill gap: – New jobs such as computer engineer and system analyst jobs require a college degree (coding? ) – Jobs such as bank tellers, customer service representatives and clerks do not • Companies are more willing to train new people using automated support systems • The computer can be a “cognitive prothesis”.

INCOME TRENDS

Income Trends Canada Increases in • Median household (family) income has increased by about 10% from 2005 to 2015 – Household median = $76, 000 – Individual median = $27, 600 – better than other OECD countries • Housing prices • Inequality • Household Debt

Income Trends U. S. • + • Since the 1970 s: Real wages down/stagnating labour share of wealth (no golden rule) benefits Causes unclear: – increased taxes – Globalization: more competition for workers. – Decrease of unionization, especially in U. S. – Automation • Purchasing power increases as prices fall. – Price fall mostly due to cheaper imports (e. g. , China). • steep recent increase in inequality

Not Enough Automation? THE PRODUCTIVITY PARADOX

The Productivity Paradox • Solow (1987): “You can see the computer age everywhere but in the productivity statistics”. • In the 1980 s, IT investment grew 24%/year--productivity declined! • Story continues: lots of money spent on IT, little growth in economy and productivity • IT is at best a one-time boost for a company, not ongoing. • especially compared to previous technologies

Discussion: Explanations of the Productive Paradox • Many possible explanations offered - can you think of some?

Measurement Error • Perhaps we don’t have the right data – e. g. failing to count work hours in flexible industries like financial services • Perhaps “output” in goods and services does not capture quality, flexibility and convenience – e. g. sharing a music video with friends

Too Much Aggregation • Perhaps IT increases productivity but other factors decrease it (headwinds) – E. g. weak investment by companies due to weak demand • Evidence that IT helps “frontier firms” and some specific industries, but not others

Do Computers Both Help and Hurt Productivity? • We have discussed – distraction (email, interruptions) – procrastination (cyberloafing) • Perhaps computers are used extensively for management/administration tasks – reports – policies – monitoring • Does not support front-line goods and services

Parkinson’s Law • “Work expands so as to fill the time available for its completion” • Variants: • The amount of time that one has to perform a task is the amount of time it will take to complete the task. • The demand upon a resource tends to expand to match the supply of the resource (If the price is zero). • Data expands to fill the space available for storage

Parkinson on the Growth of Administrators and Middle Managers 1. When faced with overwork, a manager wants to hire an assistant manager 2. Once hired, managers make work for each other • Humourous Example: After World War II, the British Navy ended up with more admirals than ships.

NATURAL MONOPOLIES AND NETWORK EFFECTS

Networking Effects and the First-Mover Advantage • From an economic point of view, many computer industry markets show strong networking effects. • I. e. , the more users you have, you more attractive you are to other users, so you get more users etc. • E. g. , the more people sell on E-bay, the more people buy on E-bay, the more people sell. • Networking effects lead to a strong firstmover advantage: the first to get set up, gets many users, hard to challenge

Coordination Game Left Right Left 1, 1: each 0, 0: nobody player gets 1 gets anything Right 0, 0: nobody 1, 1: each gets anything player gets 1

Coordination Games (2): A Simple Model of Networking Effects Connect on Facebook Connect on Google+ Connect on Facebook 1, 1: each 0, 0: nobody player gets 1 gets anything Connect on Google+ 0, 0: nobody 1, 1: each gets anything player gets 1

Natural Monopolies • Networking Effects give rise to natural monopolies: – single company dominates market – but not because of government protection or anti-competitive practice

Example: Google • 80% of on-line searches • 40% of website hits • Many people say “google this” instead of “search for it on-line”

Potential Problems: Classical Theory • In classical theory, monopolies are bad because – they raise prices for consumers – they prevent new products being developed • Are these problems for Google?

Too Much Savings? • $90 bn cash in March 2017 for Google • Not that many employees compared to companies with similar revenues (e. g. banks) • 115 bn share buyback November 2018 by 5 tech giants • Concentration: The most profitable companies are growing in market shares and profits • Google bases headquarters in countries where it pays low taxes

Leverage Dominance in One Product for Other Markets • The first widely used internet browser was Netscape Navigator • Microsoft Windows dominated PC OS • Bundled Internet Explorer with Windows to “cut off Netscape's air supply” • Undermined internet standards by “embrace, extend, extinguish” • Google and Google Shop: potential $1 bn Euro fine

Amazon: The World’s Marketplace • Amazon is host to third party vendors • And also their competitor with in-house brand • EU investigation: – do they use data from transactions for their own marketing? – do they charge too much for handling sales and advertising?

Dealing with Monopolies • Force access by competitors – MS had to open internal APIs and pay fine in EU – 280 M Euros fine in 2006 • Stop tax avoidance – Ireland forced to collect 13 bn Euros from Apple – tax companies where they make profits • Share revenues with content providers • pay for internet traffic (e. g. to google. com) – requires giving up net neutrality

“Information consumes the attention of its recipient” THE ATTENTION ECONOMY

The Advertising Business Model • Many IT companies live on advertising revenue – Google 2018 total revenue: $27. 77 BN – Advertising: $24. 1 BN – Facebook revenue growth is ad-driven • Many smaller content providers, app developers etc. depend on advertising

The Advertising Sector • Historically about 3% of the total economy • Growth trend in North America and globally • Increasingly digital, on-line, mobile ads – In 2017: $83 BN digital, $73 BN TV

Digital Advertising • Data Mining to target ads • Key performance metric: The Click. Through Rate (CTR) • Generally very low (0. 05%), but Google ads can get up to 1%

Competition in Digital Advertising • Currently a duopoly between Facebook and Google – 2016: 85 cents of every new dollar spent on digital went to F & G • Rising major competitors: Amazon, Snapchat

Discussion: Consumer Point of View • Do you think that the digital advertising market is working well for consumers? • Is competition benefitting consumers as in classical theory? Should there be more or less competition? • The future: Is there a backlash against “attention hacking” and intrusion?

Discussion: Advertiser’s Point of View • Do you think that the digital advertising market is working well for advertisers? • Is competition benefitting advertisers as in classical theory? Should there be more or less competition? • Overall spending on advertising is going up • Average cost per ad on facebook is going up

Summary I • Global trends towards inequality, weak wage growth • Is IT helping? • The productivity paradox: IT has not enabled gains in productivity or growth • Different possible explanations

Summary II • IT industry shows networking effects natural monopolies, economies of scale • Dominance in one product abused to gain control of another • Many internet platforms and content providers depend on advertising revenue: the attention economy • Is the advertising market working for consumers? Advertisers?