Will Donald Trump Unravel the Global Ponzi Scheme?

In the third volume of the Easy Money trilogy which was published in 2015, I discuss how global trade has degenerated into a Ponzi scheme.

As I write in the book: “The United States is the biggest economy in the world. It accounts for nearly one-fourth of the world’s GDP. By virtue of this, it is also the world’s biggest market, where China, Japan, and countries from South-East Asia could sell their goods and earn dollars in the process. It is also the world’s biggest consumer of oil and consumes nearly a fourth of the global oil production. This meant that oil-rich states like Saudi Arabia could sell oil to it and thus earn dollars in the process.

So, the United States imported, and countries like China, Japan, Saudi Arabia, and other countries in Asia earned dollars in the process. These dollars were then invested in treasury bonds… as well as the private sector. With so much money chasing these American financial securities, the issuers of these securities could in turn offer low rates of interest on them.

This meant that the prevailing interest rate scenario in the United States remained low despite a high budget deficit. This allowed citizens to borrow money at low interest rates and buy homes. It also allowed them to encash the equity in their homes and spend it on consuming other goods. So, the Americans could buy cars from Japan, apparel and electronics from China and so on.

And so the cycle worked. The United States shopped, China earned, China invested back in the United States, the United States borrowed, the United States spent, China earned again and China lent money again. The same was true with Japan, though to a lesser extent.

The way this entire arrangement evolved had the structure of a Ponzi scheme. A Ponzi scheme is essentially a financial fraud wherein the money that is due to older investors is repaid by raising fresh money from newer investors. The scheme keeps running while the money brought in by the new investors is greater than the money that needs to be repaid to the older investors. The moment this reverses, the scheme collapses.

The entire US-China-Japan arrangement was like that. The Chinese invested money in various kinds of American financial securities, which helped keep interest rates low in the United States. This helped Americans to consume more. The money found its way back into China (like a return on a Ponzi scheme) and was invested again in various kinds of American financial securities, again helping keep interest rates low and the consumption going. Like in a Ponzi scheme, the dollars earned by China and other countries kept coming back to the United States. This arrangement… kept interest rates low.”

What the American President Donald Trump proposes to do threatens this global Ponzi scheme. Before we come to the specifics of this, let’s take a look at Figure 1. It shows the trade deficit that the United States has run with China, over the last three decades.

The trade balance is essentially the difference between the imports and the exports of any country. If the trade balance of a country is in negative territory, it is said to run a trade deficit, which the United States does. Specifically, the United States runs a trade deficit with China i.e., it’s imports from China are significantly greater than its exports to China. Also, over the last three decades the trade deficit that United States has run with China has exploded.

Figure 1: 

Take a look at Figure 2. It shows the trade deficit that the United States has run with the world at large, over the last three decades.

Figure 2:The Figure 2 shows that the trade deficit that the United States runs with the world at large has fallen in the aftermath of the financial crisis. This essentially means that the difference between what the United States is importing from the world and what it is exporting to the world, has come down.

Now take a look at Figure 3. It basically combines Figure 1 And Figure 2. What does it tell us?

Figure 3:It tells us that the trade deficit that the United States runs with China, makes up for a greater proportion of the overall trade deficit, than it did before. In 2015, the trade deficit with China made up for 73.4 per cent of the overall trade deficit. In comparison, in 2000, the figure was just at 22.5 per cent.

Given that the United States runs a trade deficit with China as well as the world, countries earn dollars from it. These dollars then find their way back into the United States and get invested in financial securities and in the process help keep interest rates low in the United States.

The new American President Donald Trump, who took over earlier this month, wants to bring down this trade deficit that the United States runs with China in particular and the world in general. As I had discussed in the column dated January 23, 2017, this is one of the plans that Trump has, to make the United States of America great again.

As Peter Navarro, an economist known to be close to Trump, and who served as a policy advisor to the Trump campaign, puts it: “Trump proposes eliminating America’s $500 billion trade deficit through a combination of increased exports and reduced imports.” The trade deficit of the United States in 2015 stood at $500.4 billion.

So how does Trump plan to bring down imports? As his website puts it: “[He plans to direct] the Secretary of Commerce to identify every violation of trade agreements a foreign country is currently using to harm our workers, and also direct all appropriate agencies to use every tool under American and international law to end these abuses.”

Trump also plans to: a) Instruct the Treasury Secretary to label China a currency manipulator. b) Instruct the U.S. Trade Representative to bring trade cases against China, both in this country and at the WTO. China’s unfair subsidy behaviour is prohibited by the terms of its entrance to the WTO. c) Use every lawful presidential power to remedy trade disputes if China does not stop its illegal activities, including its theft of American trade secrets – including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962. (Source: https://www.donaldjtrump.com/policies/trade)

Trump plans to impose import duties (i.e., tariffs) in order to ensure that the cheap Chinese imports into the United States, no longer remain cheap. CNN reported in late December 2016: “President-elect Donald Trump’s transition team is discussing a proposal to impose tariffs as high as 10% on imports, according to multiple sources.”

The question is why does Trump want to do this? I will just come to that.

On a recent visit to Baltimore I had the pleasure of listening to the famous economist Richard Duncan. Duncan’s book The Dollar Crisis has had a tremendous impact on the way I looked at the international financial crisis, in my Easy Money books. As Duncan put it: “President-elect Trump [Duncan was talking before Trump took over as President] believes the US trade deficit has been responsible for the loss of manufacturing jobs in the United States and the downward pressure on US wages that has occurred over the last several decades.”

The question is what will be the repercussions if Trump and his associates do go about doing what they have proposed. My sense is it will lead to the unravelling of the global Ponzi scheme, which I talk about at the beginning of this piece. And in the process, nobody will be better off.

In fact, take a look at Figure 4, which maps America’s imports and exports since 1990.

Figure 4:One look at Figure 4 tells us that the import curve and the export curve closely map each other. What does that tell us? It tells us that the dollars earned by the countries which export goods and services to the United States (essentially imports for the United States), are used to buy goods and services being exported by the United States. As Duncan puts it: “Over the past 35 years, that deficit has become THE driver of global economic growth. In fact, the entire global economy has been constructed around unbalanced trade.” So, what will happen if Trump makes it difficult for the United States to import stuff from China and other parts of the world, as he has promised to do? If the American imports come down, so will its exports primarily because other countries won’t have the dollars required to import stuff from the United States. Also, with both imports as well as exports shrinking, the American trade deficit may not shrink.

Nevertheless, a fall in American imports would mean a fall in global demand and in the process the global economy will shrink. As Duncan puts it: “At this point, the attempt to eliminate the US trade deficit could very easily cause the global economy to collapse into a new Great Depression.” Things could go particularly bad for China. In 2015, the United States ran a trade deficit of $367.2 billion with China. This meant a trade deficit of around a billion dollars per day.

As Duncan puts it: “If the US eliminates its $1 billion a day trade deficit with China, China’s economy could collapse into a depression that would severely impact all of China’s trading partners, and potentially lead to social instability within China and to military conflict between China, its neighbors and the US.”

Further, eliminating imports from low-wage countries would mean that the consumer price inflation will rise in the United States. This will lead to higher interest rates.

We live in a world, where easy money available at low interest rates from the United States, has been invested in financial markets all over the world. And if interest rates start rising in the United States, it won’t be good news for financial markets all over the world.

The column originally appeared on www.equitymaster.com on January 31, 2017.

Paytm Karo! Will Govt End Up Building a Private Monopoly?

One company which has benefited tremendously from the process of demonetisation initiated by the Narendra Modi government has been Paytm. In fact, recently, the annual party speech video of the company, in which an overexcited Paytm CEO Vijay Shekhar Sharma can be seen speaking to his employees (to put it very mildly), went viral. The attitude of Sharma in the video did not go down well with whosoever saw it.

Indeed, the rise and rise of Paytm is worrying, simply because government actions are helping build a private monopoly in the finance sector. I had first written about this in the Vivek Kaul Letter, but given the importance of this issue, I am writing this for the Diary readers as well.

In early December 2016, around three weeks after demonetisation was announced, I had to run an errand and ended up paying Rs 650 in cash. But before I paid the merchant in cash, I had a very interesting conversation with him, which is worth recounting here.

“You don’t have Paytm?” I asked, hoping that I could simply transfer money to him through Paytm and in the process save on my cash reserves.

“Yes, I do,” he replied, much to my surprise.

So, I immediately downloaded the app on my phone and activated it. I already had a Paytm account given that I had been using it to pay for my Uber rides. But I hadn’t used to pay for anything else before.

Once, I had downloaded Paytm, I asked for the merchant’s mobile number, which I needed to enter into the app, in order to transfer money to him.

He didn’t give me his mobile number and instead suggested why don’t I just scan and pay him. He felt that would be much easier. For the uninitiated, merchants who accept Paytm, have a code. This code is typically a part of a large sticker that has been pasted on to a wall in the merchant’s shop. The app allows you to scan this code and the payment gets made to the merchant’s account. (This like when it comes to technology needs to be tried in order to be properly understood).

I decided to scan and pay him. When I tried to do that, the payment didn’t go through. This was a little surprising, given that there was no reason for the payment to fail. I had money in my Paytm account and I was using the app properly.

It took me a few seconds to realise that the merchant did not have the Paytm app but had Freecharge instead. I pointed this out to him. His reply was very interesting. He said: “Haan mere paas Freecharge ka Paytm hai (I have Freecharge’s Paytm).”

This was a classic example of a brand representing the entire category. Dear Reader, I am sure, you would have heard of similar examples earlier as well. Like “Amul ka Cadbury (Amul’s Cadbury)” or “HDFC ka LIC (HDFC’s LIC, meaning HDFC’s insurance,” or  simply “Xerox (meaning photocopy)”. Along similar lines, in the mind of the merchant, Paytm stood for the entire category of mobile wallets.

This isn’t surprising given that Paytm has been one of the biggest gainers in the aftermath of demonetisation of Rs 500 and Rs 1,000, by the Narendra Modi government. As the company said in a statement on November 29, 2016: “Paytm has registered a strong surge in online recharges on its platform post the government’s move… As millions of new consumers tried online recharges for the first time, Paytm has registered over 35 million online recharges in the last few days.”

A major reason for this huge jump was because a picture of the prime minister Narendra Modi appeared in a Paytm advertisement. Also, the fact that the Paytm is the main sponsor of Indian cricket gives them a sort of legitimacy that other wallets don’t have. Over and above this, for a period of close to two months people were short on cash.

But there is a basic problem with Paytm and other mobile wallets. As I found out, they don’t talk to each other. There is no inter-wallet clearing mechanism. Like in case of credit or debit cards I can use a credit or debit card from one bank on a point of sale machine from another bank. Hence, my HDFC debit card can be used on an ICICI Bank point of sale machine. This makes the entire system of consumer payments extremely easy given that the card and the machine need not be from the same bank.

The same logic doesn’t hold in case of mobile wallets. If I am on Freecharge I cannot use the app to pay someone who is on Paytm. To pay him or her, I also need to be on Paytm. While, technology wise this is hardly a problem because all I need to do is download the Paytm app. Nevertheless, the way digital economics work, we may end up creating a monopoly in the financial space in the form of Paytm.  And any monopoly, government or private, is never good for the simple reason that monopolies rarely think about the customer. This is primarily because there is no competition that can make them think about the customer.

Before we go any further, we need to understand the concept of network effect. The best way to explain this is through the example of a telephone. As James Evans and Richard L. Schmalensee write in Matchmakers: The New Economics of Multisided Platforms: “A telephone was useless if nobody else had one. Even Bell and Watson started with two. A telephone was more valuable if a user could reach more people.”

The point being that more the number of people who had a telephone, more the number of people who would want to have a telephone. The economists call this the phenomenon of the direct network effect. This essentially means that more the number of people who are connected to any particular network, the more valuable it is to people who are already a part of it.

Here is another example.  As Niraj Dawar writes in Tilt – Shifting Your Strategy from -Products to Customers For those who want to be a part of a social network, it makes sense to congregate where everybody else is hanging out. There is only one village square on the Internet, and it is run by Facebook. Being on a different square from everyone else doesn’t get you anywhere—you just miss the party.”

I am on Facebook because everyone else is on Facebook. When was the last time you heard of Google Plus? Economist Paul Oyer makes a similar point in Everything I Ever Needed to Know about Economics I Learned from Online Dating: “The rise of the internet has made network externalities more apparent and more important in many ways…Perhaps the best example of the idea is Facebook. Essentially, the only reason anyone uses Facebook is because other people use Facebook. Each person who signs up for Facebook makes Facebook a little more valuable for everybody else. That is the entire secret of Facebook’s success—it has a lot of subscribers.”

The more the number of people on a particular network, the more the number of people who want to join it and the more valuable it becomes for those already on the network. At the same time, as one company gets bigger, it also leads to a situation where the competitors get driven out of the market.

As economist John Kay writes in Everlasting Last Bulbs—How Economics Illuminates the World: “The company that is first to create the largest network denies access to competitors and establishes an unassailable monopoly…Connectedness is vital, and it is best to be connected to the largest network.”

This explains the rise of Facebook and how it killed competitors like Myspace, Orkut and Google Plus. Or how Google killed the likes of Ask Jeeves, Alta Vista and many more. In fact, search engines like MSN and Yahoo, which have survived are barely used in comparison to Google.

So, the digital game is centred around building a monopoly and cashing in on it. As Ray Fisman and Tim Sullivan write in The Inner Lives of Markets in the context of network externality: “The bigger a company gets, the more valuable it is to each successive customer, there’s a huge premium on expanding your customer base.”

An important part of this monopoly is to ensure that the app or the website, does not talk to other apps and websites. To talk to someone on Facebook, you need to be on Facebook as well. To talk to someone on Twitter, you need to be on Twitter as well.

Along similar lines, to pay someone on Paytm, you need to be on Paytm as well.

But that is not the case with other forms of communication or making payment. Take the case of the mobile phone. Calls made from a phone connection issued by one company are not limited to only those connections issued by the same company.

As Kay writes: “The world telephone system consists of many operators, large and small. Most provide service in a particular geographical area, and connect each other call’s through negotiated access agreements.”

The same stands true for ATMs as well. Payments can be made across banks. “Today, a network of clearing and correspondent agreements ensures that you can make a payment through your local bank to anyone in the world,” writes Kay. You can withdraw money from an ATM of one bank using a card from another bank.

But this is something that is not possible in case of the web based messaging services. You cannot send a message from Facebook to LinkedIn, for example. Like you cannot make a payment from Paytm to Freecharge or any of the other wallets.

The mobile wallets need to be like email. As American writer Kevin Maney once told me:  “Email is technology’s cockroach: Everyone hates it but we also can’t kill it. We can’t kill it because it’s the only communications tool since the telephone that is universal. As company walls and national borders break down in cyberspace, email is the only way we can share ideas and digital matter with nearly anyone, anywhere.”

This is how mobile payment apps need to work. They need to talk to each other. This becomes even more important once we take into account the fact that prime minister Narendra Modi already has a dream of India moving towards a cashless society.

As he said in the November 2016 edition of the mann ki baat programme: “The great task that the country wants to accomplish today is the realisation of our dream of a ‘Cashless Society’. It is true that a hundred percent cashless society is not possible. But why should India not make a beginning in creating a ‘less-cash society’? Once we embark on our journey to create a ‘less-cash society’, the goal of ‘cashless society’ will not remain very far.”

In the process of moving towards a cashless society, we shouldn’t be creating private monopolies like Paytm, in the field of finance. The only way to counter this is to get mobile wallets to talk to each other.

I am not a technology guy, so I really don’t have an answer for how this can be implemented. Nevertheless, the government’s unified payment interface works across banks. We also have the Immediate Payment Service (IMPS) system which can be used for transferring money from one bank account to another bank account with a different bank, almost immediately.

Something similar needs to be developed for the mobile wallet companies as well. This would mean the involvement of the Reserve Bank of India. It would also mean developing similar standards and a clearing mechanism around which mobile wallet companies can work.

Of course, the venture capitalists funding the mobile wallet companies won’t like it, given that each one of them wants to become a private monopoly and cash in on it.

Postscript: The merchant I talk about at the beginning of this column, seems to have learnt his lesson. The next time I went to him in early January 2017, he had the Paytm payment mechanism in place.

The column was originally published in Equitymaster on January 30, 2017

Can India Afford a Universal Basic Income?


In the recent past, there has been a lot of talk around the government providing a universal basic income(UBI) to every Indian.  If UBI becomes the order of the day, then the central government will carry out an unconditional income transfer to every Indian, rich or poor, on a periodic basis (perhaps monthly).

The question is can we afford it? The answer seems to be no. This becomes clear from a remark made by the NITI Aayog Vice Chairman Arvind Panagariya, in a recent interview to The Indian Express: “The Tendulkar urban poverty line at 2011-12 prices is Rs 1,000 per person per month. Due to inflation between 2011-12 and now, at today’s prices, this sum would be significantly larger. But transferring even Rs 1,000 per month to all Indians would cost Rs 15.6 lakh crore (Rs 1,000 x 12 months x 130 crore people) a year. We simply do not have this magnitude of fiscal resources.”

The total expenditure of the Indian government during 2016-2017 has been projected to be at Rs 19.78 lakh crore. Rs 15.6 lakh crore amounts to around 79 per cent of the total expenditure of the Indian government. This makes it unviable. Or so it seems.

The question that crops up here is that why are economists who are recommending UBI, actually recommending it? It doesn’t take much Maths to understand that India cannot afford a universal basic income at this point of time.

The economist Pranab Bardhan in a 2011 article in the Economic & Political Weekly, said: “The main question is: if we want it to be universal, can we afford it? Of course the answer depends on the amount to be given out, if it will be a replacement for the existing transfer programmes which have a lot of wastage and misappropriation.”

The point being that many of the current subsidy programmes run by the government are excessively leaky. Given this, the subsidies don’t reach those that they are meant for. This includes subsidies on rice, wheat, kerosene, sugar, fertilizer etc. In this scenario, it perhaps makes more sense to shutdown these subsidies and handout cash directly to every citizen, who can then spend it the way he or she deems it to be fit.

The economist Vijay Joshi gets into the actual nitty-gritty of UBI in his book India’s Long Road—The Search for Prosperity. He talks about multiple things that will help government raise revenue as well as cut down on expenditure, and in the process, make way for UBI. Let’s look at his suggestions.

Joshi talks about a courageous government taxing agricultural incomes and in the process managing to raise 0.5 per cent of the GDP as annual revenue. He also talks about privatising public sector enterprises leading to efficiency grains and helping raise resources of 1 per cent of GDP annually, for the next decade. Over and above this, there are many counterproductive tax exemptions that have been given over the years. Joshi hopes that doing away with these exemptions would help raise revenues by around 1.5 per cent of the GDP per year.

Joshi then recommends the winding up of non-merit subsidies and food subsidies. In total, this would free up resources of at least 10 of the GDP and perhaps up to 12 per cent of the GDP. All this would make UBI viable, feels Joshi.

As he writes: “The most serious non-fiscal problem with transfer schemes is the identification of beneficiaries… Therefore, in my judgement, a universal cash transfer would be the best route to follow. I would therefore recommend the adoption of the scheme… which involves disbursing a ‘basic income’ of Rs 17,500 per household per year, into the bank accounts of all households.”

Transferring money to every household of this country would essentially ensure that the government does not have to figure out who is eligible for the transfer and who is not, a major problem with paying out almost all subsidies.

Assuming five people per household and a population of 130 crore we come up with 26 crore households. Hence, the total bill for universal basic income would work out to around Rs 4.55 lakh crore, at Rs 17,500 per household per year. If the government is able to eliminate other subsidies and at the same time raise revenues through measures like taxing agriculture, then the UBI is very workable.

And given that many existing subsidies are terribly leaky, transferring money directly to citizens and letting them decide what to do with, makes more sense. There is enough research evidence to show that when people(especially women) are given money they tend to use it wisely and don’t blow it away on alcohol and tobacco. Also, over a period of time, the overall UBI bill can be brought down by allowing people who do not want a basic income to opt out of it.

The trouble is all this is dependent on the fact whether the government is able to eliminate many subsidies that it currently offers including food subsidies. And that is easier said than done. For an economist, making a calculation, it is easy to assume, remove this subsidy, increase that revenue, and everything falls into place. For a politician, it isn’t. And that is where the whole thing starts to unravel.

Let’s take consider some of Joshi’s recommendations. Take the case of taxing agricultural income. On the face of it, this makes tremendous sense. Nevertheless, which politician would have the balls, to venture into this territory.

Or take the case of selling off public sector enterprises, lock, stock and barrel. No government till date has shown even a remote inclination to do something like that. Or doing away with tax exemptions that favours corporates. While politicians talk about it all the time, nothing seems to happen.

The joker in the pack is doing away with food subsidies. Currently, the government sells rice and wheat at subsidised prices through the fair price shops that make up for the public distribution system all over the country. The government acquires rice and wheat from farmers and then distributes it through the public distribution system. If food subsidies are done away with, this procurement would not be required.

Hence, in an ideal world, a successful universal basic income programme would mean the end of the procurement, transportation and distribution of subsidised rice and wheat. This would mean that the government would have to stop acquiring the massive amount of rice and wheat that it does from farmers directly through the Food Corporation of India and other state procurement agencies.

This is something that hasn’t been discussed at all by the economists recommending the universal basic income. Would politicians be ready for something like this? What would be the impact on food inflation? Does the open market for rice and wheat work well enough? What would happen to the five lakh fair price shops across the length and the breadth of the country? Would the government shut down the Food Corporation of India, or would it scale down its operations?

These are questions which no one would like to get into. In this scenario, my guess is that if universal basic income is introduced in the near future, it will be over and above the government subsidies already in place. And that can’t possibly be a good thing. It is something that the country cannot afford.

The column originally appeared in Equitymaster on January 27,2017

Why Robots Are Not Going to Screw Humans-At Least Not Yet


If you are the kind who reads the inside pages of newspapers carefully, you would know that these days stories around robots replacing human jobs are quite common. Most of these stories are written in a way that suggest that doomsday is upon us.

But is it as straightforward as the newspapers and the media makes it out to be? I really don’t agree. I had first written about this issue a few months back in the weekly Letter that I write, but given the importance of the issue, I am sharing my thoughts with the Diary readers as well.

In the recent past, there have been a spate of headlines in the media on the capabilities of robots having reached a stage wherein they can take on human jobs. Here are a few news items, along these lines, which I have come across over the last few months.

1) In May 2016, the shoemaker Adidas announced that it would start manufacturing shoes in its home country of Germany after nearly two decades. But it shall use robots and not human beings to do the same. The company calls its robot factory the speed factory. A second such factory is being planned in the United States as well.[i]

2) In another similar case, Foxconn, a company which manufactures mobile phones for both Samsung and Apple, is replacing 60,000 workers with robots.[ii]

3) In July 2016, HfS Research, a research firm based in the United States, predicted that by 2021, India’s information technology companies will lose around 6.4 lakh jobs to automation. This is something that high ranking officials of Indian IT firms have also said.

4) In mid-September 2016, the textile major Raymond said that it was planning to slash 10,000 jobs across its manufacturing centres all across India and replace them with robots and technology. The company currently employs 30,000 employees.[iii] Hence, robots are likely to replace one-third of its workforce.

5) Driverless cars have already arrived. As Ruchir Sharma writes in The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “The most common job for American men is driving, and one forecast has driverless smart cars and trucks replacing them all by 2020.”[iv]

6) And if all this wasn’t enough, on October 3, 2016, the World Bank President Jim Yong Kim said in a speech: “Research based on World Bank data has predicted that the proportion of jobs threatened by automation in India is 69 percent, 77 percent in China and as high as 85 percent in Ethiopia.”[v]

These are just a few examples of the expectation that robots will take over human jobs that I have come across over the last few months. As can be seen, this threat looms not just over India but over large parts of the developed as well as the developing world.

As Rutger Bergman writes in Utopia for Realists: “Scholars at Oxford University estimate that no less than 47 per cent of all American jobs and 54 per cent of those in Europe are at the high risk of being usurped by machines. And not in a hundred years or so, but in next twenty years.” He then quotes a New York university professor as saying: “The only real difference between enthusiasts and skeptics is a time frame.”[vi]

Indeed, the threat of robots taking over human jobs is nothing new. So what makes the threat this time around so different from the previous ones? As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “This is not an entirely new question. Ever since the Industrial Revolution erupted, people feared that mechanisation [which is what robots are after all about] might cause mass unemployment. This never happened, because as old professions became obsolete, new professions evolved, and there was always something humans could do better than machines. Yet this is not a law of nature and nothing guarantees it will continue to be like that in the future.”[vii]

The question is: What has changed this time around?

Human beings essentially have two kinds of abilities: a) physical ability b) cognitive abilities i.e., the ability to think, understand, reason, analyse, remember, etc. As Harari writes: “As long as machines competed with us merely in physical abilities, you could always find cognitive tasks that humans do better. So machines took over purely manual jobs, while humans focussed on jobs requiring at least some cognitive skills. Yet what will happen once algorithms outperform us in remembering, analysing and recognising patterns?

Hence, the robots used until now essentially replaced the physical things that human beings did in factories. The trouble is that now the robots have also started thinking (in the form of algorithms) and hence, many more human jobs are on the line. Harari feels that “as algorithms push humans out of the job market, wealth might become concentrated in the hands of the tiny elite that owns the all-powerful algorithms, created unprecedented social inequality.”

This argument along with the evidence offered before seems to be pretty convincing, if seen in isolation. But there is a lot more to this than just the evidence that is currently being offered. As Sharma writes: “While the robotics revolution could come faster than most previous technology revolutions, it is likely to be gradual enough to complement rather than destroy human workforce. A huge gap still exists between the size of the world’s industrial robot population—about 1.6 million—and the global industrial labour force of about 320 million humans. Most of the industrial robots are currently unintelligent machines, committed to a single task like turning a bolt or painting a car door, and indeed half of them work in the car industry.[viii]

As per the International Federation of Robots, South Korea currently has the highest penetration of robots. The country has 437 robots per 10,000 employees. Japan and Germany come in second and third with 323 robots and 282 robots per 10,000 employees, respectively. China has 14 robots per 10,000 employees.[ix]

The point is that there aren’t as many robots going around as there are made out to be. Also, it is worth remembering here that large parts of the Western world and Japan are currently seeing their population decline. China will also soon reach that stage as well. Hence, in that sense the robots will arrive at the right time replacing the decline in the labour force. As Daniel Kahneman the Noble Prize winning psychologist (he won the Economics prize) told John Markoff, a journalist, who covers science and technology for The New York Times: “You just don’t get it…In China, the robots are going to come just in time.[x]

The point is that when it comes to big predictions like robots taking over human jobs, there are always a few ifs and buts. The trouble is that these ifs and buts are not being highlighted as much as the core argument of robots taking over human jobs, currently is.

Other than these factors there is a basic law in economics which goes against the entire idea of robots totally destroying human jobs. It’s called the Say’s Law. One of my favourite books in economics is John Kenneth Galbraith’s A History of Economics—The Past as the Present (In fact, anyone who wants to understand economics should mandatorily make Galbraith a part of his readings). In A History of Economics, Galbraith writes about the Say’s Law.

This law was put forward by Jean-Baptise Say, a French businessman, who lived between 1767 and 1832. As Galbraith writes: “Say’s law held that out of the production of goods came an effective aggregate of demand sufficient to purchase the total supply of goods. Put in somewhat more modern terms, from the price of every product sold comes a return in wages, interest, profit or rent sufficient to buy that product. Somebody, somewhere, gets it all. And once it is gotten, there is spending up to the value of what is produced.”

Say’s Law essentially states that the production of goods ensures that the workers and suppliers of these goods are paid enough for them to be able to buy all the other goods that are being produced. A pithier version of this law is, “Supply creates its own demand.”

As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads to Disaster: French businessman and economist, Jean-Baptiste Say, discovered that “products are paid for with products,” not merely with money. He meant that you needed to produce things to buy things.”

So what does this mean in the context of robots destroying human jobs? If robots destroy too many human jobs, many people won’t have a regular income. If these people do not have a regular income, how are they going to buy all the products that robots are going to produce? And if they are not going to buy the products that robots are producing, how are these companies driven by robots going to survive?

This is a basic question that none of the analysts, who are predicting doom on the basis of robots taking over human jobs, have bothered to ask. For capitalism to survive, it is essential that human beings work and earn an income, only then can they go around buying everything that is being produced.

The basic problem with the robots taking over human jobs argument is best explained through this example. As Bergman writes: “When Henry Ford’s grandson [Henry Ford II] gave labour union leader Walter Reuther a tour of the company’s new, automated factory, he jokingly asked, “Walter, how are you going to get those robots to pay your union dues?” Without missing a beat, Reuther answered, “Henry, how are you going to get them to buy your cars?””[xi]

Also, another point that most analysts seem to miss is that if and when robots actually do start destroying many human jobs, it is stupid to assume that the governments will sit around doing nothing. There will be huge pressure on them to react and make it difficult for companies to replace human beings with robots.

To cut a long story short, it will be interesting to see how the robots taking over human jobs trend evolves in the years to come, but it will not be as straightforward as it is currently being made out to be.  If we are still in business, we will surely keep a lookout!

The column originally appeared in Equitymaster on January 25, 2017

[i] Agence France-Presse, Reboot: Adidas to make shoes in Germany again – but using robots, May 25, 2016

[ii] J.Wakefield, Foxconn replaces ‘60,000 factory workers with robots’, BBC.com, May 25, 2016

[iii] TNN and Agencies, Raymond to replace 10,000 jobs with robots in next 3 years, September 16, 2016

[iv] R.Sharma, The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World, Allen Lane, 2016

[v] Speech by World Bank President Jim Yong Kim: The World Bank Group’s Mission: To End Extreme Poverty, October 3, 2016

[vi] R.Bergman, Utopia for Realists—The Case for a Universal Basic Income, Open Borders and a 15-Hour Workweek, The Correspondent, 2016

[vii] Y.N.Harari, Homo Deus—A Brief History of Tomorrow, Harper, 2016

[viii] Sharma 2016

[ix] Ibid

[x] A Conversation With John Markoff. Available at https://www.edge.org/conversation/john_markoff-the-next-wave. Accessed on October 12, 2016

[xi] Bergman 2016


Of Ageing Humans and Infant Mortality

Human beings are living longer than ever before. Take the Indian case. In 1960, the life expectancy at birth was at 41.2 years. This has since improved to 68 years in 2014, as per data from the World Bank.

In fact, the human life expectancy is expected to go up further in the years to come. As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “The breakneck development of fields such as genetic engineering, regenerative medicine and nanotechnology fosters ever more optimistic prophecies. Some experts believe that humans will overcome death by 2200, others say 2100. Kurzweil and de Grey are even more sanguine. They maintain that anyone possessing a healthy body and a healthy bank account in 2050 will have serious shot at cheating death a decade at a time.”

This will have a huge impact on human society and the way it’s currently structured. As Harari writes: “Today, people still expect to be married ‘till death us do part’, and much of life revolves around having and raising children. Now try to imagine a person with a lifespan of 150 years. Getting married at forty, she still has 110 years to go. Will it be realistic to expect her marriage to last 110 years…. Bearing two children in her forties, she will, by the time she is 120, have only a distant memory of the years she spend raising them—a rather minor episode in her long life.”

Professional careers will also change in comparison to the way they are now. Currently, people study and specialise in their teens and early twenties, and then work until their retirement age. If they live up to 150 years, they will have to reinvent themselves and develop new specialisations as they go along.

So, all this does make one wonder as to what happened in the 1960s, when the life expectancy was a little over 40 years? Did that mean there weren’t many fifty, sixty and seventy year olds, going around? And now that the life expectancy is at 68, there are many more sixty and seventy year olds, going around.

As Daniel Levitin writes in A Field Guide to Lies and Statistics: “In fact, people did live that long—it’s just that infant and childhood mortality was so high that it skewed the average. If you could make it past twenty, you could live a long life back then. Indeed, in 1850 a fifty-year-old white female could expect to live to be 73.5, and a sixty-year-old could expect to be seventy seven.”

Hence, even in the India of the 1960s when the life expectancy was a little over 40 years, people were living well into their sixties and seventies. So why was the life expectancy so low? As Levitin writes: “There were many more infant deaths back then pulling down the average.”

What does this mean? In 1960, the infant mortality rate of India was 165. The infant mortality rate is essentially defined as the number of infants who die before reaching one year of age for every 1000 live births during the course of a given year. This meant that in 1960, on an average 165 out of the 1,000 babies born died before reaching one year of age.

This high infant mortality rate essentially pulled down the life expectancy number. Over the years, the infant mortality rate has come down. In 2015, the infant mortality rate had stood at 38. This means that for every 1,000 births on an average, 38 babies died before reaching one year of age. This improvement has largely been account of the availability of better healthcare facilities.

India still has some way to go on this front. In 2015, the world infant mortality rate was at 32. Our neighbours like Sri Lanka, Nepal and Bangladesh have managed to do much better than us on this front. Their infant mortality rates stand at 8, 29 and 31. Only Pakistan at 66, fairs worse than us.

The column originally appeared in Bangalore Mirror on January 25, 2017