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The war of the century which will define our future

Published at: 29-12-2017

Posted on: December 29th, 2017 by RaduC

We are living in an increasingly sophisticated, agitated, unstable and unpredictable world. And at the end of the day, increasingly tense. There is palpable tension on several levels: social, political, economic, geostrategic, to name a few. The tectonic plates of humanity as we know it are slowly but surely moving to define new realities. The comments on this topic abound, but more often than not they are limited to looking at symptoms rather than the root causes leading to the surprising developments we are witnessing. That happens because actually the present reveals rather the signs of a dramatic battle started in the last two decades and which, depending on the winner, will shape the future of people.

Any business school undergraduate, when asked, will be able to list the factors of production, the ingredients making up any economic activity intended to generate profit through producing goods and services: Land, Capital, Labor, and, more recently, Entrepreneurship. But the bulk of business literature focuses on the two that it considers as the determining factors: Labor and Capital.

Throughout the times of capitalism, the two factors of production have been engaging in a constant power struggle, each trying to prevent the other “party” from gaining excessive clout. After World War II, the emergence of a thriving middle class in the West was, after all, the measure of the extent to which a balance of power was stricken between the two competing production factors. A win-win situation where both Labor and Capital could share the gains of prosperity.

Globalization overturned the balance reached by developed societies. In 2000, IMF identified four main features of globalization: trade and transactions, capital and investment movements, the dissemination of knowledge and migration. In the rush for globalization, those moving the fastest to grab the advantages of the globally existing opportunities won. And Capital had the ability to move fast anywhere that presented a chance for profit. Financial Capital holders, a small percentage of the world`s population, were the main beneficiaries of Capital mobility and hence of globalization.

Meanwhile, accessing labor markets in developing countries had no other effect but increase the Capital / Labor gap. The minority holder of rare resources, Capital, gained an increasing negotiating power in relation to an affordable and now plentiful resource, Labor.

This lead to a balance shift in the economic terms of the relationship between the two production factors in favor of both Capital and the emerging labor markets it chose, and against the abandoned Western labor markets. The win-win situation between Labor and Capital which underpinned prosperity in the Western world after the war collapsed. Capital is now dictating the terms of its relationship with Labor. The logical consequence, evidenced by statistics, was the increase in the global economic divide between Capital and Labor holders.

Under these circumstances, the majority, the Labor holders, resorted to the one tool they had available to try and restore the balance against the wealthy few: the democratic system. This is a system that assigns equal importance to all individuals, irrespective of how poor or rich they are: one person one ballot. And the voting machinery of the many started rolling by advancing the political forces with a populist and anti-establishment agenda that is against those profiting from Capital management.

The desire of many to see the globalization process reversed has its actual roots in wanting to restore the Labor/Capital balance, in wanting to go back to the win-win situation that benefited both production factors. But will deglobalization guarantee a return to equilibrium? Not necessarily.

The explanation lies with a new opportunity presented to Capital at Labor`s expense. It was deemed the fourth industrial revolution, the digital revolution. Technological innovations require capital and skilled minds, neither of them labor intensive. This risks turning the vast majority of people into the victims of a phenomenon that will see people replaced by robots.

Under these circumstances, these new historic changes will run a very serious risk of paying out disproportionate dividends to Capital. By way of illustration, I will use an exciting and credible scenario recently sent by a follower, the accuracy of time being less important, I think than the process it describes.

“The first self-driving cars will hit the roads in 2018. Around 2020 the entire industry will be disrupted. You will no longer want to own a car. You will call a car to turn out at your place and drive you to the destination. There will be no need to park it, as you will only be paying for the ride. Our children will no longer need a driver`s license, nor will they own a car. Cities will change, as we will need 90 to 95% fewer cars than we do now. The former parking lots can be turned into parks. Worldwide 1.2 million people die annually in car accidents. There is now 1 accident for every 100,000 km; once driverless cars are here, this number will fall to 1 accident for 10 million km. This will save one million lives every year. Most car manufacturers will go under. Traditional car makers will go for the evolutionary approach and build a better vehicle, while tech companies (Tesla, Apple, Google) revolutionize the industry by building a computer on wheels. Insurance companies will be in big trouble, as they have to deal with much fewer cars and accidents. Their car insurance business model will be extinct.”

Here is a taste of our likely future where labor stands a good chance to be pushed aside to make room for the financial, technological capital and skilled minds.  World Economic Forum expects that 5 million jobs will be replaced by 2020 following the digital revolution, and a Citi and Oxford University study predicts that 77% of jobs in China are at risk of being automated.

And so, under these circumstances, the question I ask myself with you is „How is opening borders to immigration in developed countries justified?”

This is the million-dollar question to which I am tempted to answer: it is not. I cannot get my head around the consensus about to be reached on replacing human jobs with robots and expert-systems and the need for bringing workforce from abroad at high costs and integration risks. This is a contradiction which makes no sense to me and that I do not understand. At first the consequence might be an increased negotiating power of Capital over Labor, but looming on the horizon is the risk of significant tensions and anti-capital popular movements. A Pyrrhic victory…

What I do understand is the following challenge facing the developed societies, but not only: How will an increasingly higher number of pensioners be financially supported by an ever larger number of robots? Because the latter do not pay social security as the employees whose numbers will be plummeting do. And the solution imposed by the power of the popular vote has to be more taxes on capital. Therefore voters shifting more and more to the left.

As far as Romania goes, on current growth models, the future does not look that rosy. In the last 20 years, as an emerging economy, Romania also benefited, more or less skillfully, from the perks of globalization. This trend might be reversed.

A 2016 study of the World Bank predicts that emerging economies will be hit harder by the technological revolution that already started, expecting that around 2/3 of existing jobs in emerging countries are at risk of being replaced by automation. Makes sense. The Future belongs to Capital and, sadly, Romania does not fare any better in that department. It does have workforce, particularly low and medium-skilled. There will be less and less work for these people in the future.

The alternative? Education. Developing a strong capital of skilled minds encouraged to innovate locally. Which does not exclude the risk of an even deeper social divide. Societies will split between the few, holding the financial or skilled minds capital and the many to be replaced by robots on the assembly lines, or by expert-systems as is the case of specialists, currently in the middle class.

Given all of the above, how do you see some people`s proposal, such as Elon Musk`s, the forward-looking entrepreneur, to pay those replaced by technology to sit back at home and do nothing? As a bribe for accepting a world dominated by Capital and technology, which should be rejected from the outset, or a social welfare measure, for which we should be grateful?

Have a nice weekend!

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