The Road to a Robot Economy, nay, Robot Society !
Ganga Prasad G. Rao
Was it any wonder, mused Rob, alone at the coffee shop with a frappe and a book, ‘Capitalism and Society’, that capitalism, with its inexorable quest for profits, had across years and decades, responded to the ever-increasing labor wage tab and benefits burden on firms with an inexorable and incremental substitution of capital for labor? Back in the early days of the Industrial Revolution, the first use of tools and instruments enhanced the productivity of the otherwise uneducated labor force. Then came machines - first simple, then large and complex – followed quickly by control and automation. The blue collar work force developed an almost symbiotic relationship with the machines as output expansion, profits growth, enhancement of employment opportunities and higher wages provided Americans with reduced costs, and brought about a revolution in the lifestyles of the masses with affordable, mass-produced, durable goods, and consumption products. But the recent wave of robots, especially the ones with artificial intelligence, had ‘reformatted’ the shop floor like never before. Endowed with brawn, movement, memory, computing power, communications and built-in logic and optimizing software, these ‘bots were reliable, flexible and versatile, and could be counted on to be on the job 24x7 without much supervision. Themselves the product of low-cost automation, and lately, artificial intelligence, they had spawned a wave of labor ‘retirements’ and reduced several vocational categories. In fact, the blue collared, once the pride of America, were bewildered with the pace at which the robots replaced them, sour at the Executives for turning a deaf ear to their demands, and disgruntled with their political representatives for hobnobbing with the Capitalists after their loud promises to protect the middle classes, ostensibly the heart and soul of America. The robotization of the economy portended a future with large swathes of the poor and the blue-collared turning unemployed and living on dole…permanently. This was in itself a catastrophe, but as Rob realized, matters were worse. The Social security trust fund, that served as a net for those between jobs, and which funded post-retirement benefits, was overdawn and carried a mountain of debt on its books. It didn’t take a cold frappe to realize that a social crisis loomed in the near horizon.
Rob - did anyone around know he was a policy wonk? – anticipated robotization in its various aspects. How would the Labor unions, ex-ante, and the ex-blue collared, ex-post, influence the political process, and to what avail? Could the lack of an acceptable solution imperil the potentially huge gains promised by technical advances secured with investments in hundreds of millions of R&D dollars over the decades? What did robotization imply for career prospects of the Generation-Next? Would they hazard large educational loans only to find themselves bested by a robot at the interview? Rob, the personification of modesty, did not claim to possess the caveat to these questions. He was, however, quick to deduce that Robotization was an instance in which private short-run marginal benefits overshadowed the marginal long-run social costs resulting in massive short- and long-run unemployment. In other words, a short-run profit-motivated robotization drive that did not fully account for its social consequences under-anticipated the long-run costs of robotization, and permitted too far a substitution of robots for the blue-collared. Perhaps he could conceive of a system that anticipated these issues and ameliorated the long-run social costs, eased-in the AI-enhanced robots and brought about a next-generation manufacturing industry that was in equilibrium with the labor markets, and which was ‘pareto-anticipated’ by students - the next generation of employees? As he put the frappe down, and as the ‘not-yet-16’ pretty, apparently the new temp and the in-charge at the coffee shop gave him a cold look and a shrug, Rob wondered whether the rest of world, arguably more labor-intensive whether by design or due decades of corruption and lower efficiency, had anticipated the seriousness of the crisis if, much as had Capitalism and the financial crises, the robot-revolution too came knocking on their doors. After all, wasn’t robot-automation and the scale-economies it generated more suitable for the populated and per-capita, subsidized economies of the third world societies? The rain was petering out in to a drizzle, and he took the opportunity to trudge back to work - actually a think-tank serving to enhance policy-making in the nation. Cold it was for November,….and turning colder.
Rob walked in to the coffee shop a week later – it seemed like a month. He remembered as much the cold drizzle, as he did the cold frappe and the cold shrug from the pretty in-charge. This time she served him a café latte. As he gripped the latte and eased himself in to the chair by the window, Rob picked the threads from the past week. What would be an appropriate policy, a strategy that insured the hard-earned economic successes and social peace, if not social order of the past, and which was equitable and acceptable to the stakeholders – the labor unions, future generations of employees, the capitalists, and in fact, the Government which bankrolled the social security of laid-off employees? As he switched between his ruminations and the book, a thought struck him. If AI-enhanced robots were indeed replacing the blue-collared, surely they would count as an expansion of the capital stock reported in the periodic filings to the SEC? The introduction of AI-enhanced robots amounted to incorporating ‘brain’ in to the brawn of existing capital. Due this fact, and for the enhancements in productivity they brought about and the human substitutions involved, Rob deemed it defensible to permit, carte blanche, a 100% addition to the total existing capital stock of robotized firms. He figured he just might have the policy to anticipate and resolve what seemed inevitable - a virtual robot-takeover of the manufacturing sector. Realizing the potential value of his ‘robotlution’, Rob turned serious. Scribbling notes, he visualised splitting the replicated capital tranche between the Government - in fact the Social Security Administration - and an Administrator for the, surprise!, Robots. The SSA, the issuer of Social Security Deficit Bonds, SSDB, to the public, and as the owner and Administrator of the newly-christened Deficit Reduction Capital Fund, DRCF, would horde its share of the replicated common stock and milk them for the anticipated post-robotization rise in dividends and capital appreciation. The DRCF Administrator hoped the dividends would contribute to a slowing in the growth of public debt, and even its reversal at some point in the future. The Robot Capital Dividend Fund, RCDF, constituting the other half of the replicated capital, was by Rob’s imagination, a parallel Social security net for the robot-displaced labor, albeit with a self-interest in expanding the market share of the Robot economy. Rob also had the good sense to insist upon the Capitalist owners to sponsor a 20% set-aside for an ‘EO Gratuity pot’ simultaneously with the issue of the replicated common stock specifically for voluntary retirees in the manufacturing sector.
In Rob’s society, Robot-axed employees had the exclusive option to continue to earn income by volunteering to work at various RCDF-sponsored advisory-, consulting-, white and blue collar 'human-jobs', and even community activities. The RCDF Administrator endowed these employers with as many RCDF points as their dollar support for any given cycle/period. These points were freely exchangeable amongst employers who paid the robot-displaced temporary employees with individually-negotiated bundles of wages and RCDF points. The RCDF Administrator periodically distributed accrued dividends and capital appreciation in the fund among the entire group of ex-employees in proportion to their credit of RCDF points. Ex-employees, dissatisfied with their wages at their new employer could choose to be compensated instead with RCDF points and risk an uncertain payoff in the form of dividends and capital appreciation generated in the Robot economy. This strategy re-introduced to the ex-employees, the risk-reward equation and let them make their choice between earning wages the traditional way and supplementing their income by participating in the robot economy. To the RCDF Administrator, the points represented an unpaid credit with the ex-employees which the RCDF could exploit it in its network to learn of opportunities to gain upon the traditional economy. Lest the group of severed employees be exploited by the RCDF Administrator, Rob pro-actively proposed that the DRCF Administrator compete for the RCDF-points by offering in return stocks from the DRCF portfolio. Thus, the severed blue collar employees could pareto-exchange the dividends and capital appreciation embodied in the RCDF point payoffs for promising, but out of favor robot-firm stocks. It also offered the DRCF Administrator a means of encashing out of less-favoured robot stocks beyond obtaining through the RCDF points, a read on the pulse of the economy and the competitiveness of RCDF-sponsored employers. Further, and since the capital markets were never at equilibrium, and since the mix of wage-RCDF-points were individually negotiated, the price in RCDF points paid for DRCF common stock varied by individual, firm stock, and period. The strategy opened the door for the savvy among the severed blue-collared to accumulate robot-firm stock at a discount and turn capitalists in the long run.
The EO Gratuity pot, aggregated across firms, and sponsored by Capitalist owners, was a thinly-disguised allurement to those aging among the blue-collared and/or wishing to cross the street over to the Government, to bid for their parting package, and ease the pain of severment on their brethren. Interested employees entered their bids in the common, industry-wide, periodic reverse auctions. The Administrator of the EO Gratuity pot evaluated the current and expected future health, productivity and wages of bidding employees, as well as their remaining work years, against the bids submitted by them. The reverse auction algorithm then explicitly, or otherwise, sorted the bidders in to a roster of ascending expected net worth to the firm/industry, and accepted voluntary retirement bids until the funds allotted to that particular round, gross of a variable ‘EO Gratuity bakey’ that was passed on to the Labor unions, ran out. That residual varied inversely with participation interest and the bids in the reverse auctions. While those unsuccessful in the reverse auctions could bid in subsequent rounds, the RCDF Administrator excluded the successful from the roster of ex-employees. …. As Rob checked out the weather to make his exit, a grumpy, unshaven, middle-aged guy walked in and barked for attention. Instead, the in-charge turned around and gave Rob a smile. Walking out in to the chill of the grey, late fall morning, Rob hurried over the cobbled stones to the think tank. Plenty of scribbled notes to re-decipher and transcribe.
In his brightly lit think-tank office, Rob fleshed out his proposal in more detail. He turned his attention next to the Labor Unions, who, united in their opposition to involuntary termination of the blue-collared, were offered, as part of a two-pronged strategy, both a ‘bakey’ from the EO Gratuity pot (an ‘Auerbach Signing bonus bakey Jew Group Executive 2 bakey’, if you will) and a matching, pan-University ‘Endowment Bakey’ as an inducement to accept the robotization of the manufacturing facilities. Post the rounds of reverse auction for voluntary separation, and come axe-time during recessions, the Labor unions simultaneously redeemed both bakeys and some of their own bond holdings in the opposite of the fall in RCDF assets. The Union Administrator distributed the largesse amongst members, and endowed the more worthy among them with scholarships for graduate studies. This strategy offered an escape hatch to the more worthy among the blue-collared workers and further dulled the eventual axe the rest of the union members faced. The Administrators of the pan-University Endowment Fund and the Education Loan Bond Fund, both invested in long bonds, found it convenient to time their moves in an approximate ZS with the moves of the Union Administrator whose bond holdings were of shorter term. In times of impending recessions, when the Union Administrator redeemed bond holdings, their countervailing moves were predicated upon labor market developments. When blue collar wages fell relative to white collar salaries and held back the pace of robotization, the Bond market rewarded the Education Loan Bonds, whose prices increased relative to the bonds the pan-University Endowment fund was invested in. In such instances, the Endowment Administrator redeemed funds to support ‘would-be’ executives currently at school. If, however, wages were ‘sticky’ and did not yield to the realities of robotization and recession, forcing the Capitalists to wield the axe upon the blue-collared, the prospects for future employment among the current generation of students would grow less rosy due incremental robotization, and the consequent higher probability of loan default reflect in a relative fall in bond prices covering education loans issued the students. In such instances, the Administrator of the Endowment Fund held on to gains in value and postponed awards to even worthy students at universities, signalling tough times ahead. The activities of the Endowment Fund, the Union Administrator and the Education Loan Bond Fund afforded the extant blue-collared workforce and college students the opportunity to leverage information embodied in bond market volatility and resolve their future consistent with current realities and incentives from the future.
The Sun was out that Friday morning, and Rob was in an expansive mood at the coffee shop. His thoughts wandered again to the Robot resolution he had outlined. Though, Rob had provided for the RCDF-sponsored alternate social security net for robot-displaced employees, he realized there could be times when the RCDF Administrator would be constrained from issuing distributions from the fund. Prudently, he deemed it necessary that the robot-displaced blue-collared be further permitted to leverage and enrich themselves from the expanded capital base due the introduction of robots in manufacturing. To this end, he offered such households the facility to borrow firm-specific stocks from the DRCF Administrator, and arbitrage them two ways - against an aggregate RCDF stock ‘Hedge Derivative’ instrument, and against SSD bonds from various tranches issued by the SSA – in structured trading. (The former hedged the risk arising from holding the entirety of RCDF assets in dollar denomination. It was essentially a derivative instrument of value equal the worth of RCDF assets that the Administrator bought in the currencies of major foreign competitor nations. The foreign currency derivatives provided an opposite hedge to movements in the dollar, and protected the value of the RCDF assets in times of dollar weakness or volatility). The aggregate RCDF hedge instrument revealed the prospective competitivity of the US Robot economy relative to potential foreign competitors. Though the stocks borrowed from the DRCF did not cost any, the Administrator restrained exploitation of the facility by forcing household borrowers to share with the fund a larger fraction of their gains with incremental borrowing. The two-way trading revealed, on one hand, the fortunes of individual firms relative to the aggregate robot economy, and on the other, the sustainability of such firms relative to the default-risk embodied in the SSD Bonds. Between the liquid position of the RCDF hedge instrument, the short horizon of the DRCF, and the long-dynamics of the SSA bond market, the ex-blue-collared speculators played their 'firm-specific bets' on prices and volatilities of their borrowed stock with expressly-tailored financial instruments. Rob even went so far as to imagine the development of ‘Android Apps’ that permitted speculators to automatically square off positions and skim away the daily profits net of the RCDF Administrator's 'take'. This trading strategy, in the context of volatility in bond markets and international currency markets, permitted the robot-displaced to get away with intra-day trading gains that added modestly to their wallet. Thus, Rob managed to add another stream of uncertain income to the robot-displaced while revealing the opportunities and threats as they pertained to individual firms, the aggregate robot sector, and the bond market. The blue-collared now had the opportunity to choose between temp positions that paid variable wages and RCDF-points, and trading RCDF firm stocks for volatility gains – a choice determined by the home equity, spouse’s income, family circumstances, and lifestyle desires, among others. Their income options too had increased and now spanned social security, temp wages, RCDF-points that were either ‘variably’ paid-off by the RCDF Administrator or exchangeable for common stock through the DRCF Administrator, and the 2-way structured trading gains. If Carol noticed a change in his countenance that bright and cold day in December, it was understandable. Rob looked discernibly more relaxed with, huh!, merely a decaf!
Back at his office, Rob looked out the window. Flurries, just as predicted, and more to follow! He pushed himself harder to ‘close’ his proposal before taking off for Christmas. ….The DRCF Administrator, realizing many migrating and laid-off blue-collared might seek a future in the service sector, (and, in any case, eager to stop the growth of social security claimants) shrewdly supported a move to enhance service benchmarks and standards in the higher echelons of commerce, business and government. The consequent increase in the number of advisorial, consultant and customer-oriented supervisorial positions stimulated a move up the service career pyramid, a wave that opened new positions for the retrenched blue-collared, if at the bottom of the ladder. Not to be outdone, the RCDF Administrator supported both, a group of issue experts from the academe and think-tanks, and special-interest lobbyists. These experts and lobbyists opined on, and canvassed for policy and regulatory issues of concern or interest to the robot-dominated manufacturing sector. The strategy secured RCDF assets, opened up new opportunities that furthered the Robot revolution. In yet another pro-active move to anticipate and internalize the impacts of robotization, Rob pictured the RCDF Administrator applying the post-dividend hike in capital appreciation to support a risk cover for commercial and industrial bankruptcies among new and recent start-ups, albeit on a reverse auction basis until funds ran out. This move provided a probabilistic bankruptcy-cover for entrepreneurs willing to take risks and invest in their ideas. The promotion of risk-taking and the entry of new businesses and technologies brought about higher returns in the risk-favoring equity markets.
It was barely 3 in the afternoon, but it was also the Friday before Christmas. Rob checked off the essentials in his proposal and recounted the various ways in which his proposal made sense. It provided for a planned penetration of efficiency-enhancing robots in to the world of manufacturing. The Robot revolution would reduce costs in manufacturing and expand exports in to the far corners of the world. The consequent increase in corporate profits and government tax revenue would help the nation close the debt owed to overseas and domestic creditors. And though no amount of dole could supplant a secure blue-collar job, the strategy he had proposed was a half-step forward toward a comprehensive package that permitted worker migration, retirement, as well as post-lay-off income options. In fact, it went one better, and offered the blue-collared a half-chance at amassing sufficient capital in dividend-paying ‘robot stocks’. Why it even sponsored a mid-life opportunity to earn an academic degree for those so inclined among the laid-off, and underwrote an implicit capital risk-cover for the more entrepreneurial among them. In working through the financial markets, the strategy leveraged the financial markets to anticipate impacts years down the road. In particular, Rob was enamoured of the Endowment Fund - Labor Union EO Fund - Education Loan Bond Fund ‘triangular strategy’ that transmitted information from the workplace and the labor market through the bond markets to students at universities years ahead, and afforded them the opportunity to re-orient and re-align their educational and career strategies, thus mitigating the impacts of robotization significantly. In fact, and to sum up, Rob could justifiably claim his proposal was a quasi-efficient, quasi-sustainable, quasi-pareto strategy to respond to robotization-induced changes already underway, and which would, if left unanticipated, almost certainly create, beyond social chaos, a lost super-cycle of robot profits.
The flurries were thickening….and Rob took off with the draft of his proposal tucked inside his coat. On way, he dropped in at the Coffee shop, and found, to his surprise, Carol, reading a magazine at his favourite table. Why, she even invited him, and Rob, for once, didn’t mind the company…or the weather. Talking of the weather, it was just right for the cinnamon tea she served him. And the moment the talk drifted from the weather to the proposal, Rob turned excited, animated, and almost pedantic in the exposition of its virtues. After what seemed like a long ‘sermon’, Rob wound down, leaving Carol overwhelmed by his sincerity, passion and genius ….
…..and wondering whether it’d be a White Christmas afterall !