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Capital Management: Your Economic Edge Over Automation

2 March, 2017

Whatever you’re doing right now to earn a living, there’s a good chance much of your work could eventually be done by a machine. In fact, some futurists predict machines will do all our work. On first exposure, this may seem ridiculous. But both history and current developments make a reasonable, perhaps compelling, argument that work will be a much smaller part of our future. If this is true, it portends some dramatic changes for personal finance as well.   

The Uneasy Tension Between Labor and Capital

In economic terms, people are born with an “endowment of human capital;” they have the potential to work, to learn, and to earn money. Human capital is often referred to as “labor,” which distinguishes it from other capital assets, such as land, equipment, or money.

Wealth creation occurs when human labor is applied to capital – to grow food, manufacture products or provide services. Labor is the catalyst for all wealth, because capital can’t develop on its own. Forests don’t become houses, and ore doesn’t become metal apart from labor. Over time, labor tends to get smarter, more sophisticated in its use of capital. And in doing so, much human labor becomes less essential; once profitable ways of earning a living disappear, the man is replaced by a machine.

The logical conclusion of this trend of capital replacing labor is that, eventually, the need for labor will almost cease to exist. In academic circles, this is called “capital-biased technological change.” In the past, this displacement of labor by capital has swept through specific sectors, completely changing the economic landscape.

The History of Capital Replacing Labor in the United States

One of the ways economists analyze an economy is by the distribution of the labor force – who works where. Historically, labor has been divided into three categories: those working in Agriculture, Industry and Services. This chart, derived from academic research and government statistics, shows the changes in the US labor force from 1840 to 2010.      

The Agricultural and Industrial segments of the labor force are easily defined: these are people whose work produces food or manufactures goods. The Service sector encompasses a much broader range of labor: retail, transportation, management, education, medicine, finance, information technology, etc.

In less than two centuries, the labor force distribution has flipped dramatically, due almost entirely to capital replacing labor. 

  • In 1900, most Americans still lived in rural areas and 40 percent of them worked on a farm. Today, only two percent of Americans list farming as an occupation, yet these few mechanized farmers produce much more food than their predecessors.
  • A similar pattern is occurring in Industry. In the early 1950s, manufacturing represented almost 40 percent of the nation’s workforce. But since then, automation has steadily eroded this sector of labor. Citing a January 2016 Federal Reserve report, Rex Nutting wrote in a March 28, 2016, MarketWatch column that “US factories produce twice as much stuff as they did in 1984, but with one-third fewer workers.” Today, Industry comprises under 20 percent of the US work force. But like Agriculture, it is plausible that eventually only two percent of the work force will be needed by Industry, as machines can handle the entire process, from design to manufacture.
  • Historically, as both agricultural and industrial labor opportunities diminished, the service sector has taken up the slack. And until now, the service industry has been the most machine-resistant. But machines are beginning to replace low-end service labor (think of the automated phone systems that keep you from talking to a real person). And as they integrate with artificial intelligence platforms, automation is moving up the service food chain. In a November 2016 interview in Vox, Andy Stern, a past president of one of the nation’s largest unions, notes the most common job in 29 states is driving a truck. Yet driverless vehicles (projected to hit the road within the next five years) could make that occupation obsolete, perhaps overnight.

No Work, or No Need to Work?

While many see capital-biased technological change as inevitable, there is no consensus on whether the economic consequences will be beneficial or disruptive. An August 8, 2014, Wired article by Marcus Wohlsen captures the ambivalence:

“Optimists say that more robots will lead to greater productivity and economic growth, while pessimists complain that huge swaths of the labor force will see their employment options automated out of existence.

“Each has a point, but there’s another way to look at this seemingly inevitable trend. What if both are right? As robots start doing more and more of the work humans used to do, and doing it so much more efficiently than we ever did, what if the need for jobs disappears altogether? What if the robots end up producing more than enough of everything that everyone needs?”

Hypothetically, an economy without human labor at the center threatens to unravel the social and financial systems under which we operate, which is sort of scary and unnerving. If almost no one earns a living, what happens to buying and selling, lending and borrowing, income taxes, retirement planning?

One response put forward by some economists to the possible end of work is a Universal Basic Income (UBI), where each adult citizen receives a monthly stipend, with no regard for employment status or income. Stern, the ex-union president, sees UBI as a way to ease the transition away from dependence on wages by providing an economic base that gives people a sense of security, as well as the freedom to be entrepreneurial. A large-scale experiment involving UBI for 2,000 people in Finland began in January, and two cities in Scotland are also considering UBI on a test basis. Last year, a Swiss referendum proposed giving every adult citizen a guaranteed income of $2,500 a month, but the plan was soundly defeated; centuries of working for a living make people resistant to the idea of giving money to everyone for doing nothing.

Some more pragmatic thinkers simply want to get more capital in the hands of workers. Noah Smith, in a January 2013 Atlantic article titled “The End of Labor: How to Protect Workers from the Rise of Robots,” says it should be “easier for the common people to own their own capital – their own private army of robots. That will mean making ‘small business owner’ a much more common occupation than it is today.”

Taking the idea one step further, Smith proposes giving every citizen “an endowment of capital” when they turn 18, consisting of a diversified portfolio of investments. “This portfolio of capital ownership would act as an insurance policy for each human worker; if technological improvements reduced the value of that person's labor, he or she would reap compensating benefits through increased dividends and capital gains.”

Your Next Job: Capital Management

You might dismiss the end of work as dystopian pessimism. You could discount the replacement of agricultural and industrial labor, ignore the academic papers, and scoff at experiments with universal income. But recall the phrase repeatedly used to describe the aftermath of the Great Recession: The Jobless Recovery. Productivity is up, but wages and employment are not. Capital is replacing labor.  

It is reasonable to assume this change will not impact all sectors equally; some careers and professions may endure and even benefit from this displacement. And there will still be farmers and industrial workers (just not as many) and it might be possible for these select few to successfully continue in a work-and-save personal finance model.

But if your anticipated retirement is more than 10 years in the future, relying exclusively on your labor for present income and future retirement is a financial strategy with potentially seismic fault lines. A labor displacement in your field could precipitate a financial earthquake.

These conditions present two profound and inter-connected philosophical shifts in personal finances. First, the potential wealth accumulation from work alone (and saving) will be much lower. Second, when capital replaces labor, the only “job” left for human labor is managing/owning capital. In this paradigm, capital management – i.e., the active control of assets for both short- and long-term income – is an essential wealth-building activity.

In most careers, there is little integration between labor and capital; people are either workers (labor) or owners (capital). Workers are focused on compensation; their only “capital management” usually consists of designating a money manager at retirement. Many, if not most, workers are ill-equipped to be owners.

But when capital-biased technological change and universal incomes threaten to cap or drastically limit earnings from one’s labor, the only practical response is to consider capital management – and not only for retirement, but perhaps to supplement or replace current income. If automation takes your job, owning and managing a fleet of driverless cars could be a lucrative and necessary application of your endowed human capital. And monthly income from rental properties might be a steady retirement income.

The value of your labor may not be immediately threatened. But your financial life isn’t just about today; most of your financial objectives won’t be realized until a future date. What happens if capital-biased technological change has re-ordered the economics of daily life?

No matter where your human capital is currently working, considering capital management strategies for your personal finances is good advice, because even if it’s wrong, it’s right. You can’t make a mistake by becoming a better capital manager.