Chinese Political Neo Luddites and How Productivity Means More Employment

The clashing visions of entrepreneurs, whom in general desires to improve productivity through the marketplace (profit and loss system), and political agents, who looks at immediate needs for the purpose of staying in power, can be best illustrated by the proposed wide scale adaption of robotics in China’s economy.

From technologyreview.com

One of the defining narratives of modern China has been the migration of young workers—often girls in their late teenage years—from the countryside into sprawling cities for jobs in factories. Many found work at Foxconn, which employs nearly one million low-wage workers to hand-assemble electronic gadgets for Apple, Nintendo, Intel, Dell, Nokia, Microsoft, Samsung, and Sony.

So it was a surprise when Terry Guo, the hard-charging, 61-year-old billionaire CEO of Foxconn, said last July that the Taiwan-based manufacturing giant would add up to one million industrial robots to its assembly lines inside of three years.

The aim: to automate assembly of electronic devices just as companies in Japan, South Korea, and the United States previously automated much of the production of automobiles.

Foxconn, one of China's largest private employers, has long played an outsize role in China's labor story. It has used cheap labor to attract multinational clients but now faces international scrutiny over low pay and what some see as inhumane working conditions.

"Automation is the beginning of the end of the factory girl, and that's a good thing," says David Wolf, a Beijing-based strategic communications and IT analyst. Wolf, who has visited many Chinese factory floors, predicts an eventual labor shift similar to "the decline of seamstresses or the secretarial pool in America."

Since the announcement, Guo hasn't offered more details, keeping observers guessing about whether Foxconn's plans are real. (Through its public-relations firm, Burson-Marsteller, Foxconn declined to describe its progress.) Trade groups also haven't seen the huge orders for industrial robots that Foxconn would need, although some experts believe the company may be developing its own robots in house.

"Guo has good reasons for not waving his flag about this too much," says Wolf. Keeping quiet could give Foxconn a jump on competitors. What's more, with the Chinese economy slowing down, "it is politically inadvisable to talk too much about replacing people with robots," he says.

China's leaders see employment as essential to maintaining a harmonious society. The imperative of creating jobs often trumps that of efficiency. For instance, Wang Mengshu, deputy chief engineer at China Railway Tunnel Group, says that labor-saving equipment isn't always used even when it's available. "If all the new tunnels were built with the advanced equipment, that would trim the need for the employment of about six million migrant workers," he says. "In certain fields we don't want to have fast development in China, in order to solve the national employment problem."

Political leaders are shown here as practitioners of neo-Luddism—opposed to many forms of modern technology.

They are either unaware that advances in technology leads to greater productivity and more employment or simply have been looking at their narrow interests.

Hedge fund Andy Kessler eloquently explains the causal relationship in layman’s lingo.

From the Wall Street Journal, (bold emphasis mine)

So how does productivity result in more employment?

Three ways. First, some new technology comes along that allows something never before possible. Cash from an ATM, stock trading from an airplane's aisle seat, ads next to Google search results.

The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don't hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.

This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense. Adobe software killed typesetters, but allowed millions cheaply to get into the publishing business. Millions of individuals and micro-size businesses now reach a national, not just local, retail market thanks to eBay. Amazon allows thousands upon thousands of new vendors to thrive and hire.

Consider Uber, a 20-month-old start-up, whose smartphone app knows where you are and with a simple click arranges a private car pickup to take you where you want. It doesn't exist without iPhones or Androids. Taxi and limousine dispatchers lose. Customers win. We'll all be surprised by new tablet applications being dreamed up in garages and basements everywhere.

The third way productivity results in more employment is by attracting capital to satisfy new consumer demands. In a competitive economy, productivity—doing more with less—always lowers the cost of products or services: $5,000 computers become $500 tablets. Consumers get to spend the difference elsewhere in the economy, and entrepreneurs will be happy to sell them what they want or create new things they never heard of, but will want. And those with capital will be eager to fund these entrepreneurs. Win, win.

The mechanism to decide the most effective use for this capital is profits. The stock market bundles profits and is the divining rod of productivity, allocating capital in cycle after cycle toward the economy's most productive companies and best-compensated jobs. And it does so better than any elite economist or politician picking pork-barrel projects and relabeling them as "investments."

The productive use of capital is not an automatic process, of course. It is all about constant experimentation. And it is never permanent: Railroads were once tremendously productive, so were steamships and even Kodachrome. It takes work, year in and year out—update, test, tweak, kill off. Staples is under fire from Amazon and other productive online retailers. Its stock has halved since its 2010 peak and is almost at a 10-year low. So be it.

With all the iPads and Facebook and cloud-computing growth, why is unemployment still 8.2% and job creation stalled? My theory is that productivity is always happening but swims upstream against those that fight it. Unions, regulations and a bizarre tax code that locks in the status quo.

Read more of the fallacies of Luddism from must read classics of the great Frederic Bastiat from “That Which is Seen and That Which is NOT Seen” (Machinery) or from the equally distinguished Henry Hazlitt’s Economics in One Lesson (The Curse of the Machinery)

I am reminded by the recent conversation I had with the charter president of Rotary of Mandaluyong, Fred Borromeo, who at age 86 ironically is an avid fan of technology.

In his recent encounter with some local government neo-luddites who objected to his suggestion to adapt to new (farming) technology for the same reasons as Chinese politicians, Mr Borromeo told them, “the world will move along with or without you”. Indeed.

Competition Fueled Global Stock Exchange Automation

Transition to electronic trading in global stock exchanges only gained traction after the derivatives exchanges gave them a challenge

Professor Michael Gorham of the Illinois Institute of Technology narrates (World Federation of Stock Exchanges) [bold emphasis mine]

As we have seen, the early pioneers of electronic derivatives trading created brand new exchanges starting in the mid 1980s. It took almost another decade before existing floor-based exchanges began fully converting to screens. Aside from the fact that conversions from floors to screens met stiff resistance from member-owners whose livelihoods were threatened, derivatives trading, especially in financial products, was still in its infancy and many countries did not yet have derivatives exchanges. New Zealand, Sweden, Switzerland, Germany, South Africa and China all had no derivatives exchanges. So during the mid 1980s and early 1990s, all these countries created new derivatives exchanges, and they were all electronic right out of the box.

Stock exchanges, on the other hand, were relatively mature institutions, and most countries of any size already had one or more stock exchanges and were not generally building new ones. And given the natural resistance of member-owners, the existing stock exchanges, just like the existing derivatives exchanges, were not likely to quickly convert to screens. Consequently, early electronic activity on the securities side was carried out on an experimental basis, typically only for stocks that were relatively inactive. So in figure 6.2, we see that except for the isolated event of the Cincinnati Stock Exchange becoming electronic in 1980, it was not until 1989 that stock exchanges began to start converting to electronic trading in earnest

Some observations;

Most stock exchanges being monopolies or oligopolies have been slow to adapt to changes.

It took the introduction of derivative markets which threatened to compete with these traditional exchanges to prompt the latter to automate.

Nevertheless automation revolutionized trading. It facilitated increases in transparency, enabled outsourcing of traditional functions such as trading floor operations, product development, marketing, legal, regulatory and often clearing and settlement, which has contributed to the precipitous decline in the cost of trading, promoted direct access to exchange matching engines, introduced new order types, and fuelled a leap in merger and acquisitions activities.

Automation has been a significant part of financial globalization which means that the trend for stock exchanges here (in the Philippines) and abroad will likely incorporate new trading platforms/services.

For instance, the Philippine Stock Exchange has derivatives on the pipeline (via Red Hat) and has seen participation in new Exchange Traded Funds (ETFs) traded offshore, e.g. for ASEAN, the FTSE ASEAN Index Series and iShares MSCI Philippines Investable Market Index Fund (EPHE)

Deep and sophisticated capital markets are prerequisites to progressing market economies.