Can history help guide investors during this period of rapid technological change?

Companies that make the most of the opportunities presented by new technologies may thrive for years to come; those that don’t are worth avoiding even if they look “cheap”.  

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In 1768, disgruntled sawyers burned the first automated sawmill – in Limehouse – down to the ground. The British Parliament responded by passing an Act making the destruction of machines a felony punishable by death. But attacks on machines – like Cartwright’s power loom and his wool-combing machine, or papermaking and cotton-weaving machines – continued. 

Thought to have been named after Ned Ludd, an apprentice who allegedly destroyed two textile frames in 1779, Luddite riots became common. They led Frederick Engels to argue in The Condition of the Working Class in England that the profits from automation went to factory owners and that machines impoverished workers. He had a point: many of the early machines undercut the costs of the home-working artisanal producers. The new factories were not only much more productive, but the equipment could be operated by young (often very young), newly trained workers. Although some artisans did find work in the new factories, their wages were often lower. 

In subsequent waves of the Industrial Revolution, the benefits of automation were more clearly spread. But the broader benefits did not stop workers from objecting, generally through strikes rather than by smashing machines. Some of the more colourful strikes included:

  • 1900 – New York streetlamp lighters’ strike. Policemen tried climbing up and lighting the gas lamps, but children went along behind them, turning them off again.
  • 1926 – The General Strike. An attempt to prevent lower pay and worsening conditions for 1.2 million locked-out British coal miners.
  • 1945 – New York skyscraper elevator operators’ strike. Office workers either had to climb the stairs of the Empire State Building (it has 102 floors) or go home. The owners brought forward plans to install automated lifts.
  • 1958 – US longshoremen’s campaign against containerisation. A resolution was agreed with unions, but the global introduction of shipping containers could not be stalled.
  • 1968 – US telephone operators’ strike. 160,000 operators refused to place calls, but automated boards were already sufficiently widespread to enable management and their allies to handle most calls.

None of these strikes could stall the adoption of new technology. Indeed, they often had the opposite effect – encouraging owners to accelerate automation.

The sector that has seen the greatest change from the introduction of machinery has been agriculture. From the 1930s to the 1960s, the share of farms using tractors rose from 17% to 80%, with a parallel collapse in the use of horses. Without horses to feed and groom, farmers saw their productivity rise by 30%. Improved ploughing, sowing and automation of the food manufacturing chain brought further leaps in productivity. Between 1870 and 2015, the percentage of the US population working in agriculture fell from 46% to just 1%.

You’ve never had it so good

Obviously, periods of adjustment to new working practices were distressing for those whose skills had been superseded. Many, especially the old, struggled to fit into the new economy.

Overall, however, society benefited. Technology brought electric light, cheaper food and the opportunities of travel. It took much of the drudgery out of housework and laundry. Displaced gas lamp lighters, farmhands, buggy drivers and housemaids often found new roles in more salubrious conditions.

New products produced by technology spawned entirely new industries: cars and aeroplanes stimulated the development of tourism and road haulage. Nearly half of current American employment is in jobs that simply did not exist in 1870.

Technology also eventually improved incomes. The productivity gains from the Second Industrial Revolution, from 1870 through to 1914, led to rapidly rising real wages across much of society. This trend continued for most of the 20th century. Strong returns from equity markets show that capitalists continued to reap the financial benefits too.

Those who adapted better to the change tended to be the better educated and those able to learn new skills. This effect led to ‘class’, which used to be defined by job (manual labour, professional) coming to be defined by educational level (degree or no degree).

Chart: Explosion of average wages, driven by industrial revolutions

Source: Angus Maddison's "World Population, GDP and Per Capita GDP, 1-2003 AD. Chart displays world average GDP per capita 1500 to 2003.

The computer age

In my own working lifetime, technology has continued to have an impact. When I first worked in the City, I was unusual in having a pocket calculator; most offices used slide rules and log tables.

Younger generations struggle to imagine life without computers, but you do not have to have been working long to see how the rapidly increasing power and decreasing cost of computers is threatening to put skilled jobs at risk today.

Chart: Explosion of computing power since 1980

Source: cielotech.wordpress.com. 05/11/2016

Understandably, in a time of rapid change, people are nervous. And it is easy to over-simplify as politicians do when they decry ‘lost jobs’. Once proven, new technologies will be deployed somewhere, even if politicians try to slow their adoption.

History suggests computers won’t make us redundant – but there will be winners and losers.

The uses – and limitations – of technology

Technological advances are seeing robotics being applied in a range of new sectors. Most industrial robots are currently used in automotive manufacturing, making repeat movements with metal components. Improved sensors and smaller robot arms allow automation to be used in sectors such as food handling, textiles and even surgery. This automation seems mainly of the productivity-enhancing type, rather than the labour-replacing type - though some low-skilled jobs, such as fruit sorting, will undoubtedly be lost.

But the new wave of automation also extends computing power into artificial intelligence. It does not mean that computers are starting to think more like people – but they are now faster at reaching the same conclusions. Their growing ability to learn from human-generated patterns is powering translation software and the development of things like autonomous driving. Here again they are often faster than humans, but only when faced with patterns they recognise.

The ‘Moravec paradox’ reflects some of these limitations. It tells us that computers are great at doing things we find difficult but can struggle with tasks a toddler can do. So they can beat us at chess but can’t put the pieces back in the box afterwards. They follow rules, while we follow patterns. The Henn na Hotel in Nagasaki recently disposed of its robots: they were waking up guests who were heavy snorers and asking them to repeat their ‘requests’!

Recently, computer scientists have looked at various jobs and tried to analyse how much they rely on logical processing and how much on ‘value judgment’ – the aspect that computers find hard. The idea is not so much that computers should replace humans, but supplement them.

Impact of computers on jobs 

Since the 1980s,  computerisation has widened divisions in the labour market and the distribution of incomes. In the US income inequality has increased – particularly over the past 20 years. Blue-collar manufacturing workers have been especially affected and this trend will continue. The list of ‘at risk’ trades for the next wave of automation includes farming, transportation, food preparation, retail and construction.

The number of jobs that require little further education has remained the same: catering, security guards and so on. But workers in professions that require value judgments have become more productive thanks to the support of computing. Where such value judgments represent the larger part of the job, this has sometimes led to higher pay – but where the computerisation allows more candidates to qualify for the job, pay has tended not to rise. Job numbers in these areas have all risen as the improved product attracts greater demand. Sectors where automation may create more jobs than it destroys include healthcare, financial and legal services.

Political responses

As in the past, automation is creating friction. Perhaps for political convenience, attention is being deflected towards China, with accusations of ‘unfair’ trading. It is hard to separate the two issues as offshore manufacturing savings increasingly come from automation in those locations, rather than simply from low wages. Tariffs are unlikely to offset them. With US unemployment currently low and wage inflation rising, we may see this issue as a more modest vote winner in the 2020 elections than it was for Trump in 2016.

In the 1920s, John Maynard Keynes predicted that productivity would rise eightfold over the next century and that the working week would therefore shrink to 15 hours. In fact, productivity has risen nine-fold, but the working week has not shrunk. Rather than opting for greater leisure as incomes have risen, we have found new things to buy. 

The jobs that the new wave of automation challenges may well extend further into white-collar than earlier waves. Politicians threatening to ‘tax robots’ may have misunderstood the situation: computing power is hard to tax and there is little point in slowing the use of robots in manufacturing unless the Chinese and others promise to do so too.

Many jobs will be challenged. Many of our children and grandchildren will need to retrain mid-career. Some have argued that as wealthier families invest more in their children’s education, they will cope better with the changing job market than others. This seems a strong argument for the state to improve education for all and throughout life: as skill levels and adaptability challenges rise, social mobility may be further reduced.

How we invest around these trends

In the Artemis Global Select Fund, Automation has been one of our largest investment themes for some time. One of our larger investments is a medium-sized Osaka-based business, little known among investors, but well known in retail and distribution as the global leader in warehouse automation.

While we remain excited about technical developments in this area, it has been a poor performer over recent years as the US-China trade dispute has made multinational companies slow to implement their capital investment plans. This, however, is merely delaying the inevitable. Companies with global supply chains are recognising the need to revisit and extend their plans for automation to help reduce offshore manufacturing costs and accommodate recently introduced tariffs. It is unlikely that President Trump intended to stoke a boom in the automation sector where most of the leading companies are Japanese, but we hope to thank him for it.  

Despite sales of advanced automation being sluggish, most of our investments across the rest of the portfolio continue to benefit from technological change. Most obviously, companies in our Online Services theme are driven by increased computing power, especially chip-design companies. In our Screen Time theme, we invest in companies that connect digital networks. In Scientific Equipment, we invest in makers that are using big data to anticipate changing consumer trends. Most of the companies we invest in use modern technology to plan and drive their growth.

For some companies, the threats and challenges seem larger than the opportunities. We are, for instance, avoiding the banking sector at present. Some banks have cleaned up their balance sheets and are finally seeing some loan growth. But the traditional banking model faces challenges from new financial operators using low-cost, technology-based systems. Banks are trying to keep up with modern technologies, but institutional sluggishness and the concern of cannibalising existing profit centres often hold them back.

Conclusion

We are investing during a period of unusually rapid technological change. Companies that make the most of the opportunities will, no doubt, thrive and provide strong investment returns for years to come. We suspect those that can’t should be avoided even when they look ‘cheap’. Technology does not depend on economic cycles, nor particularly on trade deals. We hope our politicians will embrace the technological advances and  anticipate the various challenges and pressures that may result. In the long run, a more productive economy can be good for workers and investors alike. 

Simon Edelsten is the manager of the Artemis Global Select Fund and the Mid Wynd International Trust.

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