Swathes of lower skilled, skilled, middle and upper management tasks, roles and occupations are forecasted to be taken over by machines from AI to robots in their widest sense. The media is full of this upcoming automation and technology wave which could see many unprepared for its effects. But what does this mean beyond the visible impact or, the organisation of the firm?
In business and economic terms automation occurs when the cost of the machines reduces the unit cost of the product. Economics is acutely aware of the return to capital and return to labour. In business terms the cost structure of the firm will change as assets increase and operational people costs reduce. Margins therefore change. And hence the return on assets and profit margin on sales change as the model changes. Shareholders are happy if the profits increase; trades unions are unhappy when people lose their jobs. This is anchored in economic theory.
But machines are made from technology, and technology is built from Intellectual Property.
So how does the value from this automation wave get dissipated?
The conscious business choices will be to replace unskilled or skilled labour with machines. Other unforeseen consequences will be higher skilled and management roles quietly or not so quietly disappearing. Even C suite and board roles will unwittingly change.
People will move from the employed to the unemployed, with differing time horizons. The firm will reduce its operating expenditure and increase its margins. The firm also increases its capital expenditure, asset base and depreciation charges. These feed into cash flow, funds flow, increased income and increased dividends. Shareholders will benefit if the cost of change is manageable whilst the state’s social programs increase to cover unemployment and social benefits. Education and training benefits might also increase to retrain people.
But 70% of the value of the firm is in its Intellectual Property.
This value is carried in the profitability of its products where either pricing is enhanced through say Trademark, Design, Copyright and features or, costs are reduced though new Patents and other IPR. In reality it’s much more complex than that.
Therefore those supplying the machines will derive significant value from their markets. If this occurs within a single country e.g. US, then the wealth generating impact of IPR can be handled by domestic economics.
But if a country such as the UK imports significant volume of machines from another country e.g. US or Japan, the value embedded in those machines by virtue of their IPR (70%) is transmitted either back along the supply chain to the corporate balance sheet in a foreign country or, transmitted elsewhere to an offshore tax haven. IPR value does not necessarily follow the physical movement of goods and people and therefore the value of the free movement of goods and people is unclear.
Either way the employees of the machines vendors build personal wealth through better salaries and share options whilst shareholders benefit through dividends and increased share price. Those iprators creating and exploiting IPR receive additional funds to develop further new IPR. I.e. they build a platform for personal wealth.
However in the receiving country shareholders may receive a fillip though short term increased value, whilst the state has to pick up the tab for the costs of social programs. But many individuals have their platforms for building wealth thwarted.
This would not be such an issue were the IPR regimes of different countries the same but the reality is that they are not and the reasons for that are partly to be found in economic theory, politics and law. This affects investment decisions.
Therefore to benefit from the technology and automation wave, people need to look beyond the confines of the firm and look to the organisation of the economy and industrialisation.
Welcome. My name is William Bill Jones, author of MindWealth. I’m so happy to have you as a visitor to my blog about my new book. This project is very special to me, and I hope to share some of that excitement with you here.
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