Latest insight: Will the fourth industrial revolution drive global economies or eliminate millions of jobs?

The merger of man and technology was the main theme at Davos, highlighting how the trend could drive an unprecedented economic cycle laden with opportunities. But is this a good thing for everyone?

An Englishman named William Lee once invented a machine that would replace the hand knitting of textiles, and thus launch that industry into a new age of efficiency. He traveled to London to demonstrate the machine, hoping to obtain a royal patent. Queen Elizabeth I refused the request. She feared the machine would “assuredly bring her poor subjects to ruin by depriving them of employment.” The year was 1589. The Industrial Revolution lay nearly 200 years in the future, but Good Queen Bess knew a risk that could cause unrest among the population when she saw one.

How technology will impact society and businesses is a question as old as innovation itself, and it was a focus last week at the World Economic Forum’s (WEF) Annual Meeting in Davos, Switzerland. Much of the discussion was around the Fourth Industrial Revolution, which is described in a new book of the same name by WEF Founder and Executive Chairman Klaus Schwab, as being “not only about smart and connected machines and systems. Its scope is much wider. Occurring simultaneously are waves of further breakthroughs in areas ranging from gene sequencing to nanotechnology, from renewables to quantum computing. It is the fusion of these technologies and their interaction across the physical, digital and biological domains” that can make this era filled with potential and distinct.

But could it make many jobs extinct globally?

They said it in Davos:

 

A more systematic approach is required to integrate renewable energy sources into an overall smart grid.” – Hiroaki Nakanishi, Chairman and CEO, Hitachi, on the challenges of distributing the clean energy necessary to power the Fourth Industrial Revolution

Opportunities and risks

In the WEF’s recently released “The Global Risks Report 2016,” one of the top five risks of highest concern over the next 18 months is unemployment and underemployment. One of the top five risks of highest concern over the next 10 years is profound social instability—of which joblessness is a major driver. While the Fourth Industrial Revolution is cause for considerable optimism, it will invariably create new global risk scenarios, including those linked to employment issues. “Previous revolutions all generated economic growth and jobs, and moved the world forward,” says Steve Wilson, Chief Risk Officer General Insurance, Zurich Insurance Group, a strategic partner in the WEF report. “There can be a complacency risk, however, if we assume that every time there is an industrial revolution it will do the same thing. It is possible that this one could be different. With the ability to automate work tasks, systems robotics and forthcoming quasi-artificial intelligence systems—autonomous vehicles, for example—jobs could be eliminated or easily replaced. I think that’s where the big question around this revolution is pointing.”

They said it in Davos:

We have technologies now that are really good at doing routine physical and knowledge work. And those technologies are rapidly getting better at work that we used to think of as a little bit less routine—recognizing patterns, understanding human speech and responding to it. Jobs doing that kind of routine work are not coming back. Strengthening the labor movement will not bring them back. Raising the minimum wage will not bring them back. Entrepreneurship will not bring them back.” – Andrew McAfee, Co-director, MIT Initiative on the Digital Economy.

It’s a question that Carl Benedikt Frey and Michael A. Osborne of Oxford University explored in their 2013 paper “The Future of Employment: How Susceptible Are Jobs to Computerization?” The results of their study include an estimate that 47 percent of total U.S. employment is in the high-risk category, meaning that associated occupations are potentially automatable over some unspecified number of years, perhaps a decade or two.

“There’s a case to be made that among certain skill groups in the U.S., a lot fewer of them are working today than 30 years ago,” says Frey. “You could argue about whether that is the result of globalization or technology. I think technology has something to do with it, in the sense that even countries like China are seeing declines in manufacturing employment right now. As manufacturing processes become increasingly automated in the future, a lot of mid- to low-skill workers will find it difficult to find a job. But that is not to say that the overall unemployment rate is necessarily going to surge, or that we’ll see mass unemployment in the next decade or two. Because we know that when one new technology job is created in a local economy, it tends to create five local jobs in the non-technical sector.”

They said it in Davos:

Automation is inevitable. The advance of AI is inevitable. We have to embrace that.” – Vishal Sikka, CEO, Infosys India

Frey sees two key open questions for the future: Will the pace of new job creation be sufficient in the technology sector to create new jobs outside of the sector? And will the multiplier effect (technology jobs creating non-technology jobs) remain the same as more labor-saving technology is applied in the technology sector itself?

“So vast and multifaceted”

In his book, Schwab says that the Fourth Industrial Revolution “will have a monumental impact on the global economy, so vast and multifaceted that it makes it hard to disentangle one particular effect from the next. Indeed, all the big macro variables one can think of—GDP, investment, consumption, employment, trade, inflation and so on—will be affected.”

Every business sector will have to deal with technology evolving at high speed, and every individual business will have to decide if it will be pulled by changes or use them to push innovation. The financial industry, for example, which to date has maximized the benefits of technology, is currently swept up by the potential of blockchain, the cryptographic technology underlying Bitcoin. Politicians in Greece and Honduras are looking to blockchain technology to solve land registry problems, while banks are exploring how blockchain can overhaul financial markets. Blockchain is also making an appearance on Wall Street: In October, Nasdaq unveiled Linq, a platform enabling private companies to trade their shares using blockchain-based technology.

“It’s not just the industry that’s excited about blockchain—it’s the world, everyone,” Garry Lyons, Chief Innovation Officer, MasterCard, says. “Even at Davos, every single tech panel I have gone to mentions blockchain, and some people call it the second coming. But while we think it’s very interesting, we don’t want to, and no one wants to, be blindsided by rushing into it.”

What impact blockchain will have, and what new risks it might create, are as yet unwritten chapters. However, the financial sector could experience shifts similar to those that affected other industries during past revolutions. “Manual work in heavy industries and factories has diminished heavily,” says Wilson. “And that could be the impact on white collar work in this new iteration of industrial revolution. Financial businesses, banking, insurance and so on—jobs in all of these could be eliminated. What happened to heavy industry will likely happen to light industry this time around.”

Fiercer competition

The big winners in all of this could be consumers. In terms of employment, technology mainly benefits relatively skilled workers and producers, but as consumers everyone benefits from declining prices and improved services that result from technology.

Businesses will have to stay on their toes to seize the opportunities that emerge. According to Frey, “competition will become even fiercer. What tends to happen with revolutions in general is that new technologies emerge and some businesses fail to adapt. Look at Nokia’s experience as smartphones evolved, and Kodak’s with the shift to digital film. Companies are going to have to watch out and make sure they are adapting the right way, and it’s difficult to say exactly what that is or how to achieve that. But in times of technological turbulence, there tends to be a shakeup in markets that causes some established companies to disappear and others to emerge.”

They said it in Davos:

It’s up in the air if [the Fourth Industrial Revolution] is a net negative or net positive. We know it’s going to be disruptive.” -- Mark Haefele, Global Chief Investment Officer for Wealth Management, UBS

One aspect of managing the risks associated with emerging opportunities in the Fourth Industrial Revolution will be to remain aware that the demographics of your customers will also be changing as a result of technology. For example, people could be living significantly longer in the future; last year, researchers at the Salk Institute reported they’d made progress in keeping human cells young by keeping DNA more stably packed together.

“Ultimately, the consumer is a human being,” says Wilson. “Everything that your business does is somehow in the value chain of a product or a service that a human being consumes. What does it mean for your business if there are massive increases in human longevity? If you’re selling surfboards, for example, then maybe your sales will increase and your business will grow because people can be surfing well into their 50s or 60s. If that’s the case, how does that affect what your business will sell? And how does it affect the workforce that you have working for you?”

In some ways, resilience to the risks of the Fourth Industrial Revolution resembles Darwinian evolution: Businesses will have to adapt to the world they find themselves in rather than the world they want. “In many ways, technology is like the evolution of living things,” says Frey. “It’s a good analogy. Although, on balance, we have benefited vastly from technology.”