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Horizons Talks: The Next Digital Economy

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[Eric Ward]

Before we talk about the future, let’s just review the present. At this moment, there is a human replacement organ that’s being built with the patient’s own cells using a digital model. Facebook recently announced that it’s launching something like a transnational platform currency. Automated drilling equipment, today, including drilling trucks and a train are mining iron ore in Pilbara, Australia. They’re being controlled, well, more supervised entirely by a small team of humans 1,500 kilometres away in a control room.

Last night a trained architectural drafter in Bangladesh produced plans for an Ottawa client. Those plans are meeting the Ontario Building Code and getting approved by the city. They’re doing that work for $3 an hour.

That’s today, actually that’s yesterday and that’s last year and that’s two years ago. So how do we make sense of the underlying shape of these disruptions to our economy?

First, we want to say that a lot of this is exciting. We love thinking about the future. We also recognize though that previous economic transitions have been wrenching too many who lived through them and we bear that in mind as we do our work.

I’m going to speak briefly to what innovations are transforming the economy, how the digital economy works and what the Next Digital Economy might look like and my colleague Marcus is going to speak to this question of what are the challenges and opportunities and policy implications of the Next Digital Economy.

So if you remember one thing, remember something that I said, remember that the digital technologies, really, fundamentally are allowing us to unbundle the factors of production and offer new ways of putting them back together.

Unbundling, putting them back together.

It’s pretty simple but they’re really profound consequences for firms, workers, economic sectors and our policy suites when that starts to happen. And fundamentally we’re seeing that there are new ways of this happening across time, across space and across the allocation of work to humans and machines.

So we looked at a number of technologies, here are some of them, and asked, what happens is – these technologies that you’ve heard of before, the Internet of Things, AI, advanced materials, 3D printing… what happens when they cease to be the new one thing we’re focusing on, and instead mature and combined become kind of boring and are the fundamental underlying infrastructure for the Next Digital Economy.

I’ll give you a bit of a sense of where that took us.

First, advanced materials like thin-film batteries are allowing us to create objects that are very small and smart and also cheap. It means that we can spread these across the built-in natural environment, eventually extending what’s become known as the Internet of Things to almost everywhere that there are things. The data that these objects will pull in, one of the things that they’ll do and really the only thing that can keep track of the masses of the data, is to train artificial intelligence; which seems set to replace or at least participate in all algorithmic, cognitive labor over time. And it turns out that a lot more is algorithmic or at least can be done in algorithmic ways. And AI will acquire its body through robotics. Extending its reach into the physical world.

With advanced telepresence we’ll project ourselves and our skills and expertise anywhere in the physical, virtual or mixed worlds irrespective of borders as long as there is network access. And many objects as small as smart dust, as elaborate as human organs, as large as buildings, may be 3D printed in factories that are local and multifunctional in the sense that they can be reprogrammed to produce any number of different objects. Some of the materials that run through these new multi-purpose factories may be produced by synthetic biology. Essentially custom-designed and human-created organisms. We’re exploring this bio digital economy more deeply in the next study.

And finally, and crucially for making all these parts work, blockchain technologies allow us to create unique, non-copyable digital assets which is why you can use it to create money like Bitcoin or whatever Facebook is doing. But also you can use it to create digital objects that record or have in themselves value, like a contract or an invoice or a security and you can digitally verify their authenticity. This enables secure, trusted, low cost transactions between humans and machines that do not know each other and that’s part of what makes this whole thing work.

So in the Next Digital Economy we can see both cognitive and physical labor currently organized as jobs being broken out into tasks and spread out through networks. Now, you’ve seen UpWork and Mechanical Turk. Imagine that 15 years forward and that humans and machines can connect from anywhere to anywhere to accomplish tasks that are later on put back together as larger products. Manufacturing could be automated and many people are suggesting it could be re-shored as well, of course, because the comparative advantage created by cheap labor ceases to operate in the same way once you’re largely automating manufacturing.

So, re-shoring of production. Value chains could be pulled together very quickly from an on-demand pool of resources and we’ll come back to that. So, preparing value chains, essentially creating something in the economy, a good or a service that people want to consume or that has economic value, is less like building your own single product line; getting all the things together, getting all the people together and then designing your conveyor belt and it’s more like reaching into a box of repurposable resources, connecting them digitally as long as you need them and then throwing them back in the box for other people to use to create very different value chains.

What matters here then, is access to that unbundled pool of resources. That’s crucial. But not necessarily owning them. And this priority of access over ownership may apply both to firms and also to consumers over time. So instead of focusing on specialized production at scale, you may start to see firms offering a broad scope of goods and services to a customer base that they understand very well because they have the data. Consumers could even start to see themselves as living within the ecosystems provided by these giant firms or families of firms.

In this economy that we’re starting to experience, basic data discovery and trust mechanisms become part of the underlying infrastructure. That is, they’re provided by kind of just the tools of the economy. They cease to be business propositions on their own within the economy. That’s really important if you are providing a service that relies on information disequilibrium like law, you know, or a trust difficulty like a lot of banking does for us. And importantly and in some ways very hopefully, production costs and consumer prices could greatly reduce. We could see falling prices across the board for anything that can become a digital good or for the digital elements of mixed goods. And that’s because the marginal cost of producing digital goods and digital elements of mixed goods is essentially zero.

How much did it cost you to take the 2031st photo on your phone this year as compared to the one before? Zero.

And what did it cost the company to provide it? Essentially zero.

In this world firms could face fierce competition amid ultra low profit margins. That’s because many many people can learn easily about how value chains are made in an area and then can reach into the box and grab the pieces necessary to do that. Many could respond by having few formal employees. And some of these firms may be built to last only a short term to take advantage of a particular opportunity. So firms may not be as focused on corralling resources but on exploiting a lot of short-term opportunities and really understanding a source of demand.

And depending on data protection and competition laws, we may see a number of giant firms attempting to capture much of the information, much of the rents and profits in this emerging economy. We can imagine workers coming under significant pressure as machines displace humans from many tasks long before the machines can do the whole job the way it’s been bundled for humans.

Machine centered design and hybrid machine “humans centaur” arrangements could accelerate this partial replacement and rearrangement of humans place in value chains. Machine-centric design is like the opposite of human-centric design which is having its moment essentially rebuilding the workplace for how machines work best, optimizing for machine work.

We’re starting to see that.

Workers could also find themselves in a competitive networked global talent pool. I’ve talked about the Bangladeshi architect who’s offering services, massively undercutting what can be done at a living wage here. Now this is great for India, it’s great for Bangladesh, but this period of wage convergence across jurisdictions could be very difficult for many people offering their services in Canada.

The service sector will experience, we think, the early effects of the transformation to the Next Digital Economy and overtime robotics seems poised to provide services, not only online but in the household, service center and in the sidewalk.

In manufacturing, as I’ve said, highly distributed factories could 3D print or otherwise build a vast range of goods from standard biological mineral plastic and synthetic raw materials. And when these goods have a digital element like the new Tesla car or like a cell phone, a software update can add new functions, new value without ever having to sort of manufacture a new object.

And in Natural Resources we already see signs of automation and remote control, real signs today in mining, in forestry, in oil and gas projects. So before, I mean, resource towns experienced job losses when the resource was used up or became unprofitable. In the future we could see continued, extensive extraction of resources without local jobs, that’s the Pilbara. I don’t think there was necessarily a community around Pilbara mine. I don’t know. But if there was those jobs are not there, they’re way off on the coast 1,500 kilometers away.

And synthetic biology could really also be a disruptor here in natural resources since we might over time see alternative ways of creating products such as plant fiber, fertilizers, pharmaceuticals, proteins, meats, building materials and oils grown instead of necessarily having to harvest them.

So stepping back, previous economic transitions such as the Industrial Revolution not only spawn new ways of thinking, they also disrupted ways of life. They spawned new ideologies. They overturned powerful institutions and they transformed the built and natural ecosystems in environment. They also challenged the understanding and the roles of government in that new economy. The same could be true this time.

So to start to explore some of the policy implications of the Next Digital Economy, we introduce Marcus Ballinger and he’ll take us through.

[Marcus Ballinger]

Clearly it makes sense to invest in staying on the cutting edge of the technologies that Eric described earlier. It’s hard to predict the jobs that are going to spin out from them in 10 to 15 years. If you think back 10 or 15 years there are a lot of jobs that people are doing today that didn’t even exist at that time and so we think the same thing will happen again. We expect these technologies are going to create a whole host of jobs but we don’t know what they’ll be. But, if we’re in the game, we can get advanced warning and maybe some early mover advantage on the jobs but also on the technologies as well.

We’re going to need good digital infrastructure in Canada. I think that’s pretty clear. But we shouldn’t assume that building it will automatically create jobs here in Canada. As Eric alluded to, platform-based gig work and advanced telepresence means the talent you need can be sourced from anywhere in the world. But that works both ways. Because we can also provide talent from Canada to the world.

Given that, maybe we should be looking at how we get qualified people to come here. Not necessarily because they’re earning money here or even if they have jobs here, but because they’re spending money here. Spenders support your secondary economy. It’s the one with a lot of jobs, good jobs potentially for people who have lower skills or abilities.

We already have good reasons for people to come here but maybe we make it even better by investing in physical infrastructure and social capital that makes Canada a really attractive place to come and live regardless of where you work. This is a strategy that goes from putting bums in seats at work to one that puts backs and beds at home.

Employment skills: we see a potential for scenarios in which there is persistent structural unemployment and jobless recoveries. Jobs that disappear in a downturn might not come back when the economy picks up because, in the interim, digital technologies took over the work. Downturns often accelerate the adoption of technologies that are specifically targeted at reducing labor costs.

So are there skills that are hard to replace? Yeah! But they’re soft skills. Skills like empathy, judgment and creativity. But these are personal attributes. They’re inherent or they’ve been picked up through years of socialization. You can’t get these in a two-week online course at the local community college.

Where there is work, the shift to a global market for labor means Canadians are competing with everyone anywhere else in the world that has the same skills. Many of them will live in places with significantly lower cost of living than here in Canada. Which means they can continuously underbid you to the point that you cannot afford to take the work. You need to be mindful that in our rescaling and retraining programs we might be rescaling for Canadians for work that is technically available but they can’t make an effective living wage at it because of global competition.

Looking at trade: a lot of the value that’s going across borders is going to be digital and it’s going to be peer-to-peer. This could make it really difficult to impose traditional tariffs quotas or non-tariff barriers. We could see the emergence of de facto global free trade at least in digital goods.

Alternatively, we might not see that happen if competing actors intentionally create incompatible standards so you’re essentially locked in to their digital trade block or alternatively locked out. Think about iOS vs. Android but on a global international trade level.

Looking at social support programs: we have to realize that the standard employer-employee relationship might not be the norm in the Next Digital Economy. We have to think about working gigs on a global tasking platform does not pay benefits to the employee and the government gets no employer contributions from which to fund programs. We also see the potential for income inequality to go up. We’ve talked about prices going down and that’s good, lower prices are good for everybody but they’re particularly good for some people. If you’re one of the people whose job hasn’t been digitized and still pay well you will be increasingly better off compared to those who continue to lose wages even if your income stays the same. You’re up here and all your prices are going down. Spread of money that you have keeps getting better.

This inequality could lead to calls to redistribute income, actual employment, hours of work or assets. Particularly to people who have lost income but have not seen it offset by these declining prices. It wouldn’t be surprising if we saw a lot of intergenerational tension in this space as it rises because of this.

We also have to think that work is more than just a way for people to earn money. If work disappears or changes its nature significantly, how do people find the non-monetary things that they lose from this standard employer-employee relationship or working in an office like this one?

Looking at regulations: it could be difficult. Here’s an example: people are importing digital files and 3D printing things locally out of materials that don’t meet the environmental consumer safety or health standards that you’ve imposed. What do you do? How do you impose that at a micro level in people’s homes?

Enforcing labor standards can be really tough too. In a global market that pays by the task on a platform rather than by the hour, how do you enforce a minimum wage? It’s task based, not hourly based. How do you enforce maximum hours of work or the minimum working age? How do I know that the person that I’m hiring on the platform isn’t a 12 year old child?

Looking at IP protection: the cost of entry into digital production is quite low. It’s essentially computers and the internet and a 3D printer – readily accessible. As a result of this it makes it really easy to develop identical offerings using parallel but distinct pathways.

So think about Uber and Lyft. They provide identical ride-sharing services but have completely different IP and digital assets. Privacy and data use is an issue now that we can only see getting entirely more complex as we move forward.

From an environmental perspective: this decentralisation, disaggregation might make enforcement harder because there could be a higher number of small and dispersed mom-and-pop type organizations. These might be super high-tech mom-and-pop organizations but it’s much harder to environmentally regulate a dispersed manufacturing base than it is to regulate a small but highly concentrated manufacturing base.

There are some upsides. Local production reduces transportation impacts including those related to carbon emissions. A digital economy runs on electricity rather than petroleum. So upsides and downsides for Canada. We are a petroleum country but at the same time we are also a country with an enormous amount of electricity which is non emitting. So, a bit of a balance there. Some good, some bad.

There’s also the question of dematerialization and repurpose-ability that Eric was talking a little bit about. Devices can take on multiple functions without changing their physical form simply by changing the software. Smart phones is a great example of that. They replace lots of things that would have had separate physical form even ten years ago. And we’re seeing repurpose-ability in this type of activity now in things like home appliances and the smart devices that are in your home and even in automobiles. So you can upgrade them by downloading improved software. So people may have fewer things and they may hang on to them longer because they can continue to add functions to them without having to trade them in.

You could also see things like blockchain being very significant here. Blockchains allow you to track the origin and environmental sustainability of raw materials and products throughout the entire supply chain. So you know when something is bought, what the entire history of it is from an economic perspective and you can make selections based on that knowledge that we can’t now.

Looking at taxation: this could be a real problem. There’s people in places like the OECD that are looking at this and they say it’s going to be problematic. It’s challenging. And the reason is that when economic activity is global and it’s digital, it’s really hard to determine when value is created and whether it’s created inside your tax jurisdiction. And even if you can figure that out, there are problems.

As we said, there’s a convergence of wages. So we see we could see lower income taxes because of falling wages. We could see lower corporate taxes because profits are being eroded by competition and we could see lower value-added taxes because of dematerialization and lower prices.

So when you buy something there’s less GST or HST on it. All of those things could create a perfect storm in which tax revenues are falling at the same time as demands on the fiscal framework are increasing and that’s because more and more people and maybe corporations are looking for government support during the transition to the Next Digital Economy.

The last point on this slide is that it may be more difficult for governments to run deficits in economic slowdowns because there would be less certainty about the ability to pay them down in the future. We could find that traditional metrics like GDP may be less relevant for decision making. We could see for example consumer welfare going up significantly for a lot of things because prices are going down. If prices are going down that would mean GDP is also going down. We should be mindful that we sometimes work on investments specifically targeted at increasing GDP but they may actually be decreasing welfare at the same time.

We’ve talked all about the potential for significant unevenness across the economy. This digitization of the economy is not going to happen overnight. It’s going to play out in different sectors over different times and to different depths. So we’ve already seen it shred photography. We’ve seen it shred music. We are seeing it shred print media. It’s going to go into legal and financial probably next.

But in the meantime some sectors will be disrupted later and some will be disrupted earlier, different depths of disruption. That means that an aggregate measure of the economy like GDP might not have the granularity needed to make appropriate policy interventions or investment decisions. We keep talking about declining prices as well and while that’s good, it’s actually possible that in aggregate these declines could put us into deflation. Most of our instruments are geared towards controlling inflation and it’s not clear how well-prepared we would be in a deflationary environment, particularly one that extended over a long period of time.

For the last slide, I want to remind you that digitization doesn’t happen to the whole world or even to the whole economy, I can’t eat digital pizza and I can’t stay out of the rain in a VR generated apartment. So there’s still real value in real world materials and in non digital work. Where value persists, in the face of digitization, is a question Horizons will be working on and we’ll keep you posted on it as that progresses potentially in January early in the next year.

I also want to talk about our basic assumptions about economic modeling. We always assume that there is scarcity and that we have to compete for resources to win. Think about every time you’ve heard a statement from your department potentially saying: we will build a strong and competitive… fill-in-the-blank.

But what if the ability to create additional units of digital goods and services at almost zero cost means that we go from scarcity to abundance or at least sufficiency? We may find that there are fewer zero-sum games in our dealings with each other and with other nations. It could be that for some things cooperation between nations provides greater benefits for citizens of both countries than competition would. And this could become a more common approach. Particularly as digitization continues to blur geographic boundaries and our concepts of nationality and citizenship.

Horizons
Horizons

Policy Horizons Canada, also referred to as Horizons, is an organization within the federal public service that conducts strategic foresight on cross-cutting issues that informs public servants today about the possible public policy implications over the next 10-15 years.

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