Tuesday, February 22, 2011

Is it ethical to automate business?

Recently, "Is Setting Up an Offshore IT Help Desk Ethical?" appeared on Slashdot. I am glad technical folks are thinking about the ethics of their profession. The ethics of business automation was a topic that puzzled me for years.

Like many of you, I got interested in programming as a teenager. It seemed like the logical career choice because I was good at it. I ended up writing software professionally for Wall Street for about eight years during the 1990s. I took a break and am currently employed with Palo Alto Software. I still enjoy programming personally, but as I have studied our economic predicament, I have often wondered about the ethical aspect.

From an economic point of view, software often automates business processes that were formerly done manually. For example, contrast the human effort involved in accounting before and after spreadsheets. Of course the reduction in human labor has not been restricted to accounting. For example, enterprise resource planning software has facilitated detailed procurement based on actual customer demand, with full modeling of suppliers, plants, warehouses, work centers & cost centers. This degree of automation was not possible prior to ubiquitous computer networking. Technology makes it possible to do the same amount of work with fewer people.

Since 2008, USA has lost around eight million jobs. In other words, the last ten years worth of job growth has been wiped out in the last two years. Now I'm not blaming all of our economic distress on software developers. There were many other contributing factors including mismanagement by government and historically low interest rates. However, software was a prominent enabler. We could not have outsourced our factory production to foreign countries such as China without sophisticated logistics and communications software. Economic globalization was, in a large part, enabled by software. Although today's notable trend is outsourcing, I predict that robots will gradually replace even cheap labor. A strawberry picking robot is a great example of this long-term trend.

The payroll chart above actually understates the economic damage. Due to shifting demographics, more people want to work in 2010 than wanted to work in 2000.

So where does this data lead us? In an economic context, what does software do? It increases efficiency. In terms of efficiency, we can construe the information revolution as an extension of the industrial revolution. Prior to the invention of computers, productive efficiency was already increasing. Computers kicked the second derivative up a notch. It was only a matter of time before our vast increases in efficiency---and less need for labor---would show up in macroeconomic data.

Needless to say, the vast increase in efficiency has had some perverse effects. Take Warren Buffett, for example. Mr. Buffett is worth nearly $50 billion dollars but "did he work so much harder than everyone else? Did he create something so extraordinary that no one else could have created it?" No. Mr. Buffett simply made smart investments in productive capital assets that multiplied in value over the long term. His some $50 billion in gains dramatize the massive efficiency boost offered by technology. That boost in efficiency cannot really be attributed to one person or even a group of people. There are too many contributors. This wealth really should be spread around society as a whole more equitably.

Louis Kelso predicted our present economic predicament about fifty years ago. Mr. Kelso foresaw that the need for labor would continue to diminish and the value of productive capital assets would skyrocket. Mr. Kelso also devised an economic theory to account for this dynamic, binary economics. "Binary economics holds that (1) labor and capital are equally fundamental or 'binary' factors of production, (2) technology makes capital much more productive than labor, (3) the more broadly capital is acquired with the earnings of capital the faster the economy will grow." (Truly well named, huh? Binary economics for a people whose profession rests on binary arithmetic.)

Mr. Kelso further argued that the only fair way to cope with the dynamic of binary production was to diversify ownership of capital assets as much as possible. In contrast to the concentrated ownership of Mr. Buffet, a single person, owning $50 billion worth of capital assets, Mr. Kelso needed to devise a fair way to diversify ownership. Employee stock ownership plans (ESOPs) were a small step in this direction. However, Mr. Kelso advanced a more ambitious plan: to replace social security with capital homestead accounts.

Capital Homesteading (CH) is a complex proposal that takes some study to fully appreciate. However, the basic idea is to change how money enters the system by issuing interest-free loans through individual retirement accounts for the purpose of investing in high-quality productive assets (stocks that pay a dividend). At the same time, CH would restrict other sources of liquidity (close the discount window for primary dealers and stop fractional reserve banking). This plan would gradually diversify ownership of productive capital assets without confiscating assets from current owners.

Let us return back to my original question: is it ethical to automate business? If you are not concerned about the ownership of productive capital assets being further concentrated then, YES, automating business is unethical. Wealth inequity is bad and getting worse. Our wealth as a society is due to innumerable contributors. There is no logical justification for one group of people to own vastly more than another group of people when our wealth is the product of a collective, multi-generational aggregation of cultural expertise. The following chart shows nothing less than highway robbery on a massive scale in broad daylight.

On the other hand, if you are concerned about diversifying capital ownership then there are few professions more ethical than automating business. Software reduces the need for brute labor in meeting our collective needs. Software ought to enable us to retire at a younger age, have more resources to engage in leisure work (i.e. volunteer service), and spend more time with our families. Those with advanced education or unusual artistic talent ought to be freed from the chains of wage labor to pursue their greater contributions to society. The gains of efficiency due to software ought to enable us to enjoy life more and labor less.

I would like to point out that the struggle for ownership is a contemporary meme in science fiction. The fictional worlds presented in The Matrix or Battlestar Galactica center on a struggle between humans and computers over ownership of the space and industry needed to survive. In the real world, we are not quite at that advanced stage---artificial intelligence is still pretty dumb---but we are faced with a similar struggle for control between human owners and human wage laborers. This struggle will only intensify as further automation diminishes the value of brute labor. The outlook is bleak unless we can metaphorically escape The Matrix or beat the robots in Battlestar Galactica by acknowledging and respecting both binary factors of production.

"Conventional wisdom says there is only one way to earn a living, and that's to
work. Conventional wisdom effectively treats capital (land, structures, machines, and the like) as though it were a kind of holy water that, sprinkled on or about labor, makes it more productive. Thus, if you have a thousand people working in a factory and you increase the design and power of the machinery so that one hundred men can now do what a thousand did before, conventional wisdom says, 'Voila! The productivity of the labor has gone up 900 percent!' I say 'hogwash.' All you've done is wipe out 90 percent of the jobs, and even the remaining ten percent are probably sitting around pushing buttons. What the economy needs is a way of legitimately getting capital ownership into the hands of the people who now don't have it." (Louis O. Kelso, Journal Asset Based Finance, 1982)


  1. Amazing thoughts!
    I have been inside a large corporation where, after implementing a new ERP, Around 400 persons lost their jobs... after that I have always been dealing with the ethical issues around technology. Thank you.

  2. Have you read Henry Hazlitt? He refutes this logic in his book "Economics in One Lesson". The relevant chapter is here:


  3. Rep. Jesse Jackson Jr. goes on an anti-tech rant, blames the iPad for U.S. job losses


  4. "Have you read Henry Hazlitt? He refutes this logic in his book 'Economics in One Lesson'." -- The evidence presented in the article is incomplete. For example:

    Arkwright invented his cotton-spinning machinery in 1760. At that time it was estimated that there were in England 5,200 spinners using spinning wheels, and 2,700 weavers—in all, 7,900 persons engaged in the production of cotton textiles. The introduction of Arkwright’s invention was opposed on the ground that it threatened the livelihood of the workers, and the opposition had to be put down by force. Yet in 1787—twenty-seven years after the invention appeared—a parliamentary inquiry showed that the number of persons actually engaged in the spinning and weaving of cotton had risen from 7,900 to 320,000, an increase of 4,400 percent.

    I bet that the number of laborers was not the only thing that changed from 1760 to 1787. A more fair comparison would be to estimate how many manual laborers in 1787 it would take to match the output of the 320,000 laborers using machines in 1787.