Friday, February 28, 2014

Income Inequality Part 2

By Market Authority

This is the Second Part of a multi-part series on Income Inequality. Click here to view the first part:

Today, I’d like to discuss the reasons why creative destruction is rearranging industries at the fastest pace in history. The speed of creative destruction is causing job losses at a rate we’ve never witnessed, and increasing income inequality.

The situation is best described by MIT economists Brynjolfsson and McAfee in their book “Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy.” You can buy the book here…

The MIT economists explain how the acceleration of technology is changing the labor force faster than workers can adjust to new jobs. And the speed of this change is starting to rapidly accelerate. The futurist Ray Kurzweil coined a term for the speed of the growth of technology, “the second half of the chessboard.”

Let me explain – there’s a parable about the inventor of the chess board and the rate of exponential growth. The king of the realm enjoys playing chess so much that he summons the inventor in front of his court and grants him one wish. The inventor of the chess board asks that the king take a chess board, put one grain of rice in the first square, and then double the amount of rice in each subsequent square (64 squares in total). When the first half of the chessboard is complete, the inventor owns a football field size of rice. When the second half is complete, the inventor owns a pile of rice the size of Mt Everest. The king opts to behead the inventor rather than paying his reward.

So how does this apply to technology? According to Moore’s Law, the number of transistors on integrated circuits doubles every 2 years. Computers get smarter, and the size needed to house the circuitry becomes smaller. This has been happening since the 1950s, or about 30 two-year cycles. As referenced above, we are only just exiting the first half of the chessboard.

In the 90s, creative destruction caused by new software technology greatly streamlined businesses. Much of the routine paperwork, once handled by humans, was replaced by Microsoft Office. Middle market tasks were replaced by Oracle software. Productivity surged as the number of people and time required to perform administrative tasks was greatly reduced. With increasing productivity came increasing profits and a stock market rally.

In other sectors, manufacturing plants shed labor as humans on assembly lines were replaced by machines. Now, even storage warehouses can employ robots to choose items, pack, and ship. In fact, if you were to order “Rage Against the Machine” from Amazon- a robot with higher intelligence than Johnny-5 from “Short Circuit” will retrieve your book from the Amazon warehouse and place it in the packing queue. Eventually, your UPS deliveryman will be replaced by a drone.

Now here comes the proverbial “second half of the chessboard.” This is where jobs requiring a higher-level of education and skill are reduced, and we are already witnessing it. has disrupted the incomes lawyers traditionally received for drafting LLCs, wills, and divorce papers. Robots are replacing the amount of doctors and nurses required for surgery. Algorithms are executing stock orders. Your travel agent has been replaced by The list goes on and grows everyday, as technology becomes smarter and faster.

So, how does the increasing speed of creative destruction impact income inequality? There is a huge transfer of wealth from people who own capital (and are able to invest in the new technologies) and the labor force. This is why the majority of income gains over the past decade increasingly land in the pockets of the 1%.

There is an interesting chart that reflects this phenomenon.

The red line is Corporate profits and the blue line represents Labor’s share. As technology has increasingly become a larger factor, the amount of profits for corporations has grown, but compensation for labor has decreased. This is why we live in a have- or have not- society.

Technology is rapidly increasing and the productivity and profits that follow are going to the owners of capital, not labor.

And the most frightening part of all this is robots have just entered “the second half of the chessboard,” meaning the rate of income inequality is set to increase.

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