The Enterprise Automation Imperative—Why Modern Societies Will Need All the Productivity They Can Get

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ITIF | Robert D. Atkinson and David Moschella | November 12, 2019

tech handshake - The Enterprise Automation Imperative—Why Modern Societies Will Need All the Productivity They Can GetContrary to common belief, enterprise automation is not a cause for alarm, but instead a societal imperative. Modern nations will need all the productivity they can get to address today’s ever-more-resource-constrained challenges.

Key Takeways

  • Increased automation can significantly boost societal productivity, which would help address challenges such as wage growth, aging populations, rising health-care costs, environmental restorations, global competitiveness, and public sector debt.
  • The EU and U.S. economies are in a productivity slump, which is one of the reasons wage and GDP growth have stagnated, making it increasingly difficult for governments and residents to meet their civic and financial obligations.
  • Productivity increases in the EU and the U.S. would reshore work, make the costs of aging populations affordable, boost wages and living standards, reduce debt-to-GDP levels, and free up human capital and other resources for new societal tasks.
  • Large enterprises—both public and private—must drive automation and its ensuing productivity gains, because many of today’s most promising digital initiatives can only be brought to fruition by large organizations and the sectors they serve.
  • Public policies should support the transformation of large enterprises and their associated industries and ecosystems by ensuring laws, rules, regulations, incentives, political attitudes, and worker skills do not impede needed changes.

Introduction and Overview

Despite vocal claims to the contrary, automating a large portion of today’s U.S. and EU economies remains one of the most important technology opportunities of the 2020s. Increased automation—with its ability to significantly boost societal productivity—is needed to help modern nations address seemingly intractable challenges such as sluggish wage growth, aging populations, rising health care costs, environmental restorations, global competitiveness, and often-worrisome levels of public sector debt. Advances in public and private sector productivity are also needed to free up human capacity, talent, and ingenuity so the workforces of the future can more fully focus on the exciting possibilities of the Information Age.

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Much of this automation must be led by large public and private sector enterprises because so many of today’s most promising digital initiatives—including smart cities and grids, precision agriculture and medicine, shared ledgers, autonomous vehicles, robotics, machine learning, and artificial intelligence (AI)—can only be brought to fruition by large organizations and the sectors they serve. While easy-to-use services designed for consumers have dominated digital innovation thus far, global technology leadership will increasingly depend on complex changes in the ways many traditional enterprises and industries work.

There is a risk society will turn away from automation at the very moment it is most needed.

Unfortunately, today’s automation debate is focused almost entirely on the potential downsides. From both the left and the right, we are constantly warned that new technologies—particularly AI and robotics—will destroy tens of millions of jobs, and even diminish human worth. This paper disagrees with these now widely shared perspectives. Although technology innovations will require, as they always have, difficult worker transitions, forecasts of massive job losses have been proven wrong ever since the dawn of Industrial Revolution. Today’s labor and skills shortages—and aging populations—suggest the doomsayers are well along the path to being wrong again. While we could just dismiss the hype and say, “Here we go again,” there remains the risk of society turning away from automation at the very moment it is most needed.

Of course, new technologies are not an instant cure-all. We have heard many times how, for example, e-health, e-government, and self-driving cars were just around the corner, only for reality to prove otherwise. But while the skeptics can make their case—and it is true there will be no quick fixes—two things make us optimistic over the longer term. First, today’s automation technologies are almost uncannily well suited to meet the societal challenges listed above. This means that to bet against advanced automation is to bet against the future of digital technology itself—and this has generally been a losing wager. Second, we can already see that China, without the same constraints many Western economies face, is committed to establishing its own highly automated society, albeit not always in a manner more democratic nations would prefer.

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Importantly, we want to state from the outset that we are not saying that increasing productivity is the only way public policy should respond to these challenges. Far from it. Clearly, much can be done to reduce income inequality, shrink the pay gap between CEOs and workers, close international and other tax loopholes, ease employment transitions, make U.S. health care more portable and affordable, and address similar concerns. However, as these are not technology policy issues per se, they are largely outside the scope of this paper. More fundamentally, without higher levels of productivity, we believe these efforts will likely fall short of meeting the societal challenges we have identified.

To inform both industry executives and technology policymakers about today’s productivity challenge, ITIF and the Leading Edge Forum have launched a new research initiative. This initial paper argues that, contrary to common belief, enterprise automation is now a societal imperative—and modern nations will need all the productivity they can get to address today’s ever-more-resource-constrained challenges. It further argues that without greater enterprise urgency, a significant public policy boost, and the requisite societal skills and support, Western competitiveness will likely suffer.

The paper begins with a discussion of the current trends in productivity and automation. It then shows why increasing public and private sector automation will be essential to Europe and the United States if they are to meet their financial and demographic challenges. We end on an optimistic note by explaining why fears of an increasingly jobless future are still largely unfounded. There’s a great deal of work that needs to be done.

What Do We Mean by Productivity?

To understand what productivity is, it is worth noting what it is not. Productivity is not a measure of how much an economy is producing. In other words, total output (gross domestic product) is not a measure of productivity. Nor is productivity a measure of how many hours people work. Rather, in its simplest form, productivity is a measure of economic output per unit of input (i.e., it is an efficiency measure). The unit of input can be labor hours (labor productivity) or all production factors, including labor, machines, and energy (total-factor productivity). The former is the easiest to understand: If a hairdresser previously cut 10 people’s hair in 8 hours, but now cuts 12 people’s hair in the same amount of time because of better technology (e.g., more efficient clippers), then the hairdresser has increased their productivity by 20 percent.

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Productivity can increase in a number of ways.1 One is for workers to work harder and faster. But this comes at the cost of worker satisfaction and, in some cases, safety, so such gains can be offset by “losses.” This is why increased productivity and overall economic growth are not the same thing. One proven way to raise productivity is to help people work more efficiently by reorganizing work processes or using better technology. For example, self-service elevators eliminated the need for elevator operators, just as automatic teller machines reduced the need for human bank tellers to handle many routine transactions.2

Productivity is often confused with innovation and competitiveness.  As noted, productivity is the ratio of output to input, while innovation means developing an improved product (a good or service), production process, marketing method, or organizational model—or making a similar change. The distinction between “product” and “process” innovation is important because product innovation usually affects the output side of productivity, while process innovation affects the input. Similarly, competitiveness mostly relates to the relative strength of a region’s or nation’s “traded sectors,” i.e., those sectors wherein output is also sold outside that region or nation.

To be sure, these three factors can be closely related. For example, effective innovation can improve productivity and competitiveness. Consider how faster computer chips boost the productivity of the companies and people using devices with those chips—while also helping the chip manufacturers become more globally competitive. Likewise, productivity growth, especially in traded industries such as automobiles, can make nations more competitive by enabling their companies to sell in global markets at lower prices. But each of the three terms is distinct in important ways. For example, rising productivity does not make a nation more competitive when other nations are increasing their productivity even faster.

In most countries, policymakers prioritize competitiveness first, innovation second, and productivity last, if at all. But in modern economies, productivity is typically the most important driver of economic well-being. This is not just because the majority of jobs in most economies are in “non-traded sectors,” wherein the benefits of productivity gains go more directly to workers and domestic consumers. It’s also because these same gains often spread to traded industries because the companies that compete in traded sectors also tend to be heavy consumers of health care, transportation, telecommunications, and many other non-traded services.

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Finally, there are two related measures of productivity: labor productivity and total factor productivity. Labor productivity is just as it sounds: the output of workers divided by the number of hours of work. Total factor productivity is a broader measure of the productivity of all factors of production, including workers, energy, and machines. For example, an economy might increase labor productivity by adding more machines, but total factor productivity could go up or down depending on whether the machines’ output is worth the costs. This means total factor productivity is ultimately the more comprehensive measure, although it’s often considerably more difficult to quantify. Even more confounding to the productivity-measurement community is the fact that digital technology is often a major driver of both cost cutting and value creation, as well as labor and factor productivity—and the resulting competitiveness—all at the same time.

Today’s Worrisome Productivity Slowdown

The EU and U.S. economies are in need of a productivity “booster shot” of the kind they experienced in the 1950s and early 1960s with electromechanical and materials innovations (steel, chemicals, plastics, etc.), and again in the 1990s with information and communications technology (ICT) innovations (personal computing, the Internet, broadband, etc.). Indeed, both economies are now in a productivity slump. Labor productivity—all the goods and services a country produces per hour of work—inched up in the United States at just 1.2 percent per year between 2008 and 2017. That is half the rate of the prior 13 years. Similarly, since the financial crisis, labor productivity in the 28 EU member states has grown at just 0.7 percent annually.3 While there is some debate about whether the productivity slowdown is real or simply reflects measurement challenges, the body of evidence suggests the slowdown is not just a measurement effect.4

The EU and U.S. economies need a productivity “booster shot” of the kind they experienced in the 1950s and early 1960s with electromechanical and materials innovations, and again in the 1990s with ICT innovations.

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As will be discussed throughout this paper, this slowdown in productivity is one of the key reasons wage and gross domestic product (GDP) growth have stagnated in both regions, making it increasingly difficult for governments and residents to meet their civic and financial obligations. Too often, the result has been ever-rising public and private sector debt. And even with this borrowing, many nations and individuals feel increasingly squeezed in terms of both their time and finances.

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