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Everywhere you look, artificial intelligence is making headlines. If you believe its cheerleaders, such as Facebook founder Mark Zuckerberg, we’re at the start of a new industrial revolution, with boundless productivity growth ahead. If you believe the naysayers, including Tesla founder Elon Musk, then computer super-intelligence is humankind's largest existential threat.
Whatever the future holds, an AI-powered world will have huge consequences for investors – the trouble is working out which companies will prosper, and which will be left in the history books. Here, though, I want to make the case that shareholders as a group will do very well.
Artificial intelligence has been described as the last invention humans will ever need. Once computer intelligence eclipses human thinking, computers will be able to out-invent us, out-design us, and out-smart us at every turn.
The day that computers can outperform humans at all activities is a long way off but, in the meantime, technology continues to replace human labour at an incredible pace. An Oxford University study found that one-in-three jobs is at risk of computerisation over the next 20 years.
By cutting labour, technology is making processes cheaper and more efficient. Consider manufacturing: today, the body of a car is assembled by 30 or so robots – and it takes them less than 90 seconds to weld together a typical 4WD. Or consider the media industry: Facebook distributes news to 2 billion people with up-to-the-millisecond updates, and it does so with less than 20,000 employees. Can you imagine telling a media mogul 50 years ago that one day a single paperboy would be able to deliver the news to 100,000 readers?
In these examples, it’s easy to see who brings the muscle. Factory workers have almost no negotiating power. Highly-skilled employees, such as those at Facebook, are in demand to design the software but, as artificial intelligence advances, even these jobs will eventually be replaced by super-efficient electronic employees.
The holy grail of machine learning, and where billions of research dollars are being invested, is to build software capable of programming itself and making self-directed improvements. If that day is reached, it's conceivable that at least some companies of the future will have no staff.
As technology advances, the bargaining power of employees declines. That means that as artificial intelligence slowly replaces manual labour, it’s the owners of the capital equipment that will capture a larger slice of the income relative to the labourers.
We may already be seeing this effect. Between 1997 and 2015, hourly labour productivity grew 29% whereas wages increased only 11% after adjusting for inflation.
What’s more, corporate profits as a proportion of GDP have moved from 15% in the mid-1970's to 21% today. Put another way, the share of Australia’s produce going to business owners has grown 40% in one generation. That’s a major change in the distribution of income, and the tech revolution is only just getting started.
Wealth is increasingly concentrated in the hands of shareholders, and especially so for shareholders of companies with competitive advantages and pricing power. As technology makes processes more efficient, the nature of competition means that the price of goods will be pushed down. However, if a service or product’s price is able to be maintained while the cost of delivering it declines due to automation and productivity gains, margins go through the roof.
As things stand, company profits – and the income distributed to shareholders – is growing at a faster clip than wages, and the current tax system also favours investors by taxing long-term capital gains at half the rate of employment income.
As technology marches forward and increases in productivity continue to provide a growing pie for society’s indulgence, there could come a day when the machines do all the work and humans spend their time relaxing at the beach. What this vision forgets, however, is that the shareholders will own almost everything.
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