Startup entrepreneurs are fond of talking about how their business idea will “change the world,” or “disrupt an industry.”

While some of this talk is bravado, it contains a kernel of truth, as successful tech companies like Google, Facebook, Apple and Uber have certainly transformed their own and other industries.

But when social forecasters take these claims a step further and suggest that technology is disrupting society, that it is rendering workers redundant or exacerbating inequality, many in the tech world are quick to shout or Tweet their objections.

“No, no!” they say. “Tech might destroy jobs but new jobs will be created. That’s how the world has always worked. There’s nothing to worry about.”

In other words, every single sector of the economy will be disrupted, but the social structure will remain intact.

5/So "robots eat jobs in field X" = "products get cheaper in field X" = "consumer standard of living increase in field X" -- necessarily.

— Marc Andreessen (@pmarca) June 2, 2014

But reality doesn’t always conform to our wishful thinking. It behooves responsible adults to look ahead and understand where society is headed. Now, a pair of Oxford professors along with Citi (C), one of the world’s largest banks, have published a report entitled “Technology at Work: The Future of Innovation and Employment.” The report predicts that half of all jobs in most developed countries could be automated as soon as the next decade or two, leading to large-scale unemployment and social instability.

Image Credit: Citi/Oxford University

Although written in academic language and replete with charts and statistics, the report is so far-reaching in its predications that I found myself double-checking that its title wasn’t actually Das Kapital by Karl Marx.

In a nutshell, the report makes three arguments: First, innovation is necessary. Second, innovation will likely lead to massive unemployment and social instability in the next few decades. Third, governments must look ahead and prepare for this imminent crisis. “Technology is not destiny. With the right understanding of associated challenges, and the right strategies, the digital age may be an inclusive one,” the report concludes.

Innovation is necessary

The report begins with the assumption that rising inequality is a bad thing because it leads to lower consumer demand and economic stagnation. The authors argue, a la Thomas Piketty, that the way to prevent huge wealth gaps is “continuous creative destruction, giving rise to a new generation of innovators and entrepreneurs.”

But despite the fact that the digital age appears to be one of rapid innovation, the report cites thinkers like Peter Thiel and economist Tyler Cowen who argue that compared to the breakthroughs of the last two centuries – electricity, railroads, automobiles, and telephones – innovation has actually slowed down. This in turn has led to declining living standards for the majority of people in the developed world.

Digital innovation is destroying jobs

In the 19^th century, the report argues, technological change benefitted ordinary people both as producers and consumers. For instance, factories employed vast numbers of unskilled workers, while Ford priced his Model T low enough so that his own workers could afford it. It was these twin processes of growing wages and falling prices of consumer goods that created the modern middle class.

According to the report, technological progress has two competing effects on employment. As robots and automation replace labor, there is a destructive effect. But at the same time, as costs go down, demand for other goods and services increases, and new jobs and industries are created. However, “the magnitude of new jobs created from the arrival of new technologies” is small. For instance, in 2010 only about 0.5% of the U.S. workforce was employed in new industries that did not exist a decade earlier.

One reason that digital industries do not create a lot of new jobs, says the report, is that digital innovation does not require a lot of labor. For instance, WhatsApp started with $250,000 of seed funding, but they still only employed 55 workers at the time the company was acquired for $19 billion. By comparison, clothing retailer The Gap has a similar valuation but has 137,000 employees.

The report predicts that in the EU, 54 percent of its workforce is at risk of automation. In the U.S., that figure is 47%.

Image Credit: Citi/Oxford University

Even though in developing countries the percentages are lower, as incomes rise, there will be pressure to replace the workforces of those countries with machines as well.

Why is inequality bad?

The report goes on to make a case that inequality is good in moderation, but too much inequality is self-destructive.

Inequality is good because entrepreneurs need the lure of financial gain to inspire them to take risks, thus spurring innovation. The authors quote economist Arthur Okun who argued that societies must make trade-offs between equality and efficiency.

However, the authors warn that we are entering an age of extreme income inequality. This is actually counterproductive.

When the middle class is hollowed out, consumers spend less money. Wealth accrues to capital (i.e. the rich get richer) but they do not increase their consumer spending. After all, how many shirts, cars, boats and planes can a single family buy? The result is less spending in the economy as a whole.

In other words, the digital economy could eliminate so many jobs that there won’t be enough customers left to buy all the cool gadgets and products we’re producing.

How much different sectors will be affected by automation.
Image Credit: Citi/Oxford University

When will all this happen? “Soon,” say the authors.

“The technologies we discuss, from autonomous vehicles to algorithmic sales assistants, are largely already available within research labs: any uncertainty is due less to the surrounding rates of technological development and more to questions of adoption.”

What can be done?

The report’s researchers offer numerous policy suggestions, including eliminating payroll and income taxes for lower wage workers and taxing “wealth,” instead. Because wealth taxes are hard to implement, as wealthy individuals will just move their money overseas, they would have to be global, as recommended by Thomas Piketty.

However, the authors add, governments should not focus narrowly on income redistribution. Rather, they should channel funds into public investment that will create growth and new employment opportunities. The faster an economy is growing, the less important old wealth is. That’s why governments must generate perpetual creative destruction by encouraging technological progress.

In other words, governments need to encourage startup entrepreneurs. They can do this by reducing red tape and making it easy to be self-employed. Also, they should construct welfare safety nets to make failure less costly for entrepreneurs.

A third policy recommendation is that governments should subsidize job retraining and the acquisition of new skills for the soon-to-be masses of unemployed people.

The 40-hour work week is overrated

But if these policies are not enough, the authors suggest that governments will have to implement work-sharing policies to spread the work that is available across a larger pool of workers.

On a more philosophical note, we may be entering an era where it won’t be necessary for people to work full-time. The authors quote a 1932 essay, In Praise of Idleness, by Bertrand Russell in which he says that a shorter working day will allow people to enjoy “the necessities and elementary comforts of life.” The authors point out how companies like Netflix and Spotify are making leisure activities cheap and affordable, so in the future you may not need a lot of money to enjoy your free time.

Bankers as philosophers

Reading the report, I was reminded of Karl Marx’s theory in Das Kapital that capitalism contains the seeds of its own destruction. Capitalists tend to prefer investing in machines rather than workers, and over time most of the population doesn’t earn enough to buy the goods the society produces.

But the folks at Citi certainly aren’t Marxists: So why would they publish a report that is so critical of the direction our capitalist economy may be headed?

“It is not unusual for a large organization, such as Citigroup to be involved in a project such as our collaboration with the Oxford Martin School,” Susan Monahan, Vice President for EMEA Public Affairs at Citi told Geektime. 

Or perhaps the situation has already gotten so dire that even businesses are sounding the alarm. It has been widely reported that shops and restaurants that cater to the middle class are in a slump, while luxury sales are doing well.

Is there any hope?

“Our findings suggest that it will be technologically possible to automate 47 % of US employment within the next decade or two,” Carl Frey, one of the authors of the report told Geektime. “It does however not suggest that these jobs will in fact be automated, as relative costs, legislation and consumer preferences also play a role.”

Here’s a thought. In most Western countries, large swathes of the middle class are already feeling pinched, squeezed and somewhat hopeless. That’s a huge pain point. If a tech company could figure out how to put money back into their pockets, that would be the most disruptive feat of all.