When Warren Buffet speaks,
people listen. In 2017, 42,000 showed up for the annual Berkshire Hathaway
meeting and another 17 million streamed the event online. While it is his views
on cryptocurrency (he hates it) that grabbed the headline this year, I believe
his bit on productivity (from 2015) below is far more relevant, especially in
the current environment, which has many calling for breaking up big tech and
universal basic income.
“Too few Americans fully grasp the linkage between
productivity and prosperity. To see that connection, let’s look first at the
country’s most dramatic example – farming – and later examine three
Berkshire-specific areas. In 1900, America’s civilian work force numbered 28
million. Of these, 11 million, a staggering 40% of the total, worked in farming.
The leading crop then, as now, was corn. About 90 million acres were devoted to
its production and the yield per acre was 30 bushels, for a total output of 2.7
billion bushels annually. Then came the tractor and one innovation after another
that revolutionized such keys to farm productivity as planting, harvesting,
irrigation, fertilization and seed quality.
Today, we devote about 85 million acres to corn.
Productivity, however, has improved yields to more than 150 bushels per acre,
for an annual output of 13-14 billion bushels. Farmers have made similar gains
with other products. Increased yields, though, are only half the story: The
huge increases in physical output have been accompanied by a dramatic reduction
in the number of farm laborers (“human input”).
Today about three million people work on farms, a tiny 2% of
our 158-million-person work force. Thus, improved farming methods have allowed
tens of millions of present-day workers to utilize their time and talents in
other endeavors, a reallocation of human resources that enables Americans of
today to enjoy huge quantities of non-farm goods and services they would
otherwise lack. It’s easy to look back over the 115-year span and realize how
extraordinarily beneficial agricultural innovations have been – not just for
farmers but, more broadly, for our entire society. We would not have anything
close to the America we now know had we stifled those improvements in
productivity. (It was fortunate that horses couldn’t vote.)
On a day-to-day basis, however, talk of the “greater good”
must have rung hollow to farm hands who lost their jobs to machines that
performed routine tasks far more efficiently than humans ever could….The answer in such disruptions is not the restraining or
outlawing of actions that increase productivity. Americans would not be living
nearly as well as we do if we had mandated that 11 million people should
forever be employed in farming.”
In other words,
society should welcome progress, but also help those left behind. Buffet’s maxim
is simple enough, but do monopolies and the speed of disruption complicate things?
Is there a case for breaking up big tech because it actually hurts progress and
productivity?
Investors have
always recognized and valued productivity. As a result, the market rewards technology
stocks with high valuations even if they make no money. Today, investors have
become even more enamored with them. Given the monopolistic positions companies
have built using their network effects and ecosystems, Apple, Microsoft,
Amazon, Facebook, and Alphabet (Google) now have a market cap of $3.78 trillion
dollars (March 12). These five make up of 15% of the S&P’s market value,
more than the entire financial, health-care, or industrial sectors. Taking a
step back, one finds that the tech sector’s 25% share of the S&P is the
highest since the dot-com bubble, when it peaked at 35%.
A big question now
is if these companies are monopolies, what are their implications for
productivity? Do they help productivity in the short-run, but harm it in the
long-run? Would they resist the temptation to buy out competitors and hike
prices on consumers in the future? On the other hand, is it possible that they
keep their disruptive spirit and drive productivity gains? Just as Amazon is entering
into healthcare, is it possible that it will upend the DMV and save the day too?
Another
big question is whether the technological disruptions today are any different for
their effects on the labor market. While the farmers who were put out of work
by machines may have found other jobs, is it possible that future disruption
will be so widespread that the farmer equivalent today will not be able to find
any job? This is presidential hopeful Andrew Yang’s view. He says that “we’re going to have a million truck drivers out of work who are
94 percent male, with an average level of education of high school or one year
of college.” In other words, self-driving trucks “will be enough to create
riots in the street. And we’re about to do the same thing to retail workers,
call center workers, fast-food workers, insurance companies, accounting firms.”
To play devil’s advocate, one can then ask whether technology actually improves
productivity if it puts a large part of the labor force out of a job. If people
are constantly asked to re-train their skills because technology keeps on making
them obsolete, then maybe society’s productivity has not improved much after all.
In response to these questions, I am sure Warren Buffet will hold his ground, but I do not know the
answer to these questions. Maybe it is inevitable that information technology’s
network effect produces large companies and only they can be productive given
the high fixed costs. Maybe savvy consumers, activist shareholders, and conscientious
employees can prevent big tech from doing evil. Maybe robots will takeover, but
people will find something else to do like people have always done.
One thing I do
know is that when big tech takes over the market, may be the only active management left will be for tech analysts (sarcastically).
Source - WSJ graphics
