Good luck. Guest thank you. Next eric or nelson and andrew mcabee talk about the technical advancements taking over our lives and our economy and suggest ways to harness those advancements to benefit society. The conversatconversat ion is about one hour. Good evening. Welcome to todays meeting of the Commonwealth Club of california the place where you are in the know. You can find the Commonwealth Club on the internet at Common Wealth club. Org. I am Andrew Leonard from salon. Com your moderator for this evenings program. To my left is eric or nielsen and Andrew Mcafee who are business researchers at the m. I. T. Sloan school of management. Eric is the director of the m. I. T. Center for and enters the principle for research science. The two men made a name for themselves a couple of years ago with eric selfpublished book race against the machine which coalesced some emerging nervousness about the fact that automation is beginning to replace jobs at higher and higher levels. They follow followed this up with a bigger book work and prosperity in a time of brilliant technology. And it is really i think everybody in this room will understand how timely this is in San Francisco and the greater bay area. There is a lot of tension about how the tech economy is changing everybodys lives and where we are headed from there. The second machine age directly tackles both the promise of technology and some potential challenges it poses. I think we would like to start before questions giving a brief summary of their views and what is the second age all about. There is a reason that they are called the business plan. I just came from a panel there and there were three other economists and they were pointing out some pretty good statistics. As you may know, the Median Income is the 50th percentile is lower now than it was in the 1990s. In the employment to population ratio has plummeted. Some of the members are little bit better recently, but it keeps people dropping out of the labor force and not new job and how can these two groups be a very different perspective with one right and one wrong end if you look deeper there are some impressive numbers that match up with the optimism of the technology and there are record levels of productivity and gdp and all of those numbers are growing quite deeply. And the other statistics about the Median Income are also exactly accurate. And it is happening on the situation simultaneously. And it does create more wealth. And that is that there is no economic law that will help others benefit from the technological example. And warsaw pact other terms. Including manufacturers that were heard by the interruption of the automobile. And there are a much larger group of people even the potential majority of people that are having a harder time making a living than they did before. And this includes the spreading out of the outcome in this includes corporations for society and we are hoping to focus the conversation on this. And especially with technology and research there. And we have described the economic parallels. Both of these technologies have done things that they are not supposed to be able to do. The book started in the fall of 2010 and google has been bribing not google, but no one had been bribing the spirit. And thousands of american roads without mishap had experiences. So we had the chance to do that and even six years earlier in 2004 that eric and i talked about with this strong argument and you will never be able to drive this. So its a pattern matching the process and although we are doing while is pretty easy for a and is precipitously difficult. In 2004 we nodded her head and they are already driving cars. We have seen similar weirdness happening in a few other problems that have been part of this with other people and we are going to do a pop quiz and its going to be really easy. And then we pointed to these conclusions. And here is an even weirder situation the point where you are in this room and they are both correct and we will accept both of them. But my point is that you have to solve one of the funniest slams the simultaneous with localization and what does this mean and where am i in the seo . We are really good at that and that program has precipitated this and if you put a robot in the room where he or she is and we just watch the shenanigans. In 2008 there was literature that said it is just too darn hard to do so we had a problem for a room about the size by waving a microsoft connect around. 150 for this electronic. So we have examples like that in the play go, what is going on here both on the economic side and the Technology Side and eventually led to this book. I think that the first question that we would answer then is how and why this has happened. We are just working on where these things get made. Change the world of Artificial Intelligence and things that are rarely not delivered on. Now in the last four years something seems to have changed. So what is the remap. Theres a twopart answer to that question because that is really what sent us there. There is really a threepart answer. Which are really going to have to give us this. The first part is the role Relentless Improvement that most of us know of and its really easy to underestimate an exponential improvement has been going on long enough. And it really is a different type of thing in kind. Because the smart phone, probably all of us carry around them in our pockets tonight is utterly a computer of a generation ago. And there are some extraordinarily difficult things. Its not orders of magnitude, but it is thousands of billions of times greater than it was five or 10 years ago. But asia is the light load of science and if you want to be smarter about a realworld problem, you have a ton of data. Finally the third part of the threepart answer is the real innovation coming up with something new is not this process but rican talked about how it is a internal Combustion Engine with the gps system and google invented none of those things. They just combined the Building Blocks are already there. And this is a wave of innovation. So the shorthanded answer to your question is about the expotential digital situation. I have one question here which touches a little bit on that. And what does the stagnation not recognize and so there is a great deal of problems on this and in your painting a different picture. And he conspired to have us work on that first book. And there are no more good things or few good things to have left. This guy is looking at the same economy that we are looking at. And that the other hand he has a lot of compelling data and that will force us to think hard about how this should be happening. And that is where we came up with this recognition. Just because the Median Income is stagnating, it doesnt mean that innovation is stagnating. Paradox ugly if it speeds up that can lead to a lot of people falling behind if they are not keeping up with their skills or organizations that are not keeping up in this dramatic reorganization of the economy can simultaneous way be a symptom of Great Innovation and Wealth Creation and also lead to stagnating Median Incomes. Its great to a fundamentally injured worldview. Which is that innovations, we dont think of them as the low hanging fruit, that is a metaphor and we have most of the low hanging fruit plucked. But its harder and harder to get new innovation. But as was just explained, innovations dont use up that it that way. And in fact the huge innovations create the Building Blocks for additional innovations. Whether it is the google self driving car or other things. There was an undergraduate student who at one point had 1. 3 million are in users using it. And the reason that his application was able to scale so rapidly was because it was going to be built facebook and facebook was built on top of the worldwide web. There is a networking that could go on and on. But each of those innovation have made it harder for individuals, they have not made it harder but they have made it easier. So the low hanging fruit metaphor is exactly the wrong one that is the nature of innovation we are lucky that it is because that means that we are getting more Building Blocks for additional innovation and potential for additional growth. Just listening to a bunch of questions that is a part of the second part of your book and the specifics that we need to particularly grapple about more generally. Which is that it doesnt appear to be distributed in this way. And getting to the root cause and what it is about. I think that a good example of what is going on is the conversation i have heard after reading about the google self driving car. I was getting on a plane and a person was talking too loud on his cell phone and he was hanged at oh, no, i dont use h r block anymore but i use turbotax or its faster and easier and cheaper and it does things more accurately. And he was right. It does your taxes very accurately and it took a process, used to be done by humans and it has codified it and digitize it. Once it digitizes it, you can make a copy of that. You can make 10 copies or 100 million copies of it and that is what they did. Each of those copies is identical to the original and its a perfect copy. And it can be reproduced at virtually zero cost. And transmitted anywhere in the world almost instantaneously. So this is something that is free and perfect and those are the three characteristics that we have had in the past. And it leads to some very unusual economics in particular the winner take all market or winner take most markets. But each neighborhood or town may have a tax preparer and with the Tax Preparation Program you dont want to have the secondbest program, you just want to buy the best one that is available so that those markets can concentrate. One or maybe a handful of programs in those markets. In the revenue for that industry ends up being much more concentrated. What is more is that it doesnt hire a whole lot people to make copies of this once the basic algorithms have been written. You end up with different economics. You get winners and losers in and theres two groups. One is a small group of winners, people that create that and developers and some of them are billionaires and some of them are millionaires. And theres other very large groups which we shouldnt forget, which is consumers and people have access to amazingly cheap Accurate Software in this category that they didnt have before and they can solve problems more efficiently than they could before. Theyre also people who are worse off who invest a lot of time in learning how to do that profession and skill and go to college and do that. And now in an economy where you compete against a 39 piece of software it doesnt have as much value and is not a coincidence because there are 17 fewer that are under pressure. What i just described is a microcosm of what is happening in lots of other industries and we are seeing it in software and music and media and in manufacturing and retailing and financing and software and digitization becomes the core of more industries and we will see the same kind of economic instances in society. I love that example because it talks about the two main economic consequences that we have talked about in our book and have tried to elaborate. The first one is bouncy and at under and as was said, there are two different flavors of this here and one is the reward for the innovator and the people that came up with this. And the other one, the bigger category as those who have access to higher aldie cheaper tax preparation and we think it is critically important. But the bad news is that whenever i talk about the book, i keep on doing these dorky dance moves and keep on going like this. [laughter] its pretty tightly structured and we are going like this. In the middle is being hollowed out and we have a small group of people who know talent to harness the power and their income goes way up. In the bottom is gradually slipping behind. That is the challenge that we face in our goal should be to keep the boundary while minimizing the negative effects of the stress. What about the standard economic theory that automation may be occurring in some sectors with increased productivity overall and other sectors will pick up the slack and make up for that . Since at least the beginning for 200 years. People like us have been saying that the age of technological unemployment is part of this. It definitely happened during the Industrial Revolution and john king was kind of a intellectual hero in this regard. So the question is knowing that history and the historical pattern should, down a lot. And is this time different . The only honest answer is that we dont know, but the data encourages it and i think there are good reasons to try to understand that this time is different. If you wanted a report in history, you had to involve a person and not work area not anymore. If you wanted to listen to a person and understand what they wanted, you had to involve a human being and not. But not anymore. If you go on and on, diagnose a disease, any of these things, we have always need people for them and we dont anymore. So the digital encroachment is broad and deep and i think irreversible and to me it feels like this time it is different. It is not just the technology difference. The technology also sync just that Something Different is going on. Technology has always been destroying jobs and creating jobs and there has been this Creative Destruction and flow and turnover that has gone from one in this race to another industria. For most of the past couple hundred years, since the Industrial Revolution those have been in balance and if you look at the trends of proto davidian employment and Median Income, they all kind of rose roughly in sync. It started about 15 or 20 years ago when they started diverting. Productivity has continued to grow and profits overall with the gdp continue to grow and Median Income has stagnated. So its not keeping him the way they did the work. And this has also stagnated as well. So there is something new going on in terms of the technology and in terms of the economic specifics and we think the nature of this is at the core of this difference. We dont think those two things are unrelated at all. What is going to happen . What are your views for what has weakened the power of the working class and is the working class doomed economically . We do not think that they are doomed. But we do agree that the Bargaining Power has been weakened and that has left the underlying fundamentals of economics as a ceo or company can make do with robots or software machinery, then its a lot harder for a working man or woman to say give us our share of the revenues of the company and higher wages or else we will go on strike because they can say okay, great, let me replace you with robots. The guy who makes iphones over there. And he says that he will hire a million robots and that is a pretty Severe Threat and it turns out an increasingly realistic one. So the Bargaining Power of the worker goes down with a credible alternative. There are workers in other countries and there is a digital alternative which is already pretty good and only getting better. Derrick story about the robots shows that they appear even in the lowest parts of the world. But to try to get back to the question, it is way too early to say that the working class in america is like this. We dont want to walk away. The last part of our book is about the intervention and makes an in this era of pretty astonishing to logical process. You can jump in that or i can give you a couple of ideas. What do young people need to succeed in this economy, what can we do to increase educational skill levels and lead to more jobs and this is a much more specific question. So what it is based on is the routine information process has been especially hard hit over the past 10 years. It basically means following instructions like a tax preparer that we are talking about or the travel agency you can carry out information and it turns out that a big chunk of the American Economy is devoted to exactly those. But careful research by my colleague and others at mit has found that if you look at the go content of all the occupations in the United States, the more routine Information Processing is involved, the more it takes time for fewer jobs in the categories and the more the wages are under pressure. So if you are looking for it a job to stay away from, it would be Information Processing. If you look at the way that a lot of schools are structured, they are very much set up to get people to sit quietly and rose and learn how to follow instructions carefully. Rather then the skill set were dominant in the second machine age of following instructions. I have one question pushing back a little bit on the emphasis on education. How does increasing the educational and skill level of workers lead to more jobs when job creation is driven by aggregate demand within the domestic economy . There are two good questions in there. The first is even if we can get the educational system ride would that be futile . Absolutely not. When erik and i talk to Business Leaders the most common complaint we hear is i cannot ayn people with the skills i need. All of them down the ladder from my frontline employees to the people at the very top of the company. I cant find people with the skills that i need indicates to us that our educational system is turning out people that are mismatched in the job market. Right now if we could wave a magic wand and fix education we would do a huge amount to help the unemployment and the wage crisis. The second part of your question though is his concept of aggregate demand which economists love to talk about. 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