The Economics behind driverless cars

Hello readers, welcome back to my blog.

This week I will be looking at a topical yet controversial issue: driverless cars and their impact on the economy. With self driving cars becoming more and more of a reality, most notably Tesla’s model S and X and more recently the model 3, which all feature autopilot technology, it’s only a matter of time before other manufacturers can utilise this and develop more advanced technology. The problem however, is not with the manufacturers producing the technology but instead with the laws that need to be established and the economic implications associated with a driverless economy.

In this post I will explore some of the economics behind driverless cars as well as look at the issues/laws that could prevent this market taking off. I will also consider the idea of rational decision making by machines vs. the moral conscious of a human being. Rational decision making in economics for those who don’t know is an economic principle that states that individuals always make prudent and logical decisions. These decisions provide people with the greatest benefit or satisfaction given the choices available and are also in their highest self-interest. I will also briefly touch upon the reduction of carbon emissions and how the negative externality issue could be reduced (for more information on this topic see the Carbon Taxes and Negative Externalities post). It is estimated that by 2030 the majority of cars on the road will be electric and the combustion engine will have had its time. Many of these are likely to incorporate autopilot/self driving capabilities. Although Tesla currently seems to dominate the market, many conventional German car brands such as Audi, Mercedes and VW are in the development stages of building their cars and it is thought that we may see some new players enter the market such as Google, Apple and even Dyson.

When people mention driverless cars it often conjures two images: The first being the idealistic image of a world in which cars move around by themselves, allowing commuters to maximise their time travelling be it to check their emails or have a power nap whilst they travel to work. The dystopian view holds that these vehicles will put 5 million lorry drivers and cab drivers out of work. The outcome of this scenario most probably lies somewhere between the two extremes, although whatever the outcome research is showing that the global economy will see a big boost. Those at Intel and the research company Strategy Analytics suggest a $7 trillion boost.

Although carmakers like to talk about autonomous vehicles (AVs) as if they will be in showrooms in three or four years’ time, the reality is that they are unlikely to do so anytime soon. Despite their lightning reactions, tireless attention to traffic, better all-round vision and respect for the law, and the fact that they won’t get tired, drunk, have fits of road rage, or become distracted by texting, chatting, eating or fiddling with the entertainment system; too many obstacles lie ahead that are not amenable to brute-force engineering. It could be a decade or two before autonomous vehicles can transport people anywhere, at any time, in any conditions, and do so more reliably and safely than human drivers.

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What are the potential benefits to the economy?

  1. One of the biggest benefits of an economy with no drivers is parking. Driverless cars will drop passengers off at their destination and go find parking elsewhere (or remain on the road if they are part of a ride-sharing program e.g. Uber). The U.S. has about 144 billion square feet of total parking, which represents up to one-third of the total real estate in some large cities. A reduction in the demand for parking can result in reclaiming this valuable real estate for more beneficial social and economic purposes potentially increasing the supply of housing and dampen sky high prices in cities.
  2. Reduction in traffic accidents. In the US, traffic accidents cost $900 billion annually. In addition, we can also expect to see less traffic violations, which may lead to a decrease in the size of police forces or shift people and resources to more important areas of serving and protecting the public.
  3. Insurance: About 90 percent of car accidents are caused by human error. In the world of autonomous vehicles, we can expect to see a major reduction in the number of accidents, which will significantly change the insurance revenue model. As the risk of accidents drops, demand for insurance will be virtually non existant. In anticipation of this shift, some insurers are rolling out usage-based insurance policies, which charge consumers based on how many miles they drive and the safety of their driving habits.
  4. The need for lodging will drop as people sleep in their cars during overnight road trips. Utilizing cars as a moving hotel is much more cost-efficient and convenient than purchasing a hotel room. Audi’s vice president of brand strategy and digital business, Sven Schuwirth, has predicted that car interiors will “eventually be able to morph between driving mode and sleeping mode”, presenting a major obstacle for the hotel industry.
  5. More media consumption as autonomous cars transform into rolling living rooms. A report by McKinsey and Company finds each additional minute occupants spend on the Internet could generate $5.6 billion annually, totaling $140 billion if, for example, half of the time of a 44-minute average round-trip commute is spent online.
  6. For delivery services, there will be enormous economic gains: McKinsey estimates between $100 to $500 billion per year by 2025 from driverless vehicles in the U.S. trucking industry. (The bulk of this windfall will come from the elimination of truck drivers and their wages).
  7. With multiple sensors, no distractions and no drunk driving, self-driving cars will largely eliminate car crashes so collision repair shops will lose a huge portion of their business. Indirectly, the decreased demand for new auto parts will hurt steel producers and part manufacturers.
  8. Price of goods are likely to fall and become more stable. This is because transport costs will drastically fall due to less dependence on oil which is extremely volatile.
  9. Fewer people will buy cars. Instead, they’ll rely on on-demand taxi services to ferry them about, which explains why the number of miles people and things travel in vehicles is expected to rise in the autonomous future. The more cars move around, the faster they’ll wear out. Those that aren’t replaced will be repaired, which means lots of jobs for mechanics and others who keep cars motoring along.
  10. House price fall not only from increased space in urban areas allowing for developers to rapidly construct new developments but because people could travel overnight to work and sleep-(this idea was explored in The Economist a few weeks ago). Furthermore, we may see a reduction in rural-urban migration in particular in LIDC’s providing the price of this technology falls, putting downwards pressure on the population of major cities.
  11. The rise of the automobile helped people rethink how to use space and created new forms of employment, like pizza delivery drivers. The self-driving automobile could do much of the same. No one has officially yet predicated how many jobs the autonomous future will create, and that’s partly because this issue is all-econompassing.
  12. Uber will have a fleet of autonomous vehicles ready by 2030. A Columbia University study suggests that Uber would need just 9000 autonomous cars to completely replace all taxis in New York City, with consumers only having to wait 36 seconds, on average, for a ride. Cars are currently seen as status symbols, giving their owners freedom and a sense of familiarity and luxury that ridesharing cars do not. However, as ridesharing services become safer and cheaper, and wait times continue to fall, the end of car ownership is a real possibility, leaving consumers with much more disposable income, automatically boosting the economy in other sectors.
  13. Self-driving cars will significantly improve the life of disabled individuals, increasing their personal sense of freedom and their employment prospects due to increased mobility. It is estimated that British individuals with limited mobility could see their earnings increase by £8,500 annually, on average and there would also be a reduction in welfare benefits, improving government finances.
  14. Many of these cars will be electric in order to reduce carbon emission which will help tackle the negative externality issue associated with burning fossil fuels. This would not only keep the environmentalists happy but would have huge economic benefits as the “dead weight social loss” would essentially be eliminated, in other words things like respiratory issues associated with pollution or the blackening of buildings in major cities would be reduced.

Sound to good to be true? Some of these benefits may be a little farfetched but are still a possibility perhaps not in the next 10 years but at least by the turn of the century. Lets take a look at some of the drawbacks mentioned at the start and explore the economic consequences that driverless cars may have on the economy.

What are the potential set backs?

  1. Significantly less money for cities through parking tickets. In 2012 alone, Washington, D.C. collected $92.6 million in parking ticket revenues. Whilst this may be a boon for consumers, it may have an adverse effect on government revenue. Morgan Stanley believes US governments could lose US$1.3 billion from revenue sources such as parking fees. This forecasted revenue loss also takes into account fewer registration fees, as American households are expected to reduce their car ownership from 2.1 non-automated vehicles to 1.2 driverless cars, on average.
  2. Insurers and injury lawyers will see their revenues fall.
  3. Major effect on the travel industry. Sven Schuwirth, vice president of brand strategy and digital business at Audi, proclaimed “In the future you will not need a business hotel or a domestic flight. After all, why fork out the money for a flight, and go through the hassle of seat selection, check-in, customs, boarding, disembarking and luggage collection, when your car can take you from Melbourne to Sydney overnight?”
  4. There will be plenty of safety concerns, and it’s unlikely that individuals will be comfortable sitting in the back seat of a self-driving car, let alone sleeping in one.
  5. In the accident that killed a Tesla driver in Florida last year, the driver either failed to respond in time to avert disaster, or mistakenly assumed that Autopilot meant more (as its name implied) than mere driver-assistance. Tesla continues to include the Autopilot sensors and software in its cars, but has deactivated the system while further testing is undertaken. The company plans to re-activate it in 2019.
  6. Lack of trust. Would you travel in a driverless cars which had to cross narrow bridges or drive through windy roads with cliffs on either side and is based on maths, risks and probability with some clever engineering? What about those moments when your laptop has a little blip or crashes when it boots up? Surely this technology will have similar issues. How would it cope with dirt tracks off the map, in blizzards, thunderstorms or pitch darkness, with animals bursting out of bushes, children chasing runaway balls and people doing irrational things?
  7. The recent Uber law case stands testament to the fact that even ‘small issues’ in the grand scheme of things to do with employment etc. are preventing this industry and making this idealistic image we have more of a pipeline dream.
  8. According to statistics from America’s Bureau of Transportation, there were about 35,000 fatalities and over 2.4m injuries on American roads in 2015. That may sound a lot but, given that Americans drive three trillion miles a year, accident rates are remarkably low: 1.12 deaths and 76 injuries per 100m miles. Since accidents are so rare (compared with miles travelled), autonomous vehicles “would have to driven hundreds of millions of miles, and sometimes hundreds of billions of miles, to demonstrate their reliability in terms of fatalities and injuries.
  9. “Safer than human drivers” ought to be a minimum requirement. Some would go further and require them to present no threat whatsoever to human life. That would imply it is acceptable for humans to make mistakes, but not for machines to do so. Such safety issues will have to be resolved before any regulatory framework for autonomous vehicles can be put in place.
  10. Carmakers could find themselves selling fewer vehicles to individuals, and more to operators of driverless fleets, who will run them 24 hours a day, seven days a week, and scrap them after a year or two. This may lead to more wasted resources as companies scrap old technology to upgrade fleets.
  11. Power-stations may not have the capacity to meet the demand to produce enough electricity. Also if energy is not being generated via green and sustainable ways e.g. solar panels, it defeats the purpose of having electric cars. Furthermore this change so far only applies to the automotive industry and not to planes/ships which due to globalisation play a big role in trade.

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What is the moral issue?

In economics, we often refer to the idea of rationality and assume in mathematical models homoeconomicus ( the concept portraying humans as consistently rational and narrowly self-interested agents who usually pursue their subjectively-defined ends optimally). For more information on this concept and its applications see my previous post titled “Key Economics Concepts”.

The issue with driverless cars is that they will be programmed to make rational decisions such as killing an old person who is sick and only has days to live rather than killing a child. Now although this may seem logically the right thing to do; it presents a serious ethical issue, why should a machine “play at God” and choose who lives and dies. “We think of humans as moral decision-makers. Can artificial intelligence actually replace our capacities as moral agents?”. That question leads to the “trolley problem,” a popular thought experiment ethicists have mulled over for about 50 years, which can be applied to driverless cars and morality: In the experiment, one imagines a runaway trolley speeding down a track which has five people tied to it. You can pull a lever to switch the trolley to another track, which has only one person tied to it. Would you sacrifice the one person to save the other five, or would you do nothing and let the trolley kill the five people? In the same way, will these cars optimize for overall human welfare, or will the algorithms prioritize passenger safety or those on the road?

Researchers at the Massachusetts Institute of Technology are asking people worldwide how they think a robot car should handle such life-or-death decisions. Their goal is not just for better algorithms, but to understand what it will take for society to accept the vehicles and use them. Their findings present a dilemma for car makers and governments eager to introduce self-driving vehicles. “People prefer a self-driving car to act in the greater good, sacrificing its passenger if it can save a crowd of pedestrians. They just don’t want to get into that car.”

What do I think will happen?

Overall it is clear that we are definitely going to see a change in the automotive industry. On one side we could see an economy whereby no one owns cars and instead driverless, electric vehicles are summoned like an Uber. On the flipside we may see a shift to electric cars however the driverless capability may not be rolled out for many years maybe even decades, as firstly many people would have a serious trust issue with such technology especially when we all know of times when technology can just fail on us at the most important times and secondly because of the moral “trolley problem” that occurs. I believe that the latter option will dominate but as this topic is so dynamic anything is a possibility. There are clearly economic consequences on both sides for using such cars most notably the number of job losses; however, as mentioned above these will more than likely be replaced by new jobs that we do not even know exist yet. This is an old problem that has happened throughout history and we have seen how it plays out. Admittedly we cant guarantee that history will repeat itself but it does seem likely that new technology is likely to create demand for workers. There will of course have to be major retraining and reshaping of the economy; although any major change in the economy is bound to have some disruption associated with it.

The disruption has begun though and whether we like it or not, there’s not much we can do about it to stop this revolution.  Although I have looked at a number of benefits and complications there are many others points that I have not even touched upon. This just highlights the complexity of the issue; changing the way the whole economy functions and operates every day was never going to be an easy task and it certainly won’t just happen overnight. Also, even though I have discussed more positives than negatives of the autonomous car industry, that’s not to say that driverless cars are overall better; the moral issue is a major problem and could hold back laws from being proposed. The future is unclear but for now car manufacturers will continue to develop and work on this technology. The battle we may win, is reducing carbon emissions by promoting electric cars through EV grants and subsidies, although Donald Trump’s ‘anti climate change’ mentality could act as a major obstacle.

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Sources used and quoted:

http://economicstudents.com/2017/07/economics-self-driving-cars/

https://www.wired.com/2017/06/impact-of-autonomous-vehicles/

https://www.cnbc.com/2017/05/03/self-driving-cars-will-disrupt-10-industries-commentary.html

https://www.economist.com/news/science-and-technology/21722628-forget-hype-about-autonomous-vehicles-being-around-cornerreal-driverless-cars-will

https://news.stanford.edu/2017/05/22/stanford-scholars-researchers-discuss-key-ethical-questions-self-driving-cars-present/

https://www.nbcnews.com/tech/innovation/driverless-cars-moral-dilemma-who-lives-who-dies-n708276

 

Thanks for reading, if you have any thoughts of your own you would like to share or have any questions that you would like answering please comment below.

Bitcoin-What’s the hype all about?

Hello readers, welcome back to my blog.

In this post I thought I would explore the idea of Cryptocurrencies, in particular Bitcoin. With its market price soaring past £10,000, something that many people did not even think would happen, it has certainly got everyone talking about it and wondering whether to invest in it. I’m not just talking about the economists who analyse and process the data from six computer screens whilst monitoring other currencies/commodities but everyday people who are looking to make a quick and effortless profit from their smartphones in the comfort of their own home or office. Its volatile nature however is what makes this quite a risky investment. That said you can yield some big profits if you buy at the right time and are not too risk seeking or risk averse. Although it is actually relatively straightforward to purchase Bitcoin via your smartphone using a coin wallet such as Coinbase, the mechanism behind it is actually rather complex and there is a lot of technical jargon that comes with it from ‘miners’ to ‘blockchain’ to ‘hash rate’.

In this post I will firstly outline what Bitcoin is, briefly summarise how it works, explain how it is different to conventional currencies and explain why it is suddenly growing in popularity. I hope this post clarifies some of the questions you may have about Bitcoin and if you have any further questions, please post them in the comments below. It is an interesting and topical issue which has the potential to replace traditional currencies  (aka Fiat currencies) whereby the central banks control the money supply. Already certain business are starting to accept payments in bitcoin and it was recently reported that people in central London have sold houses in the currency, therefore there is clearly potential. Others however argue its just a ‘craze’ or hype and that people will not be as confident in it due to the growing uncertainty about cybersecurity. Its recent crash last week proved that at some stage the bubble would start to bust, although could it rise again, and more importantly how high will it go this time round.

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Bitcoin was invented by Satoshi Nakamoto (the unknown inventor/ inventors of Bitcoin), who wanted to invent a peer to peer electronic cash system, in essence a decentralised cash system. Previous attempts at this had failed in the past until the invention of Bitcoin. It was created in 2009 and is now classified as a ‘cryptocurrency’. Numerous other cryptocurrencies such as Litecoin and Ethereum have been introduced although Bitcoin is by far the most successful one. [1]

A currency needs a payment network (accounts, balances and a record of transactions) as well as a central server or authority that verifies this network. In conventional currencies ( Fiat Currencies), this role is provided by the central banks such as the Bank of England. The challenge in a decentralised system is that every single transaction needs to be verified as if there are any discrepancies the whole systems will collapse. The game changing innovative feature of Bitcoin was that Satoshi Nakamoto  invented a system that could verify every single transaction in a decentralised system.

A brief summary of this is as follows:

  1. Cryptocurrencies are entries in a database that cannot be changed without fulfilling specific conditions.
  2. Bitcoin transactions are sent from and to electronic bitcoin wallets, and are digitally signed for security. Everyone on the network knows about a transaction, and the history of a transaction can be traced back to the point where the bitcoins were produced.
  3. The transaction is known almost immediately by the whole network. But a specific transaction gets confirmed after a certain amount of time. Confirmation is a critical concept in cryptocurrencies.  An unconfirmed transaction is pending and can be forged. Confirmation usually only takes a few minutes. Once a transaction is confirmed, it cannot ever be reversed, it is part of the so-called blockchain (database).
  4. Only miners can confirm transactions. This is essentially their job in a cryptocurrency-network. After a transaction is confirmed by a miner, it is added to the database and It has become part of the blockchain. For this job, the miners get rewarded with a token of the cryptocurrency.
  5. Anyone can be a miner, a decentralized network has no authority to delegate this task. Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task.[3]

Bitcoin mining is legal and is accomplished by running complex computer programmes in order to validate Bitcoin transactions and provide the requisite security for the public ledger of the Bitcoin network.[4]

The Bitcoin network compensates Bitcoin miners for their effort by releasing bitcoin to those who contribute the needed computational power. The more computing power you contributed then the greater your share of the reward. In the initial stages of Bitcoin mining could be done on a personal computer. Today that’s no longer possible. Specialised computer hardware is now needed for Bitcoin mining. Mining with anything less will consume more in electricity than you are likely to earn.

Like traditional currencies, such as Sterling, Bitcoin has value relative to other currencies and physical goods. Whole Bitcoin units can be subdivided into decimals representing smaller units of value.The smallest Bitcoin unit is the Satoshi, or 0.00000001 Bitcoin. Bitcoin can be used to purchase goods from an increasing number of companies that accept Bitcoin payments. It can be exchanged with other private users for services performed or to settle debts. It can be swapped for other currencies, both traditional and virtual, on electronic exchanges similar to Forex exchanges. And, as it is untraceable, it can be used in illicit activity, such as the purchase of illegal drugs on the “dark web”.[5]

Recently there has been a surge in the value of Bitcoin the current valuation on the day of writing this is 1 Bitcoin is worth £10314.49. though there have been several large fluctuations in the price.[6]

Bitcoin was initially thought off as a niche product but the rest of the financial world is starting to take notice. A blog by Nieplet in the LSE Business Review [7], succinctly summarises the potential effect of Bticoin on Central Banks, he writes

‘Crypto currencies offer limited benefits for users who do not have overwhelming privacy needs. Their usefulness as money suffers from limited liquidity, which creates exchange rate volatility. As long as the number of people using crypto currencies is small, the incentive for others to adopt them too remains limited. But strong network effects may quickly disrupt the payments system once a critical mass of users coordinate on, and adopt a specific crypto currency.’ Central banks increasingly are under pressure to keep ‘their’ currencies attractive. They should let the general public access electronic central bank money, not just financial institutions (Niepelt 2015). To do this, they should embrace the blockchain.’

Why the sudden hype?

The latest spike was driven by the news that the Chicago Mercantile Exchange will trade futures in Bitcoin; a derivatives contract based on a notional currency. If more people trade in Bitcoin  that means more demand, and thus the price should go up. But what is the appeal of Bitcoin? There are three main reasons: the limited nature of supply (new coins can only be created through complex calculations, and the total is limited to 21m); fears about the long-term value of fiat currencies in an era of quantitative easing; and the appeal of anonymity. Perhaps is is time to reassess our relationship with money. Crypto currencies and Bitcoin may be the start of this revolution, if its volatility can somehow be ironed out. However, currencies need to have a steady price if they are to be a medium of exchange. Buyers do not want to exchange a token that might jump sharply in price the next day; sellers do not want to receive a token that might plunge in price. People are buying Bitcoin because they expect other people to buy it from them at a higher price; the definition of the “greater fool theory“. [8]

If you’re reading this from an investors point of view, my advice would be to play it safe and invest only what you can afford to loose. Although it has the potential to make you a millionaire overnight, it is extremely volatile and a crash like the one we recently saw is always a possibility if not a certainty. Its just a question of time.

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References:

[1] https://www.chapman.edu/research/institutes-and-centers/economic-science-institute/_files/ifree-papers-and-photos/koeppel-april2017.pdf

[2] https://blockgeeks.com/guides/what-is-cryptocurrency/

[3] https://www.coindesk.com/information/how-do-bitcoin-transactions-work/

[4] https://www.bitcoinmining.com/getting-started/

[5] https://www.moneycrashers.com/bitcoin-history-how-it-works-pros-cons/

[6] http://www.xe.com/currencycharts/?from=XBT&to=GBP&view=1Y

[7] http://blogs.lse.ac.uk/businessreview/2016/10/21/bitcoin-may-have-implications-for-monetary-policy/

[8] https://www.economist.com/blogs/buttonwood/2017/11/greater-fool-theory-0