Driving to a new era of economic growth

Driving to a new era of economic growth

ESSA Writers
March 27, 2014

The IT revolution is in full throttle. Among the most fascinating inventions—such as 3D printing and robots performing complex tasks—is the autonomous vehicle (AV, or the driverless car). By examining its economic implications, one cannot help but feel optimistic about how the AV will transform our economy and enhance living standards across the board.

For those unfamiliar with the concept, Google and many others have already started designing a completely autonomous car that drives itself from A to B without human control. According to a study by the ENO Center for Transportation, AV operations differ dramatically from human-driven vehicles. AVs can be programmed not to break road laws, their reaction times are better than our own and ‘they can be optimised to smooth traffic flows, improve fuel economy and reduce emissions.’

Economic benefits

With this image in mind, the economic benefits are almost endless. Given car accidents are largely the result of human error, AVs could reduce accidents to 1% of current levels. Not only would this almost eliminate the 1.24 million deaths a year worldwide caused by car accidents, but it would also save the Australian economy $27 billion each year. Unnecessary health care, insurance, law-enforcement and litigation costs would be avoided. Sure such numbers are always pleasing, but on a more personal level, individuals would never have to pay a speeding fine (or for that matter drink-driving related costs such as imprisonment or licence suspension), significantly cheaper insurance premiums are inevitable (increasing one’s disposable income annually), and incapacitated drivers are afforded a new form of transport that is more individualised compared to public transport, thereby overcoming the barriers standing between them and the workforce, which, in effect, increases the participation rate.

AVs allow for gains in productivity and living standards in two direct ways. Firstly, according to leading Google developer Sebastian Thrun, we can expect AV technology to reduce traffic congestion by 90%, allowing more efficient travel. This is primarily the result of AV precision far and above our own, leading to better use of roads where lanes can be narrowed and speed limits can be increased. We could also eradicate human causes of traffic congestion, such as 90% of all car accidents, booze bus induced congestion and time wasted while lost or searching for a car-spot. With the time regained (estimated to be 52 minutes per day for the average US driver), people can either choose to address issues of time-poverty by engaging in more exercise or leisure and thus increase their non-material living standards, or work more, raising GDP and material living standards. Additionally, freight industries can expect a surge in productivity, which would be passed on to firms and consumers in the form of lower prices. Also pleasing are the environmental benefits associated with driving less and the consequent decline in car expenses borne by drivers.

Secondly, by more efficiently using our travel time, we effectively minimise the opportunity cost of driving—while driving, one must forego the opportunity of doing something else. Therefore, (economically rational) people would spend this time in a way that maximises utility and minimises opportunity cost, whether it be reading, tweeting or shopping online. Not to mention how eliminating the situations of cursing pathetic drivers produces mental benefits that enable us to be more productive.

Furthermore, markets currently affected by driving laws (e.g. drink driving laws) such as the hospitality industry could expect to see a rise in demand as these barriers soften, thereby incentivising these competing firms to improve efficiency in order to capture the additional profits available in the market. The flipside is that car instructor, trucking, taxi and public transportation industries could be forced to restructure or, at worst, face extinction.

Social and economic barriers

The AV’s arrival in the economy won’t be without resistance. The first barrier is that although the risk of a car accident is now significantly reduced, the technology may (very rarely) fail, albeit at a severely lower rate than that of our own. This lack of control could irrationally lead drivers to refrain from using the safer form of travel. Similarly, some people simply enjoy driving. While these factors may ensure AVs aren’t universally accepted, they don’t offer any valid reason for why AVs shouldn’t be available to the average person.

Another potential barrier is that the AV’s adverse impact on employment, especially taxi drivers, may spawn unionist resistance. While some industries would undoubtedly suffer, in response, the change is not one that will materialise overnight but will rather take place over a gradual period of time, offering ample opportunity for these workers to transition into more sustainable and profitable markets. In any case, such dissent is just a different form of the same age-old concern based on illogical assumptions. People who lay claim to this argument do so through a myopic lens because they fail to recognise that the labour market of tomorrow will look drastically different to what they see today. People of the next generation will have technological skills far advanced than the average person today, as proven by the IT savvy modern-day toddler. This generational shift will allow the workforce of the future to embrace, rather than envy and deplore, the productive capabilities of technology. To explain the same point rather differently, have you met anyone today who complains that the automobile has prevented them from steering horse carriages for a living?

However, there may be some merit to the claim that as technology entirely replaces the manual working class, a larger proportion of the population will be structurally unemployed due to an insufficient amount of IT-related or professional jobs to cater for the world’s population. True this may be, but what is overlooked is how drastically prices would fall if this were the case. With substantially cheaper goods available, perhaps working a 40+ hour week will be viewed as obscene and a complete waste of time. Not to mention the fact that our predictions on future jobs are distorted by our inherent inability to accurately quantify how many technologies will be invented in the future.

So when and how will driverless cars enter our lives? Predictions vary. Although Google believes it could partner with a carmaker by 2017, industry-watchers believe the middle of the 2020s is more realistic. As for ‘how’, there are two non-mutually exclusive possibilities. The first is the traditional form where consumers will be able to purchase the car in the market, although its exorbitant price tag may prevent most from doing so in the short-run. More interesting is the second form known as a car club, where people would pay an annual fee to the relevant company to gain access to the car at the touch of their Smartphone and then pay a rate per unit of travel. As explained in the graph, this second form would be more financially viable than the traditional form, with the ‘Shared Driverless Purpose-Built Vehicles’ offering cost-savings of up to $0.44 per cost per trip-mile compared to the most cost effective ‘Personally Owned Vehicles’ method.

The AV’s economic benefits are mind-blowing. Just as the inventions that led to the Industrial Revolution precipitated unprecedented levels of economic growth, a similar expectation for the AV is, well, automatic.