Launching a drone attack on the most boring concept in economics.

Overnight, Amazon chief executive Jeff Bezos has released a plan that has the whole world talking. The online shopping company plans to deliver goods by drone.

“In urban areas, you could actually cover very significant portions of the population. And so, it won’t work for everything; you know, we’re not gonna deliver kayaks or table saws this way,” Mr Bezos said.

He says the machines could have a 10 mile radius (that’s 16km in the developed world) and carry 5 pounds (2.27kg). That weight limit covers over 80 percent of Amazon’s deliveries.

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This post box’s future is as a drone launch pad

The story of delivery drones is an engineering epic that is far from finished. “This is all an R&D project,” Bezos pointed out. “This is years away”

But the narrative is important for economics too.

The people who first turned their minds to the economic effects are the 560,000 people who work in the logistics industry. Bosses are probably rubbing their hands with glee while drivers are twisting the lid off the gin bottle.

But under Civil Aviation Safety Authority rules, drones must be piloted. They may be unmanned but they are not uncontrolled. The real savings are going to be time, fuel and vehicle costs.

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Outmoded, outdated, outdone

Yesterday UPS brought me a package. It was the second delivery attempt and two men showed up on my doorstep for a package that weighed under a kilo. This is madness and it got me thinking about productivity.

The Financial Review froths about productivity incessantly. The Age on Monday had an enormous, yawn-inducing interview with Ross Garnaut where he spoke at length about the concept. Economists drone on about productivity, but have convinced few people to care about it.

Productivity should be fun and exciting, like finding a shortcut, or figuring out how to put on your pants two legs at a time.

Why is productivity important? Economic output can grow in three ways. By increasing the amount of labour; by increasing the amount of land and machines; or by changing the ways by which the first two are used. The last one is always the best. The first two come with trade-offs (more hours at work / more money spent on machines). But figuring out smarter ways of doing things is a free kick. That’s why the last concept (labelled productivity or total factor productivity) has economists obsessed.

Drones are an opportunity to make productivity cool. I’ve played with drones as part of a James Bond-themed bucks party and I can speak to their power to draw a crowd.

MI6 tests its drone capabilities

If you can swap a five tonne van with driver for a drone, you are raising productivity. And for once, people are enthralled by it.  If you can use the drones to deliver goods to people’s upstairs balconies, backyards, or other secure locations, so they can accept goods when they are not home, there’ll be a big upswell of love for the concept

Economics can also talk to the downsides of drones. Every time one person’s economic activity annoys or hurts someone else that’s called an externality.

The biggest risk with drones is that they crash. Because they are small, light and cheap ,they are not going to be as reliable and crash-proof as a real aircraft.

What’s notable is that in the Amazon promotional video, the little drone carries its cargo over a field. It never flies over a busy freeway, other people’s homes, schools or an airport. Probably because drone-flying can be pretty risky.

This video shows a drone going out of control and crashing into the Sydney Harbour Bridge.

I flinch if a sparrow comes too close to the windscreen, so I can imagine my car would spin out of control and plummet to the watery depths if an Octocopter smashed into the glass halfway across Sydney Harbour. That’s a real externality.

Privacy is also a pretty significant issue. If I was a burglar I’d fly a drone along a street to check for open windows, then buzz in a bit closer to see if anyone is home. (I’d also consider following the Amazon drones and swiftly picking up the parcels they drop off.)

But externalities can be managed.

The eventual upsides of this technology are huge. Drones are cheap and we can make them in Australia.  And drones can help in bushfires, search and rescue, police operations, weather monitoring, spreading pesticides, and many uses we haven’t even thought of yet. Fedex currently has an application with the US Federal Aviation Administration for an unmanned 747, according to CASA. The upside is huge.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

One thought on “Launching a drone attack on the most boring concept in economics.”

  1. I agree, I think they are the next step. No productive system is without its risks. Like every technology, it’s possible to use it for nefarious purposes, but externalities can be accommodated for or managed.

    Related to one of your previous posts, though, is the first mover advantage. The airways are well regulated of course, but if you can be the first to cut a deal and occupy flight paths, I can only imagine that it works in your favour as the air authorities aren’t going to allow drones flying everywhere. I do get a bit concerned with the idea that Amazon (which I use because I have a kindle, but hate because of its employment practices) has dominance of warehouse sale and distribution markets…and the skies.

    Like

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