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The myth of technological unemployment: another Liberal Party failure
Gerard Jackson
Any period of prolonged widespread unemployment or rapid technological change invariably resurrects the myth of technological unemployment, even though history and economics have long since discredited it. As expected, the Liberal Party has found itself singularly inept in tackling this anti-investment fallacy.
It was not that long ago Paul James, a lecturer in political science, claimed, without a shred of historical evidence or theoretical support, that the next generation will experience the 80/20” work-force where only 20 per cent will be fully employed, the remainder suffering unemployment and underemployment.
James’ ridiculous prophecy was enthusiastically endorsed by Greg Callaghan of The Australian (Digital downsizing in employment is creating a new social divide, 14 February 1998). Although his article epitomised all too well what now tends to pass for serious economic and social commentary in the Australian media it did, however, serve to underline the utter poverty of the left’s economic thinking and their basic intellectual dishonesty.
Now I would normally have allowed this article to pass considering that it is more than eight years old. Unfortunately Professors Paul Frijters and Robert Gregory appear, at least to me, to have dressed the technology-causes-unemployment myth in new garb in an attempt to strike a mortal blow against labour market reform.* As I intend to deal with their variation next week the present article will confine itself to a general rebuttal of this fallacy.
Any assertion that technology destroys jobs is based on the fallacy that capital is a substitute for labour and not a complementary factor. This belief in turn springs from the fallacy of composition, confusing the part with the whole. This is not to deny that machines do not destroy jobs — they do. But the process by which this is done expands real purchasing power, lifts living standards and raises the demand for labour in general. Therefore observers have confused the destruction of certain jobs with the destruction of employment, thinking they are the same thing.
Rather than being a substitute for labour capital is a means of economising labour, because it is the least specific factor, and making it more efficient. Not only does capital economise on labour it makes it possible for labour to produce services that were once impossible (e.g., x-ray machines, jet flight, telecommunications, deep sea drilling). Some might argue that we are not discussing capital but technology. This would be to miss the point.
Technology can only be applied through capital. It would be pointless having the best programmers in the world if you cannot supply them with computers. Technology, including so-called information technology, is always applied through capital which in turn is fuelled by savings. It therefore follows that savings limit the extent to which investments in technology, no matter how highly advanced or desirable, can be made.
Critics of technology, because that is what these people really are, implicitly assume that labour is specific, that it has no alternative use. Once it is dismissed from a particular line of production its services are rendered valueless. This is where a curious contradiction between some critics of capitalism emerges: There are those who argue the above and those who argue that lowering real wage rates reduces investment by inducing capitalists to hire more labour rather than invest in machinery. Though they appear to contradict each other the arguments are closely linked in the obvious sense that labour and capital are viewed as competing substitutes.*
Let us imagine an overpopulated country in which all the land is fully utilised and capital is virtually nonexistent. Obviously the living standard of the general population would be at a bare subsistence level with little in the way of wages. According to both views it would not pay capitalists to invest. The first view claims that machines destroy jobs while the latter claims that the cheapness of labour makes investment unprofitable. These views overlook the fact that machinery is primarily employed to raise output per unit of input, i.e., productivity, not to displace labour. A moment’s reflection and one quickly realises that if either one were right there would never have been an industrial revolution.
Let us assume that in our imaginary country entrepreneurs calculate that by using, let us say, textile machinery they can make handsome profits while incurring very little in the way of labour costs. Clearly the investment will be made in the machinery even though abundant labour is available and domestic weavers and spinners abound. Why? Because the machinery raises the value of the labourer’s product by increasing his marginal product even though unit prices fall.
As profits are maladjustments between supply and demand it follows that labour is undervalued in relation to the value of its product. This means the demand for labour will rise as more entrepreneurs move into the newly developing, though labour intensive, industry to compete away the profits. (I have assumed that the government does not interfere with markets). This is basically what happened in eighteenth century England when its cotton industry took off. And the same thing happened to the Asian tigers. History demonstrates that though this process destroyed a great many jobs in the short term many more at higher wage rates were created.
As I pointed out earlier on, much of the confusion stems from extending the experience of one company to that of the economy. OK, a company decides to invest in the latest cost-cutting technology that will double output without raising total costs. If demand is elastic (sensitive to changes in prices) a small price reduction could see all of his output sold. No one is fired, prices have fallen somewhat and healthy profits are being earned.
However, these profits act as a signal to other entrepreneurs who move in to compete them away. The demand for labour rises, output rises, as do costs while prices fall. Eventually stability is restored at a higher level of employment, output and investment, and profits, though not interest to the firm, disappear.
By buying the machines employment was created in their production and maintenance; more employment was directly created in the industry as it expanded to meet demand; purchasing power rose as the price of the product fell which in turn expanded the demand for other products. In addition, given unchanged time preferences, more savings would have been made available for more job-creating investments.
However, assuming that demand for the product was insufficiently elastic, despite falling prices, to maintain the industry’s current level of employment then unemployment would appear. But note, whether labour is dismissed is determined by the shape of the demand curve for the product and not by the introduction of the labour-economising machinery. As the machinery (applied technology in reality) is of the cost-cutting type then the amount of labour in terms of payrolls that is dismissed will be greater than is used in the production and maintenance of the machinery. Hence there will be a net loss of employment in the industry.
But the effect of the new investment (and I must stress that this means new technology) is to expand total demand by expanding output at lower prices. This raises purchasing power which in turn expands the demand for the products of other industries. These industries respond by raising their demands for labour. Total demand is raised by raising total output.
Therefore, as pre-Keynesian economists would have said, supplies constitute demands. (This is Say’s Law). Money is the means by which we carry out indirect barter so when the money price of any product falls this leaves consumers with more of their own products to exchange for the products of others. Hence, as new technology expands demands it also expands the demand for labour.
Obviously the central point that goods exchange against other goods, not money, and that supplies are demands is being neglected. When individuals engage in production they offer their products in exchange for the products of others. When investment raises the marginal productivity of labour more goods will be offered in exchange for other goods.
If the critics’ reasoning is correct then technological unemployment would go hand-in-hand with remarkable increases in productivity and masses of idle capital. This is because as companies invested in more labour-economising technology mass unemployment would emerge along with masses of idle capital and unsold consumer goods. (In the 1990s US manufacturing productivity greatly exceeded Australia’s, and still does, while the Australian unemployment rate was twice as high).
In other words, this kind of technology causes general over-production. But this could only happen if supplies are not demands. So long as there is sufficient land and capital to employment people then lasting mass unemployment is not possible in a free market. And as long as people’s wants remain unsatisfied and the means (capital) exists to employ labour then our critics economic prediction of 80 per cent unemployment is nothing but a bogeyman.
There is the argument that the above analysis only applies to what has passed because new technology is qualitatively different does not hold up. The same technophobic argument was used in the 1930s and 1950s without success. But this argument does suggest that productivity increases during the Industrial Revolution must have been comparatively small otherwise the period would have been market by mass unemployment and a general glut.
The eighteenth and nineteenth centuries experienced industrial innovations that brought about rapid strides productivity and employment that continue to the present day. For example, virtually overnight Henry Cort’s process raised the productivity of bar iron production by 1400 per cent. Between 1873 and 1886 the price of Bessemer steel fell by 75 per cent while the productivity of Bessemer furnaces rose by 400 per cent. These are remarkable productivity increases.
The English textile industry is another graphic example that should have caused mass unemployment. A variety of inventions and innovations led to a massive rise in productivity. It was estimated that by 1812 the productivity of a spinner was 2000 per cent greater than in 1770. So great were the increases in productivity by the 1800s that some workers, fearing technological unemployment, resorted to machine-breaking, even though the expansion of employment in the industry had been spectacular.
Without labour-economising technology the American telephone system would collapse. In 1972 it was estimated that using 1900 technology 20 million operators would have been needed to handle the volume of calls. (Taken at face value technology has destroyed more than 20 million jobs in this sector alone). In 1998 it was estimated that American telephone traffic uses so much computer power that if it were done manually the number of operators would exceed the numbers generating the traffic. So where did all the operators go? To other jobs, every one. That’s where.
There is no point in critics asserting that information technology is qualitatively different when they do not even make the slightest attempt to explain why. Information is only useful to industry when it allows a more efficient allocation of resources. Any technology that allows such valuable information to be more efficiently and rapidly disseminated is to be welcomed, not condemned.
On the other hand, I suspect that what was really being attacked is the microprocessor — the very device that has given birth to a number of new industries and the hundreds of thousands of jobs it created. Only God knows how many future industries and jobs will owe their existence to this astonishing device.
Finally we come to technology and income. That some groups can suffer in the short term from the introduction of technology is indisputable — a similar thing happens with shifts in demand — but the principle effect is to raise overall income in the longer term. However, it is not the existence of the technology per se that raises income but, as already stated, its application through investment in capital goods.
These goods form an integrated heterogeneous structure consisting of stages of production. As the structure becomes longer, more complex and productive it raises the marginal productivity of labour. This phenomenon can conceal some surprising facts. Though only about 3.5 million Americans are directly employed in agriculture, 20 million or more are directly and indirectly employed in the food industry of which agriculture is the highest stage.
Seeing the economy as integrated stages of production, as we should, rather than isolated sectors, as is frequently the case, helps put things like information technology in their proper perspective because it forces us to seek out economic linkages. If an advanced economy is experiencing a significant shift in income from wages to capital, this suggests that the population is either expanding at a faster rate than investment or the production structure is shrinking. In either case the result would be falling wages.*
We do know one thing for certain: The Liberal Party is completely incompetent when it comes to any criticism of its labour market policies that are based on this fallacy. So when some anti-market economist argues that freeing the labour market won’t increase the demand for unskilled labour because the value of their marginal productivity has collapsed Liberal Party spokesmen find themselves paralysed.
*Liberal Government and labour market reform: more fallacious attacks
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 24 April 2006