The Luddite Fallacy

Standing in line marking time
Waiting for the welfare dime
'Cause they can't buy a job
--Bruce Hornsby & the Range

This post is meant to collect a few notes ahead of a forum that we will hold in class tomorrow. The forum topic is whether technological improvments that improve productivity (e.g., automation) create permanently high levels of unemployment.

This issue is typically referred to as 'technological unemployment.' It is also known as the 'Luddite Fallacy' after a group of English textile workers who revolted against the implementation of sewing machines in the 1800s.

Mises (2008, Ch 7, p 136-137). High levels of unemployment can only persist when all material factors of production are fully utilized such that there is no opportunity to employ people who are ready to work. In such a world labor would be abundant. If the world was socialist, additional people would mean additional mouths to feed. If the world was capitalist, then wages paid would not be enough to prevent starvation.

But that world is not the present one. Labor is more scarce than other factors of production. There are material factors of production that remain unused because the labor required to work on them is employed in satisfying more urgent needs. There is no abundance of manpower; there is a shortage.

The substitution of equipment and other more efficient methods of production does not render labor more abundant, provided that there are still other material factors of production whose utilization can increase human well being. Enhanced productivity thru use of better technology increases output, thereby reducing want. This does not bring about 'technological unemployment.'

Mises (2008, Ch 30, p. 768-769). The confusion starts with the misinterpretation of the statement that machinery is 'substituted' for labor. What happens is that labor is rendered more efficient by the aid of machinery. The same input of labor leads to greater quantity or better quality of output. The employment of machinery itself does not directly reduce the number of people employed in the production of the article concerned...The technological improvement in the production of A makes it possible to realize certain projects which could not be executed before because the workers required were employed for the production of A for which consumers' demand was more urgent. The reduction of the number of workers in the A industry is caused by the increased demand of these other branches to which the opportunity to expand is offered...

Tools and machinery are primarily not labor saving devices, but means to increase output per unit of input. They appear as labor saving devices if looked upon exclusively from the point of view of the individual branch of business concerned. Seen from the point of view of the consumers and the whole of society, they appear as instruments that raise productivity of human effort. They increase supply and make it possible to consume more material goods and to enjoy more leisure. Which goods will be consumed in greater quantity and to what extent people will prefer to enjoy more leisure depends on people's value judgments.

Hazlitt (1946, Ch 7 The Curse of Machinery). This is perhaps the best treatment of the subject in everday language. He brings up the Technocrats, those people who during the 1930s got loud with the technological unemployment message. He notes that every individual as well as every employer is trying to save his own labor, to economize the means required to achieve the ends. The thought process of the Technocrats implies that this is wrong. That we would be better off if freight were carried on people's backs rather than by truck or rail.

Hazlitt observes that in many if not most cases, efficiencies gained thru the use of machinery happen over the long run since it may take many years for machines to 'pay for themselves.' If/when this occurs, the capitalist now has more profit, and labor may have suffered a loss. But it is out of these excess profits that social gains must come. These profits must be used to either 1) expand operations, 2) invest the capital in some other manner, 3) consumer more. Whichever the approach, employment will increase.

In competitive markets, efficiencies realized by one operator will prompt others to imitate. Thereby the gains discussed above are multiplied by competitive forces. Profits will begin to drop and in highly competitive markets, there may be little or no profit at all. The efficiencies in such a case are passed onto consumers in the form of lower prices. This increases the purchasing power of buyers and drives either more consumption or more saving which, once again, increases employment.

Hazlitt astutely observes that where full employment already exists, the result of increased productivity is more voluntary unemployment, because people can work less time and still satisfy their wants.

What machines do is increase production and increase standard of living. They do it by making goods cheaper for consumers and by increasing the real wages of workers (higher salary and/or increased purchasing power).

The focus of media and other intellectual groups is often on the immediate effects on certain groups. Keep your eye on Joe Smith, who just got thrown out of a job. What these observers often fail to do is to also keep an eye on Tom Jones, who just got a job making productive machines, or Sue Brown, who just got a job operating one, or Sarah Miller, who can now buy a coat for half the previous cost.

The problem for Tom Jones arises if he is too rigid to adapt to what is needed in the Market for Talent. In free markets, the process of creative destruction is likely to render skill sets obsolete, meaning that workers need to have the flexibility to re-invent themselves.

Therein lies the heart of the problem that makes the headlines.

References

Hazlitt, H. 1946 then 1979. Economics in one lesson. New York: Three Rivers Press.

Mises, L. 1949 then 2008. Human action. Auburn, AL: Ludwig von Mises Institute.