The Curse of Machinery and Spread the Work Schemes

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The Curse of Machinery and Spread the Work Schemes

“Among the most viable of all economic delusions is the belief that machines on net balance create unemployment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever.” This particular economic fallacy has died and risen 1,000 additional times since Hazlitt’s original writing in 1946.

Use common sense: Machines aid man in production and make our lives better. If they were a “curse” or caused unemployment, the cavemen would have never materially advanced because each new machine would throw more and more cavemen out of work.

This fallacy seems obvious, even to the casual observer, but Nobel-prize  winning economists have “opposed the introduction of labor-saving machines in the underdeveloped countries on the ground that they ‘decrease the demand for labor’.” This statement is impossible to square with the history of mankind.

For example, economist Milton Friedman once took a trip to China, where he saw men there digging ditches with a shovel instead of widely available and more efficient heavy machinery. Friedman asked what the logic was behind this move and he was told they used shovels to prevent anyone from being thrown out of work. Friedman, understanding the fallacy at play, responded, “well then why don’t you have them dig using spoons?”

It should be evident that jobs, in and of themselves, are not the end goal of economic activity. The end goal is production and consumption. We produce to satisfy the various ends that individuals may want to achieve. Machines aide us in this process, they are a blessing not a curse.

For example, imagine a factory owner that produces shoes. After discovering a new machine that creates shoes using only half the labor as before, he decides to install the machine and cut half of his workforce. We can see the unemployment before our eyes and the culprit is clearly the new machine.

But this is to forget our main lesson, to see the unseen. For starters, there will be new jobs creating and maintaining this new machine, jobs that did not previously exist. Even so, this does not mean we are back to “even” on the jobs front just yet.

If the factory owner has kept prices the same — while producing the same quantity of shoes — he has earned a tremendous monetary gain. This is where the labor-leader comes in a claim exploitation — “labor has suffered a net loss of employment, while it is only the manufacturer, the capitalist, who has gained.”

Once again, this misses the big picture. What does the manufacturer do with this new money?

He either reinvests his money in the company and expands operations (creating jobs); invests the money in a different industry (more jobs); or spends the money on personal consumption (still more jobs). Standards of living have increased through increased production and no exploitation has occurred.

In the real world, what usually happens is that competitors, responding to the extremely high profit margins in this sector, will enter the industry and bid up the input and asset prices of the new machines. Meanwhile, the new competition will drive down consumer prices and thus the rate of profits. In the end, consumers will have shoes and lots of extra money; money that can be spent on new products or saved in the bank. Standards of living have increased due to more efficient production methods.

Is the shoe factory example outdated? No! Imagine a mobile application that cuts the cost of a cab ride in half. Putting aside for the moment that living standards are already better from more convenient service, cleaner cars and nicer drivers; let’s analyze how this modern example of creative destruction plays out.

Suddenly, consumers that were paying $50 for a ride and now paying $25. This means they have $25 extra dollars to spend; and an entirely different industry may expand or a new one may even develop. Consumers have taxi services and something else, instead of just the taxi services. Jobs, on net,  have shifted from one industry to another, they have not been lost; and standards of living are improved.

It is true, individual workers may be harmed by these developments. The uniquely skilled horse and buggy designer is left with a skill not desired by the market. The response to this particular problem goes beyond the aim of this particular economic lesson; but nevertheless we cannot lose sight of the improvements to the rest of society.

Another variation of labor intervention is so-called “spread the work” proposals. Unions concoct these schemes by arguing “to shorten the working week, usually by law. The belief that it would “spread the work” and “give more jobs” was one of the main reasons behind the inclusion of the penalty-overtime provision in the existing Federal Wage-Hour Law.”

There are two main outcomes that can occur in response to overtime legislation attempting to “spread the work.” First, employers may reduce hours to avoid having to pay the overtime — with no change in hourly payment. The second option is for employers to reduce hours while maintaining the original amount of pay.

In the first option, workers are forced to work less hours than they chose on their own to work, and their standards of living have suffered in the process. The make the same amount of money per hour, must work less hours, and therefore have had their purchasing power eroded. Since in this case the employer can afford to hire replacements, new jobs are created. As a practical matter, it is likely these specific workers are less skilled and less efficient than the workers they are replacing, but if we ignore that assumption it is still clear that no new production will occur.

40 hours of labor is still producing 40 hours worth of production (and probably less with the newer workers) and overall standards of living remain unchanged. All that has happened is that some men have been forced against their will to “purchase” leisure so that other men could now work.

In the second option, where hours are reduced but take home pay remains the same, all that has happened is that production costs for employers have increased. It is now more expensive to make houses, shoes, computers, etc; therefore we can expect to see less of these things produced. Since we can safely assume these workers were already getting paid at par with their productivity, the “wage increase” (less hours, same money) will actually cause greater unemployment. If they cannot produce the same amount of goods in, say, 30 hours what they were producing in 40 hours, then less production will occur, prices will rise and standards of living will be diminished.

The belief that machines create unemployment and that work can be arbitrarily spread around rest on the same faulty premise that there is “just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied.”