We have experienced these scares before with no long-run catastrophes. Why is this alarm so different? Because this time, advocates say, the culprit is the computer, which leads them to forecast dire outcomes: mass unemployment, especially borne by the middle class, prompting its great shrinkage, which leads to higher income inequality.
THIS IS ENOUGH to propel one into a fit of dreadful depression. Let us examine the evidence the alarmists provide. Driver-less cars promise to toss out of work millions of truck drivers, bus drivers, cab drivers and others whose occupations entail driving responsibilities; electronic devices replace meter readers in public utilities; ATMs replace bank tellers; and so on. The possibilities for such progress are unbounded.
Then Larry Summers, the former secretary of the Treasury, asks us to imagine a device labeled the “Doer,” which can produce any product or service. Except for inventors and operators of Doers, all others would be unemployed.
Please. Since the onset of the Industrial Revolution, Western economies have experienced periodic waves of unemployment with experts pointing to new machines as the cause. We not only survived these episodes, but managed to generate increases in our standard of living without the forecasted army of unemployed.
PRIOR TO THE current uprising, the most recent alarms were sounded in the 1950s, when the notion of worker displacement acquired the label of automation. These warnings were sending people to the hills, but subsequently we enjoyed one of the most robust periods of economic growth in our history.
These dismal forecasts consistently fail for several reasons. First is the obvious notion that manpower is required to produce the more efficient machines. Second, the introduction of improved technology always engenders a host of spillover or ripple employment effects that new machines have on other industries, lines of business and individual firms. These effects are complex and daunting to unravel, which is one reason they are rarely studied.
THIRD, AND most important, is the resilience of our free-market system to the shocks induced by the relentless substitution of capital for labor; the development of more efficient machines; and the persistent appearance of “better mousetraps.” This resilience is poorly understood and rarely appreciated.
The key in our free-market system is its capacity to adjust to changed circumstances. (Indeed, studying how a market system adjusts to the constant flow of changed conditions, the interruptions, is the essence of the subject of economics.) To introduce new products or machines, resources including labor must be available for production. New jobs are created and the market system must adjust.
By the same token, if these new machines are to replace existing machines, the manufacturers of old machines must adjust their outputs. Or if labor is displaced, labor must adjust. This process moves so continuously that we are hardly aware of its magnitude. The reader is familiar with all the aids that are available to labor in the adjustment process: Maybe displaced workers offer their services at more competitive wages. Maybe they relocate; acquire new, more competitive skills; obtain counseling; establish more efficient networks of friends and acquaintances – the list of aids is almost endless.
What makes this efficient system even more remarkable is that it is based on the individual’s right to choose. The outcome is a surprisingly resilient system.
BUT THERE ARE persistent interruptions to adjustment that are government induced, making the process longer and more painful. Increases in minimum wages, in union power and in various government regulations, can, in the short run, make us feel better, like a narcotic fix. But in the long term, it breeds higher costs of production, increased business investment risk and decreased expected returns on new investments – in short, decreased incentives to increase employment, which is the major purported objective of these government programs.
Our current political-media-academia-entertainment complex’s economic model reduces personal freedom, free choice, the right to contract and property rights – all justified because the programs that violate these freedoms serve a “greater public good,” a typical Solomonic judicial stance. This model does not protect personal freedom.
THE SUBSTITUTION of capital for labor is only one of many paths management may take to achieve cost savings. They frequently obtain them through more efficient organizational structures; through rearrangement of production operations; and by introducing plain cost-saving measures, other than labor-saving machines. Quite often less efficient labor is displaced by these efforts. Should society be concerned about the possibility of mass unemployment in this continuously ongoing case? But this process, like the replacement of humans by machines, is subject to adjustment in a resilient economy.
Paralleling the machine-labor substitution question, is the event where the entrepreneur replaces employee A with a more productive worker B. Do we become alarmed with the substitution? Speaking with tongue in cheek, if we allow this process to go unchecked, those working will only be the most efficient, leaving the less efficient to join the army of the unemployed.
If this scenario sounds Marxist, it is. It ignores the resilient power of a free-market economy.
Humans have been striving to find the most efficient way of providing output for millennia. As heads of households in primitive societies, we aimed to minimize our own labor input; as entrepreneurs in more advanced economies, we strove to save material and labor costs; managers in modern economies have the same motives.
Our success in achieving high standards of living differentiates us from primates. With a free-market economy that embodies personal freedom, free choice and freedom to contract, there is no reason why we cannot continue to enjoy a fruitful future.
(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)