Wednesday, June 10, 2015

Sharing the Tech Threat, I: The Shoemaker and the Machine


A couple of days ago one of our faithful readers sent us links to two very interesting articles.  One was on the “Naked Capitalism” website, “People and Power: The Technology Threat.”  The other was from the Washington Post Magazine, “The Post Ownership Society: How the ‘sharing economy’ allows Millennials to cope with downward mobility, and also makes them poorer.”  Taken together, they paint a very grim picture indeed.

"It's my new invention. Start grooming it to take over your job."
The Naked Capitalism article focused on a two-part Al Jazeera documentary chronicling how advancing technology is eliminating “mid-range” jobs, i.e., traditional white collar bastions of middle and low management and others on that level.  The Washington Post Magazine article related how the trend to temporary work and reluctance to commit to anything (such as marriage and home ownership) is undermining the “Millennial” generation.

The two articles fit very neatly together, although that was probably not the respective authors’ intentions . . . who may not even be aware of one another.  Not having seen the Al Jazeera documentary, we suppose that it related how jobs that used to be done by actual, flesh-and-blood human beings are now being done increasingly by machines.

Babbage's "Analytical Engine"
This is nothing new.  Advancing technology has always eliminated jobs.  It’s the nature of technology to do so.  Both Jean-Baptiste Say (“Say’s Law of Markets”) and Charles Babbage (who is generally acknowledged as the “father of the computer”) noted that technology replaces human labor in the production process, or no rational producer would purchase the technology.

What, then, are we to make of the mantra that “technology creates jobs”?  Nothing.  It’s not true.

Put away your torches and guns, techies.  We will proceed to demonstrate the truth of this claim.

We begin with the standard economic copout of holding everything else equal except the thing we are changing.  It’s not really a copout, of course, but standard scientific practice.  You keep everything else the same and change only one variable to see what happens.

"Damn' elf labor. The other eight must be playing hooky."
So, let’s start with the shoemaker and the elves.  The only shoemaker in town employs ten elves, who produce ten pairs of shoes each day, five days a week.  That’s fifty pairs of shoes, which is exactly enough to meet local demand, no more, no less.  The shoemaker pays each elf one silver piece per week, and sells each pair of shoes for one silver piece.  The cost of materials and operations is 25 silver pieces each week, leaving the shoemaker a profit of 15 silver pieces each week, or one and a half gold pieces.  If you just did the math, one gold piece = ten silver pieces.

One day Mac the Machine Salesman comes to town and tells the shoemaker he can sell him a machine, set it up, and give him a service contract for the life of the machine (ten years, guaranteed) for 100 gold pieces plus 4% interest on the loan principal.  This will be at the rate of one gold piece per week for two years; the additional four weeks’ gold pieces are for the 4% interest.  The machine is guaranteed to produce exactly 50 pairs of shoes per week.

Whipping out his stylus and wax tablet, the shoemaker figures that over the life of the machine he will save 416 gold pieces in wages, or 4,160 silver pieces, with no increase in other costs: pure profit; his retirement is secure.  At the end of the machine’s useful life, the shoemaker can either buy another machine and sell the old one for scrap or take a trade-in allowance, or go back to elf-manufacture.

Nothing sadder than an unemployed elf.
Naturally he buys the machine, and fires the elves, who are not unionized.  Because the elves did not contribute to the local economy by buying anything, not even shoes (they produce what they themselves need by magic and hoard their silver), and the shoemaker saves all the extra money in a sock under his bed for retirement, the only change in the local economy has been the disappearance of ten jobs.

Thus, by holding everything except the introduction of machinery constant we see that advancing technology does not create jobs, but eliminates them.

So what does create jobs?  As Dr. Harold G. Moulton demonstrated in The Formation ofCapital (1935), increases in consumer demand create jobs by increasing the demand for machinery that requires human operators.  Not the same jobs that technology eliminates, of course, but different jobs.

Take the shoemaker again.  He tells Mac the Machine Salesman that the deal he offers is great — but he is anticipating doubled demand for shoes because everybody in town has taken up jogging and wearing out their shoes twice as fast as they used to.  Demand is going to increase from fifty to a hundred pairs of shoes per week.

Mac, of course, says, “No problem.  I can let you have two machines on exactly the same terms.  You will produce twice as many shoes and make twice the money.”

"There's gotta be a better way to make a lousy silver piece."
The shoemaker almost agrees, but then realizes something.  “I can only operate one machine at a time.  Who is going to operate the second machine?” he asks.  “Elves can’t reach the turn-on switch, and they’re not strong enough to pull the lever to produce the shoes.”

Mac shrugs and says, “So hire somebody at one silver piece per week, the going rate.  The only difference is that you’ll net 29 silver pieces each week instead of 30 for your living expenses and double the amount of your retirement savings.”

Thus, one new job was created in place of ten jobs eliminated — but it wasn’t the same job.  It was a new, different job.  Further, it wasn’t due to the introduction of machinery per se, but because of an increase in consumer demand.

Tomorrow we’ll look at how advancing technology is affecting the “mid level” people in the economy.

#30#

No comments: