Do Machines Cause Unemployment?

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It’s a curious question, and one that requires more deep diving than just the usual surface examination Thayer get from the mainstream media and their on-demand economists.

Today, I’m writing this based on Henry Hazlitt’s book Economics In One Lesson. This book contains a chapter on machinery and jobs titled The Curse Of Machinery. This is where I will be basing my analysis and article on.

Hazlitt uses the example of a manufacturer of clothing learning that he can produce clothing quicker than his workers can. Hazlitt writes:

He installs the machines and drops half his labor force.

Dramatic right? Half of the workers at that factory are now unemployed. That’s far more than enough to enrage any communist or socialist. Now, upon the superficial examination, things are pretty bad. Hazlitt writes:

This looks at first glance like a clear loss of employment. But the machine itself required labor to make it; so here, as one offset, are jobs that would not otherwise have existed.

Hazlitt is applying his lesson here, which is looking beyond just the superficial data. He continues:

The manufacturer, however, would have adopted the machine if it had either made better suits for half as much labor, or had made the same kind of suits at a smaller cost. If we assume the latter, we cannot assume that the amount of labor to make the machines was as great in terms of payrolls as the amount of labor that the clothing manufacturer hopes to save in the long run by adopting the machine; otherwise there would have been no economy, and he would not have adopted it.

Confused a bit? Maybe. Let’s continue:

After the machine has produced economies sufficient to offset its costs, the clothing manufacturer has more profits than before. … At this point, it may seem, labor has suffered a net loss of employment, while it is only the manufacturer, the capitalist, who has gained. But it is precisely out of these extra profits that the subsequent social gains come. The manufacturer must use these extra profits in at least one of three ways, and possibly, he will use part of them in all three: (1) he will use the extra profits to expand his operations by buying more machines to make more coats; or (2) he will incest the extra profits in some other industry, or (3) he will spend the profits on increasing his own consumption. Whichever of these three courses he takes, he will increase employment.

So, no matter what he does with it, be it either of the three above, the manufacturer will end up increasing employment. He will increase the possibility for employment in either the mechanics who create the machines, the workers of another industry he invests in, or the workers involved in the things he is now consuming. The extra profits that these people earn from the manufacturer enables them to expand their employment, thus growing the economy.

Continuing on, because he’s still not finished here, Hazlitt writes:

In other words, the manufacturer, as a result of his economies, has profits that he did not have before. Every dollar of the amount he has saved in direct wages to former coat makers, he now has to pay out in indirect wages to the makers of the new machine, or to the workers in another capital-using industry, or to the makers of a new house or car for himself, or for jewelry and furs for his wife. In any case (unless he is a pointless hoarder) he gives indirectly as many jobs as he ceased to give directly.

Remember my big paraghraph before this? This was the basis of that paragraph. The money saved from the wages of the manufacturers lost workers will end up in the pockets of the workers in other industries.

Now, what about those lost workers? What about their welfare? They’re now unemployed, and while the economy may have recovered from their loss, they’re now out of a job. Well, consider this. Hazlitt continues on saying that if the manufacturer comes into great economies (really good times), he will expand his operations, and thus, buy more machines to produce his coats, thus increasing the quantity demanded in mechanics to produce and install them.

Hazlitt writes:

The rate of profit of the manufacturers using the new machine will begin to drop, while the manufacturers who have still not adopted the machine may now make no profit at all. The savings, in other words, will begin to be passed along to the buyers of overcoats – to the consumers.

The more their competition begin to get onto their level, the more their profits drop. This, in turn, will cause the demand for overcoats to increase, because the price is now much lower before, and more people can now afford them. Hazlitt then writes:

If the demand for overcoats is what economists call “elastic” – that is, if a fall in the price in overcoats causes a larger total amount of money to be spent on overcoats than previously – then more people may be employed even in making overcoats than before the new labor-saving machine was introduced.

So, it’ll increase employment? Yes. But he goes on to say that this increase in employment isn’t even dependent on elasiticity of demand for the product. He goes on to say that if the price were cut, and the quantity supplied did not go up, then the consumer would have that extra money left over. He uses the example of the overcoat that is priced at $150, and the price is cut to $100. The consumer now has that $50 left over that can now be spent in other industries, and increase their employment.

So, in summary, Hazlitt writes:

In brief, on net balance machines, technological improvements, automation, economies and efficiency do not throw men out of work.

So, this is Henry Hazlitt’s lesson in economics for today. I know, it was long, but I think it was worth it.

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