and I knock ’em down. This one is too easy…
Here is problem # 9080984 with Neo-Liberal economics, and I will share it with you by telling you a story. Milton Friedman was touring a government project to build a bridge or highway of some sort, when he noticed that the men digging for the project were using shovels. Given the expansive project, . “Why are they using shovels; why don’t you just use a bulldozer?” he asked the foreman, confused. “Because they want us to create jobs!” the foreman replied. “If that is true,” Friedman said without skipping a beat, “Why not have them use spoons?”
The point is this: full employment should not be an end in itself. Imagine that we lived in a place in which all of the goods that we wished to have were magically created at our very whim. What would be the point of working? There would be none. Capitalism in America has ensured that the products we all have in our house are far cheaper today than they were years ago, on terms of how many hours it takes for us to work enough to buy the products. For example, where 15% of the richest households in 1978 had a microwave, 93% of the poorest households had a microwave by 2002. [Note: these figures are off, but not by much…] Capital develops such that it takes less work to buy the goods we need and want in our lives. So imagine that everyone in America only had to work half time to make enough money to feed themselves and have that which would make them content. Technically, unemployment has increased. But it really doesn’t matter, because all people have that which they need to survive. Unemployment is therefore not a signal in itself of a failing economy. In the Garden of Eden, there was 100% unemployment. Still sounds like a place I would want to live. But can you see how the preoccupation with full employment can be a dangerous one, especially when the jobs being created are for governmental positions. Imagine our taxes going to pay for 10,000 men to dig a ditch with spoons, or even 100,000 men…
Another approach dawns when we look at the recent comment of your friendly neighborhood president, Barack Obama, who said yesterday: “There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.” Now to avoid insulting YOU, who probably don’t know what is wrong with such a statement at first glance (because who has exposure to such ideas, really, unless you are a weirdo and like reading about things like this?), I will just say, for a president, this level of economic understanding is very telling. Not only does it explain how our economy is in the wreck that it is, it explains that the politician is not as smart as he appears. Here is how you can be smarter than the president. But first, I have a close friend who said a similar thing at a Safeway when we were in college. I went to the self checkout line, where the rows of kiosks allow you to beep your own food and pay, and get out of dodge as you please. He objected very quickly. “No, man, those machines are taking jobs! Since those machines exist, they take jobs from the people that could be working here, checking you out instead of you doing it yourself!”
Here is the kicker. These men are looking only at that which is seen when they make these judgments, and as they are only seeing half of the picture, they are incorrect about these assumptions. You must look at that which is not seen in addition to that which is seen, as Frederick Bastiat and Henry Hazlitt noted so many years ago. Essentially, and in the limited picture you can see, my friend and president Obama are correct. But not in the bigger picture. You see, when a bank of ATM machines go in, say 5, it is probably true that the bank needs to get rid of a human teller. Or perhaps they don’t need to, but in the name of efficiency and cost, the bank fires one of its workers. Fine, this is what our friends Obama and my buddy are seeing. But the equation is not over. You see, there is now an ATM repair man who has a job. There is now another man who has a job refilling the ATM. There are probably ten men who have earned jobs creating the ATM machine. Not only that, but say the bank is saving money now, in having to employ one less man. That money can be put into the economy in a different way, stimulating some other capital to produce for customers. One job has been lost, but AT LEAST one has been created in return (albeit in a separate area of the economy), and the bank is saving money that it can use for other things. But since the unseen jobs are not immediately seen, it is easy to assume that the net effect of machinery on employment is always negative. Got it? Maybe you need a professional from the 1800s to explain it to you. Heeeeeeeeeeeere’s Freddy B:
“A curse on machines! Every year, their increasing power devotes millions of workmen to pauperism, by depriving them of work, and therefore of wages and bread. A curse on machines!”
This is the cry which is raised by vulgar prejudice, and echoed in the journals.
But to curse machines is to curse the spirit of humanity!
It puzzles me to conceive how any man can feel any satisfaction in such a doctrine.
For, if true, what is its inevitable consequence? That there is no activity, prosperity, wealth, or happiness possible for any people, except for those who are stupid and inert, and to whom God has not granted the fatal gift of knowing how to think, to observe, to combine, to invent, and to obtain the greatest results with the smallest means. On the contrary, rags, mean huts, poverty, and inanition, are the inevitable lot of every nation which seeks and finds in iron, fire, wind, electricity, magnetism, the laws of chemistry and mechanics, in a word, in the powers of nature, an assistance to its natural powers. We might as well say with Rousseau—”Every man that thinks is a depraved animal.”
This is not all. If this doctrine is true, all men think and invent, since all, from first to last, and at every moment of their existence, seek the cooperation of the powers of nature, and try to make the most of a little, by reducing either the work of their hands or their expenses, so as to obtain the greatest possible amount of gratification with the smallest possible amount of labor, it must follow, as a matter of course, that the whole of mankind is rushing towards its decline, by the same mental aspiration towards progress, which torments each of its members.
Hence, it ought to be made known, by statistics, that the inhabitants of Lancashire, abandoning that land of machines, seek for work in Ireland, where they are unknown; and, by history, that barbarism darkens the epochs of civilization, and that civilization shines in times of ignorance and barbarism.
There is evidently in this mass of contradictions something which revolts us, and which leads us to suspect that the problem contains within it an element of solution which has not been sufficiently disengaged.
Here is the whole mystery: behind that which is seen lies something which is not seen. I will endeavor to bring it to light. The demonstration I shall give will only be a repetition of the preceding one, for the problems are one and the same.
Men have a natural propensity to make the best bargain they can, when not prevented by an opposing force; that is, they like to obtain as much as they possibly can for their labor, whether advantage is obtained from a foreign producer or a skillful mechanical producer.
The theoretical objection which is made to this propensity is the same in both cases. In each case it is reproached with the apparent inactivity which it causes to labor. Now, labor rendered available, not inactive, is the very thing which determines it. And, therefore, in both cases, the same practical obstacle—force, is opposed to it also.
The legislator prohibits foreign competition, and forbids mechanical competition. For what other means can exist for arresting a propensity which is natural to all men, but that of depriving them of their liberty?
In many countries, it is true, the legislator strikes at only one of these competitions, and confines himself to grumbling at the other. This only proves one thing, that is, that the legislator is inconsistent.
We need not be surprised at this. On a wrong road, inconsistency is inevitable; if it were not so, mankind would be sacrificed. A false principle never has been, and never will be, carried out to the end.
Now for our demonstration, which shall not be a long one.
James B. had two francs which he had gained by two workmen; but it occurs to him that an arrangement of ropes and weights might be made which would diminish the labor by half. Therefore he obtains the same advantage, saves a franc, and discharges a workman.
He discharges a workman: this is that which is seen.
And seeing this only, it is said, “See how misery attends civilization; this is the way that liberty is fatal to equality. The human mind has made a conquest, and immediately a workman is cast into the gulf of pauperism. James B. may possibly employ the two workmen, but then he will give them only half their wages, for they will compete with each other, and offer themselves at the lowest price. Thus the rich are always growing richer, and the poor, poorer. Society wants remodeling.” A very fine conclusion, and worthy of the preamble.
Happily, preamble and conclusion are both false, because, behind the half of the phenomenon which is seen, lies the other half which is not seen.
The franc saved by James B. is not seen, no more are the necessary effects of this saving.
Since, in consequence of his invention, James B. spends only one franc on hand labor in the pursuit, of a determined advantage, another franc remains to him.
If, then, there is in the world a workman with unemployed arms, there is also in the world a capitalist with an unemployed franc. These two elements meet and combine, and it is as clear as daylight, that between the supply and demand of labor, and between the supply and demand of wages, the relation is in no way changed.
The invention and the workman paid with the first franc, now perform the work which was formerly accomplished by two workmen. The second workman, paid with the second franc, realizes a new kind of work.
What is the change, then, which has taken place? An additional national advantage has been gained; in other words, the invention is a gratuitous triumph—a gratuitous profit for mankind.
From the form which I have given to my demonstration, the following inference might be drawn: “It is the capitalist who reaps all the advantage from machinery. The working class, if it suffers only temporarily, never profits by it, since, by your own showing, they displace a portion of the national labor, without diminishing it, it is true, but also without increasing it.”
I do not pretend, in this slight treatise, to answer every objection; the only end I have in view, is to combat a vulgar, widely spread, and dangerous prejudice. I want to prove that a new machine only causes the discharge of a certain number of hands, when the remuneration which pays them is abstracted by force. These hands and this remuneration would combine to produce what it was impossible to produce before the invention; whence it follows, that the final result is an increase of advantages for equal labor.
Who is the gainer by these additional advantages?
First, it is true, the capitalist, the inventor; the first who succeeds in using the machine; and this is the reward of his genius and courage. In this case, as we have just seen, he effects a saving upon the expense of production, which, in whatever way it may be spent (and it always is spent), employs exactly as many hands as the machine caused to be dismissed.
But soon competition obliges him to lower his prices in proportion to the saving itself; and then it is no longer the inventor who reaps the benefit of the invention-it is the purchaser of what is produced, the consumer, the public, including the workman; in a word, mankind.
And that which is not seen is, that the saving thus procured for all consumers creates a fund whence wages may be supplied, and which replaces that which the machine has exhausted.
Thus, to recur. to the forementioned example, James B. obtains a profit by spending two francs in wages. Thanks to his invention, the hand labor costs him only one franc. So long as he sells the thing produced at the same price, he employs one workman less in producing this particular thing, and that is what is seen; but there is an additional workman employed by the franc which James B. has saved. This is that which is not seen.
When, by the natural progress of things, James B. is obliged to lower the price of the thing produced by one franc, then he no longer realizes a saving; then he has no longer a franc to dispose of to, procure for the national labor a new production. But then another gainer takes his place, and this gainer is mankind. Whoever buys the thing he has produced, pays a franc less, and necessarily adds this saving to the fund of wages; and this, again, is what is not seen.
Another solution, founded upon facts, has been given of this problem of machinery.
It was said, machinery reduces the expense of production, and lowers the price of the thing produced. The reduction of the profit causes an increase of consumption, which necessitates an increase of production; and, finally, the introduction of as many workmen, or more, after the invention as were necessary before it. As a proof of this, printing, weaving, & c., are instanced.
This demonstration is not a scientific one. It would lead us to conclude, that if the consumption of the particular production of which we are speaking remains stationary, or nearly so, machinery must injure labor. This is not the case.
Suppose that in a certain country all the people wore hats. If, by machinery, the price could be reduced half, it would not necessarily follow that the consumption would be doubled.
Would you say that in this case a portion of the national labor had been paralyzed? Yes, according to the vulgar demonstration; but, according to mine, No; for even if not a single hat more should be bought in the country, the entire fund of wages would not be the less secure. That which failed to go to the hat-making trade would be found to gone to the economy realized by all the consumers, and would thence serve to pay for all the labor which the machine had rendered useless, and to excite a new development of all the trades. And thus it is that things go on. I have known newspapers to cost eighty francs, now we pay forty-eight: here is a saving of thirty-two francs to the subscribers. It is not certain, or at least necessary, that the thirty-two francs should take the direction of the journalist trade; but it is certain, and necessary too, that if they do not take this direction they will take another. One makes use of them for taking in more newspapers; another, to get better’ living; another, better clothes; another, better furniture. It is thus that the trades are bound together. They form a vast whole, whose different parts communicate by secret canals: what is saved by one, profits all. It is very important for us to understand that savings never take place at the expense of labor and wages.
Hazlitt has a similar analysis, perhaps even easier to understand, in his Economics in One Lesson. I will save you the inclusion, though it may be easier to understand. I think my point has been made…
Since I doubt he realizes he ever makes mistakes, I don’t think Obama will ever know the level of ignorance he has betrayed with his statement. Given the fact that he will never know and rectify his mental mistake, you now know more than the president. Congrats.
[EDIT: The WSJ published an entry 4 days after mine with the same Friedman story and similar points. One aspect of the story I failed to develop they do well, namely the freeing up of capital and ability for us to all live better due to machines. Check it out.]