The news is out: things ain't getting better, which means America's phony media will have to start digging up more excuses for the Democrats' failed economic policies. Alana Semuels, Harvard graduate and a 'reporter" for the Los Angeles Times has come up with a real old chestnut: technological unemployment. (She gets an A for effort and an F minus for lack of imagination.)

Semuels notes that "[w]ith the help of machines... growers can continue to boost output while reducing headcount". From this she deduces that the increased use of labour-economising machinery displaces labour. Ergo -- it ain't Obama's fault. (Assuming she is serious, this strongly suggests that one should never send one's offspring to Harvard.) To deduce from what she witnessed on a farm that technology -- because that's what it is -- is the real cause of America's unemployment rate (and I am being generous here) is to commit the fallacy of composition. The overall effect of technology (increased investment embodies new technologies) is to increase the aggregate real demand for labour, even if the demand for labour might fall in particular industries. As was pointed out 44 years ago:

There have been radical and far-reaching technological breakthroughs, and many of them. Yet in no case have they produced, either singly or in combination, the permanent mass unemployment predicted for the future. It is of course impossible to prove or disprove predictions before the event, but with the perspective of history we can at least form an opinion of their plausibility. (George Terborgh, The Automation Hysteria, W. W. Norton & Company Inc., 1966. p.71.)

And Dr Terborgh clearly has the facts of history on his side. In the late nineteenth century it was observed that while displaced labour is deserving of sympathy and help

it should be at the same time remembered that the world, especially during the last century, has had a large experience in such matters [but] the whole progress in civilization consists in accomplishing greater or better results with the same or lesser effort, physical or mental. All experience shows that, whatever disadvantage or detriment the introduction and use of new and improved instrumentalities or methods of production and distribution may temporarily entail on individuals or classes, the ultimate result is always an almost immeasurable degree of increased good to mankind in general. (David Ames Wells, Recent economic changes, and their effect on the production and distribution of wealth and the well-being of society, New York, D. Appleton and Company, 1889, p. 365-6.)

Well's went on to note that

those countries in which labor-saving machinery has been most extensively adopted, and where it might naturally be inferred that population through the displacement and economizing of labor would diminish, or at least not increase, are the very ones in which population has at the same time increased most rapidly. (p. 373.)

If labour-saving machinery really does displace labour then more investment would lead to greater unemployment. In fact, given the amount of investment and technological advances during the last 150 years I should imagine that America ought to be suffering 99 per cent unemployment. The following illustrates my point:

In 1792 the power of machinery in Great Britain was estimated at equals to work of 1,000,000 of labourer; In 1829, to 200,000,000; and in 1833, to 400,000,000. (Eisdell, EE Treatise on the Industry of Nations EE, Vol. I, London: G. B. Whittaker and Co, 1839, p. 187.)

The population of Great Britain in 1801 was about 10.5 million. By 1831 it had risen to 16.3 million. Given the massive increase in capital accumulation there should have been an equally massive and permanent increase in unemployment. There wasn't, of course. The reason is Say's law of markets. As the classical economists put it: supplies constitute demands. In plain English, (and especially for the edification of the Alana Semuels) demand springs from production, something that would be obvious in a barter economy. The massive increase in capital accumulation raised productivity of labour and hence demand, and it was

superior productiveness alone of the labour of our working classes which has raised their condition above those of other countries; and this in spite of the inferiority of our soil and climate. (Ibid. p. 189.)

Current claims of technological unemployment are utter nonsense, especially when we consider how little capital accumulation, if any, is taking place in the US. Considering that the Democrats or their media collaborators might very well push this line makes it necessary to go into greater depth which, unfortunately, requires a somewhat lengthy response

Any claim that technology destroys jobs must be based on the fallacy that capital is a substitute for labour and not a complementary factor and that there is only a fixed amount of work to be done, otherwise knows as the lump of labor fallacy. This belief springs from the fallacy of composition, confusing the part with the whole. This is not to deny that machines do not destroy jobs -- they do. But the process by which this is done expands real purchasing power, lifts living standards and raises the real demand for labour. Therefore observers have confused the destruction of certain jobs with the destruction of employment in general, thinking they are the same thing.

Rather than being a substitute for labour capital is a means of economising labour, because labour is the least specific factor, and making it more efficient. Not only does capital economise on labour it makes it possible for labour to produce services that were once impossible (e.g., x-ray machines, jet flight telecommunications, offshore drilling rigs, computers, etc.) Some might argue that we are not discussing capital but technology. This would be to miss the point. Technology can only be applied through capital. It would be pointless having the best programmers in the world if you cannot supply them with computers. Technology, including so-called information technology, is always applied through capital which in turn is fuelled by savings. It therefore follows that savings limit the extent to which investments in technology, no matter how highly advanced or desirable, can be made. This fact in itself demolishes the argument that there is now a qualitative difference between the present and previous eras.

Critics of technology, because that is what these people really are, implicitly assume that labour is specific, that it has no alternative use. Once it is dismissed from a particular line of production its services are rendered valueless. This is where a curious contradiction between some critics of capitalism emerges: there are those who argue the above and those who argue that a lowering of real wage rates reduce investment by inducing capitalists to hire more labour rather than invest in machinery. Though they appear to contradict each other the arguments are closely linked in the obvious sense that labour and capital are viewed as competing substitutes.

Let us imagine an overpopulated country in which all the land is fully utilised and capital is virtually nonexistent. Obviously the standard of living of the general population would be at a bare subsistence level with little in the way of wages. According to both opinions it would not pay capitalists to invest. The first opinion has it that machines destroy jobs while the latter one claims that the cheapness of labour makes investment unprofitable. Both opinions overlook the fact that machinery is primarily employed to raise output per unit of input, i.e., productivity, not to displace labour. A moment's reflection and one quickly realises that if either one were right there would never have been an industrial revolution.

Let us assume that in our imaginary country entrepreneurs calculate that by using textile machinery, let us say, they can make handsome profits with little in the way of labour costs. Clearly the investment will be made in the machinery even though abundant labour is available and domestic weavers and spinners abound. Why? Because the machinery raises the value of the labourer's marginal product by raising his output per unit of time even though unit prices fall. (This is why the Indian distaff could not compete against British textiles.)

As profits are maladjustments between supply and demand it follows that labour is undervalued in relation to the value of its product. This means the demand for labour will rise as more entrepreneurs move into the newly developing, though labour intensive, industry to compete away the profits. (I am assuming of course that the politicians in charge are not Democrats.) This is basically what happened in late eighteenth century England when its cotton industry took off. And the same thing happened to Asian countries. History reveals that though this process destroyed hundreds of thousands of jobs in the short term many more were created at higher wage rates.

As I pointed out earlier in the piece, much of the confusion stems from extending the experience of one company to that of the economy. Okay, a company decides to invest in the latest cost-cutting technology that will double output without raising total costs. If demand is elastic (sensitive to price changes) a small cut in prices could see all of his output sold. No one is fired, prices have fallen somewhat and healthy profits are being earned. However, these profits act as a signal to other entrepreneurs who move in to compete them away. The demand for labour rises, output rises, as do costs while prices fall. Eventually stability is restored at a higher level of employment, output and investment, and profits, though not interest to the firm, disappear.

By buying the machines employment was created in their production and maintenance; more employment was directly created in the industry as it expanded to meet demand; purchasing power rose as the price of the product fell which in turn expanded the demand for other products. In addition, given unchanged time preferences, more savings would have been made available for other job-creating investments.

However, assuming that demand for the product was insufficiently elastic, despite a fall in prices, unemployment will appear. But note, whether labour is dismissed is determined by the shape of the demand curve for the product and not by the introduction of the labour-economising machinery. As the machinery (applied technology in reality) is of the cost-cutting type then the amount of labour in terms of payrolls that is dismissed will be greater than is used in the production and maintenance of the machinery. Hence there will be a net loss of employment in the industry.

But the effect of the new investment (and I must continue to stress that this means new technology) is to expand total demand by expanding output at lower prices. This raises purchasing power which in turn expands the demand for the products of other industries. These industries respond by raising their demands for labour. Total demand is raised by raising total output. (Say's Law again.) Money is the means by which we carry out indirect barter so when the money price of any product falls this leaves consumers with more of their own products to exchange for the products of others. Hence, as new technology expands demands it must also expand the demand for labour.

Obviously the vital points that ultimately goods exchange against other goods, not money, and that supplies are demands are being neglected by critics. When individuals engage in production they offer their products in exchange for the products of others. When investment raises the marginal productivity their labour more goods will be offered in exchange for other goods.

If the likes of Alana Semuels were right then technological unemployment would go hand in hand with remarkable increases in productivity and masses of idle capital. This is because as companies invest in more labour- economising cost-cutting technology productivity rises and operations expand. But if the side-effect is mass unemployment then there would be a glut of goods and the economy would experience the emergence of a huge amount of idle capacity. (It beats me why firms would continue to 'invest' if it simply meant an increase in idle capacity.)

In other words, this kind of technology causes general over-production. But this could only happen if supplies are not demands. So long as there is sufficient land and capital to employment people then lasting mass unemployment is not possible in a free market. And as long as people's wants remain unsatisfied and the means (capital) exists to employ labour then the dire economic predictions of the likes of Alana Semuels will go unfilled.

The argument that the above analysis only applies to what has passed because new technology is qualitatively different does not hold up. The same technophobic argument was used in the US in the 1930s, 1950s and early 1960s without success. (As late as the 1980s Australian unions were even demanding a "moratorium" in computers.) But their argument suggests that productivity increases during the Industrial Revolution must have been comparatively small otherwise the period would have been market by mass unemployment.

A cluster of industrial innovations saw rapid strides productivity and employment that continued throughout the century. For example, virtually overnight Henry Cort's process raised the productivity of bar iron production by 1400 per cent. Between 1873 and 1886 the price of Bessemer steel fell by 75 per cent while the productivity of Bessemer furnaces rose by 400 per cent. These are remarkable productivity increases.

The English textile industry is another graphic example that should have caused mass unemployment. A variety of inventions and innovations led to a massive rise in productivity. It was estimated that by 1812 the productivity of a spinner was 2000 per cent greater than in 1770. So great were the increases in productivity by the 1800s that some workers, fearing technological unemployment, resorted to machine-breaking, even though the expansion of employment in the industry had been spectacular.

Without labour-economising technology the American telephone system would have collapsed years ago. In 1972 it was calculated that using 1900 technology 20 million operators would have been needed to handle the volume of calls. Taken at face value technology had destroyed nearly 20 million jobs in this sector alone. About 12 years ago it was estimated that American telephone traffic used so much computer power that if it were done manually the number of operators would exceed the numbers generating the traffic. So where did all the operators go? To other jobs, every one. That's where, Miss Semuels.

There is no point in critics asserting that information technology is qualitatively different when they make no attempt to explain why. Information is only useful to industry when it allows a more efficient allocation of resources. Any technology that allows valuable information to be more efficiently and rapidly disseminated is to be welcomed, not condemned. This was not understood by critics of computers. What these critics were really attacking was the microprocessor -- the very device that has given birth to a number of new industries and the millions of jobs it created. Only God knows how many future industries and jobs will owe their existence to this astonishing device whose power is forever growing.

Finally we come to technology and income. That some groups suffer in the short term from the introduction of technology is indisputable -- a similar thing happens with shifts in demand -- but the principle effect is to raise overall income in the longer term. However, it is not the existence of the technology per se that raises income but, as already stated, its application through investment in capital goods. These goods form an integrated heterogeneous structure consisting of stages of production. As the structure becomes longer, more complex and productive it raises the marginal productivity of labour.

This phenomenon can conceal some surprising facts. Looking at some figures that are about 15 years old I found that though some 3.5 million Americans were directly employed in agriculture, 20 million or more were directly and indirectly employed in the food industry of which agriculture is the highest stage. Seeing the economy as integrated stages of production, as we should, rather than isolated sectors, as is usually the case, helps put the introduction of new technology in its proper perspective because it forces us to seek out economic linkages.

Now if an advanced economy begins to experience a significant shift in income from wages to capital this would suggest that population growth exceeds the rate of capital accumulation or the capital structure (capital-labour ration) is shrinking. In either case the result would be a fall in real wage rate. There is only one real solution to this situation: More savings and investment. More political interference and Keynesian policies will only accelerate the process.