Thursday, October 8, 2009

Beware of the machines

Progress is a positive word. But progress implies change and change implies a different state of affairs than we have today. The biggest fallacy promoted in economic thinking is that how things are is the only way they can be. True progress means that tomorrow will be different, but it also means the destruction of today.

Is offshoring progressive? Offshoring involves transferring jobs from the United States to foreign countries in search of cheap labor. Let's look at the economics:

  • Company X has 100 workers that it pays $100/hr
  • Company X replaces those workers with foreign workers and pays them $5/hr
  • Total cost before offshoring: 100 * $100 = $10,000
  • Total cost after offshoring: 100 * $5 = $500
  • Benefit to Company X: $10,000 - $500 = $9,500
We can't forget about the workers. The U.S. workers are out of jobs. The foreign workers now have jobs. On net, it seems the U.S. workers have been screwed.

This is the progressive view of the world and it appears progress is bad for workers and good for business. I disagree. Let's ask another question, is efficiency progressive? Back to the economics:
  • Company X has 100 workers that it pays $100/hr
  • Company X builds a machine which replaces the workers. The machine costs $500
  • Total cost before efficiency gain: 100 * $100 = $10,000
  • Total cost after efficiency gain: $500
  • Benefit to Company X: $10,000 - $500 = $9,500
Once again we must consider the workers. The U.S. workers are out of work. No foreign workers have been employed. Replacing people with machines is even worse than offshoring. Only the company benefits, everyone else is screwed.

Something doesn't make sense here. Forget about offshoring for a minute and only consider efficiency gains, i.e. the machines. It would seem that productivity gains are a loss for laborers. Every machine puts people out of work and they only benefit companies. But we know that over the short course of the last century machines have proliferated and the standard of living has increased. How can this be?

I won't answer the question but I will preempt one line of argument. It is not the case that the reason we have progressed is because the machine needs someone to build it or to maintain it. Even if this were true, the sheer number of workers necessary to build the machine and maintain it are far less than before. This means that more people lose jobs rather than gain jobs as a result of the machine.

I am a big believer that I cannot force people to want to know. People who want to know must figure it out on their own. So if you want to understand, here are some questions to get you thinking on the right track:
  • What happened to all the farmers we used to have?
  • Did your parents have cell phones?
  • Why has our economy transitioned into a service economy and what does that mean?


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