Monday, October 12, 2009

Welcome the Machines

My last post was supposed to be interesting. I think I failed, but if anyone was curious, here is the point I was attempting to make. The economy grows because of gains in efficiency. The machines allow fewer people to make more stuff. The fallacy with cursing machines (and foreigners) for stealing jobs is the assumption that displaced workers can't do anything else. People always assume that there are a limited number of jobs. The contrary is true. Jobs are something that are created and they can only be created when resources are freed because of efficiency gains. It is because of the machines that new products and services can be developed.

It is true that some people are displaced which can be very difficult. But that is the price we as a society pay for progress. There is no way to have progress without "creative destruction". The solution is not to impede progress but to mitigate the human suffering caused by it.

The same holds true for offshoring. Cheaper labor is no different than creating a cheaper machine. In both cases efficiency has been increased and society as a whole is better off.

To see why the system is better off we have to consider what wealth was in the system before and after the efficiency gains. In order to do this, we have to figure out what company X produced. That wasn't mentioned so let's assume it produced apples, I like apples. Company X consisted of 100 employees all employed in producing apples. Let's say they made 100 apples. It doesn't matter how much those apples are worth in terms of money, all we care about is the number of "things" in the system. In reality, this is the true measure of wealth, not money. Money is a tool, but I'll talk about that in another post. Right now all labor and capital is employed in producing 100 apples. This is therefore the current maximum production of the system.

All of a sudden someone makes a machine which replaces every single employee. The machine produces the same 100 apples as before. What happens to the displaced workers? Do they sit around and do nothing? No, we are not European. In America, available labor gets to work and creates new products and services. Let's imagine that those newly freed resources make cellphones. I like cellphones because I am old enough to remember that cellphones didn't exist 20 years ago. Pretty amazing when you think about it and a good example of a new product that is now ubiquitous. For the sake of argument let's say the 100 workers produce 100 cellphones.

Now let's examine the wealth in the system before the machine and after.
Before: 100 apples
After: 100 apples, 100 cellphones.

In both situations there are only 100 people. This means that on a per capita basis the second scenario is clearly better. This is indisputable. We may have issues with how to distribute the new bounty of cellphones, but that is a separate issue. In fact, it may have been the case that we had problems distributing apples, but I digress. The point is, if we want the system (and it's principal components, namely people) to become better off, we need to build more machines and utilize lots more cheap foreign labor. Or to say it another way, we need to promote efficiency gains in all their possible forms.


Post a Comment