Creative Destruction, Technological Unemployment and Choice


Creative destruction has become again, a popular term to explain the dislocation of workers in western labor markets. Although first coined by Karl Marx to describe how capitalism would be destroyed by the bourgeois, Joseph Schumpeter (1883-1950), an Austrian economist, (not part of the Mengarian Austrian Economic School) modified the meaning to be understood as the outcomes of introducing new methods of production, new technologies and discoveries and the reallocation of resources to new lines of production by entrepreneurs. The “new” replacing the “old”.

A Little History

Examples of creative destruction are replete throughout history, especially in the twentieth century. The introduction of the internal combustion engine introduced gasoline and diesel as fuel sources. These new fuels displaced coal in external combustion train engines. The advent of the automobile replaced the horse and buggy and mass quantities of horse breeders. In turn, it removed the ever burdensome mountains of horse manure that plagued US cities. Electricity replaced kerosene in lamps, the telephone replaced the telegraph and so on. New industries sprung up, almost overnight, that took advantage of these new technologies that helped move the population from an agrarian based economy to an industrial one thus kicking off the mechanized age. Standards of living increased as wealth became abundant. The twentieth century is a study of society getting ever wealthier as production increased. A middle class emerged that set the standard for the world. Housing increased by magnitudes unheard of in the past. Families bought homes, cars and the conveniences of new household appliances that added to their leisure. The terms, “consumerism” and “The Affluent Society” became new catch phrases for those hard headed Marxists that saw their hopes for the socialist man disappear. People, in general, were happy to go to work because they saw an immediate positive result for their labor. The idea of retirement or even a vacation were once reserved for the wealthy, but because of the economic progress due to creative destruction and the increased level of productivity, every day people could actually get to a point where they could stop working in their old age. Without creative destruction human progress can not happen. Economies would stagnate and resemble North Korea or the old Soviet Union.

In 1930, John Maynard Keynes published an essay called, “The Economic Prospects for Our Grandchildren” in which he coined the term, “technological unemployment” taking his queue from economist David Ricardo a century earlier. He saw a world where machines were quickly replacing more and more workers. Production becoming more and more efficient and producing better and cheaper consumer goods. He thought that by the turn of the 21st century people would only have to work 15 hours a week. This would be more than enough to live a life of comfort and leisure. As Ricardo before him, Keynes understood the short term negative impact on labor from creative destruction before any long run benefit would be realized.

What some economists thought of as being extremely unlikely are now  taking another look at Keynes’ negative prognostication. Thanks to Moore’s Law, which states that CPU speeds will double every two years, computers and advanced systems in robotics have become reality. When new lines of production came on line, fifty or even twenty years ago, it wasn’t too difficult for the displaced worker to adapt to the new technology. Human inputs were still required on assembly lines and manufacturing. Today’s assembly line, however, is a very different environment. Computerized robotics no longer requires the same amount of human input, if any at all. As technology leaps forward, at it’s ever increasing pace, the average worker is finding it increasingly difficult to adapt. Manufacturers are requiring fewer and fewer workers while producing more and cheaper goods. Society is leaving the age of mechanization and entering the age of automation.

Technological Unemployment

In Burns Harbor, Indiana, Arcelor-Mittal’s steel plant employs about 3,400 steel workers. The plant, founded by Bethlehem Steel, once employed some 6,600 workers but thanks to technological advances, almost half the number of workers are now required to operate the county’s second largest steel manufacturing facility. John Surma, CEO of US Steel, said that what was once required of ten steel workers to produce can now be done by only two.

Google’s self driving car has logged over 100,000 accident free miles in heavy traffic (except when a human driven car rear-ended it). Mercedes Benz has done the same with a self driving truck in Germany. Those closest to the technology believe that within ten years self driving cars and trucks will be fully operational. The displacement of transportation labor will be in the magnitude of tens of millions of people when accounting for the taxi cab drivers, bus drivers, long haul and local truck drivers, parcel delivery drivers and the vast amount of back office support and administration personnel. Fully automated warehouses are not the thing of the future, they are already in use today and gaining more ground, displacing forklift drivers and warehouse workers.

The cognitive computer system by IBM called, “Watson” made an overnight sensation by beating the two smartest Jeopardy contestants. Today, Watson has joined Bon Appetite to help whip up new creative culinary delights, not to mention it is being used by business to help change the healthcare finance industry.

High frequency trading by computers has replaced human floor traders at the exchanges. The world’s stock market exchange floors are almost void of human traffic, save for the few business news camera crews. The once crowded and extremely noisy New York Stock Exchange of yesterday are long gone.

Another technology that seemed to have sprung up overnight is 3D printing. Although, 3D printing in advanced modeling and prototype design has been around for more than a decade, today 3D printers are showing up in manufacturing more and more. Better plastics and metals are being used to print virtually almost anything. In 2013 Boots Industries developed a “RepRap”, a self-replicating 3D printer. This machine can actually replicate itself! It can print another RepRap which can be assembled in 30 minutes and shared with a friend. The technology has even advanced into printing human body parts and organs.

 

Marshall Brain, founder of “How Stuff Works” and author of “Robotic Nation” believes the only thing keeping robotics from going fully operational is the vision problem. When researchers and engineers discover how to overcome the vision problem, it’s all down hill from there. Robotics has overcome walking and motion, hearing and sound recognition, speech and conversation and fine motor skills and dexterity. Once the robotics sector has the ability to see and visually recognize then humanoid type robots, like Star Wars, are around the corner. These robots can even replace service sector jobs.

In his book, “Robotic Nation” he describes the tip of the iceberg,

“Automated retail systems like ATM’s, kiosks and self-service checkout lines marked the beginning of the robotic revolution. Over the course of fifteen years starting in 2001, these systems proliferated and evolved until nearly every retail transaction could be handled in an automated way. Five million jobs in the retail sector were lost as a result of these systems.”

Echoing Keynes, he goes on to say,

“The problem is that these systems will also eliminate jobs in massive numbers. In fact, we are about to see a seismic shift in the American workforce. As a nation, we have no way to understand or handle the level of unemployment that we will see in our economy over the next several decades.”

Unemployment and Choice

At the dawn of the Industrial Age technology was advancing at a much slower pace. When the tractor replaced the plow horse, the farmer didn’t lose his job. He simply learned how to operate his new tractor and became more productive. When those classic horse and buggy workers were displaced they had the opportunity to enter the automobile industry. The time needed to re-train was minimal as machinery wasn’t as advanced as today’s robotic systems. Temporary or “frictional” unemployment during the Mechanized Age wasn’t a significant problem. Today, what was once considered frictional unemployment is becoming more structural. That is, the economy as a whole is changing it’s labor structure. The time needed to re-school or re-train for modern high tech jobs is much longer and more costly. Making matters worse is the quick pace at which new technologies and automated systems are coming online. Today’s unemployed are moving targets in one respect. The job a displaced worker is training for may be automated away by the time he or she has finished vocational school. Secondly, some workers just haven’t the skill set to take a new high tech job. For some, losing a job may lead to choosing between menial employment or permanent unemployment.

Ludwig von Mises stated in his book, “Human Action” that in reality there is no such thing as frictional unemployment. Economies change all the time and reallocate resources in accordance to these changes. Mises refers to this market generated or  catallactic unemployment as a phenomenon where unemployed workers are making choices. Just like in all market decisions, the worker is weighing the pros and cons of employment or unemployment. The only thing keeping a worker from getting a new job is his wage rate, changing occupations or his location. He explains,
“Unemployment in the unhampered market is always voluntary. In the eyes of the unemployed man, unemployment is the minor of two evils between which he has to choose. The structure of the market may sometimes cause wage rates to drop. But, on the unhampered market, there is always for each type of labor a rate at which all those eager to work can get a job. The final wage rate is that rate at which all job-seekers get jobs and all employers as many workers as they want to hire. Its height is determined by the marginal productivity of each type of work.”

 

Mises’ analysis is absolutely correct as it is based on the unhampered economy. Reality, on the other hand, is quit different. We live in a very hampered economy. The presence of a central bank which is devaluing the currency at an unprecedented rate being a prime example. Simply lowering one’s own wage in this inflationary environment is unfeasible. To be fair, Mises concludes by stressing that any interference with market phenomena intent upon enforcing by coercion or compulsion wage rates higher than those the unhampered market would have determined, are not structural. Rather, it is a result of intervention. It is because of intervention into the market’s ability to discover the prices of wage rates that workers are forced to demand higher wages. Even pricing themselves out of the job market. It’s not only wage rates. Other interventions in the market process such as labor laws, unionization, national health care and legal costs cause businesses to turn to automation. By substituting expensive labor with robotics entrepreneurs are able to keep prices low and production high. They must or risk being put out of business through competition.

Another form of intervention into the market choices for displaced workers is the welfare state. The competition that welfare and unemployment insurance has added to the bidding away of workers has only complicated the problem. A displaced worker may have to choose between a lower paying job or going on the dole. In a 2013 report from the CATO Institute, a combination of food stamps, temporary cash grants, WIC, and housing assistance is worth a pre-tax value more than $30,000 in 16 states. In Hawaii, the most generous state, a working family of three would have to earn almost $61,000 just to be even with the $50,000 in welfare the government hands out. Employers are finding it harder to compete with Federal and State welfare as well as market competitors at home and abroad.

Conclusion

Whether it’s from creative destruction or intervention, the unemployment rate is becoming an ever increasing problem. As Marshall Brain stated earlier, a seismic problem. Ever fewer workers are needed to produce even more goods. Any discussion from the mainstream about full employment is simply unrealistic. Automation and technological advances in manufacturing and production must continue in order to maintain the high quality of life westerners are accustomed to. Luddite socialists will contend that government intervention is needed in order to stop automation from destroying our jobs. But it’s not jobs that are needed, rather production. More production, in an unhampered economy yield lower prices. Because of automation flat panel TVs went from upwards of $15,000 a few years ago to under $800 for an even better unit as of this printing. Advanced automated agricultural systems have prevented mass starvation and absurd food prices with fewer workers and less farm land. It’s no small task to feed over 7 billion people.

Like it or not, robotics is here to stay. Automated systems will be implemented more and more, to include the service sector. What the massive amount of unemployed people will do with there time is anyone’s guess at this point. Be assured, the market will find its equilibrium between how much automation and human labor it will employ. People still use money wages to purchase goods. Without the consumption end of the equation production will stop. Other more extreme speculations include the Malthusians at the UN reducing the population. Although I have read the literature I still find a 90% global population reduction nothing more than a pipe dream. Something more realistic that would have a negative effect on production technologies would be that ever menacing global currency collapse. If the Keynesian central banksters continue with their machinations of currency destruction then what their guru, Lord John Maynard Keynes predicted in 1930 will certainly never come to pass.

[Image credits: SingularityHub.com, Wired.com]

Note: This article is a re-write of a previous article titled, “Dystopia: Creative Destruction vs. Technological Unemployment”. Lesson learned, never attempt to slap together an article when you’ve worked all night and haven’t slept since yesterday. Apologies!
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5 thoughts on “Creative Destruction, Technological Unemployment and Choice

  1. Your article reminded me of a YouTube video about automation that I saw the other day.

    I couldn’t resist the urge to comment on the video, but I find your Misesian perspective much more fulfilling as you addressed the whys of such rapid retail automation when clearly customers don’t particularly desire it

    So bravo! More please!

    Like

  2. Pingback: A Tale of Two Luddites | The Blue Collar Economist

  3. Pingback: A Tale of Two Luddites | The Libertarian Liquidationist

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