Thursday, September 29, 2011

The Fallacy of Luddite Economics

We are told that by this Wall Street Journal article that business spending on machines than labor is bad news for the US economy. (bold emphasis added)

The man-vs-machine situation, however, presents a huge negative to the outlook. In an economy based on consumer spending, the lack of jobs and income growth means consumers can’t spend.

Businesses’ preference for equipment — while understandable from a cost perspective — is also a big reason why policymakers are stymied to find ways to ignite job creation.

Indeed, the Federal Reserve‘s pursuit of low interest rates only widens the cost gap. That’s because it cheapens the borrowing costs for capital projects while doing little to hold down payroll expenses.


The reasons cited why businesses spending have been substantially tilted towards machinery have rightly been attributed to political factors:

Aside from the Fed’s policies, again from the same article, (bold added)

You can’t fault companies for investing in new machinery rather than hiring new workers. As two news reports detail, labor costs are rising, a function of both private and public pressures.

First, employers face a jump in health insurance costs. The Kaiser Family Foundation reported a 9% average increase in the premiums paid by employers this year. The average yearly cost to cover a family hit a record $15,073, up sharply from $13,770 in 2010.

Second, companies must deal with higher taxes to replenish state unemployment-benefit coffers. According to Wednesday’s Wall Street Journal, employers will get hit by higher tax bills as many states have to pay back Washington for benefit money borrowed during the recession.

So while politics has been a factor, this misses out the more important factor: Investments in machines are about added productivity and a higher standard of living, which eventually brings about more jobs.

The great Henry Hazlitt demolishes this myth in the must read classic Economics in One Lesson p.41-42. Here is an excerpt: [bold emphasis added, italics original]

it is a misconception to think of the function or result of machines as primarily one of creating jobs. The real result of the machine is to increase production, to raise the standard of living, to increase economic welfare. It is no trick to employ everybody, even (or especially) in the most primitive economy. Full employment—very full employment; long, weary, back-breaking employment—is characteristic of precisely the nations that are most retarded industrially. Where full employment already exists, new machines, inventions, and discoveries cannot—until there has been time for an increase in population—bring more employment. They are likely to bring more unemployment (but this time I am speaking of voluntary and not involuntary unemployment) because people can now afford to work fewer hours, while children and the overaged no longer need to work.

What machines do, to repeat, is to bring an increase in production and an increase in the standard of living. They may do this in either of two ways. They do it by making goods cheaper for consumers (as in our illustration of the overcoats), or they do it by increasing wages because they increase the productivity of the workers. In other words, they either increase money wages or, by reducing prices, they increase the goods and services that the same money wages will buy. Sometimes they do both. What actually happens will depend in large part upon the monetary policy pursued in a country. But in any case, machines, inventions, and discoveries increase real wages.

By the article’s main premises—where consumption drives the economy and where machines signify a threat to consumption—then we must conclude that the medieval era or even the stone age would be a much wealthier and ideal society than today.

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