Robert Reich is Shortsighted and Wrong

“Among the most viable of all economic delusions is the belief that machines on net balance create unemployment.  Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever.  Whenever there is long-continued mass unemployment, machines get the blame anew.”

Quite the prophetic words written in 1949 by Henry Hazlitt, as just last week Robert Reich issued the latest condemnation of technology and the ills that befall all in its cold and insensate wake.  In his regular piece for APM’s Marketplace, Reich did his best to demonstrate that, while some improvements in technology were good, more recent ones have been supplanting so many jobs that if trends continue then unemployment will become much worse.  He is, of course, absolutely wrong, and for being a professor at UC Berkeley and a former Secretary of Labor, demonstrates a critical misunderstanding of economics.  To think that labor-saving technology which increases efficiency reduces aggregate employment requires one to completely ignore economic history while falling face first into the fallacy of overlooking secondary consequences.

A Kernel of Truth

First, let us take a look at the part of Reich’s argument that he gets right.  Machinery and other technological innovations decrease the demand for labor in particular industries and in certain cases diminish the level of employment in that industry.  On occasion, men and women devote much of their lives in becoming skilled artisans and craftsman, only to find that their skills are no longer needed as technological improvements have rendered their specialized skills obsolete.

These skilled laborers are rightly indignant at seeing the investment in their chosen profession become all for not.  A noteworthy historical example is found in the 19th-century English textile artisans known as the Luddites.  The technical innovations of the Industrial Revolution made their skills unnecessary as new automated mechanical looms could produce greater amounts of textiles at lower cost using unskilled labor.  The artisans responded by violently protesting the owners of the new textile factories and by breaking in and destroying the machinery and burning wool and cotton mills.  Nowadays, anyone who emphatically protests the labor-destroying tendencies of technological improvements can expect to be called a “neo-Luddite”.

Know that I am not suggesting that we should simply forget these men and women.   Overnight they may find that their investment in their employable skills has become obsolete and that they are once again unskilled workmen who can expect a corresponding reduction in pay, should they find a new source of employment at all.  It is a worthwhile discussion to consider what their family, friends, and fellow citizens should do to best assist them in navigating their jarring transition, though that discussion goes beyond the scope of the present article.

What Reich Gets Wrong

In his succinct analysis, Robert Reich simply stops at the point made above and fails to consider the secondary effects of innovative and labor-saving technology.  Here are a few of the possible beneficial consequences:

1.  Increased efficiency results in greater profits.

After employing labor-saving technology, the entrepreneur can expect, in the long run, to achieve greater profits than before by reducing labor costs.  We must understand that greater profits are good, not only for the entrepreneur, but for the entire economy as well.  This is because, unless the entrepreneur is incredibly stupid and simply hoards cash in a vault, there are really only three things he can do with his greater profits:  (1) expand his operations to produce more goods or increase services offered to consumers, (2) invest extra profits in other industries, or (3) spend the extra profits on increasing his own consumption.  Any of these things will increase aggregate employment, regardless of the effects to employment in his own industry.

2.  Increased efficiency results in lower costs to consumers.

This point is obvious when considering manufactured goods.  If the use of machines causes the entrepreneur to save money when manufacturing desk chairs, then he will try to undersell his competitors by selling the chairs for $100, rather than $150.  For the consumer, this is $50 that can then be used to buy other goods that she would not have considered buying in the other case; or it can be invested, and in either case will increase employment in other industries.

Reich uses the example of personal health apps, used in self-diagnosing maladies, which will save costs on healthcare.  I can’t understand why he would appear to be against saving money on healthcare considering how prohibitively expensive it is for many individuals, though he does advocate a single-payer system, which would simply cause the costs for one group to be subsidized by another, and do nothing to reduce overall costs either.  The argument is the same as above.  If patients go to the doctor less often and demand for medical professionals decrease, then the money they save will simply employ individuals in other professions.

3.  Technology might actually reduce aggregate employment.  That is a GOOD thing!

Why is it that we no longer employ children to perform labor in the agricultural and industrial professions?  Many would argue that protective legislation, such as child labor laws, are singularly responsible for ending that uncivilized practice.  This is rubbish.  The laws would never have been followed if the automation achieved by the Industrial Revolution didn’t first result in levels of production that rendered the labor of children and the elderly obsolete.  They were unnecessary.  Families used to need their children to work so they could have enough money to pay for shelter and food, but maximized production lowered costs and increased real wages, and the trade-offs for having children work tedious or dangerous jobs were not worth it anymore.

Furthermore, these improvements made it so that adult men and women could also work less.  Men began working less hours per week and their real wages grew so much that many wives no longer had to work at all and could stay home to mind the children.  We want technology to diminish the demand for labor because it means that each person can achieve the same productivity, and subsequently the same real wages, for less time and effort.  Imagine technology improving to the point that many people needed only to work 20 hours a week?  That would be a good thing.

4.  Sometimes the improvements actually increase employment in the affected industries.

Hazlitt cites the cotton spinning and textile industry, ironically that of the Luddites, as an example of this phenomenon.  In 1760 it was estimated that 7900 people were employed in cotton spinning and weaving.  Arkwright’s cotton spinning machine was invented then and opposed on the grounds that it would put workers out of jobs.  The increased productivity of this and other machines expanded the cotton textile market and by 1787, the number of persons in the industry had grown to 320,000; a 4400% increase in only 27 years.

Incidentally, India is one country that historically resisted innovation in textile production, believing that traditional methods of production were superior and maintained cultural traditions.  The waste and inefficiency of this forced government policy has been one source of blame for India’s terrible economy and the abject poverty of its citizens, as explained by Milton Friedman in this video.

In Conclusion

Robert Reich ends his piece with this tidbit:

“All this [technology] is good for us as consumers — but as workers we’re putting ourselves out of business. At this rate, 50 years from now, a tiny machine may satisfy all our needs. Call it the ‘iEverything.’ The only problem: none of us will be able to afford it because we’ll all be unemployed.”

He reminds me of another shortsighted and fallacious statement, this made by Eleanor Roosevelt in 1945:

“That may have been all very well in the past, but today conditions are fundamentally different; and now we simply cannot afford to develop any more labor-saving machines.  We have reached a point today where labor saving devices are good only when they do not throw the worker out of his job.”

Imagine the calamitous effects if people had truly taken this nonsense seriously and enacted policies averse to technological innovation.  The problem with their conclusions is that no one can predict the new and various industries that will emerge in the next 50 years.  Eleanor Roosevelt had no idea that in today’s economy we would have demand for such jobs as network administrators, web programmers, software engineers, aerospace engineers, physician assistants, solar panel installers, yoga instructors, etc.  I have to stop myself because I could literally go on for dozens of pages.

Not only were people incapable of imagining these jobs and industries in the 1940s, but without the innovations in other industries that we’ve made since then we would not have achieved the productivity and efficiency required to even make them economically viable.

Reich is guilty of this transgression as well.  We don’t know what kinds of jobs we will have in 50 years.  We don’t need to worry about trying to figure it out either, as they will emerge as price signals give us the information of the industries that are most profitable.  His last statement is bafflingly contradictory.  His hypothetical killer app would not be “cheap” in terms of real wealth if no one had jobs because if no one earns money then any price is prohibitively expensive.  Also, if everyone were involuntarily unemployed and not earning real wages then there would be no goods to sell as nothing would be profitable anymore.  You could not sell this proposed “iEverything” if people are struggling just to get food.

In addition to the disastrous policy decisions that Reich seems to be advocating in stifling innovation, if you take this idea to its logical end it suggests that previous improvements were actually harmful to the human race.  Why did we invent trains and railroads, hell, why did we invent wheels, when we could have employed far greater numbers of people to carry goods across the country on their backs?  To think the Reich teaches public policy and was once the Secretary of Labor!  It is mind-numbing.

This brings us to the point I attempted to make in my last article:  machines and other forms of technology maximize productivity and create an improvement in the standard of living.  They increase real wages or reduce prices to consumers, and in some cases they do both.  So pay no mind to Reich’s technophobic, neo-Luddite musings.  Technological innovations might reduce employment in certain industries, but they will consequentially bring about tremendous benefits to society as a whole.

Notes

Many of the points made in this article were first explained to me in chapter seven of Henry Hazlitt’s Economics in One Lesson, which can be found here.