Luddite Logic

Who were the Luddites?  British textile workers of the 1800s who feared automation would displace their jobs.  They took to sabotaging machinery as a result.   With the rise of artificial intelligence and robots, this fear has moved to the forefront of economic discussions once again.   As an engineer it is a topic of great interest to me, because one of the first questions I asked myself upon taking up the study of economics was the following: Why didn’t the industrial revolution lead to massive long term unemployment?

The simple answer is that “bots don’t shop.”   In other words, if robots replaced all workers at every task,  there would be no one left to purchase their output.   But the situation is a bit more subtle than this.  Automation is the road to productivity gains, and thus the foundation to economic growth and raising standards of living.   The mechanics  are discussed in my “Just Measures” tab.   I urge the reader to review this tab before proceeding.

Yet there is a subtle nuance to this debate in my opinion that I have yet to hear anyone voice.  Because my radical position suggests that money is a domestic phenomenon that can only properly function in a closed economy, it has implications for the potential impact of automation.  In short, automation makes a nation richer in a closed economy, but carries the risk of long term unemployment in an export intensive society.  Since Britain of the 1800s was an export intensive economy, the Luddites were right in their contempt of machinery.  In other words, a factory owner who exports and replaces his workers with robots does not need to rely on the nation’s workers income to sell his goods (he has foreign buyers).  In a closed economy, the worker consumes what he produces.   The factory owners sales are dictated by this principle.

As a result,  automation in a closed economy leads only to short term unemployment because the consumer savings (cost reduction in the good) is directly proportional to the the lost wages of the displaced workers.    These new consumer savings will then be spent in a new sector resulting in new employment opportunities for the recently unemployed.  For example, if a genius figures out how to build  a TV for half the price and half the TV factory workers become unemployed, the consumers may for example spend the new savings on luxury clothing.   The unemployed TV workers take up new employment in the textile sector as a result.

Automation has been with us since the industrial revolution.   A tractor displaced farmers, chains saws displaced axe men,  the train displaced the stage coach, and so on.   These were all effectively “robots” which displaced 1000s of man years with their arrival.  At the time, each industry could probably not conceive where the unemployed would find new work, because they wrongly believed there were no new opportunities.  Yet it is precisely the cost savings tied to the lost jobs that generate the new opportunities (see Just Measures tab).

You can blame the robots for unemployment if you like, but history is not on your side.  The proper blame lies with free trade and the defective theories which support it.

As always, critique welcome.


Van Geldstone