THE ECONOMIC DISPLACEMENT
The move into labor-saving technology offers magnificent promise – except that it radically scrambles the usual order of things. What we are accustomed to is that people share in economic output because they earn income that allows them to be consumers. A circularity between income and consumption has formed the basis for the present and all preceding economic systems. When an economy will no longer need to employ large numbers of people and pay them wages, or there are jobs but they are mostly marginal, the question will become one of how people are to receive income that will make it possible for them to be consumers. In turn, without consumers, how will the production of goods and services continue to be motivated and funded?
This is the old "underconsumption" or "purchasing power" problem that socialist thought raised for over a century without a good basis for it. "Say's Law" – that each producer's output provides the demand for what others produce, so that in the mutuality of multiple production there is no lack of demand – was formulated early in the nineteenth century as part of the general classical liberal rebuttal to the socialists’ many arguments that "the market can't work." Those arguments have until now lacked justification because a very large percentage of the population has been able to thrive in a system of personal striving. This has meant that they have in fact had the means to purchase the output. Say's Law made good sense and has proved right about the working of modern economies.
Now, however, non-labor-intensive processes are coming in that will give the purchasing power shortfall a very real foundation unless there is a wise restructuring. This causes a crisis even for the scientific-technical system as such. As technology comes to displace labor and personal striving, the concern over purchasing power does become relevant. Unless some way can be found for the billions of people who make up the world's population to share in the revenues of the economy, those revenues will begin to decline as mass markets disappear or fail to develop. In that case, the science and utopian possibilities cannot be sustained, and will fade for the population as a whole – and even investors who own the technology will cease to make more than piddling sums from it. The technology will depend on the consumption just as much as the consumption will depend on the technology.
We don't need to engage
in the "lump of labor fallacy" (the simplistic view that the world
has just a fixed amount of work to be done) to realize that there is a crisis
for the traditional work-centered society.
Human beings no doubt have vast future undertakings to venture upon,
including space and perhaps oceanic colonization. There is no end to the things that need doing
just to bring everybody in the world up to the existing standard of living in
the developed countries, much less to the standard that is visible even today
as a potential. So there is no thought
of having a finite amount of things to do.
The question is whether they will employ hundreds of millions, even
billions, of people. The president of
Especially during periods of economic boom, it has been easy for many people to miss the import of what is taking place. The university where I taught offers a good example: a great many professors were busy working on Internet presentations of their courses, while at the same time the development of Internet course offerings was going forward rapidly through the efforts of publishing companies, entire university systems such as the State University of New York (SUNY), and think tanks. All of this activity continues to occupy large numbers of people, who are pouring their professional talents into it. But what they have been preparing is a system of educational delivery that will within a few years tend strongly to make the in-class professor obsolete under the impact of intense competition among low-cost, credential-granting Internet courses. What they are working on so intensely is a delivery system that will be profoundly non-labor-intensive. To point this out does not suggest that society should retard in any way the technological and competitive factors that are leading into the future. But let there be no confusion: the recent bustle of innovation, in all areas of economic life as well as in universities, seems to offer plenty for those who are technically proficient to do. Whether they realize it or not, however, they are laying the foundation for their own displacement.
The whole phenomenon of economic displacement – of downsizings, layoffs and "early retirements” – is not a passing phase.
Over many decades since the beginning of the industrial revolution, people moved from agriculture into manufacturing. More recently, the movement has been from manufacturing into services. This has been true in all the advanced economies. The American economy has to a large extent moved from there into “finance.”
In the underdeveloped
world, the vast migration of populations from the countryside into the cities
still continues. This is marked also by movement from the
There is much to be learned from looking at the specifics of the economic displacement.
Of farmers. The displacement of agriculture that has been
underway for centuries has much further to go. In his seminal
book The End of Work, Jeremy Rifkin says "new breakthroughs
in the information and life sciences threaten to end much of outdoor farming by
the middle decades of the coming century... leading to a world without
This will occur in the advanced economies; and as
An example of how the
displacement is strongly felt by the individual farmer came in 1998 in the
While the number of
Of workers. Economic theory says that because of "the inexhaustibility of human desires," if wages are flexible there will (subject to some frictional disconnections) always be demand for as many people as want to work. The theory needs amendment, however, in the cyber/robotic context. The new technology’s impact has already been enormous even in its incipient stages.
Tens of millions of jobs
have been eliminated in the
It now takes far fewer
hours of labor to make steel than it did a short time ago. The result has been that the number of
Employees of all kinds are
affected, including a great many in the service sector. We see the effect of non-labor-intensive
technology in such a thing as the optical scanner, which has displaced thousands
who at one time worked at data-entry. This has meant that even the
Needless to say, there are some important offsets. The new technologies create jobs relating to themselves, such as in information technology. Even those technologies, however, are becoming increasingly non-labor-intensive as they mature.
Of firms. Among business firms the struggle to survive amid lowest-cost world competition leads to much desperate activity – what is best described as “churning.” Larger-scale enterprises such as Wal-Mart, which has displaced countless small-town retailers, have succeeded, although their brick-and-mortar stores will themselves soon be threatened by direct consumer-factory transactions through the Internet. At the same time, the new technology lends itself to small business units serving unique niche-markets.
Firms and production
facilities move to where there is lowest-cost labor, only to move again when a
still-lower-cost location is found. By
Of industries. Whole industries are churning in much the same way as individuals and firms. This has been visible in deep-water oil and gas production where large platforms have given way to automated production technology located on the ocean floor. In the steel industry, minimills located near their markets came in to take advantage of new technology and non-union labor, while the large mills spent billions of dollars for modernization that allowed a greatly reduced workforce.
William Davidow has referred to a "process of disintermediation – getting rid of services that are in the middle." This will go far toward eliminating wholesalers, retail stores, publications carrying advertising, travel agents, automobile dealers, stockbrokers, and even educational institutions.
The late historian-businessman Otto Scott wrote that "U.S. shipyards are gone: vanished into the mist of ‘free trade' that has turned so many U.S. heavy industries over to other countries and peoples. The vessels that arrive in our ports are virtually all foreign-owned, built in foreign shipyards."
Just as newspapers
and book publishing are threatened, there is a serious question whether brick-and-mortar universities will
continue to thrive, as we saw when we noted how unaware many people are of
their own impending displacement. "Distance-learning" offers students
accredited courses, degrees and credentials at a fraction of the steadily-increasing
cost of an in-residency education. If,
to speak hypothetically, a student can take a for-credit course on the
"History of Western Civilization" from an
Of national economies. If a nation’s economy is based on items that can be supplanted by new
technologies, the economy is in jeopardy.
An example mentioned earlier is
Will skilled and service jobs fill the void? A number of commentators have looked to high-technology and services as an inexhaustible sink for the absorption of labor. A common recourse is to say that "people must train themselves to be highly skilled, to work flexibly and to be comfortable with considerable insecurity." Today's literature is filled with this prescription.
This reflects the faith we have mentioned that in a market economy there will always be endless things to do, since scarcity is a given and human wants are infinite. But this is wishful thinking, engaged in by commentators who have failed to adapt an ideological fixation to the world as it is now becoming, and who are willing to grasp at any straw or to think only incompletely about a problem. They forget two fundamentals: (a) First, that half the members of the human race are below 100 in I.Q. and have always found employment in repetitive tasks. These are people who have little aptitude for flexibility and little tolerance for ambiguity. It is no slur against them to point this out; it does not reflect on their character or worth as human beings. But it does negate the expectation that they can en masse "turn to high-skill training" and take jobs where they are counted on to make complex decisions as masters of advanced technology. (b) Second, that there just won't be enough high-skilled work, under any conceivable scenario, for billions of people to perform. If this is true in the advanced economies, it will be even less true in the less developed countries.
Today, we hear this sort of transfer-to-upgraded-skills optimism as part of the conventional wisdom. In the movie "You've Got Mail," a small bookstore goes out of business when a giant store opens around the corner, but it is presented as a blessing-in-disguise because the small store's owner (played by actress Meg Ryan) goes on pluckily to become a writer of children's books.
Indeed, as with Ryan’s character, there is a factual basis for the optimism. But optimism doesn’t adequately tell the story. If the principal services come to be performable with only minor, rather than mass, human effort, we get to what Rifkin calls "the end of work." Stanley Aronowitz and William DiFazio have written in The Jobless Future: Sci-Tech and the Dogma of Work that “the new technology has fewer parts and fewer workers and produces more product. This is true not only in traditional production industries but for all workers, including managers and technical workers."
Even many services now require less human input, and other services are becoming unneeded. Moreover, whatever takes their place is not likely to require mass human effort. Among the many examples: In aircraft manufacturing, coordinate measuring machines are controlled by computers, eliminating the need for thousands of hours of inspection. In architectural firms, computer-aided drafting not only replaces the old manual drawing, but increases productivity several times over. Within organizations, top managers don’t need staff and middle managers when real-time information is available at the click of a mouse. (This is the “disintermediation” to which we have referred.) Sales forces shrink, and wholesalers become unnecessary, as customers come to have a direct computer link with a business firm.
“High-tech” will no doubt continue to employ a rush of new talent to feed its rapid development and implementation. This need will be so great that for many years there will be rewarding opportunities for those with the necessary intelligence and aptitude. Because rapid innovation will remain a feature of society unless we allow serious impediments to stop it, new opportunities will arise in perpetuity for such people. But high technology's long-term direction is to make its own workforce redundant. The present technology will be non-labor-intensive itself once it reaches maturity, and later innovations are almost certain to be non-labor-intensive as well. As the technology becomes self-automated and "user friendly," fewer skills are needed to run it, so that less high-skilled labor is required. This is referred to in the literature as "de-skilling."
There may be an interesting twist to all of this in the advanced economies.
1. It is worth considering what the situation
might be in the absence of a distributive
mechanism such as a “shared market economy.” There is a possibility that a near-total
displacement of workers will not occur within the economies that sustain a
substantial industrial base, and that people won't be rendered desperate in
their search for scraps. No doubt, even
in a best case scenario, much churning will occur as people are made insecure
and tossed about by constant restructurings as businesses react to the
relentless drive to cut costs. The
downsizings and restructurings of the past few years aren't over. Rather, they are just starting, since they are
a response to computers, technology and global competition. Despite this
churning, near-total as distinct from partial displacement may conceivably not
occur. Why not? Consider an illustration: In a town in 1849
With the engine of science, high technology, and global competition, the market economy will so greatly enrich a portion of the population that their wealth may provide demand for services from the others. Riches will go to leading-edge entrepreneurs, a certain fraction of the population that is employed in operating existing or creating new technology, people who provide something marketable that mass markets can disseminate to tens of millions or even billions of others, and investors who own part of the productive mechanism and derive dividends, interest or capital gains from it. These income-earners will then provide demand for a multitude of subsidiary services to be performed for each other (subject, however, to the fact that most of those services will be more and more available through means other than mass human effort).
Just the same (continuing to assume that there is not a broad program of income distribution), a severe economic polarization will be the main manifestation of the changed conditions. There will be those who participate in the highly rewarding high-tech economy as skilled technicians, as owners, or as people who reap enormous earnings from mass markets. And there will be the great bulk of other people, in comparatively endless supply, who compete with each other, with foreign labor, and with increasingly non-labor-intensive technology for the supporting roles. Science and technology may under those circumstances raise the overall level of life, but the differences in income and wealth will be immense.
Something to note now is
that in the absence of a wide dispersion of wealth through something like the
shared market economy, we would have reason not to welcome some of the forms
this spreading-out may take. I saw
reference the other day to the possibility that domestic servants may again
come into demand. And I recall that in
the main hallway of the historic old Hotel Colorado in
The wages for the millions who want to provide ancillary services will be pressed down by the on-going introduction of non-labor-intensive ways of providing them, and the enormous supply of people anxious to offer the services. In theory, those wages could fall to the subsistence level, but in fact they won't unless the cultural factors that have repealed Malthus's dire predictions (about the expansion of population always pressing on subsistence) are also repealed, such as by mass immigration. In fact, the "rising tide" of potential well-being caused by science and technology may even lift everybody to a level that in absolute terms is higher than the present one. But the wages will be very low relative to the riches of the groups of people who are able effectually to draw income from the productive mechanism. This polarization of income and of wealth is precisely what we have been seeing.
2. If, now, we consider the situation where there is a shared market economy, we find that the possibility for economic activity among the population at large is considerably enhanced. There, everyone will receive income from the overall productivity. This income, in turn, will provide purchasing power for the items produced not only by the technological powerhouse but also for the goods and services people will otherwise choose to provide for profit.
This gives rise to important questions. Isn't inequality – even some considerable inequality – just an indication of the normal operation of a free society based on the market economy? Won't the unequal distribution be a product of free economic interchange, so that people will receive neither more nor less than what freely-arrived-at contracts will lead them to receive? And don't inequalities of income and wealth simply demonstrate the salutary fact that there is no "command economy" dictating some other distribution?
Because of the income people will be able to make from sources other than the general distribution, a shared market economy will feature a fair amount of precisely the sort of inequality that is the hallmark of a free society.
But there is more to be said. A consideration of these things is why we must devote detailed attention in coming chapters to issues that some readers may think "are too academic for me." Far from "academic and theoretical," such questions go to the heart of how we are to live and to structure society. In fact, a consideration of those questions will be the most interesting and important part of our analysis. What we say in the following paragraphs provides some foretaste of that discussion.
If the supporters of a free society extrapolate their market ideology (as so many of my friends have so far been inclined to do) to provide a normative justification for the vast polarization that is developing in the absence of a shared market economy, they will be holding to the outer shell of their (and my) philosophy without remaining true to its substance. That substance has many facets:
To classical liberalism the market economy is not just an essential
alternative to a command economy, but is a way to realize the benefits of the
vital energies of millions of people pursuing their own ends. The theory of the "invisible hand"
postulated that "natural processes will indeed work to the general
benefit." The aspiration has been a
vast middle class, with the entire population producing and benefiting. Classical liberalism, placing individual
liberty at the center of its thinking, has embraced many of the values of aristocracy
in the best sense, since it isn't slobs who are best fitted to be free men; but
classical liberals have believed in an aristocracy of merit, not culturally (or
technologically) hardened aristocracy.
They saw the Old Regime of medievalist
Thus, the possibility, mentioned earlier, that a society can become inured to extremes of wealth and poverty poses a real danger. Herrnstein and Murray warned: "We fear that a new kind of conservatism is becoming the dominant ideology of the affluent–not in the social tradition of an Edmund Burke or in the economic tradition of an Adam Smith but ‘conservatism' along Latin American lines, where to be conservative has often meant doing whatever is necessary to preserve the mansions on the hills from the menace of the slums below." An indifference toward polarity has been accepted as natural in many societies and at most times in history; but it is utterly at odds with classical liberalism as best conceived. This is a major reason why a "market ideology" that is too narrowly framed, and thereby becomes a rationalization for the intolerable, is fundamentally inadequate to classical liberalism.
The economic displacement has contributed to serious problems for many American blacks. It is impossible to say precisely how much of the devastation American blacks have experienced since World War II and of the consequent social problems for American society as a whole have been due to blacks' displacement first from southern agriculture and then from northern factory jobs
The situation with many blacks feeds into the problem of an "underclass." In his book on the "new urban poor," William Julius Wilson said that "where jobs are scarce... and where there is a disruptive or degraded school life..., many people eventually lose their feeling of connectedness to work in the formal economy... In the case of young people, they may grow up in an environment that lacks the idea of work as a central experience of adult life." Middle class and working class black families have moved away from black ghettos, and many black businesses have closed down. This has been accompanied by increased drug trafficking and consumption, and so much violence, augmented by rapid-fire assault weapons, that there has been a vastly increased murder rate among young black males. Neighborhoods have come to resemble a war zone, with abandoned and ruined buildings. Sexual barbarism reigns and there is an extremely low rate of marriage. The serious-minded comedian Bill Cosby and columnist Juan Williams have commented on all this extensively in the 2000s.
Nor is the underclass limited to ghetto-mired blacks.
Murray and Herrnstein’s book has a section on "the emerging white
underclass," and predicts that "sometime in the next few decades it
seems likely that American whites will reach the point of
conflagration." They point
especially to the rise of illegitimacy, which they see as a trigger. The illegitimacy ratio among whites has been
increasing rapidly in the
Such an underclass, and the fact that it is increasing, amount to a social cancer. The underclass is different from the immigrant-poor of earlier generations, who were poor in the first generation but whose children rose out of poverty and saw their places taken by the next wave of immigrants. The underclass is composed instead of people who are sunk in hopelessness and have personal characteristics to match. George Schultz, former U.S. Secretary of State, speaks of this as a "group of people that I feel is growing in the United States... that are not really in this system. They are in a system of crime and drugs, of no family attachments, and of gang attachments... They are in a different pattern, a different system... It is a threat to society...."
prevalent in the underclass was underscored by Charles Murray when he commented
on reports that
The displacement has broken the connection between productivity and earnings. According to the major Austrian economist Ludwig von Mises in Human Action, economists reason that "the height of wage rates for each kind of labor is determined by its marginal productivity." If a gap exists between the marginal productivity of labor and the prevailing wage rate, "there will be people eager to take advantage of the margin... Their demand for labor will bring wage rates back to the height conditioned by labor's marginal productivity." Economist William Allen had this reasoning in mind recently when he said "wages have grown rapidly during our nation's history because the productivity of labor has increased... By competing against one another to obtain greater quantities of labor made more valuable by more capital, businesses bid up the wages they pay." We will see other statements of the argument in Chapter 14 when we critique a number of free-market concepts.
The theory is a good statement of a syllogism’s major premise, but the factual minor premises don't exist to complete the argument. First, the facts today make the gap so great that there is no real chance for the adjustment Mises and Allen talk about. Productivity has been rising far beyond what the outmoded statistical measures show, and yet wages have remained stagnant or fallen. Why? Because of an immensely expanded labor pool – which has fast become a worldwide, not merely a local, pool. The theory itself tells us that an enormous expansion in the supply of an "economic good" (which is what labor is in an economic sense) will bring its price down even if there is an increasing demand for it, unless the added demand is commensurate with the additional supply. Second, although the new technology raises productivity, its non-labor-intensivity offsets the adjustment that Mises and Allen describe as business' "competing to obtain greater quantities of labor" to "take advantage of the margin." The augmented productivity doesn't stimulate a commensurate demand for labor because it simultaneously makes labor unnecessary.
Accordingly, Kevin Kearns spoke recently of "the de-linkage of wages from increases in productivity." He says that "from 1972 onward, the productivity of the American worker has continued to rise. In fact, in the last several years it has skyrocketed. But real wages have continued to decline." In the Harvard Business Review, Schwab and Kaljian say "the whole phenomenon of delocalization [i.e., the seeking of the lowest costs worldwide] has broken the linkage that previously existed among high technology, high productivity, high quality, and high wages. It was this linkage that once appeared to guarantee ever-improving standards of living in the industrialized countries. Today, however, it is possible to have high technology, high productivity, high quality, and low wages" [their emphasis].
Is "deindustrialization" happening to the
But this is hardly the
perspective of those who most strongly support globalization. Thomas J. DiLorenzo argued that "the
deindustrialization theory is a hoax.
Manufacturing output as a percentage of GNP is about 24 percent today,
compared to 25 percent in 1950." William Niskanen pointed out at the end of
the Reagan administration that "in terms of what we produce, America is
not deindustrializing," since the manufacturing percentage of total output
actually increased during those eight years even though the percentage of
people employed in manufacturing dropped. Compare this with William Greider's critical
view, which looked to the decrease in manufacturing's percentage of
The world is changing so rapidly, however, – with the shift first to countries with low-pay workers, but then eventually to whichever has the most efficient technology – that the key eventually will be held by whoever has the technology. The ultimate issue will be technological expertise, transcending the issues as we know them today.
. Jeremy Rifkin, The End of Work (New York: G. P. Putnam’s Sons, 1995), pp. 70-80.
. Donald L. Bartlett and
James B. Steele,
. William Davidow, “The
Buck No Longer Stops Here,” Forbes ASAP,
. Rifkin, End of Work, p. 124.
. Quoted in the review
by Edward T. Chase of the Aronowitz-DiFazio book in New Leader,
. William Julius Wilson, When Work Disappears: The World of the New Urban Poor (New York: Alfred A. Knopf, 1997), pp. 52, xvii, 4, 9, 34, 35, 60, 88, 99.
. George Schultz, "Closing Remarks," Federal Reserve Bank symposium on Reducing Unemployment, Jackson Hole, August 1994, pp. 366-7.
. Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949), pp. 591-2.
. Allen, The Economist, Third Edition, p. 144.
. Schwab and Kaljian, Harvard Business Review, November-December 1994, p. 41.
. Barry Bluestone and Bennett Harrison, The
. Wallace C. Peterson, Silent Depression (New York: W. W. Norton & Company, 1994), pp. 191-2.
. Thomas J. DiLorenzo, "The Political Economy of Protectionism," in Burton W. Folson, Jr., ed., The Industrial Revolution and Free Trade (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), p. 135.
. William A. Niskanen, Reaganomics (New York: Oxford University Press, 1988), p. 261.
. William Greider, One World, Ready or Not (New York: Simon & Schuster, 1997), p. 211.