“The increase in what is called the productivity of labor is due to the employment of better tools and machines.”—Ludwig von Mises

Gregory Clark published an article in the Washington Post on 9 August, claiming that the main threat to the laborer was technology.  With stagnating wages (as a percentage of corporate profits) and advances in computer technology, the factory worker is becoming increasingly obsolete.  Gregory Clark comes to the conclusion that this will lead to the beginning of a massive welfare state, as tens of millions lose their jobs.  As such, he suggests a radical redesign of the country’s tax system, in order to fund this welfare.  According to his vision, the future looks grim.  Those who do have work face an increase in taxes, and a large percentage of the national population will live bellow the poverty line, funding themselves through the welfare system.  Fortunately for all of us, Gregory Clark is wrong.  Technological advances do not lead to a net loss in jobs, and might even lead to a net gain.  Gregory Clark has committed the same mistake that most make: an economist should look at what can be seen and what remains unseen.

The wage of the laborer, ultimately, is irrelevant in this exercise.  Increase in wages for laborers usually come with an increase in productivity.  Why there has not been a proportional increase in wages for laborers in the past two or three decades is a good question.  Vedder and Gallaway seem to blame a lack of adjustment of nominal and real wages.  They also go about using this theory to explain why the natural rate of unemployment has been so high in the past three decades.  It is interesting to note that workers have been becoming progressively poorer (as a percentage of aggregate corporate profits) since the legislation of a minimum wage.  But, as aforementioned, wages carry little to no weight in any discussion on technology and the laborer.

The idea that machinery will replace the work is ridiculous.  Let us assume that Factory A decides to cut costs by introducing a new machine that helps produce their product ten times as fast.  In other words, in the same amount of time, that factory now produces ten times the amount of products.  The machine, of course, will replace a number of workers, at first.  A historical example would be the cotton gin.  It is fair to assume that the cotton gin replaced a certain amount of workers, given one worker with the cotton gin was able to produce as much cotton as a certain amount of workers were able to produce before.  But, the displacement was probably not as dramatic as thought.  The factory is not looking to maintain output levels.  To the contrary, the factory is looking to increase output, and so a certain amount of laborers must remain on the factory’s payroll to cause that increase in production, despite the introduction of machinery.

So, what happens to the rest of them?  That is the wrong question to ask.  The key question is: Who builds those machines?  There will be an obvious increase in the labor market for machine building.  Who maintains the machines?  Human laborers are needed for maintenance tasks, and so there will be a gain in employment.  Who is responsible for building the factory required to build the new machine?  The questions are endless.  It is becoming obvious, however, that the introduction of a new machine will only replace a certain amount of workers in a certain factory, while opening endless job opportunities elsewhere.  As a result, there was not a net loss in employment.  Indeed, the increase in production of capital, and therefore the increase in wealth, will cause new investments and new demand for laborers.  As a result, there will be a net increase in employment.  It is interesting to note that historically wages, at this point, would have increased.

This is because the laborer had necessarily become more skilled than he was originally.  It requires greater skill to operate the machine, as it will require greater skill to maintain the machine and even to build it.  There is an increase in productivity in the average laborer, because the worker is forced to take on new skills.  This is why during the 19^th and early 20^th centuries there was an increase in the real wage of the average laborer.  As aforementioned, it is interesting that the welfare net at the time was extremely small, and there was no such thing as a minimum wage.  In fact, high wages did not become the norm until the advent of Hoover, and his policies were disastrous in the short-term and fatal in the long-run.  Currently, with an expanded safety net there is less incentive to go and learn new skills to find a new, higher paying job.  And, learning new skills is not synonymous with going to college.  Furthermore, with the increased political power of unions, it is difficult for a factory to introduce machinery that would increase productivity, because it is difficult for the factory to lay off workers.  This makes productivity increases a slower process and ultimately curtails economic growth in the United States.

Gregory Clark, however, resigns himself towards accepting the bleak, fictional future and says:

In France, generous welfare has already produced huge suburban housing estates, les banlieues, populated with a substantially unemployed and immigrant population, parts of which have periodically burst into violent protest.

The glorious suburban estates brought through the welfare system.

It is fair to say that Gregory Clark has never been to Paris.  Many Parisian citizens live in slums, others in tall project buildings inside the city.  The idea that the French welfare system has produced “huge suburban housing estates” is ridiculous.  Although I hesitate to compare the welfare system in France and in Spain, it is without a doubt larger in Spain than it is in the United States (or, at least, Spain’s tax level would seem to suggest that).  However, the unemployed are definitely not better off, and there are no sprawling suburban estates for the poor.  Many poor remain without a roof, and so resort to squatting.  In Spain, high artificial wages and State-legislated wage rigidity make it difficult for many to find a job, because their wage has to be awarded to an employed laborer to meet State quotas (minimum wage).  Regardless, it is obviously that Gregory Clark is living in some sort of dream world, with an alternate reality.

Growing poverty cannot be fought through welfare.  Up to now, welfare has proved disastrous.  It has failed to assuage growing disparity between wages.  It has not brought the poor any closer to the rich in terms of lifestyle.  No, it has deepened the divide between high-income earners and low-income earners.  Gregory Clark makes reference to earlier periods of American history, where the laborer’s wage did increase with productivity.  What we need is to return to that era.  An era without strict State labor law legislation and regulation: an era where wage increases were brought about through self-improvement of the worker or through an increase in general productivity.  The answer is not a greater welfare state, as we have all seen the consequences of this.  European welfare states have low economic growth, and in Israel economic growth has actually stalled due to the size of the burden of government.  What we need is a return to Capitalism.