JULY 01, 1965 by TOM ROSE
Mr. Rose is Director of Economic Education, Associated Industries of
Automation is a popular topic of discussion. Almost everyone is willing to express an opinion about it. Union leaders claim automation causes mass unemployment. Businessmen welcome it as a way to remain competitive. and social reformers use the "threat" of automation to plan new welfare programs.
The purpose of this article is to bring into focus some of the little-known aspects of automation and to stimulate and help crystallize thinking about automation and its ever-present twin, technological change.
Some years ago a young man was hired to turn small boxes at right angles on a conveyor belt. After a few days he found that, by holding his finger at a certain angle, the boxes turned properly when they came in contact with it. The next day he brought a stick to work, clamped it to make proper contact with the boxes, and thereby "automated" his job!
One definition for automation is "the use of machinery to control machinery." But this is simply a refinement of the practical conveyor example given above. When a person views computers and automatically controlled machines in this way, he is apt to gain a new perspective of automation—especially when he recognizes that the human energy that is replaced can be either physical or mental. Automation, then, is simply a new name for an old process: the transfer of work from people to machines in order to lighten man’s burdens and to increase his output.
What Isn’t Automation?
Actually, automation is blamed unjustly for effects it has not caused. It has become the public whipping post for a bigger thing called "technological change."
Technological change is change that is brought about by advances in the application of skills or methods of production or, even more importantly, change brought about by the discovery of new products that have new uses. For instance, the introduction of television dealt a tremendous blow to the movie industry.
Private companies have invested millions of dollars in research on a "new" metal called Titanium. It weighs about twice as much as aluminum but has some superior characteristics, so is preferred for some uses in aircraft and spacecraft. Cost has been a barrier to its use, but the millions of dollars invested in research have paid off by drastically lowering production costs. Soon it may compete withaluminum on a cost-weight basis. When this happens, lost aluminum sales could cause lowered employment in the aluminum industry. If so, the drop in employment would also be a direct result of technological change—not of automation. However, aluminum producers might turn to increased automation in an effort to lower production costs and thereby win back lost customers.
This distinction between technological change and automation is one that more people should understand. And that better understanding may come through study of some basic economic principles.
Basic Economics As a Benchmark
When a man buys a telescopic sight for his rifle, the first thing he does after installing it is to "sight it in." Fire control men in the Navy also "sight in" a ship’s guns to make sure they aim true. To assist in doing this, they select a fixed point somewhere on the ship as a "benchmark." Measurements are made from this mark to insure an unchanging point of reference.
When talking about automation and changes in production or products, we can refer to similar benchmarks. Such reference points can be found in the following unchanging economic principles:
Man’s Material Welfare equals Natural Resources plus Human Effort times Tools.
Man determines his material welfare (standard of living) by taking natural resources and applying his human effort to develop them with the aid of tools.
This is an absurdly simple statement of fact, yet how many people forget it when thinking about automation? If we remember the simple rule that man’s standard of living is directly dependent on both the amount of effort he expends as well as the number and quality of tools he uses, it’s easy to see that automation (i.e., better tools) can’t possibly cause unemployment. Automation (better tools) can only increase production. Therefore, the real cause of unemployment must be found elsewhere.
Man’s wants are unlimited.
Some people claim automation increases production so much that overproduction results. This idea sounds plausible until we remember that man’s wants have never been completely satisfied. Regardless of how many products there are, consumers always seem ready for more new ones.
For example, if we could go back100 years and list all the things people could possibly want, the people of that day couldn’t begin to name the thousands of wonderful new products that have been invented during the past century. If the list were up-dated every 25 years, people’s wants would grow each time by leaps and bounds: from coarse black stockings to sheer nylon hose; from molasses and sulphur to modern antibiotics; from food cellars to automatically defrosted refrigerators. Yes, there’s no doubt that people’s wants always exceed the possibility of satisfying them. So, overproduction isn’t the cause of unemployment either.
All employment comes from customers—when customers are lost, unemployment results.
Once the truth of this statement is understood, the real cause of unemployment begins to rear its ugly head, and it’s not "automation" or "changes in products or production." It’s simply the refusal of customers to buy what is produced. A totalitarian government might possibly force customers to buy, but in
This leads to the next benchmark and to what brings about automation and changes in products or production (technological change).
When a customer buys something, he pays these five costs:
· Cost of goods and services purchased from suppliers
· Cost of tools wearing out (depreciation)
· Cost of taxes
· Cost of human energy (wages)
· Cost of using tools (interest)
In the long run these five costs make up the per-unit cost of everything produced. And payment for them, if a company is to operate successfully, must come from the people who buy its products or services—its customers.
The important word "if" constitutes the intriguing challenge of being in business: can a company recoup its costs of production from its customers? A history of business failures could provide many interesting, but sad, experiences of entrepreneurs who have personally faced the sad realization that costs do not determine prices that consumers are willing to pay. Rather, it is the other way around: market prices limit the costs that can go into producing an article for sale. If a producer is to operate profitably, he must stay under the costs the market is willing to cover.
The Difference Between Interest and True Profit
Perhaps it might be well to digress a moment to explain the above designation of interest rather than profit as the "cost of using tools."
First, the question of profit as a cost. In its true economic sense, profit doesn’t add to the market price. It is residual. Profit is the reward a producer gets for keeping his cost of production below the price his goods will bring on the market. When considered thus, profit certainly isn’t a cost of production. It is extremely flexible. It might be very great or very small, and even negative if a business operates at a loss. The fact is that not very many businesses in a keenly competitive situation earn a true profit over and above interest costs.
Next, the designation of interest as the "cost of using tools." This is also logical and practical. By "tools" we mean not only our plant and machinery, but all assets owned and used by the business. This also includes ideas that have been patented, temporary cash balance held to pay the other four costs of production, and the like. Without these tools, our business wouldn’t exist. Unless a business earns interest on investment, it will soon lose its investors.
Now, to get back to the significance of the five costs of production mentioned above. We’ve noted that costs do not determine market prices. Thus, when customers refuse to buy a product because the asking price is too high, producers must reduce the price to sell it. This reduced price will curtail future production of the item (with corresponding unemployment) unless total costs can be brought in line with the price ceiling set by the free market. If ways can be found, the product can be produced and sold, and unemployment thereby will be prevented. Now we begin to see the real cause for unemployment which is wrongfully blamed on automation: Failure to reduce the five costs customers must pay each time they make a purchase.
From the financial data contained in the 1964 annual report of a large
1. Cost of goods and services purchased from suppliers 57¢
2. Cost of tools wearing out (depreciation) 50
3. Cost of taxes …… 60
4. Cost of human energy (wages) 270
5. Cost of using tools (interest) 50
How to Cut Costs
Now, suppose this is our company, and that customers stop buying our cars because they are priced too high. What do we do? We look to see where costs can be cut.
Our first three production costs shown above total 68¢. There is little chance to cut them very much. Competition determines the price we pay for our goods and services. Taxes and depreciation are fixed by government, and our accountant will vouch for the fact that present depreciation rates won’t cover the cost of replacing our machines when they wear out.
Next, we look at the two remaining cost items. We find that only 32¢ remains to be divided between tool owners (stockholders) and tool users (employees). Here’s how this 320 has been divided:
84 per cent was paid to employees 27
16 per cent accrued to owners 50
If savings have to be made in these two cost areas, the greater potential for reducing the cost of our cars, then, is the 84 per cent of divisible income paid to employees for the cost of human energy (wages). We can achieve this savings (remember, the need to lower costs is forced upon us by our customers) in two ways:
By paying fewer employees at existing wage rates, or By paying the same number of employees at lower rates.
The goal we must reach to stay in business is clear: reduce our per-car cost to the point where customers start buying them again.
If an inflexible wage contract prevents us from employing all of our present workers at lower pay, we are forced to reduce wage costs by replacing some of them with machines (assuming that we can raise the necessary investment funds). If we don’t, we will have to close up shop. Then everyone will be unemployed. It would not be right to blame the resulting loss of jobs on automation, since the real cause would stem directly from the problem of inflexible wages. (This is why many employers claim the decision to automate is forced on them. They are forced to replace people with machines in order to keep total wage costs from going too high.)
Customers in Control
In summary, then, we see that all jobs in our company are created by the customers who buy our cars. If the five costs which we ask each customer to pay get too high, we start to lose customers to our competitors. To win them back, we must cut the price we ask for each car. This gives us less money to pay toward the five costs of producing each car. Whether our choice is increased automation at existing wages for some employees, or lowered wages for all employees, the need to regain customers is the cause that forces our decision.
Automation on one hand, or lower wage rates on the other, are only the effects caused by the unavoidable need to meet the price demands of customers. This fact should be stressed and stressed by businessmen until employees, stockholders, and the general public understand it.
Once the direct relationship between prices and customers to wages and employees is widely understood, a new basis for employee-employer understanding and cooperation will be opened. Employees will more readily recognize that the common interests of tool users and tool owners can be simultaneously achieved by conforming to the dictates of consumers. Such an understanding, in the long run, is the only hope to achieve the necessary high degree of labor-management cooperation to make our free enterprise system work at peak efficiency. So let us now consider some illustrations of the way in which automation serves to expand the market and regain lost customers.
How Automation Helps Expand Markets and Regain Lost Customers
The Coal Industry. After World War II, coal lost its competitive advantage to oil and gas. This was caused by two contrasting factors: Excessive wage demands had increased the price of coal, while new methods of production decreased the relative cost of gas and oil. Naturally, consumers spent their dollars where they got the most for their money. Domestic and foreign use of coal dropped. Production slipped from 688 million tons in 1947 to 439 million tons in 1962. Employment in the coal industry fell with production, and thousands of miners were left without jobs.
Now, coal has made a comeback through the combined help of automation and technological change:
Automated machines mine more coal at less cost.
Unitized trains and more efficient loading docks made lower freight rates possible.
Larger coal ships have reduced the cost of overseas shipments.
Big utility companies have increased coal purchases. Foreigners have, too, because
Electronics Industry. The radio business in the
Recently General Electric announced it was selling transistor radios in competition with Japanese radios—not only in the
The Steel Industry. Widespread destruction in
To meet the foreign competition, our mills are installing automated equipment at a faster rate. For instance, one company is planning a new plant that will use three major advancements of recent years: the basic oxygen furnace which turns out steel five times faster, vacuum degassing to remove impurities, and continuous casting which eliminates one production step. The benefits will be better steel at lower costs. These savings mean more customers and increased employment.
Every day we can see new examples of how automation and changes in production and products provide higher quality and lower prices to consumers—with increased employment resulting.
The key points in gaining a better understanding of automation, as we see it, are these:
All changes in production and products, all automation is aimed at winning customers.
If all segments of our economy will cooperate in meeting the quality and price demands of consumers, they will become customers.
All payroll dollars have only one ultimate source: the customer.
The key, then, is to concentrate on doing what is necessary to win customers. If this is done successfully, the jobs will follow.