Why Automation

JULY 01, 1965 by TOM ROSE

Mr. Rose is Director of Economic Education, Associated Industries of Missouri.

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 America we rely on voluntary persuasion. And the best customer persuasion is usually a reduced price tag.

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 U.S. auto manufacturer, we see that its income dollar was distributed like this:

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 U. S. companies can now mine and deliver coal in Europe at a lower cost than Euro­pean coal companies. As a result, coal industry employment has risen in the United States.

Electronics Industry. The radio business in the United States suf­fered a serious blow in 1959 when Japanese-made transistors were introduced. They were of excellent quality and cheaper, so consumers again spent their dollars where they got the best value. By 1962, Japanese producers had captured two-thirds of the transistor radio market in our country. The result­ing decline in U. S. production caused a decrease in employment.

Recently General Electric an­nounced it was selling transistor radios in competition with Jap­anese radios—not only in the United States, but even in far-off Japan! Again, it was automation and technological change—along with intelligent worker coopera­tion—that made the necessary savings in costs possible. Stream­lined assembly lines, swift con­veyor systems, more productive machines, and redesigned products all combined to produce quality products at competitive prices.

The Steel Industry. Widespread destruction in Europe and Japan during World War II provided op­portunities to build efficient steel mills from scratch. Enterprising investors installed oxygen convert­ers, computer-controlled systems, and other devices to increase efficiency. These cost-saving tools, in conjunction with low wage rates, lowered the production costs of foreign steel mills tremendously. As a result, steel producers in the United States lost not only foreign customers, but also domestic cus­tomers. Within a few years the dollar value of our steel exports dropped almost 45 per cent while imports increased almost 250 per cent. Lost foreign customers and increased imports meant fewer jobs for American steelworkers. Better tools of production and lower wage rates in foreign coun­tries stole away customers who pay the wages of American steel­workers.

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.



Equality of Opportunity

We in America have had too much experience of life to fool our­selves into pretending that all men are equal in ability, in char­acter, in intelligence, in ambition. That was part of the claptrap of the French Revolution. We have grown to understand that all we can hope to assure to the individual through government is liberty, justice, intellectual welfare, equality of opportunity, and stimulation to service.

Herber T Hoover, American Individualism (1922)


July 1965

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November 2014

It's been 40 years since F. A. Hayek received his Nobel Prize. His insights, particularly on the distribution of knowledge and the impossibility of economic planning, remain hugely important today. In this issue, we look back on the influence of his work. Max Borders and Craig Biddle debate whether liberty must be defended from one absolute foundation, further reflections on Scottish secession, and how technology is already changing our world for the better--including how robots, despite the unease they cause, will only accelerate this process.
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