Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs.
When, shortly after World War II, the first electronic computers were placed into service, they occupied large rooms, contained miles of wire and hundreds of vacuum tubes, and cost many thousands of dollars. Today, a computer with similar capabilities fits on a desk top and, de spite rampant inflation, costs less than $1,000. The early computers consumed enough power to drive a locomotive; the modern computer uses less electricity than a television set. Two technological inventions gave rise to this spectacular computer revolution: the transistor and the integrated circuit. They ushered in what the National Academy of Sciences called “the second industrial revolution.” It is thoroughly affecting not only the way we communicate, store and use information, but also the very nature of industrial production. It is transforming millions of jobs and changing the skills needed in productive society.
Computer manufacturing is the fastest-growing industry in the United States. In 1980 its sales were estimated at $24 billion and its growth rate was averaging more than 20% per year. It gave us a growing array of computerized consumer goods, such as pocket calculators, digital watches, electronic games, computer toys, and microelectronic timing devices in washing machines and microwave ovens. It provided the automobile industry with computerized engine controls regulating fuel and air intake and ignition timing. Computer technology is applied to every operation of the engine and drive-train as well as to speedometers, clocks, and other dashboard instruments.
Other Uses for Computers
Computers have begun to affect product structuring for many other industries as well, for apparel, food distribution, petroleum, energy, printing, publishing, retailing and transportation. They are invading the halls of government and the of-rices of banking, insurance, accounting, and the securities industry. They are helping to provide health and welfare services and forcing education to adapt to its new ways. Computers are touching the lives and work habits of people in all trades and professions, of millions of hourly workers and professional engineers, managers, lawyers, doctors, dentists, scientists, writers, editors, historians, economists, and others.
Word processors, which are relatively cheap computers equipped with the capacity to edit text stored electronically in the machine’s memory, are finding their way into many offices. An estimated half a million were in operation by 1980, and sales are expected to exceed 200,000 a year by the mid-1980s. We are seeing a new generation of “intelligent” office equipment, such as facsimile machines, which can read printed text and transmit it over telephone lines to other facsimile machines that reproduce the printed text. It is converting more and more information from paper documents to electronic signals that are stored in electronic data banks and transmitted to other banks. It is reshaping the nature of white-collar work.
Computerized machinery is helping engineers to design products and parts thereof on computer screens and then draw up the specifications for manufacturing them. In the production process the computer that designs a part then generates the instructions for the machine that will manufacture it. A new generation of industrial robots, which are flexible computer-controlled arms holding tools, is performing a wide range of complex tasks. In 1980 some 3000 were performing heavy repetitive labor on American assembly lines. By the end of the decade a hundred thousand more versatile robots may be clanking away in shops and factories. Some experts are predicting that more than 50% of all jobs in the American economy may soon be affected by computer-based automation. And the microelectronic “revolution” has barely begun.
Antagonism to the New
Many Americans are painfully afraid of the economic and social consequences of the revolution. They are convinced that the computer technology is responsible for the high rates of unemployment, and that it is bound to get worse with the addition of every new robot. The computer-intensive industries are burdening society with mass unemployment, they lament, which may greatly intensify the social tension and polarization between its productive members and millions of people out of work.
How terrifying! Tools and machines are said to cause unemployment. If it were true it would suggest a simple solution: pass more laws and regulations that restrict or even bar the application of computers. Let’s return to the simple ways of the past that made for hard labor and full employment!
Popular hostility toward any type of innovation probably is as old as the first invention. Since the dawn of history it sought to block the way toward economic betterment. Early stonecutters probably objected to the discovery of metal and the casting and forging of a wide assortment of metal tools. The monastic scribes copying ancient manuscripts undoubtedly were alarmed about Johann Gutenberg’s first printing press, built in the 1430s. Laborers resented the harnessing of wind and water power, and when steam power appeared on the scene, the use of steam engines. Water carriers regretted the introduction of water pipes, messengers deplored the invention of the telegraph and telephone, and horse breeders and blacksmiths bemoaned the coming of the automobile.
Old ways and habits are always defended by antagonism to the new. But new ideas are difficult to resist for long if they are beneficial to someone. In a free economy with private property in the means of production, eager entrepreneurs are always searching for new tools and machines that make human labor more productive. New inventions may necessitate the development of new skills and proficiencies, and may require more learning and readjustment. But they do not cause unemployment. As they increase the productivity of labor and thereby reduce its costs, the demand for labor in effect tends to rise, which creates more employment opportunities.
“Automated” Water Delivery
The great benefits of “automation” are clearly visible in many examples from the distant past. It is difficult to imagine life in a city of 500,000 people, like New York in 1850, before the days of “automated” water delivery. Several times a day many residents trudged to the nearest public well or cistern where they obtained a small quantity of polluted water which, when mixed with brandy or gin, was presumed to be safe to drink. Women and children, in particular, were carrying barrels of water hundreds of yards to their crowded tenements. Those who could afford the extra expense relied on professional water carriers who, by cart or on foot, delivered water to more affluent homes. Surely, it is no exaggeration that a hundred thousand New Yorkers labored daily to secure a few gallons of water, and that thousands of fully-employed professionals carved out a meager living from the manual delivery of needed supplies.
During the middle of the 19th century, industry was developing cast-iron and steel pipes that came to the market at ever lower prices. Gradually the water system began to change, new techniques and methods were introduced, and modern plumbing came into existence. By the end of the century, some 3.4 million New Yorkers enjoyed an automated delivery system. The water carriers, those toilers of the ages peddling their supplies like luxuries, had disappeared, and the horse-drawn tank wagons hustling through the streets were forgotten. But there were thousands of workers manufacturing plumbing supplies, countless stores and shops handling the supplies, movers and haulers delivering them, and tens of thousands of plumbers fully employed in the task of installing and servicing them.
The “automation” of water delivery not only created many more employment opportunities, but also immeasurably improved the living conditions of millions of people. Surely, it must have been difficult for the water carriers to adjust to the new technology. But in the end, even they benefited from the plumbing revolution.
Triple Benefits for Workers
The American labor market today is in a significant transition that is as beneficial as the plumbing revolution during the second half of the nineteenth century. There are labels for this new era. Some call it the post-industrial society, the high-technology economy, the service economy, the information economy. But no matter how you may call it, it is a new technology that is improving the lives of millions of people as consumers and producers. It is basically and fundamentally transforming the work that needs to be done. In the course of two or three decades direct manufacturing as we know it today, is likely to be restructured completely. Old tasks are disappearing and new opportunities are opening up in high technology.
It is erroneous and misleading to blame the computer technology for the chronic unemployment. The major patterns of joblessness in key manufacturing industries, such as autos, steel and construction, were visible long before the first computer appeared on the scene. There has been unemployment whenever, for any reason, the costs of labor exceeded its usefulness and value in production. Tools and equipment make human labor more productive, they do not cause “technological unemployment.” Surely, new tools necessitate the learning of new skills as they make old skills obsolete. They may necessitate the movement of la bor from old locations to new locations as economic changes have done from the beginning of time.
To reduce manufacturing costs and make themselves more competitive, manufacturing industries are introducing ever more productive technology. General Motors, for instance, has laid off some 100,000 workers because its cars are not selling. But in the depth of this severe depression, GM has announced plans to purchase 20,000 robots in the next 10 years. It is resorting to a massive infusion of “labor-saving” technology that may affect many of its workers. They will have to learn new skills and fill new positions. Many will have to leave the centers of change for new jobs elsewhere; only skilled technicians and those unwilling or unable to adjust will stay behind.
A Rise in Productivity
To speak of “labor-saving” equipment is to speak exclusively for those workers who need to learn new skills and pursue new opportunities for employment. When seen from the point of view of consumers and the whole society, modern computers raise the productivity of labor and improve working conditions. They increase the supply of goods and raise the levels of living by permitting consumption of more goods. Consumers may choose to buy those goods manufactured with computer assistance or any other items and services.
Wage earners reap triple benefits from the introduction of technological improvements:
1. As the productivity of labor increases wage rates tend to rise. Economists speak of a rise in the marginal utility of every kind of labor, which is the value added to or subtracted from the value of the output by the employment or withdrawal of a worker.
2. Rising labor productivity lifts some unemployed labor whose costs up to now exceeded its usefulness above the threshold of employability, and thus creates new jobs.
3. As consumers, wage earners tend to benefit from the fall in goods prices which the rise in productivity and output tends to bring about.
All workers benefit from the general rise in the productivity of labor. But in the short run some may suffer economic losses from the necessity of retraining and relocating. They may have certain skills that are made obsolete by the technological improvements. Despite the general rise in wage rates they may earn less than before, or be unemployed if they refuse to adjust.
Technological improvements do inflict painful losses on some investors and entrepreneurs. The increase in the quantity of computer equipment tends to lower its marginal productivity, that is, the value added by the application of yet another computer, which tends to lower computer prices. Moreover, old equipment may lose in productivity and Value, which will hurt the interests of those investors who, for any reason, fail to keep up with the changes.
Learning New Skills
Technological innovations necessitate adjustments not only by investors and entrepreneurs but also by workers. They all are subject to the dictates of the market where consumers, through their buying or abstention from buying, issue the orders. Consumers also determine the methods of production. In choosing between new Detroit cars or foreign imports, or just a used car, or any other item, consumers implicitly decide the issue of equipment, in particular, the continuing use of old equipment or its replacement by computerized robots.
In a changing market economy all factors of production tend to move toward those uses and locations where they attain their greatest usefulness. They are guided by price which is the consumers’ signal of concern and value. Labor is guided by wages and benefits, which are the prices paid for the factor of production, human labor. In an unhampered labor market the adjustments and movements of labor tend to equalize the wages and benefits of the same quality labor throughout the market.
Changes in the market structure always bring about new wage differences that bring forth new labor adjustments. The magnitude of the difference tends to affect directly the speed of adjustment which is a time-consuming process. A wide differential tends to hasten the adjustment, a small difference may retard it.
Many personal and institutional factors also enter into the adjustment process. The time and expense required for retraining play an important role. Schooling and training may have made a worker a specialist with special abilities for rendering valuable services. He may have invested effort, time, and money in his training, which the computer technology may have made obsolete. He is facing new expenses for retraining. His decision is likely to be difficult and painful—as all entrepreneurial decisions usually are.
The expenses incurred in retraining vary with the levels of skills that are sought. A professional person with many years of university training would face large expenditures if he were to seek expertise in an entirely different field. An unskilled laborer who acquired his skills in a few hours of on-the-job training, may just need a few hours of instruction for a different job.
The retraining expense made necessary by the computer technology depends entirely on the level of special skill that is sought in the computer market. The professional person would have to seek many years of graduate education, the unskilled laborer a few hours of instruction. If industrial robots actually displace unskilled workers with simple on-the-job training, the retraining expenses should be rather minimal. Employers can be expected to provide the training as they did in the past.
Many companies, in fact, are offering inexpensive retraining programs that provide a possible career path from computer operator upward through programmer, systems designer, and analyst. Some are conducting evening classes for people from all types of background, from 18 to 50 years of age. After some 40 hours of instruction many become computer programmers. But such training may already exceed the demands of readjustment.
Factory workers and clerical personnel may not need to know how the computer works. They must know what the computer can do as it relates to their jobs. This type of training can be imparted anywhere, in school or on the job, to young and old alike. It is commonly known as the fundamentals of data processing, such as files and coding concepts, retrieval and accuracy, which is preparing the individual to manage data bases and building his confidence in the other end of the terminal. Young children and many disadvantaged are learning it, and factory hands, too, can learn it. They merely need to interface and interact with the computer.
Moving to Another Location
Labor adjustment may require more than simple retraining. It may impose the additional expenses of pulling up the family stakes and moving to another location. The worker may have to explore the labor market in other places, perhaps in other states. He may need to seek information provided by the news media, or avail himself of the assistance of private employment agencies serving the desired market. He may have to bear the expenses of this service, which may amount to a few percentage points of his initial wage. And after he has found his desired place of employment he may need to relocate his family at an additional expense.
If he is the proud owner of real property he will have to sell it, probably at depressed prices in a depressed community, and then, in the new location, acquire other property, probably at premium prices in a growing community. Indeed, the economic cost of relocation may be very high. Other costs may make it even more painful. He will have to sever his social bonds with friends and colleagues, with schools, clubs and churches, and turn away from his little world he grew to love. There is always the fear of the unknown which tends to exaggerate the difficulties and aggravate the anxieties. Therefore, he may not choose to adjust and seek relocation. He may decide to resist the market pressures for change and suffer the financial consequences.
In an unhampered labor market the situation is very clear and simple. The technological changes that make certain skills obsolete tend to depress the corresponding wage rates, and thus create a visible difference between the generally rising rates and the specifically depressed rates. This difference then generates the pressures for retraining and relocating.
In a severely hampered labor market, where minimum wage rates prohibit the adjustment and powerful labor unions greatly distort the market, the situation is quite different. The technological changes meet with institutional barriers that prevent wage rate adjustments, and therefore lead to mass unemployment. The worker with obsolete skills is not free to offer his services at lower rates. He is condemned to be unemployed and cast out of productive society. But when, in desperation, he seeks employment elsewhere he faces wage rates that may be substantially lower than those to which he is accustomed.
The unemployed automobile worker from Detroit who seeks relocation in Texas may be shocked to find the going rate for his level of skills to be one-half of his UAW rate. For him, to seek employment is to submit to lower rates, which do not appear very desirable. Only prolonged unemployment with all its woes and pains may force him to consent to relocation.
The same may be true in the case of retraining. The unemployed automobile worker who becomes a computer programmer outside his union fold, may have to acquiesce to a rate of pay that amounts to much less than his union scale. His new training apparently reduces his pay, which may not nourish his zeal for retraining.
Labor migration from places with lower labor productivity to places with higher productivity may be impeded further by institutional barriers which interventionist governments like to erect. Many states have license and permit requirements that make it painfully difficult for newcomers to enter a given market. There may be lengthy residence requirements or difficult entrance examinations that aim at discouraging out-of-staters. Labor unions endowed with legal privileges and immunities may deny membership to workers from other states and other vocations. And if membership is actually extended, a union invariably discriminates against its “junior” members, that is, newcomers from out of state.
Institutional barriers that render migration most difficult are reinforced by institutional incentives for remaining immobile. Generous unemployment compensation for lengthy periods of time may induce an idle worker to wait for his “recall,” rather than search for employment elsewhere. The compensation may be supplemented by other benefits, such as federal foodstamps and tax refunds, various employer exactions, and union aid. And in case some benefits should run out, there is always public assistance to which unskilled workers may get accustomed. It offers a very valuable benefit, “medicaid,” that is, free medical services for all family members. With so many powerful disincentives, it is surprising that some workers actually do muster the courage and strength to move to other places with more employment opportunities.
It is said that older people object too much, consult too long, and adventure too little. If this is true, it cannot be expected that many older workers will want to ]earn new computer skills or relocate in other places. It may be left to the coming generation now playing with computerized toys to achieve the necessary adjustment. In time young people may seize the opportunities rejected by their parents.
Economic Superiority or Technical Efficiency
Technological changes take time. On every level of production, from the manufacturers of the new equipment to its users and their workers, certain difficulties retard the readjustment process. The new process may be shrouded in secrecy or protected by patents. It may face the ignorance or indolence of entrepreneurs, or the lack of skilled labor that can work with the new equipment.
New computers are not applied everywhere as soon as they become available. People do not always trade in their old cars as soon as new models become available, or buy the latest computers when they first appear on the market. They are guided by considerations of scarcity and cost.
Old equipment is not scrapped in the instant new equipment becomes available. Economic calculation provides the data that permits selection of the most appropriate procedure. It searches for economic superiority by comparing the economic profitability of the old, less efficient, and still usable equipment with the profitability of the new, more efficient computer equipment. Technological efficiency and economic superiority are. two entirely different things.
The factors that enter such a calculation would include the price of the new computer, the price of “scrap value” that can be realized from the sale of the old equipment, the cost of production per unit of output by the computer, the cost of production by the old equipment, the anticipated future price of the product, the expected useful life of the computer, and the return from competing opportunities for investment. Replacement of old equipment by a new computer would be advantageous only if the savings in production cost by the computer during its expected useful life exceed its own purchase price minus the scrap value of the old equipment, and if this excess is greater than the return from other competing opportunities for investment.
A computer costing $100,000 net, that during its useful life lowers production costs by $100,000, is not economically superior to the old less efficient equipment. It would have to reduce production costs by an additional amount that exceeds the return from competing opportunities for investment.
In periods of rapidly changing computer technology, the useful life of a computer may be very short. Economic calculation may once again ascertain that there is superior equipment that necessitates the scrapping of the old. And again investors and entrepreneurs may be forced to choose between economic superiority and technological efficiency. The choice may be further complicated by changes in market conditions that may result from the changes in the methods of production. Declining costs of production per unit of output, for instance, may lead to lower goods prices, which in turn tend to reduce the value of the equipment that helps to produce the goods. In short, the computer-robot may decline in usefulness and value, which may materially alter the superiority calculation.
The development and employment of high technology require the outlay of large amounts of capital, which must first be accumulated through corporate profits or individual savings. If, some hundred years ago, new capital had not been available for the automated water delivery in New York City, it simply would have remained a “pipe dream” as it did in many other cities of the world. New capital must be available at a rate that promises a saving in total costs.
This condition also points at the harmful effects of confiscatory taxation and union practices that consume capital rather than create it. In particular, it refutes the popular notion that union pressures for ever higher labor costs bring forth a trend toward more and more industrial automation. Squeezed by new union demands, employers are said to seek refuge in high technology in order to raise productivity and reduce costs. Higher productivity then encourages the unions to demand still higher wages that propel the industrial surge toward unforeseeable productivity.
Oh lucky land of labor unions! It is the fabled land of Aladdin’s lamp. Its owner merely rubs the lamp to invoke the friendly genie. Labor unions merely rub employers for higher pay and costlier benefits, and affluent businessmen realize the dream of ever higher levels of living. The fact is that labor unions usually view all labor-saving equipment with great suspicion and seek to prevent its employment through prohibitive labor contracts.
Expensive severance pay and generous pensions for “early retirement,” or supplementary unemployment benefits paid by employers, greatly discourage the introduction of labor-saving tools and machines. If, nevertheless, an employer chooses to install new equipment, its technological efficiency must be immense in order to justify the accompanying labor expenses. But in many cases the technological efficiency does not suffice for economic superiority, which causes unionized industries to cling to antiquated equipment. American industries with powerful unions, such as steel, automobiles, and construction, are not known for their prompt introduction of the latest high-technology equipment.
It is also conceivable that an employer may resort to some technological changes that in the absence of union coercion would not have been advisable. But this is by no means a laudable union accomplishment. The capital needed for the costly retooling must be withdrawn from other more productive uses. Other industries that were about to acquire more productive equipment are pushed back in the waiting line. They have to be content with old inferior tools and are forced to wait until more capital is accumulated. In the meantime, consumers must pay higher prices than they would have paid in an unhampered market. In other words, the technological improvement necessitated by union coercion constitutes a “maladjustment” of technology, that is, a diversion of funds from more productive to less productive uses. On balance it depresses labor productivity and lowers wage rates.
A Brighter Tomorrow
Despite such obstacles to greater productivity and higher levels of living, the computer revolution affords hope for a brighter economic future for all people. We may at times despair about our political institutions that are feasting on and squandering our economic substance. Governments may be laboring diligently to maintain the status quo by erecting obnoxious barriers to change at every turn. And politicians who are aware that children have no votes may want to burden them with our debts. But the computer revolution, this incredible achievement of American inventors and entrepreneurs, is nourishing an imperturbable faith in a brighter tomorrow.
1. R.W. Bemer, ed., Computers and Crisis, Association for Computing Machinery, 1973; also Steve Jobs, “When We Invented the Personal Computer,” Computers and People, July-Au-gust 1981; Clarence C. Walton, “Computers—Fast Instruments and Slow Minds,” Computers and People, July-August, 1982, p. 7 et seq., September-October, 1982, p. 10 et seq.
3. Cf. John Duffy, A History of Public Health in New York City, 1625-1866 (Russell Sage Foundation, 1968), pp. 209, 391; also J. Kennard, “Sanitary Engineering: Water Supply” in A History of Technology (Oxford, at the Clarendon Press, 1958), pp. 989 et seq.; Robert Ernst, Im migrant Life in New York City, 1825-1863 (New York: King’s Crown Press, Columbia University, 1949), p. 51 et seq.; Sigvard Strandh, ibid., p. 214.
How to Raise Wages
There is no other method to make wage rates rise than by investing more capital per worker. More investment of capital means: to give to the laborer more efficient tools. With the aid of better tools and machines, the quantity of the products increases and their quality im proves. As the employer consequently will be in a position to obtain from the consumers more for what the employee has produced in one hour of work, he is able—and, by the competition of other employers, forced—to pay a higher price for the man’s work.
Ludwig von Mises, “The Economic Role of Saving and Capital Goods”