Quotation of the Day…

by Don Boudreaux on November 22, 2011

in Complexity & Emergence, Growth, Innovation, Myths and Fallacies, Prices, Work

… is from Part 1, Chapter III of Frank Taussig’s 1915 book Some Aspects of the Tariff Question:

The relation between high wages and the use of machinery calls for a word more of explanation.  It is usually said that high wages are cause of the adoption of machinery, and that we find here the explanation of the greater use of machinery in the United States.  I believe that the relation is the reverse; high wages are the effect, not the cause….  The abundant resources which so long contributed greatly, and indeed still contribute, to making labor productive and wages high, thereby stimulated the introduction of labor-saving methods in industries not so directly affected by the favor of nature.  But the fundamental cause of the prevalent use of machinery was in the intelligence and inventiveness of the people; these being promoted again by the breath of freedom and competition in all their affairs.  What are the ultimate causes of industrial progress and industrial effectiveness is not easily stated; complex historical, political, perhaps ethnographic forces must be reckoned with.  But these causes work out their results in modern times largely by prompting men to improve their implements and to use unhesitatingly new and better implements.  Thence flows a high rate of return for their labor; it is not the high rate of return that leads them to use the better tools.

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{ 18 comments }

RPLong November 22, 2011 at 10:40 am

As Mises might have said, new technology frees up our human resources, enabling us to apply them to means of production requiring longer time.

Such longer means of production are bound to be well-compensated, if highly valued.

Nuke Nemesis November 22, 2011 at 12:01 pm

Some observers have noted that increases in the mandated minimum wage have led to investments in more automation in the fast-food industry and in other business sectors that rely upon unskilled labor.

kyle8 November 22, 2011 at 6:25 pm

Perhaps, but that is not due to market forces. Rather the opposite. It comes as no surprise to most of us that government meddling in the markets produces sub-optimum conditions.

Curious November 22, 2011 at 12:12 pm

“…high wages are the effect, not the cause…”

This never made sense to me, perhaps someone can explain in simple language.

If machinery replaces labor, the result is larger supply of labor for hire, which in turn causes price of labor to go down, not up. What is wrong with this reasoning?

Bastiat Smith November 22, 2011 at 12:32 pm

Labor is not a uniform commodity. More unskilled Unemployed does not create downward pressure on the wage of a specific high skill worker.

When capital replaces labor, it is because its marginal product, per dollar of cost, is higher. So laborers must increase their marginal product in order to maintain the same income.

Otherwise, society will compensate them less because they now have a relatively lower marginal product compared to other inputs. I get paid what I do because of the skills and knowledge I have. If capital was not used so much, in my job, I certainly would have had less motivation to increase my skill set, and my value, in the first place.

khodge November 22, 2011 at 1:16 pm

Two points:
The first is that we are not dealing with zero-sum; loss of jobs because of technological advance does not mean that there are fewer jobs to go around, only fewer jobs making a specific widget.

The second is an example from recent history: the computer. What took many clerks to run a multi-million dollar business can now be done with a few accountants. There is no more need for many clerks but an entirely new information technology industry was created.

Sam Grove November 22, 2011 at 3:07 pm

Or perhaps more need for clerks because greater productivity made possible the creation of many more businesses.

vikingvista November 22, 2011 at 2:09 pm

Wages do follow supply-demand dynamics, but there is more than one thing going on. Higher supply of labor, means lower wages, cp. Higher productivity commands higher wages, cp. But higher productivity also lowers prices while creating profits, stimulating demand for labor in the broader economy. Since the driver, in your example, is productivity increases, the higher wages go hand-in-hand with stimulating demand for labor. So the effect is simultaneously growing productivity, wages, and employment.

So in this example, wages increase as a result of mechanization. It is motivated by expected efficiency increases.

Minimum wage is a bit of a misnomer. Its dominant effect is to *drop* all wages below a statutory level down to zero. Average wages only seem to go up when you exclude those moved to zero from the calculation. Producers have to find a productivity substitute for the labor that has been banned, leading to mechanization.

So in this example, mechanization occurs without any increase in wages, but rather as a loss of capital options. It is not motivated by efficiency increases, but rather is an imposed cost on the producer (not to mention the unemployed).

Ubiquitous November 22, 2011 at 3:23 pm

If machinery replaces labor,

It replaces labor, but it also lowers costs; i.e., it can produce the same output as the previous labor in less time while consuming fewer inputs (labor being one of those inputs, along with land and other natural resources).

Two things result from this:

1. Because of machinery (i.e., invested capital), each remaining laborer is more productive — he can produce more per unit time. This will cause his wages to increase, but it also makes the industry as a whole more profitable for investors; so the industry as a whole will expand, thus hiring more labor (though it will be more highly skilled labor than previously). There’s more labor employed in the textile industry today precisely because of machines and computers than in the 18th century when labor had to make do with hand looms.

2. Since machines use fewer inputs for the equivalent output as labor alone, those inputs (land, labor, capital) are now available to be employed elsewhere, in some other industry — including industries that don’t exist yet (as for some radically new product in the mind of some entrepreneur). These new industries will hire the labor formerly employed in the industry that recently mechanized.

The key to this is to refrain from imposing any barriers-to-entry on labor: no minimum wage laws and no pro-union legislation.

Jon Murphy November 22, 2011 at 3:26 pm

Bingo

kyle8 November 22, 2011 at 6:30 pm

It goes back to the idea of comparative advantage. If businesses employ more capital and more technology to create more and make more profits then they have created more wealth. More wealth makes everyone better off.

Perhaps the firm employs less people but now pays it’s employees and shareholders more. Therefore more money is available for other workers to meet the needs of these people.

Or in other words. Because there is more money in circulation then the waiter, attorney, cabdriver, and auto mechanic make more money serving these people’s needs.

Craig November 22, 2011 at 7:44 pm

“What is wrong with this reasoning?”

People must be hired to build the labor-saving technology.

Greg Webb November 22, 2011 at 12:28 pm

“high wages are the effect, not the cause” of the use of machinery

That is exactly right.

mm November 23, 2011 at 7:34 am

One point. I’ve heard people on Econ Talk ( a fantastic podcast) use the “excessively high” wages of union workers as the reason there is high use of capital equipment in manufacturing. And that unions are therefore responsible for declining manufacturing employment in the USA. Which is the truth?

Jon Murphy November 23, 2011 at 7:39 am

Unions charge a wage that is above what the market commands, so employers turn to cheaper machines to do some of the jobs. However, sometimes they MUST hire union workers (either because of state law or union rules), so they hire less workers.

The weasel answer to your question is both are causes. HOWEVER, one is a natural and healthy thing (capital) the other is destructive (union labor laws).

mm November 24, 2011 at 7:11 am

Thankyou Mr. Murphy.

Vangel November 23, 2011 at 12:38 pm

Those who have an e-reader can download the book for free from the Mises site. The link is provided below.

http://mises.org/literature.aspx?action=author&Id=109

Kindle readers can use the Calibre program to convert the downloaded e-book into the MOBI format.

Darren November 23, 2011 at 5:25 pm

It is usually said that high wages are cause of the adoption of machinery…

Who says this?

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