Quotation of the Day…

by Don Boudreaux on December 9, 2011

in Myths and Fallacies, Seen and Unseen, Trade

… is from pages 294-295 of the 1982 Liberty Fund re-issue of Frank Knight‘s 1947 collection Freedom and Reform; here, Knight is speaking of some writings on the 17th century by a history professor at Oxford University, one G.N. Clark (original emphasis and ellipses):

His economic reasoning is of a kind which is characteristic of historians and of educated people generally, a fact which is at once the main practical reason for teaching economics, and the despair of those whose profession it is to do it.  It would hardly be possible to imagine a “better bad example” than is afforded by a couple of sentences taken from the end of Professor Clark’s second chapter: “Again, technological improvement was most active . . . in those indusries in which there was international competition  . . . the export industries, which each state now tried to foster in order that its dependence on imports might be lessened, and its exporting powers increased.”  Obviously, the fostering of export industries would increase a country’s dependence on imports – unless exports were given away to foreigners, which is not customary.  And importation is the only intelligible motive for fostering exports, as well as its natural consequence.  There are other hardly less “flagrant” sins against facts and logic, such as the observation that a labor-saving invention is a “synonym for unemployment”.

Plus ça change, plus c’est la même chose.

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{ 32 comments }

vidyohs December 9, 2011 at 7:42 am

“such as the observation that a labor-saving invention is a “synonym for unemployment”.”

Seems to me that it depends on what the labor-saving invention is and how we look at the word unemployed.

If we are talking about a dishwasher in the kitchen, then obviously the labor saving device is unlikely to cause unemployment among a household.

If we are talking about automation in factories then the labor-saving device will bring unemployment.

So, now we ask, is the unemployment temporary or is it permanent? It is obvious that there will be temporary unemployment, but it is equally obvious that that fact does not mean permanent unemployment.

Yes?

Don Boudreaux December 9, 2011 at 7:57 am

Knight’s point is simply that labor-saving technology doesn’t cause a net loss of jobs in the economy over the long-run. No one denies that particular jobs are “destroyed” by technology.

GAAPrulesIFRSdrools December 9, 2011 at 9:05 am

Is Knight’s observation a similar/the same observation as Shumpeter’s “creative destruction”?

Don Boudreaux December 9, 2011 at 9:08 am

It’s consistent with Schumpeter’s observation, but it’s making a simpler point, namely, “destroying” the demand for a particular kind of labor does not thereby reduce for any extended period of time the overall demand for labor. Knight was, here, merely arguing against the commonplace misperception that sparks (sympathy for) Luddism.

Randy December 9, 2011 at 9:15 am

It occurs to me that time is the key factor. PSST operates over a period of time, but fear operates in real time.

GAAPrulesIFRSdrools December 9, 2011 at 10:17 am

I’ve always wondered how I never heard of Knight as an undergraduate.

Josh S December 9, 2011 at 11:53 am

The belief that destroying the demand for one kind of labor leads to an overall drop in the demand for labor makes about as much sense as the belief that when the TV destroyed the demand for radio in the home, the demand for entertainment dropped.

Jon Murphy December 9, 2011 at 11:55 am

“The belief that destroying the demand for one kind of labor leads to an overall drop in the demand for labor…”

All that springs from the idea of AD.

GiT December 9, 2011 at 2:43 pm

Then why interpret the quoted statement as applying to the long run rather than the short run?

In the short run, a labor saving technology is synonymous with unemployment (or, at least, unemployment in a specific line of work – one could repurpose, rather than fire, their dishwasher).

Jon Murphy December 9, 2011 at 2:46 pm

The analysis remains the same regardless of the short run or the long run. The job is still “destroyed” but other jobs are “created”.

GiT December 9, 2011 at 2:52 pm

Except the process of creating a job is completely distinct from the process of destroying a job.

Inventing a dishwasher does not create a job for unemployed dishwashers. That’s up to other entrepreneurs and the dishwashers themselves.

Jon Murphy December 9, 2011 at 3:04 pm

I still don’t see how the distinction between the short-term and the long-term changes the situation. All these things happen simultaneously.

GiT December 9, 2011 at 3:20 pm

No they don’t.

People who are fired are not simultaneously rehired.

GiT December 9, 2011 at 3:28 pm

Or, to put it another way, finding a new job takes knowledge, skill, time, and creativity.

The knowledge, skill, time, and creativity which go into finding a new job have nothing to do with the knowledge, time, skill and creativity which went into inventing, say, the cotton gin or the loom.

Jon Murphy December 9, 2011 at 3:33 pm

You are right that people are not fired and rehired at the same time. But it does occur in the short term.

GiT December 9, 2011 at 4:58 pm

I’m not really interested in some arbitrary range in time. I’m interested in the basic logic of what happens when labor saving technology is introduced.

The direct effect in the first instance is to *save labor,* which, ceteris paribus, decreases the amount of hours worked and as such decreases employment in some respect.

What happens next, to that laborer, depends upon changes in the market for labor and changes in the worker’s ability to market themselves. The uses demanded of labor and the uses labor creates for itself are independent of whatever cost cutting technology made one particular use of labor obsolete.

Jon Murphy December 9, 2011 at 5:18 pm

“I’m not really interested in some arbitrary range in time. I’m interested in the basic logic of what happens when labor saving technology is introduced.”

Then you should agree with Don.

You opened the door with the “short-term” stuff. If you didn’t care about it, why bring it up?

GiT December 9, 2011 at 5:20 pm

As a simple example, think of what happened to Lire when the Lire-saving technology known as the Euro was introduced.

That’s what happens to labor first. Labor gets put back in to use because it is a lot more useful than Lire notes. But labor’s usefulness does not come about from technologies which make labor useless for particular things. Labor always has to adapt. And adaptation takes time.

GiT December 9, 2011 at 6:04 pm

I am interested in how jobs are created and destroyed, and to what we can attribute the creation of jobs. Eliminating jobs doesn’t create jobs. It frees up resources. Those resources /can/ be used to create jobs. They could also be used for any variety of other things.

I’m also interested in what happens to actual individuals when they lose their jobs. And when they lose their jobs they generally experience unemployment, and when they lose their job to technological change they generally only find re-employment using a skillset different from that they were using previously.

How do people get out of these situations? Not thanks to the labor saving technology, but thanks to their own effort and skill.

vikingvista December 9, 2011 at 9:56 am

In a free market, where creative destruction is continuously at play, the demand for your labor is growing well before your particular job is destroyed. That is, you don’t need to wait for the opportunities that arise from your particular job loss. You benefit from that process having already occurred elsewhere and long ago.

Stone Glasgow December 9, 2011 at 4:40 pm

Brilliant insight!

GiT December 9, 2011 at 5:31 pm

Um, not necessarily. Labor is a commodity.

The demand for cowrie shells, Lire notes, and Deutschmarks was not growing thanks to creative destruction, and now that their uses have been creatively destroyed, they don’t get employed.

That demand for human labor in general is constantly growing is a unique (and not necessarily eternal) property of human ingenuity.

The demand for any individual human laborer can evaporate, and then it is up to human ingenuity (both their own and that of others) to make them useful again. For any individual, time, effort, and energy must be expended to get from unemployment to employment again. The demand for labor /in general/ may be constantly growing (though that hasn’t been true of all commodities in history), but the demand for your labor /in particular/ does not come about without (sometimes significant) friction.

Jon Murphy December 9, 2011 at 6:44 pm

“Labor is a commodity.”

That’s incorrect. Labor is a resource.

Jon Murphy December 9, 2011 at 6:45 pm

Economic resources are land, labor, capital, and entrepreneurship.

vidyohs December 9, 2011 at 7:20 pm

Just out of the fun of asking, Don teaches that humans are resources and he has recognized that land, and the things in it, is a raw material that without human manipulation is just raw material that does what raw material does when left alone.

So, if land in your mind is a resource, why not sunlight, air, and water as well? Are you discriminatory towards sunlight, air, and water? If so, why? If yes, is your discrimination active or passive? Is it sometimes potentially violent?

If land, sunlight, air, and water are resources, perhaps vacuum is as well? Huh, maybe? :-)

GiT December 9, 2011 at 7:47 pm

That is a pointless question of semantics

One technical use of the word commodity restricts it to solely relatively uniform goods (wheat, water, etc.). That technical definition does not exhaust the meaning of the word in contemporary usage, and it bears little resemblance whatsoever to the word’s historical usage, especially within the history of political economy.

By commodity I don’t mean anything more than Locke: “Commodities are Movables, valuable by Money.”

Ubiquitous December 10, 2011 at 6:17 am

So, if land in your mind is a resource, why not sunlight, air, and water as well?

I assume you’re joking?

vidyohs December 10, 2011 at 8:25 am

@ Ubiquitous
No. my tone was of having fun, but I am surprised that you’d ask if I was serious in what you quoted.

vikingvista December 10, 2011 at 7:39 pm

“The demand for cowrie shells, Lire notes, and Deutschmarks was not growing thanks to creative destruction, and now that their uses have been creatively destroyed, they don’t get employed.”

You’ll have to elaborate, for this to make any sense. There are reasons why government monopolies are unstable and result in systemic crises. That’s why I explicitly and intentionally referred to free markets.

“That demand for human labor in general is constantly growing is a unique (and not necessarily eternal) property of human ingenuity.”

You make the observation of growing demand for labor and then act as though it is a gift from the labor gods, or the result of a magical labor dance. We are talking about mechanisms here, and why such growth occurs, and why it doesn’t, which is why your taking it as a given is missing the whole point.

The notion of creative destruction is that the job you love is part and parcel with the ability of jobs to be destroyed. It is, actually, a gift of that destructive process. Bemoaning the “problem” of transitioning between jobs is like bemoaning the problems of having to chew for nourishment, or the problem of having to articulate to be understood. What you should be bemoaning are the numerous impediments to making such natural and beneficial transitions that governments put in people’s ways.

What I was getting at, is that the process of creative destruction is a growth process. It gives more than it takes. Yesterday’s destruction is already encouraging people to seek out your services–services that you aren’t even yet aware you are capable of. People are capable of more than one thing “in particular”, and that’s why labor is always in demand. Sure, it is always an issue of price–is your labor productive enough to be worth your while to sell. But entrepreneurial ingenuity, following the basest and most universal self interest, is what makes it not only worth your while, but often more valuable than you could’ve imagined.

GiT December 9, 2011 at 2:49 pm

Hooray for willful misinterpretation.

As already noted, the statement about unemployment is perfectly correct – for the short term.

As far as exports and imports goes, it is also perfectly correct that states have often in their history fostered exports for the purpose of achieving a larger degree of autarky – i.e. moving from the importation of finished goods to their export means that, if necessary, one need not trade to get such goods. Whether such policies were or are advisable is a separate question from why states chose to do such things.

As a simple example, in conditions where one’s potential enemy controlled sea-trade, the ability to produce one’s own munitions could be highly desirable.

Stone Glasgow December 9, 2011 at 4:43 pm

Self reliant states that don’t trade are better prepared for war, in theory, but states that attempt to do this end up like N. Korea. Nations that trade end up with much better weapons and are better prepared.

GiT December 9, 2011 at 5:17 pm

They end up with better weapons /so long as they can trade for them/. Free trade in arms didn’t work out very well for the South when they sat on their cotton for too long and their ports were effectively blockaded.

In any case, Knight’s reading completely misses what is being said. Clark is almost assuredly talking about specific industries. An increase in the ability to export a specific good should decrease the need to import that specific good, though it may increase interdependence overall (though not if the way in which exports are increased is through a policy which is overall detrimental to laissez faire.)

17th century trade policy was largely mercantalist. it encouraged exports in *specific industries* (manufactured goods) at the expense of increasing exports in other industries (natural resources and currency). This means that interdependence, and absolute levels of exports and imports, were decreased. Countries fostered *certain* exports by discouraging exports overall.

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