The Mugwumpery

Like many people, I long worried about the specter of technological unemployment – as machines get smarter and gradually can do the jobs that people do, will we reach a point where machines can do everything people can do?

If and when that happens, we may have a paradise of abundance – machines will make everything we want, without any people needing to work.

But at the same time, how will people get money to buy these things?

I no longer think that’s going to be a problem.

Last week’s Economist had an excellent report on “The return of the machinery question”, which examines the problem from a historical perspective. People, after all, have been thinking about this problem since the start of the industrial revolution.

Despite all the hand-wringing, the economy always seems to generate more jobs than automation displaces.

Now I understand why (others have understood for a long time).

I’ll explain with a simplified economic model.

LIMITED STUFF-MAKING ABILITY

At any given time, the world (or national) economy has the ability to produce a certain amount of stuff. Food, clothing, houses, cars, entertainment, etc. – all the things we humans want.

How much stuff we can produce at any given time depends on:

• Labor: How many people exist (each has hands and brain)
• Capital: How many machines, factories, buildings, etc. we’ve accumulated. How much education people have received, etc.
• Resources: How much raw materials we can easily get at – metals, chemicals, energy, land, etc.
• Technology: The ways we know to do things and use the things we have.

Of course how well we use these things matters – we can run factories 24×7 or only 8 hours/day. We can have rules that make us waste time and materials, or incent people to be efficient. We can work long hours, or take lots of vacations.

And over time how much of these things we have changes – population can grow or shrink, resources can be discovered or run out, and we can discover new ways to do things that are better.

But, still, there are limits. At any given time, we can only produce some limited amount of stuff.

LIMITED MONEY

Also at any given time, there is a (again, roughly) fixed amount of money in the world.

Sure, we can print more, but that doesn’t help. If we can make a billion stuffs each day, and there are a billion dollars of money, then the billion dollars will buy all the stuffs, so 1 stuff for each dollar.

(I said this was simplified.)

But if we print another billion dollars, that doesn’t help. Now there are 2 billion dollars, but still only 1 billion stuffs each day. So you need 2 dollars to buy each stuff.  (This is inflation.)

MONEY CAN ONLY BE SPENT ON PEOPLE

When someone buys something, they give money to some person.

Yes, you can buy a building, which is not a person. But to buy it, you give money to a person (who owned it).

The same is true with everything – whether you’re buying labor or capital or resources or technology – the money goes to people.

There’s no place else it can go, except to people.

NOW INTRODUCE ROBOTS

So, we can make a given amount of stuff, and the given amount of money will buy that stuff.

And money can only be spent on people.

Now we introduce lots of robots that can do most of the jobs that people do. The robots are cheaper to use than humans, so they get used instead of people.

So now there are people doing nothing, who used to be making stuff.

I just said “the robots are cheaper”. This is key.

Let’s simplify some more and assume we’re still making the same amount of stuff (actually we’ll be making more, which makes things better, but let’s ignore that for now).

So we’re making the same amount of stuff, but the robots are cheaper. That means somebody has extra money left over (probably whoever is using the robots, but that’s not important, as we shall see).

Same amount of stuff. Extra money left over. Which can only be spent on people.

The extra money will eventually get spent (that’s the only thing money is useful for – being spent).

If it’s spent on stuff made by robots, there is still extra money left over. Because robots don’t get paid, only people do.

Yes, robots cost money, but that money is paid to people – the people who make or own them.

So there is still extra money around. Held by people. They can spend it on more robot stuff as much as they like, but that doesn’t use up the money – it just moves it around to other people.

And since we’re already making as much stuff as before, that means it has to be spent on new stuff made by people, that wasn’t being made before. That’s the only place it can be spent.

So now we’re making more stuff than before. And that new stuff was made by people. And the only people available – who aren’t already busy making the old stuff – are the ones who lost their jobs to robots.

So those are the people who get hired to make the new stuff.

That’s it. That’s the whole enchilada.

That’s why despite 200 years of worries, technology has never caused mass unemployment.

Because it can’t. There is only so much money around at a given time. If money is saved by cheaper robots, that money gets spent on people.

(Yes, technology has caused, and will cause in the future, adjustment problems as people switch jobs. That’s different, and while not minor or trivial for the people involved, temporary.)

Finally – Since the robots are cheaper, prices for the stuff they make go down. Which means people can afford to buy more of them.

Which means that people actually get wealthier, in terms of how much stuff they can afford to buy. (They don’t necessarily have more money – they might have more or less – but they can afford more stuff.)

They can’t buy more of the stuff made by people, but they can buy more of the stuff made by robots. Which means stuff made by people is more expensive – more valuable – than stuff made by robots.

Which means the wages of the people who make stuff has gone up, in terms of what the money you pay them will buy.

Up, not down.

Technology makes wages rise. Not decline. Rise.

And that is why we have nice things today, like houses, and medicine, and air conditioning, and clean rivers, and airliners, and indoor toilets, and the Internet, that our ancestors with little technology didn’t have.