Wednesday, June 22, 2011

Roberts and Jarboe on Technological Progress

Russ Roberts has a good WSJ article up about what has been called "technological unemployment". I think he's reading a lot into a line by Obama, but whatever - it's a hook for a good review of the argument against Ludditism.

While Russ's piece is good, I also liked this somewhat critical assessment from Kenan Jarboe on where Russ falls short:

"I agree with everything he said about the power of productivity (while I disagree with his political potshot at the President). But, when it came to tying technology to job creation, here is the best Roberts could do: "Somehow, new jobs get created to replace the old ones."

If we can't explain the "somehow", we will lose the policy debates.

Roberts more detailed explanation given was this: "Fifty years ago, the computer industry was tiny. It was able to expand because we no longer had to have so many workers connecting telephone calls." In other words, the computer industry grew because all those unemployed telephone operators (unemployed because of advances in computer technology) could all get jobs building the computers that replaced them.

Wrong. This is the fallacy of supply creating demand. Creative destruction is the process of new industries drawing resources from old industries. Freed-up labor doesn't magically create new jobs. Free-up labor fills new jobs that are created by new opportunities. It is the new opportunities part that keeps growth going -- not simply the higher productivity part. Higher productivity allows those workers greater output - thereby allowing labor to switch to other activities while maintaining the same or greater levels of production. But if it was simply greater output of the same old stuff, the system would grind to a halt with excess labor. This is the fear that has arise over the centuries.

Turns out these fears have not been realized -- because of innovation. Innovation creates new demand as well as increases productivity. The new demand for new products absorbs the labor freed up by productivity gains in a virtuous cycle - each side reinforcing the other."

I'm not sure Russ would even disagree with these points - but they're good points to make nevertheless. Innovation and technological development increases return on investment and investment demand. This raises the marginal efficiency of capital and prevents us from falling below full employment.


  1. Creative destruction is the process of new industries drawing resources from old industries. Freed-up labor doesn't magically create new jobs.

    So true, and yet it is proof of supply creating demand

    There is no fallacy there.

  2. I have a semi-related question. Why is there so much cartelization in the taxi-cab industry in the U.S.? One explanation I have heard is that the customer base is a rather fleeting one; most people do not take cabs that often, so the expense related to reduced competition doesn't bite that much.


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