Economics 101 for Lefties: Part 4 — The Division of Labor
If you asked the typical person off the street why we are wealthier today than we were two hundred years ago, they would probably say that it is because of science and technology. Competition between firms can slash the price of cars, rice, and other consumer goods by a factor of two or three, but improvements in technology can slash the price by a factor of two or three hundred. That takes us to the next parable in our tour of economics, the parable of the pin makers. Adam Smith explained it on page one of chapter one of his book The Wealth of Nations:
“One man draws the wire, another straightened it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head to make the head requires two or three distinct operations to put it on its preculiar Business to why and it is another it is even a trade it myself to put them into paper”
Smith states that pin makers could only make about twenty pins per day by hand. With the help of assembly lines, the output per worker rose to about 4800 pins per day. Economists call this the division of labor — taking a complex job and breaking it down into simple steps. That’s how assembly lines work.
The division of labor has some profound consequences. The first was that it became much cheaper to manufacture pins. The second was that a lot of workers lost their jobs. This story has been reenacted many times in many other industries such as cars, computers, and textiles. The question is always the same: do the benefits of cheaper products outweigh the lost jobs? With the benefit of two years of hindsight the answer is obvious. The world is much wealthier today than it used to be, even for the poorest of the poor. But if you were to read through two hundred years of newspapers you would come to the opposite conclusion. You would assume that the world was on a long-term downward spiral in which jobs were constantly being destroyed. And frankly, it’s hard to fault observers for getting it wrong. The historian Ernst H. Gombrich explains in his charming book, A Little History of the World, what life was like for weavers during who lost their jobs to machines.
And naturally, rather than see his family starve a person will do anything. Even work for a pittance as long as it means he has a job to keep body and soul together. So the factory owner, with his machines, could summon the hundred starving weavers and say: ‘I need people to run my factory and look after my machines. What will you charge for that?’ One of them might say: ‘I want so much, if I am to live as comfortably as I did before.’ The next would say: ‘I just need enough for a loaf of bread and a kilo of potatoes a day.’ And the third, seeing his last chance of survival about to disappear, would say: ’I’ll see if I can manage on half a loaf’. Four others then said: ‘So will we!’ ‘Right,’ said the factory owner. ‘I’ll take you five. How many hours can you work in a day?’ ‘Ten hours.’ said the first. ‘Twelve,’ said the second, seeing the job slipping from his grasp. ‘I can do sixteen,’ cried the third, for his life depended on it.
These days, the word Luddite makes us think of people who don’t like smartphones and Facebook, but during the Industrial Revolution, the Luddite movement was about survival. The Luddites were a group of English textile workers who broke into factories and destroyed the machines that cost them their jobs. That was very common during the Industrial Revolution. An entrepreneur would invent a labor saving machine and angry workers would promptly destroy it. They did not care about labor saving devices — they wanted jobs.
Karl Marx had a more revolutionary vision. He claimed that it was futile to stop progress. Instead of destroying machines, the workers needed to take ownership of them. That way everyone could enjoy the benefits of progress rather than a few rich capitalists. That made sense, but history has proven that both Marx and the Luddites were wrong. Socialism has produced only grinding poverty and oppression, whereas capitalism with the modern welfare state has proven to be the world’s most powerful system of creating wealth and raising the standard of living for everyone. Yet Marx’s analysis seems correct. How did he go wrong?
The answer is found in the parable of the price gouger. High prices work their magic just as easily after a technological advance as they do after a hurricane. The first entrepreneur to build an assembly line would be able to corner the pin market and reap windfall profits. He could get away with price gouging. But those profits are both a signal and an incentive. They tell entrepreneurs, “Hey! Hurry up and make your own factory so you can reap some of those windfall profits for yourself!” New firms would rush into the pin market and older firms would rush to upgrade their equipment. The number of firms with assembly lines would increase. This competition would drive down prices. In the short run, the factory owners captured the benefits of technological change in the form of windfall profits. In the long run, they were passed onto consumers in the form of lower prices. Lower prices effectively make consumers richer because the things they want to buy cost less money. Consumers were the real winners.
Unfortunately there was also a group that clearly lost, namely the workers who lost their jobs. This leads to another difficult question: are the benefits of cheaper pins really worth so many people losing their jobs? Once again the answer is yes. Consumers have to do something with their extra wealth so they buy more goods and services. Someone has to make those extra goods and services, so new jobs are created in other industries. Joseph Schumpeter called this process creative destruction. New innovations cause inefficient firms to go out of business, and for skills to become obsolete. Creative destruction can even destroy entire markets, such as the market for horse and buggies, steam engines, and COBOL programmers. The consequence is lost jobs. In The Concise Encyclopedia of Economics, Richard Alm and W. Michael Cox document some of these wrenching transformations. In 1910 there were 238,000 Americans employed as blacksmiths, but today that career is obsolete. In 1920 there were 2.1 million Americans working in the railroad industry compared to only 200,000 today. In 1910 nearly 12 million Americans worked as farmers compared to only 716,000 today.
The lesson is that failure is an essential part of capitalism. It allows capital and labor to move from inefficient uses, such as making horse and buggies, to efficient uses, such as making cars. Failure also lets workers move from poorly managed firms to well-managed firms. Finally, failure is essential for the creative side of the process — creating new jobs in new industries. There are over 2,100,000 engineers today compared to only 38,000 in 1910. There are over 2,500,000 computer professionals today compared to only 160,613 as recently as 1970. There are 4,171,000 truck, tax, and bus drivers today but none in 1900. Creative destruction is not a gentle process, but it is a necessary one. Without it we’d be stuck with yesterday’s technology and yesterday’s standard of living.
The talk about invisible hands and capitalism promoting the greater good is not empty rhetoric. In their paper, The Greatest Century That Ever Was, Stephen Moore and Julian L. Simon (1999) documented some of the major advances that happened during the 20th century. Per-capita GDP increased from $4,800 to $31,000; car ownership increased from 1% to 91%; TV ownership increased from zero to 98%; and per capita telephone calls increased from 40 calls per year to 2300 calls per year. All this happened while the poverty rate fell from 40% to 12%, the length of the average work week fell from 50 hours to 35 hours, and real income for blacks increased from $1,200 to $12,400.
However, let’s not forget the fact that some workers had their skills made obselete by this process of creative destruction. This can lead to a permanent loss of income. A steam engineer in his 50’s can’t be expected to learn gasoline engines. Moreover, the process of creative destruction often results in the new jobs being created in different parts of the country. Steam locomotives were built on the east coast but the auto industry was centered in Detroid. So a steam engineer in his 50’s doesn’t just have to learn new skills, he’d have to uproot his family and his children and move. Government programs that provide job training, health care, and income supports can soften the roughest edges of creative destruction.
