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At the end of the day, the free market is all about trade-offs. When it’s working at its best, it enables us to make trades that leave everyone better off than they were before, without leaving anyone worse off. We’ve seen plenty of examples of these kinds of positive-sum transactions throughout our discussion here so far, and they’ve given us ample justification for letting the price system work. Despite the strength of all these examples, though, we should take a moment here to acknowledge that there are also situations in any market economy in which some parties are made better off while others are made worse off, simply because the market relies on the mechanism of competition, and it’s not possible to have every participant in a competition come in first place. If someone invents the automobile, for instance, there’s no getting around the fact that horse-drawn carriage drivers will be made worse off, due to their product being made obsolete. When something like this happens, the backlash from those who lose out can be intense, and for understandable reasons. That doesn’t mean, though, that such trade-offs shouldn’t be allowed to be made in the first place. On the contrary, accepting such trade-offs, as painful as it can be for some, is exactly how progress is made in a free market. As Wheelan writes:

A market economy inspires hard work and progress not just because it rewards winners, but because it crushes losers. The 1990s were a great time to be involved in the Internet. They were bad years to be in the electric typewriter business. Implicit in Adam Smith’s invisible hand is the idea of “creative destruction,” a term coined by the Austrian economist Joseph Schumpeter. Markets do not suffer fools gladly. Take Wal-Mart, a remarkably efficient retailer that often leaves carnage in its wake. Americans flock to Wal-Mart because the store offers an amazing range of products cheaper than they can be purchased anywhere else. This is a good thing. Being able to buy goods cheaper is essentially the same thing as having more income. At the same time, Wal-Mart is the ultimate nightmare for Al’s Glass and Hardware in Pekin, Illinois—and for mom-and-pop shops everywhere else. The pattern is well established: Wal-Mart opens a giant store just outside of town; several years later, the small shops on Main Street are closed and boarded up.

Capitalism can be a brutal, cruel process. We look back and speak admiringly of technological breakthroughs like the steam engine, the spinning wheel, and the telephone. But those advances made it a bad time to be, respectively, a blacksmith, a seamstress, or a telegraph operator. Creative destruction is not just something that might happen in a market economy. It is something that must happen. At the beginning of the twentieth century, half of all Americans worked in farming or ranching. Now that figure is about one in a hundred and still falling. (Iowa is still losing roughly fifteen hundred farmers a year.) Note that two important things have not happened: (1) We have not starved to death; and (2) we do not have a 49 percent unemployment rate. Instead, American farmers have become so productive that we need far fewer of them to feed ourselves. The individuals who would have been farming ninety years ago are now fixing our cars, designing computer games, playing professional football, etc. Just imagine our collective loss of utility if Steve Jobs, Steven Spielberg, and Oprah Winfrey were corn farmers.

Creative destruction is a tremendous positive force in the long run. The bad news is that people don’t pay their bills in the long run. The folks at the mortgage company can be real sticklers about getting that check every month. When a plant closes or an industry is wiped out by competition, it can be years or even an entire generation before the affected workers and communities recover. Anyone who has ever driven through New England has seen the abandoned or underutilized mills that are monuments to the days when America still manufactured things like textiles and shoes. Or one can drive through Gary, Indiana, where miles of rusting steel plants are a reminder that the city was not always most famous for having more murders per capita than any other city in the United States.

Competition means losers, which goes a long way toward explaining why we embrace it heartily in theory and then often fight it bitterly in practice. A college classmate of mine worked for a congressman from Michigan shortly after our graduation. My friend was not allowed to drive his Japanese car to work, lest it be spotted in one of the Michigan congressman’s reserved parking spaces. That congressman will almost certainly tell you that he is a capitalist. Of course he believes in markets—unless a Japanese company happens to make a better, cheaper car, in which case the staff member who bought that vehicle should be forced to take the train to work. (I would argue that the American automakers would have been much stronger in the long run if they had faced this international competition head-on instead of looking for political protection from the first wave of Japanese imports in the 1970s and 1980s.) This is nothing new; competition is always best when it involves other people. During the Industrial Revolution, weavers in rural England demonstrated, petitioned Parliament, and even burned down textile mills in an effort to fend off mechanization. Would we be better off now if they had succeeded and we still made all of our clothes by hand?

If you make a better mousetrap, the world will beat a path to your door; if you make the old mousetrap, it is time to start firing people. This helps to explain our ambivalence to international trade and globalization, to ruthless retailers like Wal-Mart, and even to some kinds of technology and automation. Competition also creates some interesting policy trade-offs. Government inevitably faces pressure to help firms and industries under siege from competition and to protect the affected workers. Yet many of the things that minimize the pain inflicted by competition—bailing out firms or making it hard to lay off workers—slow down or stop the process of creative destruction. To quote my junior high school football coach: “No pain, no gain.”

We might wish that every industry could be equally successful, so that no firms ever had to close and no workers ever had to find new jobs. But in a competitive market, it simply isn’t possible for an industry to be successful unless it’s outcompeting other industries – meaning that, by definition, the latter will have to be less successful. That’s bad news for those less efficient firms, obviously; but as Hazlitt points out, it equates to good news for everyone else:

Now in an economy in equilibrium, a given industry can expand only at the expense of other industries. For at any moment the factors of production are limited. One industry can be expanded only by diverting to it labor, land and capital that would otherwise be employed in other industries. And when a given industry shrinks, or stops expanding its output, it does not necessarily mean that there has been any net decline in aggregate production. The shrinkage at that point may have merely released labor and capital to permit the expansion of other industries. It is erroneous to conclude, therefore, that a shrinkage of production in one line necessarily means a shrinkage in total production.

Everything, in short, is produced at the expense of forgoing something else. Costs of production themselves, in fact, might be defined as the things that are given up (the leisure and pleasures, the raw materials with alternative potential uses) in order to create the thing that is made.

It follows that it is just as essential for the health of a dynamic economy that dying industries should be allowed to die as that growing industries should be allowed to grow. For the dying industries absorb labor and capital that should be released for the growing industries. It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other. These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits and costs. They are solved by this system incomparably better than any group of bureaucrats could solve them. For they are solved by a system under which each consumer makes his own demand and casts a fresh vote, or a dozen fresh votes, every day; whereas bureaucrats would try to solve it by having made for the consumers, not what the consumers themselves wanted, but what the bureaucrats decided was good for them.

Yet though the bureaucrats do not understand the quasi-automatic system of the market, they are always disturbed by it. They are always trying to improve it or correct it, usually in the interests of some wailing pressure group.

Why is it such a problem, exactly, if politicians want to interfere with creative destruction in order to save people’s jobs? Isn’t saving jobs the most important thing they can do? Well, consider this famous thought experiment from Frédéric Bastiat, known as the parable of the broken window:

In [this hypothetical scenario], Bastiat asks whether it might be a good thing to break someone’s window, since doing so would provide more business for the local glazier, helping to keep him employed in his job repairing windows and adding to the overall level of economic activity. Indeed, one might be tempted to actively encourage window-breaking nationwide, in order to create a thriving glass-repair-based economy and end our nation’s unemployment problems for good!

As Bastiat points out, the faulty reasoning here is obvious. Paying for window repairs does, to be sure, generate business and employment for glaziers – but in being forced to spend money on window repairs, consumers are forfeiting the opportunity to spend that same money on something better. If no windows had ever been broken in the first place, then consumers would be able to spend their money on more valuable goods and services instead; and crucially, they would thereby be generating just as much commerce and economic activity by doing so – perhaps even more so, in fact, if the firms receiving these consumers’ business were more efficient than the glaziers and were able to hire more people for the same amount of money. The critical difference would be that instead of spending money simply to restore their broken windows and gaining nothing further, consumers would get some additional benefit from spending their money on other products, while still retaining their windows intact. Keeping glaziers employed would still be a good thing if their services were actually needed in the economy – but if nobody’s windows were broken, then breaking them solely to keep an otherwise useless industry running would create significant opportunity costs, and would leave the economy performing at a far lower level than it would otherwise be capable of.

Tabarrok relates another anecdote that succinctly illustrates this point:

In a story beloved by economists it’s said that Milton Friedman was once visiting China when he was shocked to see that, instead of modern tractors and earth movers, thousands of workers were toiling away building a canal with shovels. He asked his host, a government bureaucrat, why more machines weren’t being used. The bureaucrat replied, “You don’t understand. This is a jobs program.” To which Milton responded, “Oh, I thought you were trying to build a canal. If it’s jobs you want, you should give these workers spoons, not shovels!”

In short, it’s not just the fact that people are employed that’s important; what matters is that they’re actually doing the most productive work that they can be doing. Needless to say, it’s crucial to ensure that everyone has a viable means of supporting themselves – but trying to “create jobs” merely for their own sake, without any regard for the actual value that these jobs are providing, is a misguided way of going about it. Caplan expands further on this point:

What we should wish for, clearly, is that each hectare of land produce little wheat, and that each kernel of wheat contain little sustenance—in other words, that our land should be unfruitful. . . . [O]ne could even say that job opportunities would be in direct proportion to this unfruitfulness. . . . What we should desire still more is that human intelligence should be enfeebled or extinguished; for, so long as it survives, it ceaselessly endeavors to increase the ratio of the end to the means and of the product to the effort. —Frédéric Bastiat, Economic Sophisms

I was an undergraduate when the Cold War ended, and I can still remember talking about military spending cuts with a conservative student. The whole idea made her nervous. Why? Because she had no idea how a market economy would absorb the discharged soldiers. She did not even distinguish between short-term and long-term consequences of the cuts; in her mind, to layoff 100,000 government employees was virtually equivalent to disemploying 100,000 people for life. Her position is particularly striking if you realize that her objection applies equally well to spending on government programs that—as a conservative—she opposed.

If a well-educated individual ideologically opposed to wasteful government spending thinks like this, it is hardly surprising that she is not alone. The public often literally believes that labor is better to use than conserve. Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress, but as a danger. I call this make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where noneconomists see the destruction of jobs, economists see the essence of economic growth—the production of more with less. Alan Blinder explains:

If you put the question directly, “Is higher productivity better than lower productivity?,” few people will answer in the negative. Yet policy changes are often sold as ways to “create jobs.” . . . Jobs can be created in two ways. The socially beneficial way is to enlarge GNP, so that there will be more useful work to be done. But we can also create jobs by seeing to it that each worker is less productive. Then more labor will be required to produce the same bill of goods. The latter form of job creation does raise employment; but it is the path to rags, not riches.

For an individual to prosper, he only needs to have a job. But society can only prosper if individuals do a job, if they create goods and services that someone wants.

Economists have been at war with make-work bias for centuries. Bastiat ridicules the equation of prosperity with jobs as “Sisyphism,” after the mythological fully-employed Greek who was eternally condemned to roll a boulder up a hill. In the eyes of the public:

Effort itself constitutes and measures wealth. To progress is to increase the ratio of effort to result. Its ideal may be represented by the toil of Sisyphus, at once barren and eternal.

In contrast, for the economist:

Wealth . . . increases proportionately to the increase in the ratio of result to effort. Absolute perfection, whose archetype is God, consists in the widest possible distance between these two terms, that is, a situation in which no effort at all yields infinite results.

In the 1893 Quarterly Journal of Economics, Simon Newcomb explains:

The divergence between the economist and the public is by no means confined to foreign trade. We find a direct antagonism between them on nearly every question involving the employment of labor. . . . The idea that the utility and importance of an industry are to be measured by the employment which it gives to labor is so deeply rooted in human nature that economists can scarcely claim to have taken the first step towards its eradication.

His last remark is particularly striking. Nineteenth-century economists believed they had diagnosed enduring economic confusions, not intellectual fads, and they were right. Almost a hundred years after Newcomb, Alan Blinder makes the same lament. But Blinder’s critique of make-work bias, unlike Newcomb’s, did not appear in a leading academic journal like the QJE. He had to venture beyond the ivory tower with a popular book to find his audience. Referees would almost certainly have taken issue with Blinder—not because modern economists agree with make-work bias, but because it is disreputable to claim that anyone embraces such folly.

But embrace it they do. The crudest form of make-work bias is Luddite fear of the machine. Common sense proclaims that machines make life easier for human beings. The public qualifies this “naive” position by noting that machines also make people’s lives harder by throwing them out of work. And who knows? Maybe the second effect dominates the first. During the Great Depression, intellectual fads like Howard Scott’s “technocracy” movement blamed the nation’s woes on technological progress.

As Scott saw the future, the inexorable increase in productivity, far outstripping opportunities for employment or investment, must mean permanent and growing unemployment and permanent and growing debt, until capitalism collapsed under the double load.

Economists’ love of qualification is notorious, but most doubt that the protechnology position needs to be qualified. Technology often creates new jobs; without the computer, there would be no jobs in computer programming or software development. But the fundamental defense of labor-saving technology is that employing more workers than you need wastes valuable labor. If you pay a worker to twiddle his thumbs, you could have paid him to do something socially useful instead.

Economists add that market forces readily convert this potential social benefit into an actual one. After technology throws people out of work, they have an incentive to find a new use for their talents. Cox and Alm aptly describe this process as “churn”: “Through relentless turmoil, the economy re-creates itself, shifting labor resources to where they’re needed, replacing old jobs with new ones.” They illustrate this process with history’s most striking example: The drastic decline in agricultural employment:

In 1800, it took nearly 95 of every 100 Americans to feed the country. In 1900, it took 40. Today, it takes just 3. . . . The workers no longer needed on farms have been put to use providing new homes, furniture, clothing, computers, pharmaceuticals, appliances, medical assistance, movies, financial advice, video games, gourmet meals, and an almost dizzying array of other goods and services. . . . What we have in place of long hours in the fields is the wealth of goods and services that come from allowing the churn to work, wherever and whenever it might occur.

These arguments sound harsh. That is part of the reason why they are so unpopular: people would rather feel compassionately than think logically. Many economists advocate government assistance to cushion displaced workers’ transition, and retain public support for a dynamic economy. Alan Blinder recommends extended unemployment insurance, retraining, and relocation subsidies. Other economists disagree. But almost all economists grant that stopping transitions has a grave cost.

Exasperating as the Luddite mentality is, countries rarely move beyond rhetoric and turn back the clock of technology. But you cannot say the same about another controversy infused with make-work bias: hostility to downsizing. What could possibly be good about downsizing? Every time we figure out how to accomplish a goal using fewer workers, it enriches society, because labor is a valuable resource.

We have a tremendous stake in allowing the churn to grind forward, putting our labor resources to work raising living standards, to give us more for less. We can’t get around it: The churn’s promise of higher living standards can’t be reaped without job losses. . . . Downsizing companies will be vilified for making what appear to be hardhearted decisions. When passions cool, however, there ought to be time to recognize that, in most cases, the dirty work had to be done.

Inside of a household, everyone understands what Cox and Alm call “the upside of downsizing.” You do not worry about how to spend the hours you save when you buy a washing machine. There are always other ways to spend your time. Bastiat insightfully observes that a loner would never fall prey to make-work bias:

No solitary man would ever conclude that, in order to make sure that his own labor had something to occupy it, he should break the tools that save him labor, neutralize the fertility of the soil, or return to the sea the goods it may have brought him. . . . He would understand, in short, that a saving in labor is nothing else than progress.

The existence of an exchange economy is a necessary condition for make-work confusion to arise.

But exchange hampers our view of so simple a truth. In society, with the division of labor that it entails, the production and the consumption of an object are not performed by the same individual. Each person comes to regard his own labor no longer as a means, but as an end.

If you receive a washing machine as a gift, the benefit is yours; you have more free time and the same income. If you get downsized, the benefit goes to other people; you have more free time, but your income temporarily falls. In both cases, though, society conserves valuable labor.

Hazlitt concludes:

The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. It is for this reason that men began putting burdens on the backs of mules instead of on their own; that they went on to invent the wheel and the wagon, the railroad and the motor truck. It is for this reason that men used their ingenuity to develop a hundred thousand labor-saving inventions.

All this is so elementary that one would blush to state it if it were not being constantly forgotten by those who coin and circulate the new slogans. Translated into national terms, this first principle means that our real objective is to maximize production. In doing this, full employment—that is, the absence of involuntary idleness—becomes a necessary byproduct. But production is the end, employment merely the means. We cannot continuously have the fullest production without full employment. But we can very easily have full employment without full production.

Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment. China and India are incomparably poorer than ourselves, but the main trouble from which they suffer is primitive production methods (which are both a cause and a consequence of a shortage of capital) and not unemployment. Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. World War II provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment.

Yet our legislators do not present Full Production bills in Congress but Full Employment bills. Even committees of businessmen recommend “a President’s Commission on Full Employment,” not on Full Production, or even on Full Employment and Full Production. Everywhere the means is erected into the end, and the end itself is forgotten.

Wages and employment are discussed as if they had no relation to productivity and output. On the assumption that there is only a fixed amount of work to be done, the conclusion is drawn that a thirty-hour week will provide more jobs and will therefore be preferable to a forty-hour week. A hundred make-work practices of labor unions are confusedly tolerated. When a Petrillo threatens to put a radio station out of business unless it employs twice as many musicians as it needs, he is supported by part of the public because he is after all merely trying to create jobs. When we had our WPA, it was considered a mark of genius for the administrators to think of projects that employed the largest number of men in relation to the value of the work performed—in other words, in which labor was least efficient.

It would be far better, if that were the choice—which it isn’t—to have maximum production with part of the population supported in idleness by undisguised relief than to provide “full employment” by so many forms of disguised make-work that production is disorganized. The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of [stay-at-home spouses] to take jobs. A much smaller proportion of the American population needs to work than that, say, of China or of Russia. The real question is not how many millions of jobs there will be in America ten years from now, but how much shall we produce, and what, in consequence, will be our standard of living? The problem of distribution on which all the stress is being put today, is after all more easily solved the more there is to distribute.

We can clarify our thinking if we put our chief emphasis where it belongs—on policies that will maximize production.

Now, it’s reasonable to wonder if there’s any kind of limit to all this. After all, if maximizing production is really the ultimate goal of our economy, then what would happen if a tiny handful of producers figured out some way of becoming so efficient and productive that they could take over all the work that everyone else is currently doing, so that 99% of the population found that there was no longer any need for them in their current jobs? Surely the result would be mass unemployment and economic ruin on an apocalyptic scale, right? Well, it might sound that way; but as Wheelan and Caplan pointed out a moment ago, this exact scenario has happened before already – it’s basically exactly what happened in the case of farming – and the result was the opposite of economic ruin. Remember, back in the old days, everyone worked as subsistence farmers, because no modern tools for improving efficiency had been invented yet, so the task of growing just enough food to sustain themselves was all anyone had time to do (and therefore made up the entirety of their economy). Eventually, some of them did figure out more efficient ways of growing food, and in time they and their successors were able to take over the whole industry and provide enough food for everyone despite only making up 1% of the population. So what happened to the other 99% of would-be farmers who were no longer growing food? Did they just starve because they no longer had jobs? Not at all. The fact that farming had been made more efficient meant that food was now considerably cheaper; instead of a day’s worth of food requiring a full day’s worth of labor to produce, it could now be produced with a fraction of the effort, meaning it could be sold for a fraction of the price. And for the people who weren’t farming anymore, this meant they could start expending their labor on other tasks besides growing food, and could then trade a portion of what they produced for the now-much-cheaper food, while still having some left over for themselves. They could do new jobs that hadn’t even been within the realm of possibility before, like building air conditioners and writing novels and so on, precisely because the old jobs had been rendered obsolete. And because food was so much cheaper, it meant that their fellow workers also now had enough extra disposable income to buy these new goods and services from them (rather than having to spend everything on food alone), while they in turn were able to do the same thing and buy new kinds of goods and services from their neighbors. In short, not only was everyone still able to afford to buy food for themselves, they were now able to buy all kinds of other products on top of that – which never would have been possible if food production had remained so inefficient that everyone was forced to remain in their old jobs as subsistence farmers. And if you think about it, it really should have been clear from the beginning that this would be the case. After all, if farming jobs were being lost en masse to ultra-productive food producers – to the point that 99% of workers were now buying their food from them instead of growing it themselves – that must have meant that those 99% of workers had found some other way of earning an income besides farming – because if they hadn’t, then they wouldn’t have had any money to exchange for the more efficiently-produced food in the first place, so the ultra-efficient producers wouldn’t have been able to gain customers and take over the food production sector to begin with.

There’s another side of this equation to consider too. When a particular firm or sector becomes more productive via some new mechanical process or whatever – e.g. food producers inventing a new technology for growing food more efficiently – what that means for the workers who do remain employed in that firm or sector is that they’ll be able to generate more output per unit of labor. That is, they’ll be more productive as workers. And in a competitive market, this means they’ll be able to command higher pay for their labor – which, in turn, means that they’ll have more extra income to put toward buying other kinds of goods and services from their neighbors. Their increased productivity, in other words, will mean more business and more income for every other sector as well. So while it’s true that there will also be losers – in particular, their less-efficient competitors will need to find another line of work if they aren’t able to keep up productivity-wise – that doesn’t automatically make the overall situation a net negative, any more than it was a net negative when manufacturers of typewriters and horse-drawn carriages had to find new lines of work because their products had been rendered obsolete by newer and better alternatives. Being able to do more and more with less and less is what defines economic progress and allows us to improve our collective quality of life.

So to return to the original question: What would happen if a tiny handful of producers became so efficient and productive that they took over all the work that everyone else is currently doing, so that 99% of the population found that there was no longer any need for them in their current jobs? Well, the short answer is that it would open up space for new jobs that could never have existed before – as evidenced by the fact that whereas our ancestors enjoyed so little efficiency of production that they could do nothing but work all day just to grow enough food to subsist on, nowadays we’re efficient and productive enough that we can feed everyone and still have enough resources left over to hire people as manicurists and pet groomers and video game designers and so on. And as long as there’s room to improve productivity and efficiency via new technologies and production techniques, there will be room for still more new jobs to emerge. As Hazlitt points out, the potential space for introducing new forms of productivity-boosting capital is practically limitless:

[It is often fallaciously assumed] that there is a fixed limit to the amount of new capital that can be absorbed, or even that the limit of capital expansion has already been reached. It is incredible that such a view could prevail even among the ignorant, let alone that it could be held by any trained economist. Almost the whole wealth of the modern world, nearly everything that distinguishes it from the preindustrial world of the seventeenth century, consists of its accumulated capital.

This capital is made up in part of many things that might better be called consumers’ durable goods—automobiles, refrigerators, furniture, schools, colleges, churches, libraries, hospitals and above all private homes. Never in the history of the world has there been enough of these. Even if there were enough homes from a purely numerical point of view, qualitative improvements are possible and desirable without definite limit in all but the very best houses.

The second part of capital is what we may call capital proper. It consists of the tools of production, including everything from the crudest axe, knife or plow to the finest machine tool, the greatest electric generator or cyclotron, or the most wonderfully equipped factory. Here, too, quantitatively and especially qualitatively, there is no limit to the expansion that is possible and desirable. There will not be a “surplus” of capital until the most backward country is as well equipped technologically as the most advanced, until the most inefficient factory in America is brought abreast of the factory with the latest and finest equipment, and until the most modern tools of production have reached a point where human ingenuity is at a dead end, and can improve them no further. As long as any of these conditions remains unfulfilled, there will be indefinite room for more capital.

But how can the additional capital be “absorbed”? How can it be “paid for”? If it is set aside and saved, it will absorb itself and pay for itself. For producers invest in new capital goods—that is, they buy new and better and more ingenious tools — because these tools reduce costs of production. They either bring into existence goods that completely unaided hand labor could not bring into existence at all (and this now includes most of the goods around us—books, typewriters, automobiles, locomotives, suspension bridges); or they increase enormously the quantities in which these can be produced; or (and this is merely saying these things in a different way) they reduce unit costs of production. And as there is no assignable limit to the extent to which unit costs of production can be reduced—until everything can be produced at no cost at all—there is no assignable limit to the amount of new capital that can be absorbed.

The steady reduction of unit costs of production by the addition of new capital does either one of two things, or both. It reduces the costs of goods to consumers, and it increases the wages of the labor that uses the new equipment because it increases the productive power of that labor. Thus a new machine benefits both the people who work on it directly and the great body of consumers. In the case of consumers we may say either that it supplies them with more and better goods for the same money, or, what is the same thing, that it increases their real incomes. In the case of the workers who use the new machines it increases their real wages in a double way by increasing their money wages as well. A typical illustration is the automobile business. The American automobile industry pays the highest wages in the world, and among the very highest even in America. Yet (until about 1960) American motorcar makers could undersell the rest of the world, because their unit cost was lower. And the secret was that the capital used in making American automobiles was greater per worker and per car than anywhere else in the world.

And yet there are people who think we have reached the end of this process, and still others who think that even if we haven’t, the world is foolish to go on saving and adding to its stock of capital.

It should not be difficult to decide, after our analysis, with whom the real folly lies.

It’s understandable why people might fear the possibility of producers becoming so efficient and so highly automated that they no longer needed to hire workers in large numbers anymore, with the result being mass job shortages. After all, at the level of individual firms and sectors, this kind of thing can and does happen; in earlier generations, for instance, there were a lot more Americans working in manufacturing, but as the sector became increasingly automated, those jobs gradually dried up. But if we’re talking about the economy as a whole, the number of available jobs isn’t limited in this same way. True, jobs may be disappearing in the manufacturing sector specifically, but that doesn’t mean that the absolute number of jobs across the entire economy is decreasing, any more than the gradual disappearance of farming jobs meant that the absolute number of jobs across the entire economy was decreasing during that time. Despite the decreasing need for physical labor to produce physical goods, job opportunities have still been just as available as they’ve always been, for the simple reason that physical goods aren’t the only things humans are capable of providing for each other. Demand for non-physical services can be just as potent a source of jobs – and sure enough, as Heath points out, those are the kinds of jobs that have become more and more predominant in our economy as productivity levels continually improve:

[Thomas] Homer-Dixon worries that unless people have “insatiable material desires,” “they may not spend enough money to spur companies to create new jobs for the workers displaced by rising productivity.” But who ever said that people have to have insatiable material desires? There are a million different ways to spend money. They could just as easily have spiritual desires, which require high levels of personal service in order to satisfy. The capitalist may decide that he needs shiatsu massage therapy, a sweat-lodge experience, or an ecotourism guide—voilà, new jobs are created.

In fact, an increase in service-sector employment has been one of the major trends in wealthy nations in the last three decades. Close to 80% of the workforce in the United States is now in the service sector. Yet there is still an enormous amount of room for growth. In the late nineteenth century, a typical upper-class Edwardian household employed a live-in cook, butler, gardener, and governess, not to mention several footmen and kitchen maids. Wealthy families in our society “outsource” almost all of these tasks, with the partial exception of governesses (that is, nannies). They do so in order to reduce costs. Yet if hard-pressed to find some new form of wasteful expenditure [because the costs of material goods have dropped so significantly due to more efficient production], is it so difficult to imagine that they might happily return to the nineteenth-century model?

If there’s one thing the free market excels at, it’s adjusting factors of production to fit new circumstances on the fly – and that includes finding new roles for labor. In fact, one of the most striking things about the market economy is just how quickly it can create new jobs for workers whose previous positions have been made obsolete for whatever reason. Hazlitt points to the example of soldiers coming back home after the end of a war, but the same principle can apply to workers in any field who suddenly find themselves in need of new professions:

When, after every great war, it is proposed to demobilize the armed forces, there is always a great fear that there will not be enough jobs for these forces and that in consequence they will be unemployed. It is true that, when millions of men are suddenly released, it may require time for private industry to reabsorb them—though what has been chiefly remarkable in the past has been the speed, rather than the slowness, with which this was accomplished. The fears of unemployment arise because people look at only one side of the process.

They see soldiers being turned loose on the labor market. Where is the “purchasing power” going to come from to employ them? If we assume that the public budget is being balanced, the answer is simple. The government will cease to support the soldiers. But the taxpayers will be allowed to retain the funds that were previously taken from them in order to support the soldiers. And the taxpayers will then have additional funds to buy additional goods. Civilian demand, in other words, will be increased, and will give employment to the added labor force represented by the former soldiers.

[…]

But the demobilization will not leave us economically just where we were before it started. The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians. If we assume that the men who would otherwise have been retained in the armed forces are no longer needed for defense, then their retention would have been sheer waste. They would have been unproductive. The taxpayers, in return for supporting them, would have got nothing. But now the taxpayers turn over this part of their funds to them as fellow civilians in return for equivalent goods or services. Total national production, the wealth of everybody, is higher.

Of course, for all this talk about workers transitioning into new sectors of the economy when their old jobs become obsolete, the next question that naturally arises is: If labor-saving technology keeps improving along its current trajectory, to the point that it threatens to take over every industry, how long can this process of finding new jobs for human workers really continue? Sure, increasing the number of workers in the service sector might be a sufficient response to the agricultural and manufacturing sectors becoming more and more automated – but what happens when the machines become so advanced that they surpass human capabilities in the service sector as well (which, if you’ve been paying attention to recent developments in AI and robotics, you’ll know is likely to happen sooner rather than later)? Will there just be no sectors left at that point for human workers to retreat to? Will we find ourselves in a situation where we’re no longer like the horse-carriage drivers who needed to find new jobs after automobiles were invented, but are instead (as Tabarrok puts it) more like the horses themselves, who were suddenly rendered obsolete and no longer had any role to fill in the economy except to be unceremoniously shipped off to the glue factories?

Well, if such a scenario actually did take place, let’s think about how it would have to happen. Let’s imagine that a dozen or so mega-conglomerates develop machines so advanced that they’re able to perform literally any task better and more cheaply than the best humans. These firms’ owners (let’s say each firm is owned by just one person) would have no reason at this point not to lay off their entire workforce and replace those workers with machines. And likewise, nobody inside or outside these firms would have any reason to buy anything from anyone other than them, since the fully-automated firms’ products would be better and cheaper than anyone else’s. But this would also mean that no other businesses would be able to compete with these firms, so they’d all go out of business, and everyone except the firms’ owners would be out of a job. And without any stream of income, that would mean that nobody would be able to buy the firms’ products, aside from the dozen or so rich owners of the firms themselves. So ultimately, we’d have a situation in which there were a dozen or so rich individuals using machines to create whatever products their hearts desired, which they then exchanged among themselves – and then the entire rest of the population would just be sitting around doing nothing, unable to engage in any kind of transactions at all.

But wait a minute – that can’t be right, can it? If that were the situation, then everyone outside the fully-automated firms could just as easily pretend that those firms didn’t exist at all, and could simply continue transacting with each other and conducting the same kind of normal economy that we have today, completely separate from anything the firms were doing. After all, the firms’ owners would already be completely ignoring them and not buying anything from them, so they’d already essentially be existing in their own separate bubble economy, with no money or products crossing the boundary in either direction. No one would be able to trade with the firms’ owners even if they wanted to (aside from the owners themselves); so the only way for regular people to obtain goods and services would be to produce them themselves and trade with each other, just as they’re currently doing. So does that mean that the ultimate effect of firms completely automating their workforce would be that nothing would change at all (aside from a dozen or so rich people breaking off into a whole separate second economy)? The story doesn’t quite seem to add up.

So what are we missing? Why wouldn’t the rich owners, with their technology allowing them to be more productive at everything than anyone else, simply secede into a state of absolute self-sufficiency and leave the rest of us behind? Well, when we put it that way, we can just as well ask the same question of people right now who are in the top percentile of capability and potential productivity. After all, there are people out there right now who are stronger and smarter and more capable in practically every way than practically everyone else (think NASA astronauts, for instance). So why do those people still engage in transactions with the rest of us regular people? The short answer is an economic concept called comparative advantage. We’ll discuss this concept in more detail in the upcoming section on international trade, but for now, the basic idea is that even if a particular person is more efficient at everything than another person, the fact that they can only do one thing at a time means that it can still be worthwhile for both parties to trade with each other, since doing so would ultimately produce more overall output than each of them trying to do everything on their own. So for instance, let’s say we had a dozen people – six highly productive ones who were each capable of either assembling 20 televisions or giving 10 haircuts per hour, and six less productive ones who were each only capable of assembling 2 televisions or giving 4 haircuts per hour. The more productive group, seeing that they’re more efficient at producing both televisions and haircuts, might decide that they don’t need the second group, and so might decide to produce everything on their own, with three of them assembling televisions and three of them giving haircuts. Meanwhile, the less productive group, forced to fend for themselves, would split up their labor the same way – three of them assembling televisions, and three giving haircuts. Altogether, then, this would result in the first group producing 60 televisions and 30 haircuts per hour for themselves, while the second group produced 6 televisions and 12 haircuts per hour, for a total of 66 televisions and 42 haircuts overall. Another way that things might go, however, would be for both groups to realize that they could be even more productive if they each spent more of their time doing what they were best at (relatively speaking), and then traded with each other as needed. So let’s say one of the more efficient ones switched from giving haircuts to assembling televisions, and three of the less efficient ones switched from assembling televisions to giving haircuts. With this new division of labor, the first group would now be producing 80 televisions and 20 haircuts per hour, while the second group would be producing zero televisions but 24 haircuts per hour, for a total of 80 televisions and 44 haircuts overall. The first group could then sell 11 televisions to the second group in exchange for 11 haircuts, which would leave the first group with 69 televisions and 31 haircuts per hour (an improvement of 9 additional televisions and 1 additional haircut compared to before) and the second group with 11 televisions and 13 haircuts per hour (an improvement of 5 televisions and 1 additional haircut). Everyone would be made better off! That’s the magic of free exchange. And the exact same dynamic can be applied to our aforementioned scenario in which one group of people was extremely productive because they owned a fleet of hyper-efficient robots, and another group of people was less productive because they were just regular workers. Even if the robots were superior to the human workers in literally every way, it would still be worthwhile for their owners to trade with the regular workers – because after all, the mere fact that a machine can do anything doesn’t mean it can do everything. It can still only do one thing at a time; and accordingly, all that matters in the end is what its relative advantages are, not what its absolute advantages are. As Lori G. Kletzer puts it:

Even in a world where robots have absolute advantage in everything — meaning robots can do everything more efficiently than humans can — robots will be deployed where they have the greatest relative productivity advantage. Humans, meanwhile, will work where they have the smallest disadvantage. If robots can produce 10 times as many automobiles per day as a team of humans, but only twice as many houses, it makes sense to have the robots specialize and focus full-time where they’re relatively most efficient, in order to maximize output. Therefore, even though people are a bit worse than robots at building houses, that job still falls to humans.

Worstall adds some additional thoughts:

In the trade model we end up insisting that there is always a comparative advantage. Even if (as is quite likely it true) the US is better at making absolutely everything than Eritrea is it is still to the benefit of both Eritrea and the US to trade between the two. For it allows both to concentrate on their comparative advantage.

When we switch this over to thinking about jobs and work I like to invert it. Not in meaning but in phrasing: if we all do what we’re least bad at and trade the resulting production then we’ll be better off overall. For example, I am not the best in the world at doing anything. I’m not even the best at being Tim Worstall, for I know there’s at least a couple of other people with the same name and it wouldn’t surprise me at all to find out that one or other of them is better at being Tim Worstall than I am. There are also people out there who are better at doing absolutely everything than I am. And yet the world still pays me a living as long as I do what I am least bad at and trade that for what others are least bad at.

The same will obviously be true when the robots are better than us at doing everything. It will still be true that we will be better off by doing whatever we are least bad at because that will be an addition to whatever it is that the robots are making. If what the robots make isn’t traded with us then obviously the economy will be much as it is now. We’ll be consuming what other humans make for us to consume in much the same manner we do now. If the robots do trade with us then we’re still made better off by working away at whatever it is that we do least badly. And the third possible outcome is that there is in fact some limit to human wants and desires and the robots make so much of everything that they manage to satiate us. At which point, well, who cares about a job as we’ve now, by definition because our desires are satiated, got everything we want? (I strongly suspect that there will still be shortages of course, the love of a good woman isn’t going to become in excess supply anytime soon I fear.)

The end state therefore cannot be something to fear. I agree that the transition could be a bit interesting (in that supposed Chinese sense of “interesting times”) but the actual destination of the robots being better than us at everything seems quite pleasant.

In short, then, as long as we’re willing and able to do work, work should be available to us; we won’t have to worry about robots making us all permanently unemployable. And what’s even better, as the robots become more and more productive, it will mean that we’ll be able to receive more and more from them in exchange for less and less labor on our part. Instead of having to do a week’s worth of labor just to be able to afford a new television or washing machine, it’ll eventually get to the point where we’re able to afford new televisions and washing machines with barely any effort at all – just like how we can now afford to buy food for a fraction of what it would have cost our ancestors in terms of labor expended. And ultimately, in the best-case scenario where the robots have gotten really efficient and productive – like, as efficient as it’s physically possible for them to get – the amount of labor we’ll have to expend in order to afford everything we could possibly want will basically be negligible. If we imagine, for instance, a future in which we’ve invented superintelligent AIs and nanofabricators that can take whatever raw materials we feed them and reassemble them at the atomic level into whatever we want – like the replicators in Star Trek, essentially – we’ll have functionally achieved a post-scarcity world, and the only “labor” we’ll have to perform at that point will just be dropping the occasional clump of dirt or garbage into the nanofabricators to be reassembled into sports cars or gourmet meals or cancer cures or whatever. As Worstall puts it, “jobs” as we currently understand them will no longer be considered necessary at all, because we’ll already have everything we could ever want. And when we look back on our current era, the notion that people might have ever been afraid of “robots taking all the jobs” will seem hopelessly confused.

Of course, all that’s assuming that we don’t accidentally destroy ourselves in the meantime – which, as technology grows more and more powerful, will present more and more of a legitimate threat. But that’s yet another topic for a whole separate post. For now, we should just bear in mind that as our economy and our level of technological development become ever more advanced, the rate at which jobs are created and destroyed is only likely to accelerate. The days in which a person could get a job with one particular company and then reasonably expect to be able to hold that same job for decades are largely over. And in the big picture sense, this is a good thing; the more jobs become obsolete, the more progress it will mean we’re making technologically. In the long term, our goal should be to make it so nobody has to spend their lives toiling away at tasks they don’t enjoy. But having said this, it’s also important to acknowledge that even if we’re on course to create a glorious fully-automated utopia at some point in the future, we’re not there yet. For now, people do still need to spend their days working in order to pay the bills. And that means that whatever the abstract long-term benefits of increasing automation and efficiency might be, the immediate reality of losing a job and having to find a new one will often be a lot less appealing to the people experiencing it firsthand – which is a complication we’re going to have to confront honestly if we want to successfully navigate the whole transition process.

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