Luddite fallacy
Encyclopedia
The Luddite fallacy is an opinion in development economics
related to the belief that labour-saving technologies (i.e., technologies that increase output-per-worker) increase unemployment by reducing demand for labour. The concept is named after the Luddite
s of early nineteenth century England
.
This is considered fallacious because, according to neoclassical economists
, labour-saving technologies will increase output per worker and thus the production of goods, causing the costs of goods to decline and demand for goods to increase. As a result, the demand for workers to produce those goods will not decrease. Thus, the "fallacy" of the Luddites lay in their assumption that employers would keep production constant by employing a smaller albeit more productive workforce instead of allowing production to grow while keeping workforce size constant. Economist Alex Tabarrok
summarises the neoclassical presentation of the fallacy as such:
Theoretical models have been developed that both support and deny this hypothesis.
Economist William Easterly
remarks that worries about "jobless growth" are an example of the Luddite fallacy.
Businessman Martin Ford, author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future, argues that the Luddite Fallacy is merely an historical observation, rather than a rule that applies indefinitely into the future. Ford describes how high technology improves geometrically
, driving productivity gains which inevitably will outstrip human driven consumption increases that go up in a more linear fashion. Comparing consumption to a river of purchasing power, as companies along the river become more automated they extract more purchasing power from the river than they return in the form of employee wages and lower cost of goods. During the period that technology created jobs at the rate that they were made obsolete in other industries, Luddism was indeed a fallacy. Ford asks what the factual support is for the belief that the rate of job creation will match job destruction in perpetuity, especially in light of the phenomenon that increased capabilities of machines reduces the need for human labor in newly created enterprises at an exponential rate. Martin Ford proposes that like rivers, purchasing power be regarded as a public resource that industries cannot be allowed to pump dry. To do otherwise would fuel a deflationary spiral as lowered employment
reduces purchasing power, forcing lower prices to compensate. The deflationary pressure perpetuates a cycle of shrinking of the economy as profitability plummets, resulting in further reduction in money put in the hands of worker-consumers. From the perspective of Ford and others such as Jeremy Rifkin
who share this perspective, the Luddites may have simply been 200 years too early.
Besides job destruction, Luddites claimed that automation made the rich richer and the poor poorer. Economists have found that between 1980 and 2005, American jobs vulnerable to automation were lost, forcing workers into either low paying manual work or high paying technical work that is inherently difficult to automate. One study by MIT economists David Autor and David Dorn drew on evidence from the United States Department of Labor to show that automation caused sharp losses of middle class jobs, forcing a polarization of wages and greater income inequality. The phenomenon of polarization due to automation is not confined to the US, also occurring in 15 of 16 European countries for which data is available.
As robotics
and artificial intelligence
develop further, even many skilled jobs may be threatened. Technologies such as machine learning
may ultimately allow computers to do many knowledge-based jobs that require significant education. This may result in substantial unemployment at all skill levels, stagnant or falling wages for most workers, and increased concentration of income and wealth as the owners of capital capture an ever larger fraction of the economy. This in turn could lead to depressed consumer spending and economic growth as the bulk of the population lacks sufficient discretionary income to purchase the products and services produced by the economy.
Development economics
Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example,...
related to the belief that labour-saving technologies (i.e., technologies that increase output-per-worker) increase unemployment by reducing demand for labour. The concept is named after the Luddite
Luddite
The Luddites were a social movement of 19th-century English textile artisans who protested – often by destroying mechanised looms – against the changes produced by the Industrial Revolution, which they felt were leaving them without work and changing their way of life...
s of early nineteenth century England
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
.
The original Luddites were hosiery and lace workers in Nottingham, England in 1811. They smashed knitting machines that embodied new labor-saving technology as a protest against unemployment, publicizing their actions in circulars mysteriously signed, "King Ludd."
This is considered fallacious because, according to neoclassical economists
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
, labour-saving technologies will increase output per worker and thus the production of goods, causing the costs of goods to decline and demand for goods to increase. As a result, the demand for workers to produce those goods will not decrease. Thus, the "fallacy" of the Luddites lay in their assumption that employers would keep production constant by employing a smaller albeit more productive workforce instead of allowing production to grow while keeping workforce size constant. Economist Alex Tabarrok
Alex Tabarrok
Alexander Taghi Tabarrok is a Canadian-American economist and co-author, with Tyler Cowen, of the economics blog Marginal Revolution....
summarises the neoclassical presentation of the fallacy as such:
If the Luddite fallacy were true we would all be out of work because productivity has been increasing for two centuries.
Theoretical models have been developed that both support and deny this hypothesis.
Economist William Easterly
William Easterly
William Russell Easterly is an American economist, specializing in economic growth and foreign aid. He is a Professor of Economics at New York University, joint with Africa House, and Co-Director of NYU’s Development Research Institute. He is also a nonresident senior fellow at the Brookings...
remarks that worries about "jobless growth" are an example of the Luddite fallacy.
Businessman Martin Ford, author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future, argues that the Luddite Fallacy is merely an historical observation, rather than a rule that applies indefinitely into the future. Ford describes how high technology improves geometrically
Exponential growth
Exponential growth occurs when the growth rate of a mathematical function is proportional to the function's current value...
, driving productivity gains which inevitably will outstrip human driven consumption increases that go up in a more linear fashion. Comparing consumption to a river of purchasing power, as companies along the river become more automated they extract more purchasing power from the river than they return in the form of employee wages and lower cost of goods. During the period that technology created jobs at the rate that they were made obsolete in other industries, Luddism was indeed a fallacy. Ford asks what the factual support is for the belief that the rate of job creation will match job destruction in perpetuity, especially in light of the phenomenon that increased capabilities of machines reduces the need for human labor in newly created enterprises at an exponential rate. Martin Ford proposes that like rivers, purchasing power be regarded as a public resource that industries cannot be allowed to pump dry. To do otherwise would fuel a deflationary spiral as lowered employment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
reduces purchasing power, forcing lower prices to compensate. The deflationary pressure perpetuates a cycle of shrinking of the economy as profitability plummets, resulting in further reduction in money put in the hands of worker-consumers. From the perspective of Ford and others such as Jeremy Rifkin
Jeremy Rifkin
Jeremy Rifkin is an American economist, writer, public speaker, political advisor and activist. He is the founder and president of the Foundation On Economic Trends...
who share this perspective, the Luddites may have simply been 200 years too early.
Besides job destruction, Luddites claimed that automation made the rich richer and the poor poorer. Economists have found that between 1980 and 2005, American jobs vulnerable to automation were lost, forcing workers into either low paying manual work or high paying technical work that is inherently difficult to automate. One study by MIT economists David Autor and David Dorn drew on evidence from the United States Department of Labor to show that automation caused sharp losses of middle class jobs, forcing a polarization of wages and greater income inequality. The phenomenon of polarization due to automation is not confined to the US, also occurring in 15 of 16 European countries for which data is available.
As robotics
Robotics
Robotics is the branch of technology that deals with the design, construction, operation, structural disposition, manufacture and application of robots...
and artificial intelligence
Artificial intelligence
Artificial intelligence is the intelligence of machines and the branch of computer science that aims to create it. AI textbooks define the field as "the study and design of intelligent agents" where an intelligent agent is a system that perceives its environment and takes actions that maximize its...
develop further, even many skilled jobs may be threatened. Technologies such as machine learning
Machine learning
Machine learning, a branch of artificial intelligence, is a scientific discipline concerned with the design and development of algorithms that allow computers to evolve behaviors based on empirical data, such as from sensor data or databases...
may ultimately allow computers to do many knowledge-based jobs that require significant education. This may result in substantial unemployment at all skill levels, stagnant or falling wages for most workers, and increased concentration of income and wealth as the owners of capital capture an ever larger fraction of the economy. This in turn could lead to depressed consumer spending and economic growth as the bulk of the population lacks sufficient discretionary income to purchase the products and services produced by the economy.
See also
- Jobless recoveryJobless recoveryA jobless recovery or jobless growth is an economic phenomon in which a macroeconomy experiences growth while maintaining or decreasing its level of employment...
- Lump of labour fallacyLump of labour fallacyIn economics, the lump of labour fallacy is the contention that the amount of work available to labourers is fixed. It is considered a fallacy by most economists, who hold that the amount of work is not static. Another way to describe the fallacy is that it treats the demand for labour as an...
- Technate. See graph on productivity and labor
- Wealth condensation