Saturday, December 12, 2009

Repost of the review of "Economics in one lesson".

This is a re-post of an old Zeitgeist Forum post I wrote in response to someone trying to de-bunk the Venus Project. They stated that technological unemployment was a fallacy, and they suggested a book called "Economics in one lesson" as being a good source of the reasons why. Since this is the companion post to one of my earlier radio shows I figured I would re-post it here.

In this thread:

www.thezeitgeistmovement.com/joomla/inde...atid=7&id=111767

This video was linked: (NOTE: Video has since been changed to "private" for some reason so the link no longer works)

In which the person who is trying to debunk the activist orientation guide suggests this book:

www.hacer.org/pdf/Hazlitt00.pdf

In later debates I had with him in the comments on his various anti-Zeitgeist pro-capitalism videos on youtube when I asked him why he never touches on the breakdown of cyclical consumption caused by technological unemployment (A matter that most Free Market economists usually avoid like the plague because there is no solution to it in the Austrian system for reasons I will give later) he then said that is why he suggested the book. So I went to the book and looked up the author's attempts to "debunk" what Austrian economists call the "fallacy" that technology has an impact on unemployment and therefore causing poverty.

What follows is my analysis, and proof that not only does this book not present any suggestions that solve the issue of technological unemployment as it exists now, that it is based on archaic notions that no longer apply.

First of all, let me state that Free Market economists reject using the scientific method to analyze the economy. They reject the use of statistics, mathematics, and any form of collected data on the subject, claiming that there are far too many variables for any such data to be useful. So instead they use what they call "logical deductions". A fancy way of saying that they "guess".

As a Libertarian and former Free Market/Austrian economist myself I remember well what changed my mind and woke me up to the fact that this concept could not work anymore in our modern society. I will share some of that insight here.

This book is basically an attempt to state that what most mainstream economists feel is fact is actually fallacy. In addition to other alleged fallacies it talks about unemployment caused by technological advance claiming that it also is a fallacy.

Like most publications written on the subject of Free Market Economics this book is very old. It was published in 1946 and quotes other books as source material that are far older, some of which are centuries old. This is not at all uncommon with books on this subject. I would first of all point out this is true of most books about systems that wish to solve the issue of poverty. And the theories they come to are generally as outdated as the scientific books of their time. This is just as true about the work of Karl Marx about Communism, and the authors who describe Socialism. What all of these authors have in common is no way of understanding what technology would bring to the table hundreds of years past their time.

"C H A P T E R V I I

THE CURSE OF MACHINERY

AMONG the most viable of all economic delusions is the
.belief that machines on net balance create unemployment.
Destroyed a thousand times, it has risen a
thousand times out of its own ashes as hardy and vigorous
as ever. Whenever there is long-continued mass unemployment,
machines get the blame anew. This fallacy is
still the basis of many labor union practices. The public
tolerates these practices because it either believes at bottom
that the unions are right, or is too confused to see just
why they are wrong.

It would be rather hard to see why they are wrong because in the short term even when Capitalism was healthy they were not wrong. It did create unemployment and therefore poverty.

The belief that machines cause unemployment, when
held with any logical consistency, leads to preposterous
conclusions. Not only must we be causing unemployment
with every technological improvement we make today, but
primitive man must have started causing it with the first
efforts he made to save himself from needless toil and
sweat."

This in of itself is preposterous. Primitive man didn't have a monetary system that forced him to work for someone else to provide for himself.

The author then quotes a book from the year 1776, and eventually gets to this part:

"Things could be blacker, for the Industrial Revolution
was just in its infancy. Let us look at some of the incidents
and aspects of that revolution. Let us see, for example,
what happened in the stocking industry. New stocking
frames as they were introduced were destroyed by the
handicraft workmen (over 1,000 in a single riot), houses
were burned, the inventors were threatened and obliged
to fly for their lives, and order was not finally restored
until the military had been called out and the leading
rioters had been either transported or hanged.
Now it is important to bear in mind that in so far as
the rioters were thinking of their own immediate or even
longer futures their opposition to the machine was rational.
For William Felkin, in his History of the Machine-
Wrought Hosiery Manufactures (1867), tells us that the
larger part of the 50,000 English stocking knitters and
their families did not fully emerge from the hunger and
misery entailed by the introduction of the machine for the
next forty years."

Those darn rioters. I mean really, being angry about 50,000 people being reduced to poverty for forty years! The nerve of some people. In the typical Free Market Capitalist fashion, the fact that 50,000 people were reduced to a state of poverty and starvation for forty years is simply not relevant. Why should their former employer care about that?

"But in so far as the rioters believed, as
most of them undoubtedly did, that the machine was permanently
displacing men, they were mistaken, for before
the end of the nineteenth century the stocking industry
was employing at least a hundred men for every man it
employed at the beginning of the century."

I am sure that was some measure of comfort to those 50,000 people who were reduced to a state of poverty for forty years. It's all ok now right? Imagine what forty years of poverty and starvation would do to 50,000 families? The Free Market economist later would go on to point out that it's ok, their system eventually balanced everything out. What the people who suggest this book fail to see is that we propose a system where nobody has to be in poverty ever. And where progress further ensures this rather then ensuring that incidents like the ones described in this book continue.

The book then goes on to make more examples of how eventually after an initial period of poverty the industrial revolution's innovations in labor would eventually create more jobs then were previously present. If you take any concern over the damage this does to the human beings out of the equation then this could be considered an acceptable loss. The author's archaic understanding of the limits of how much technology could do to reduce the need for labor if not get rid of it entirely is clear.

He does go on to point out some of the more absurd practices that were put in place to protect jobs by labor unions. Although in many cases these demands were completely unreasonable, it is a natural reaction in a society where unless you have a job you are completely incapable of taking care of yourself. The failings of the Capitalist system become more and more clear the more you read.

"One might pile up mountains of figures to show how
wrong were the technophobes of the past. But it would do
no good unless we understood clearly why they were
wrong. For statistics and history are useless in economics
unless accompanied by a basic deductive understanding of
the facts—which means in this case an understanding of
why the past consequences of the introduction of
machinery and other labor-saving devices had to occur. Otherwise
the technophobes will assert (as they do in fact assert when
you point out to them that the prophecies of their predecessors
turned out to be absurd): "That may have been all
very well in the past; but today conditions are fundamentally
different; and now we simply cannot afford to develop
any more labor-saving machinery." Mrs. Eleanor Roosevelt,
indeed, in a syndicated newspaper column of September
19, 1945, wrote: "We have reached a point today
where labor-saving devices are good only when they do
not throw the worker out of his job/'"

The example that the author gives to prove that the assertions of technophobes of the past were absurd comes a bit later, and I will get to it. What I wanted to point out however was that the technophobes were not wrong in their predictions. They just saw the problem as being a lot closer then it was. The author goes on to erect a strawman to try and discredit them by making the absurd insinuation that people would go so far as to say that in the interest of saving jobs that trains should be abolished in favor of having men carry goods on their backs. Finally after the typical ridicule employed by most Austrian economists who wish to distract from the failures in their logic (like the people in the video) we finally get to the analogy that is supposed to solve all of this.

"Theories as false as this are never held with logical consistency,
but they do great harm because they are held at
all. Let us, therefore, try to see exactly what happens when
technical improvements and labor-saving machinery are introduced.
The details will vary in each instance, depending
upon the particular conditions that prevail in a given
industry or period. But we shall assume an example that
involves the main possibilities.
Suppose a clothing manufacturer learns of a machine
that will make men's and women's overcoats for half as
much labor as previously. He installs the machines and
drops half his labor force.
This looks at first glance like a clear loss of employment.
But the machine itself required labor to make it; so here,
as one offset, are jobs that would not otherwise have existed."

So here we have it. Apparently any loss of jobs caused by automation will be fixed by the jobs created by the need to manufacture the machines that do the automation.

So in this instance we are talking about sewing machines that are replacing workers in the clothing factory. The author suggests that the labor needed to create the machines will create jobs that will replace any jobs lost. This logic depends entirely on the idea that whomever is making money making these machines is not also using automated technology to create the machines in the first place. The entire motive behind using machines is to raise your profits by not having to pay wages. And to raise efficiency because machines don't take days off, get sick, have unions, or ask for a cut of the profits that were made by their work. Machines are quite content to just be maintained. We had a name for human workers who were forced to be content with that. We called them slaves. This becomes an issue later in our modern circumstances and I will get to it shortly. Remember that in our era, machines make machines. Ask the unemployed auto workers in my home state of Michigan about this.

"At this point, it may seem, labor
has suffered a net loss of employment, while it is only the
manufacturer, the capitalist, who has gained. But it is
precisely out of these extra profits that the subsequent social
gains must come. The manufacturer must use these
extra profits in at least one of three ways, and possibly he
will use part of them in all three: ( 1 ) he will use the extra
profits to expand his operations by buying more machines
to make more coats; or (2) he will invest the extra profits
in some other industry; or (3) he will spend the extra
profits on increasing his own consumption. Whichever of
these three courses he takes, he will increase employment."

Option 1 is the most likely. However in addition he will likely also put money into research and development of ways to minimize the workforce he must employ even further. And to automate his business even further.

Option 2 also does not create new jobs either in our modern society where most companies will also be doing what I suggested in Option 1.

Option 3's effect on employment in a world of automation is actually minimal at best in our modern times.

"In other words, the manufacturer, as a result of his
economies, has profits that he did not have before. Every
dollar of the amount he has saved in direct wages to former
coat makers, he now has to pay out in indirect wages
to the makers of the new machine, or to the workers in another
capital industry, or to the makers of a new house or
motor car for himself, or of jewelry and furs for his wife.
In any case (unless he is a pointless hoarder) he gives indirectly
as many jobs as he ceased to give directly."

This equation that is supposed to create jobs has already been proven to have the bottom falling out of it more and more every day. The more automation and it's temporary rival outsourcing prevail as the industry standard, the less consumption on the part of the person making profits in this fashion fixes anything. This person in turn going out and buying products from Wal-Mart does not help the workers who were put out of work by machines and people being exploited in third world countries at all. In fact, it only perpetuates this downward spiral. As it gives the profits from your business to another business that is doing the same thing. This is a great game of keep away from the average person. And it ensures that the rich will always be rich, and the poor will always be poor.

"But the matter does not and cannot rest at this stage. If
this enterprising manufacturer effects great economies as
compared with his competitors, either he will begin to
expand his operations at their expense, or they will start
buying the machines too. Again more work will be given
to the makers of the machines."

Already debunked. More profits will be given to the makers of the machines. Some will be work will be given to those who maintain them. But if those people are building machines to automate your business you can be damn sure they are also building machines to automate the construction of their own products. Huge leaps and bounds in this technology have been made since 1946 when this book was published.

"But competition and production
will then also begin to force down the price of
overcoats. There will no longer be as great profits for those
who adopt the new machines. The rate of profit of the
manufacturers using the new machine will begin to drop,
while the manufacturers who have still not adopted the
machine may now make no profit at all. The savings, in
other words, will begin to be passed along to the buyers of
overcoats—to the consumers."

Cyclical consumption has already broken down. You will be lucky if the consumers can afford to buy the overcoats at even the reduced prices that the author assumes will happen. In many cases industries clearly work together to ensure high profits by not competing too fiercely to keep the overall prices and therefore profits of their products high. Remember the artificially created gas shortage? Gas stations competed by a difference of a few cents at best. Gas companies that were price gouging figured out that people don't just want gasoline, they NEED it. So they competed by maybe a few cents at a time. The prices did eventually drop. But not because of the reaction of the consumers as far as how much gas they bought. It's the attention that this suddenly brought to the alternative sources of energy that we SHOULD be using. This is another example of how Capitalism, the monetary system, and the profit motive bring only enough progress to ensure more profits. And not to benefit mankind. The huge efforts that gas companies go to to ensure that the public never finds out about better technologies are a perfect example.

"But as overcoats are now cheaper, more people will buy
them. This means that, though it takes fewer people to
make the same number of overcoats as before, more overcoats
are now being made than before. If the demand for
overcoats is what economists call "elastic"—that is, if a fall
in the price of overcoats causes a larger total amount of
money to be spent on overcoats than previously—then
more people may be employed even in making overcoats
than before the new labor-saving machine was introduced."

So here we have the "assumption" that more people are going to buy coats just because they are cheaper. And more of the already debunked notion that more labor will be created by making machines that eliminate labor. (Man it's hard to even type that, it frankly is just so stupid.) It does not address the fact that technology now has the ability to remove so many jobs that consumers will not have jobs to buy the products in the first place. (Which I might add, causes the service sector that sells products to hire less and lay off more that in turn causes even more unemployment and therefore even less products being purchased.)

"What machines do, to repeat, is to bring an increase in
production and an increase in the standard of living. They
may do this in either of two ways. They do it by making
goods cheaper for consumers (as in our illustration of the
overcoats), or they do it by increasing wages because they
increase the productivity of the workers. In other words,
they either increase money wages or, by reducing prices,
they increase the goods and services that the same money
wages will buy. Sometimes they do both. What actually
happens will depend in large part upon the monetary
policy pursued in a country. But in any case, machines, inventions
and discoveries increase real wages."

This assumes first of all that an employer is just going to raise the wages he pays out because the workers productivity has increased. As the ethics in business are overthrown by more and more creative applications of greed the opposite is true. Outsourcing more then anything else proves that this entire notion is a fallacy.

Lets talk about what outsourcing really is for a moment.

Essentially with the advent of superior technology, the worker has to compete with automated machines. An employer in a Free Market economy will have no regulations at all to tell them what they have to pay or what benefits or even living conditions their workers can demand. The corporate elite have already learned their lesson on how to avoid unions. Where do you find workers who are willing to work for whatever you will give them, that are satisfied with just enough money to survive?

Well, in nations that are desperate for any kind of work. Bangladesh, India, Mexico, and China just to name a few. The workers in these countries are more then willing to accept a substandard near-slavery lifestyle because it is slightly better then the starving to death lifestyle they had previously. Once again the same as it was here in the United States during the great depression. It is only a matter of time before the "global economy" that "Free Trade" creates will force Americans to accept the same standard of living as their "competition".

Free Market economists of course always justify this by saying "Oh...but nobody is FORCING these people to work for them. They could just go work somewhere else!" as if people who live in impoverished nations have a choice. They have no more choice of where they are employed then the people did during Jaque Fresco's childhood during the great depression. Scarcity of employment always leads to abuse of the workforce by the employers who realize they hold all the cards. This is exactly what was going on that caused labor unions to come into being in the first place. The only means by which labor could force companies to change their policies was to ask their political figures to pass laws to protect them, or to strike. Striking would force the employers to straighten up or lose profits when their production halted. However once a certain level of poverty is reached striking is no longer feasible. People living paycheck to paycheck cannot afford to stop working for any reason. (Believe me. Doing that now.)

To imply that workers can choose not to work and therefore not feed or care for their families is like implying that a gunmen who is threatening your family is doing no wrong because you could always choose to let him shoot them. Anarcho-Capitalists of course claim that there is no coercion. But threatening to take someone's job and therefore their life is most certainly coercion.

The choices are eliminated when the elite get together and work together to create a situation that collectively forces the labor force to accept a lower standard of living. It benefits Chrysler for example, if they agree to work with Ford and GM to ensure that no worker can expect be paid more then fifty cents an hour to make car parts.

Technology also played a serious part in this. There was a time when the overhead that would be added by sending your production overseas and then selling your products locally would be too much to make it worth it. Advances in shipping technology have long since eliminated this complication.

Free Market Capitalists tend to blame all of the problems of outsourcing on government regulation and intervention. And they claim that without government these problems would vanish. The part that I always find hilarious about this contradiction is that these same people are often the same ones complaining about the fact that our government is owned and operated by corrupt corporations in the first place. The government is a corporate owned institution. The notion that it is doing anything but facilitating the corporations ability to exploit the common man in the workforce is absurd. It is equally absurd that this would all just go away without the government. With no regulations at all, it only makes having more money more powerful. Not less.

The same is true of the media. Free Market Capitalists of course favor no regulation of anything, including the media. So if companies want to control public opinion all they have to do is buy it in the form of radio/TV stations. This minimizes the ability of any politician intent on challenging the establishment like my friend and mentor Senator Mike Gravel, or Ron Paul, or Dennis Kucinich from ever getting elected to challenge them. It also keeps pesky news outlets from reporting it when their products are found to be dangerous or are created through inhumane work practices.

Fascism that is created by Capitalism gone awry is even more insidious then that created by Communism or Socialism. The reason why is that at least in a Communist or Socialist state the control is obvious. In a Capitalist society they need no guns or tanks to control you. They simply buy that control. And the more "Free" the market is the more free they are free to do this.

To get back to outsourcing, I remember a conversation I had with a friend of mine from Mexico. We hung out online a lot playing video games together. At the time I was watching a lot of Lou Dobbs on CNN and his coverage of the outsourcing of American jobs and how it was destroying the local economies. I asked him what he thought of it. He in turn asked me first what I thought about it. I told him that the companies are claiming that the reason for outsourcing was that Americans had no worth ethic and were lazy. He started laughing on the voice chat so I asked him what was so funny. He went on to tell me that there were just as many lazy people in Mexico as anywhere else. He pointed out that what they really wanted Americans to compete with was the Mexican's desperation and therefore willingness to accept whatever scraps from the table that corporate America was willing to throw at them for working long days with no benefits. He went on to describe the average standard of living of most Mexicans he knew who ended up working in American owned factories. Needless to say it was not a house with a two car garage, cable TV and a refrigerator full of groceries.
The conditions in some of the other countries for workers that are essentially underbidding the workers in other countries are in many cases far worse. In some countries parents sell their children into slavery in factories where they are literally chained to the floor to prevent them from running away. Products made in these conditions can of course in turn be offered at extremely competitive prices that no business can stay afloat and compete with, so they can "choose" to either go bankrupt or also do business with these companies.

Even more appalling then this, is the attitude of some Free Market Economists on this issue. I remember being kicked off the air of a Libertarian/Capitalist internet TV station once for playing a documentary that exposed the inhuman labor conditions that American businesses were exploiting to maximize profits. The argument that ensued between me and the person who did the kicking included him making fun of me for caring about people in Third world countries, and calling me a "bleeding heart liberal". Mind you, this is the same person who said that it was wrong of the United States to intervene in the matter of slavery...

When you speak of these things in these circles it's like you are speaking blasphemy for even bringing it up. It's ironic, because these same people claim that the consumer will somehow bring balance to the economic forces that will prevent these kinds of exploitations. How are they to do this if they are not informed? If it is in fact considered inappropriate to do so? Even when people are informed, rarely does the consumer who is driven by the same scarcity induced greed ever inclined to shop differently. The average citizen of the United States is well aware of the abuses that go into the production of products offered in places like Wal-Mart. (And now most department stores). And whats worse as the industry standard continues to drop to slavery or automation products that not produced in this fashion become hard to find even if you want to buy them. And as the economy falters further, eventually you are once again given that "choice" of either buying these products or not having food and other nessecities at all. (Yep, in that situation now myself.)

Now, back on topic. The notion that wages will increase somehow because of all of this innovation is silly. The entire motive behind using machines in the first place is to eliminate wages entirely. The notion that taxation and tariffs are the entire motive for outsourcing is equally weak in comparison to the huge profits made by employing workers for 10 cents an hour with no benefits. Not only because of the differences in the economies of the country, but because of the difference in currency values. The simple fact that companies are actively seeking to employ people in these countries on a vast scale is proof positive that this notion is another "fallacy". (Get used to that word when debating Anarchists, Anarcho-Capitalists, etc. They use it about as often as the word "the".)

Finally on to the epically outdated conclusion:

"If we have devoted considerable space to this issue, it
is because our conclusions regarding the effects of new
machinery, inventions and discoveries on employment,
production and welfare are crucial. If we are wrong about
these, there are few things in economics about which we
are likely to be right."

This is the only part of this that is accurate. They are wrong. And it is why a resource based economy is now crucial. The previous notions of economics no longer apply anymore then an elevator man applies to the operation of an elevator.

In closing, this book not only fails to address the issues of the breakdown of cyclical consumption caused by technological unemployment, it fails to make any points that are still relevant to what our future holds.

Yes some "technophobes" panicked too early. But the Technophobes of the 1930s probably didn't even have the capacity to imagine or even understand just how much more powerful technology has become since then. Just as the authors of Austrian economics, Communism and Socialism were equally ignorant.

There was a time when Austrian Economics could function. But the notion that it would create a utopia of wealth for everyone was always questionable. And the more advanced technology becomes coupled with the more greedy corporations become in it's application the more this gap will be created.

Austrian Economists often quote "The Road to Serfdom" but fail to see that although Socialism can create new serfs, Capitalism is headed down that road as well. The workforce is going to be desperate to make itself useful. They will have to accept lower and lower standard of living to compete with machines. And eventually the vast majority will be completely obsolete.

The solution that would be offered that people who cannot find work should just open businesses of their own falls flat on it's face when you consider that the whole reason many people are not employed in the first place is because nobody is buying products because nobody is employed. In conditions such as these (if you can find the capital to start your business in the first place) how can a small businessmen hope to survive? They can't. Ask the vanishing mostly self employed middle class about that.

I know this post was long winded, but it is a complicated issue.

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