The price is too high

The Luddites Among Us

by Gary North 

Certain economic ideas that are both logically wrong and unsupported by historical facts, and which have been known to be wrong for 250 years, are still widely held. This annoys economists.

There is something that seems inherent in men’s approach to thinking about their own wealth that persuades them that what they have seen, over and over, in nation after nation, either did not happen, or, if it clearly did happen, will not continue.

One of these ideas is that sales taxes on imported goods increase the wealth of most people in society. This is the doctrine that tariffs and quotas imposed by the government somehow make people richer. This error was refuted definitively by one of the greatest philosophers of all time, David Hume, in 1752. About 25 years later, it was refuted in detail by Adam Smith, David Hume’s friend, in his classic book, The Wealth of Nations. Nevertheless, despite almost universal agreement among economists, and despite repeated political successes in lowering tariffs and quotas, which have led to increasing prosperity everywhere, there is still a hard core of anti-economics thinking that says that the federal government — but never state and local governments — needs to increase sales taxes on imported goods, or else we will all be made poor.

I have written many times about this over the last 45 years, and I intend to write a lot more, but I have no illusion that the anti-economists among us will never figure out that national sales taxes on imports do not make us richer. Some people simply do not have the intellectual capability of following a line of economic reasoning. This includes people who believe that sales taxes on imported goods make most people wealthier.

THE LUDDITE MENTALITY

There is another error, comparable to the error of the pro-sales tax non-economists, which is also widely held. This is the belief that machinery makes workers poorer. It is usually described as the Luddite philosophy. A man named Ned Ludd (or Lud) supposedly broke knitting machines in a fit of rage in 1779. In 1811, an article on Ludd was published in a newspaper. When people then began destroying machinery, they were called Luddites.

Who were the attackers? They were people who had been employed as relatively high paid producers of goods in narrow markets that catered to better-off clients. They found that they had fewer customers when other producers began to use machinery to mass produce these goods, thereby increasing the supply of goods. This forced down prices. Those guild members who had for centuries used political power in urban areas to gain a monopoly in specific markets found that price competition from these new goods was reducing their income. In response, they destroyed machinery. In other words, they used violence against property owners in order to maintain their monopoly. Before, they used political power to achieve this.

The phrase “saboteur” comes from the French word for shoe, “sabot.” Workers threw shoes into machinery in order to destroy the machinery, and thereby reduce the output of highly specific goods. This was seen as destructive by most people, but it clearly was a short-term benefit to those who were facing competition from the machines. It was one more case of violence against property owners.

Most people believe today that such violence is wrong morally, and they also believe that it is wrong economically. This is an advantage we have today. There are large numbers of people who have begun to understand a basic economic principle, namely, that whatever increases the supply of goods, and which is also profitable to the person increasing the supply of goods, is a good thing for most members of society.

The trouble is, the philosophy of the Luddites is still with us. It specifically has to do with the criticism of robotics. We still see people who have little economic understanding of the nature of free markets and their relationship to economic prosperity. These people are hostile to the use of robots in all areas of production. Well, this is not quite correct. They accept robotics in traditional lines of manufacturing, which have used robots for 30 or 40 years. In other words, they become traditionalists. The good old days were good, meaning the good old days 30 or 40 years ago. Those days were much better than the days of hundred years ago or 200 years ago.

Yet the increase in productivity which got the world to the good old days of 40 years ago was based on the adoption of techniques of mass production that we today would call robotics. It was the substitution of machinery, which in turn rested on new supplies of energy, which enabled the whole world to get richer. Think of the early inventions of the 19th century. Think of the railroad. Think of the grain reaper. Think of the sewing machine. All of these substituted equipment for manual dexterity. John Henry lost the competition to the steam driver, and the world was better off.

No matter how many stories come to us about the increased economic lifestyle that the world enjoys because of increased use of energy and increased use of machinery, the Luddite mentality still is with us. We are told that automation is going to make us poorer. We have been told this for 200 years.

But improvements in our lifestyle are based on an increased quantity of goods and services. This has made possible by automation.

There is a fundamental rule of economics which should not be ignored: anything that can be done by a machine profitably should be done by a machine. Why is this true? Because human labor is by far the most versatile and mobile of all capital. People can learn new ways of serving customers. Old dogs really can learn new tricks. But, in order to get them to learn new tricks, they need to face reality, namely, that whatever they did before to earn a living can be done better and cheaper by machine. Old dogs can learn new tricks, but necessity is the mother of invention. Old dogs prefer doing old tricks. They prefer high income for doing their old tricks. But economic progress does not let us continue to make high income from old tricks whenever there are new tools available that will enable newcomers to do the same tricks, and do them even better, at a lower price.

The way the West got rich after 1800 was through entrepreneurship, creativity, lower cost energy, and better machines. We got rich because we were able to harness the productivity of nature, in the form of energy, and by means of specialized equipment, which could be substituted by the valuable labor of human beings.

People then learned to do new tricks. They learned how to serve customers better, because a mindless machine that was highly specialized, and which could do nothing else except a limited routine, was substituted for human labor. Customers benefitted. The fact that specialized laborers who had been replaced had to find new ways to serve different customers was the price of the rising wealth of millions of customers.

DISPLACED WORKERS

The Luddite always comes on behalf of the displaced worker, whose services can no longer compete in a free market. He comes in the name of the displaced worker, as if the needs of the displaced worker have some kind of moral authority that exceeds the desires of customers who are looking for better deals. It assumes that the free market operates for the benefit of the producer, rather than for the benefit of the customer.

This is the logic of the guild. It is the logic of a person who can no longer compete with the output of machinery that can run day and night profitably, with only occasional shutdowns to make repairs. Any time it is possible to substitute a machine for a human being, and to do this profitably from the point of view of the investor, it means that customers are being better served by the machine. Who says? Customers. They buy the output of the machines.

Why should we criticize customers in the name of the displaced worker, when the displaced worker is now in a position to serve different customers by producing different services, when these are the services that the customers want? Why is it that we should defend the lifestyle of the worker who can no longer compete with a lifeless machine, and do so at the expense of the customer?

Over and over, we are told automation will make us poorer as a society. This has been refuted for 200 years, yet the same idea is being promoted today in the name of the free market. We are told that we are going to get poorer as a nation or as a civilization, because there will be a constant stream of new equipment that will increase the productivity of producers.

Whenever somebody comes to you and tells you that the free market is going to make us poorer, start looking for his hidden agenda. Start looking for the people he represents. Follow the money. If this does not show you anything of interest, follow the idea back to its origin. You can be sure that it is not a new idea. You can be sure that someone else a decade ago or a century ago came up with the same argument.

So, the free market is going to make us poorer. Why? Because it is going to enable creative people to serve customers better. This is a liability for existing producers who are not in a position to compete with new production methods. It is always in the name of the producer, and specifically the displaced producer who cannot effectively compete. Never is it in the name of the customer. Yet we evaluate increasing per capita wealth by means of whatever it is that we can buy, and when we can buy more with our income, we are richer. We are better off.

Yet the Luddites among us claim that, in our capacity as customers, we are deluded. We are making short-term decisions when we buy better deals. We are judging our economic situation by means of what we can buy. We are told that we should make our judgments in terms of our ability to keep new productive methods from being implemented, because these new productive methods are going to increase our real income (purchasing power). We are told that the increase of real income is a terrible liability. It will make us poorer.

You think I am kidding? Read this:

The combination of robots and cheap electricity could well unleash a new phase of profitability for corporations — and, of course, the owners of the means of production. What’s less likely, however, is that any such revolution is sustainable.Because unlike the Industrial Revolution, which added powerful BTUs in the form of coal to augment human labor, thus creating a tidal wave of profits and increased wages, a robot revolution promises to furnish the world with stuff at the expense of human employment.

Many thinkers currently writing on this subject believe that a labor force deprived even further of purchasing power, yet given greater access to cheap goods, will wind up richer on the whole. I won’t say that’s wrong, but I will say it seems unlikely.

Unlikely? Where is the evidence? This:

During the past 30 years, Americans have been treated to a flood of cheap goods and outright deflation in most foreign manufactured items. Did this make us wealthier? Because that is the standard position of many economists.The developed world has learned over the past decade that a steady supply of cheaper, foreign-made goods does not guarantee prosperity. What impact will (perhaps only moderately) cheaper goods have if coupled with reduced employment as human labor is displaced by machines? If we are unable to find a higher use for the displaced human labor, we are actually worse off.

This is the Luddite mentality. It is impervious to economic logic. It is impervious to historical understanding.

Think through what this line of reasoning means. It means that the free market as a social order acts against the true interests of customers. All over the world, customers since 1980 have increased the purchase of goods and services. Why? Because, as producers, they have increased the number of goods and services. Production has created demand. The only way that anyone can come into the marketplace and buy goods and services is because he has produced goods and services, or politicians have taxed productive people and have handed over the money to special interest groups. In any case, without prior productivity, there can be no new demand. Put a different way, “You can’t get something for nothing.”

Luddite reasoning rests on this assumption: individuals who act in their own self-interest to buy lower-cost goods are acting against the interests of the nation. This was the argument of the mercantilists in the late 17th century. It was this argument that Adam Smith criticized inThe Wealth of Nations. This is the essence of all systems of government interference into the economy. It says that politicians know better what is good for the nation than individuals do. It says that customers, who act individually to pursue their own ends as inexpensively as they can, are totally misguided. As individuals, they are making decisions that undermine their own wealth. This is the essence of the collectivist argument. It is the essence of Keynesianism. It is the essence of all forms of government interventionism. It says that individuals, as decision-makers who are responsible for the administration of their wealth, are blind to the good of society. In other words, the free market, by allowing individuals to possess this kind of independent authority, leads to a situation in which the vast majority of people are worse off. In short, economic freedom is self-destructive.

It is astounding to me that people who think they are free market commentators hold such opinions. These opinions run counter to virtually all free-market economic theory over the last 250 years. Yet those who espouse such views do so in the name of economic liberty. What is even more astounding is that readers who also believe that they uphold free market principles are gullible enough to take such arguments seriously.

This is why economists get annoyed. For all of their efforts, there are segments of the conservative movement that are simply incapable of following economic reasoning, and who return to mercantilism, as the Bible says, like a dog to its vomit.

CONCLUSION

My hope is that the voters will ignore this line of reasoning. There are always politicians ready to raise money from a PAC that is funded by some guild of about-to-be-displaced businessmen. These businessmen want their lock on a market, and they are ready to call on the government to send out people with badges and guns to stop efficient producers from making offers to customers.

The most serious threat, however, is intellectual. This line of reasoning undermines people’s hope in the future. If the free market is self-destructive, because the pursuit of individual self-interest is destructive of our real income, then we cannot trust liberty. We also cannot have legitimate hope in the future. Two centuries of economic liberty have made us wealthy beyond anything conceivable in 1800. But this cannot last, we are told. We are coming to the Great Reversal. Economic liberty will no longer produce a cornucopia. Why not? Because the pursuit of individual self-interest without coercion really is what collectivists have always said: a snare and a delusion.

Conclusion: we need more government officials with badges and guns to put restraints on individual self-interest, namely, the desire to get a better deal.

I’m not buying it. The price is too high.