Do New Technologies Hurt an Economy?

The argument that technology will take away jobs is not a new one. People have written on the matter since the Industrial Revolution. Advances in farm technology had people fearing farmer’s who didn’t adopt it would go hungry. There was concern that improvements in textile manufacturing would devastate the economy, throwing millions of people on the street.

And yet, that didn’t happen.

That is because this view has an incomplete view of how economies – and how people – work. Yes, these technological improvements caused people to lose their jobs, but what happened to the economy as a whole?

Peter Schiff, CEO of Euro Pacific Capital Inc., said in a recent interview, “Machines and tools make us more productive. They don’t destroy jobs, they liberate labor to pursue other things.”

Let’s work through an example.

A textile factory that makes blankets recently bought a machine that allows the same level of production for half the people working the line. That means that half of the factory workers lose their jobs. This is what the media covers as terrible and economists claim causes a reduction in jobs, but there’s more to the story.

The factory owner now has more profits as a result of paying few employees. This can allow him to do any number of things. He can expand his business to create more blankets, he can invest in a separate business – perhaps he’ll make Snuggies, or he can spend the money he earned on himself buying a bigger house or a yacht.

In all of these scenarios, more capital has been created and the economy has grown, whether it be an increase in blankets, Snuggies, or boats. Also, because there is always competition in the free market, the businessman will have to keep his prices low. He could then reduce his profit margin to make blankets cheaper, increasing the standard of living.

Furthermore, by purchasing the machine in the first place he has helped the manufacturer that made it, boosting that sector of the economy. What if he needed to take a loan out to buy the equipment? He just helped the bank out which means a higher return for investors, who can then spend that money on things like boats or blankets.

In his book, Economics in One Lesson, Henry Hazlitt writes, “The belief that machines cause unemployment leads to preposterous conclusions. Every technological improvement must cause unemployment. The logical conclusion would be that the way to maximize jobs is to make all labor as inefficient and unproductive as possible.”

So what happens to all the people who are now unemployed? That is up to them. At the end of the day, they have to provide for their well-being. Some of them could go to work for a competitive blanket factory. Perhaps others will pool their resources and start a factory of their own. Others may be the inventors of the Snuggie and sell the design to their former employer.

The important factor is that whatever they can produce, they are now freed from their job as a line worker to do. This is often referred to as human capital. Technology allows human capital to be freed to pursue other things. This freedom results in many things. A man can pursue a new invention, new markets can be explored, or leisure time can be afforded.

When newer, more efficient processes are introduced in an economy, products are cheaper which means people can buy more or save their money for investments or non-essentials.

Without technology we would be scratching at the dirt trying to grow what little food we could. Technology is not the cause for our poor economy, technology is a main factor in a growing economy.