Another Hidden Lesson

As a student of economics, I love when I am given the chance to explain or animate a particular lesson or theory in an obvious, and easy to understand way. I love it even more when the chances I get are due to someone (or group of someones) inadvertently displaying a given lesson or theory (Or the idiocy of a given lesson or theory). I had one of those “Ah-ha!” moments the other day during a commercial break for Mythbusters. (Great show by the way) Among leagues of boring and very similar car commercials, a new Audi commercial blessed my TV screen. After searching on Youtube for the video, I found that the commercial in question is called the “Audi A7 ‘Spring Cleaning’ ” TV ad. Here it is for your enjoyment:

Audi A7 Spring Cleaning TV Ad

The jest of the video is the only way to properly prepare for the arrival of the new Audi A7, is for all of the people to clean up the streets, paint the divider lines, and shoo pigeons all by hand. Audi of course promotes the irrationality as a grand gesture to the importance of their new car. However, the very second I saw the commercial the first thought that popped in my head was the argument that many put forth stating that machinery (or workplace mechanization) destroys jobs.

I’m sure everyone who watches television or has read a book has heard this argument, it is a popular one. In summary, the argument goes something like this: “When businessmen replace their workers with machines that can increase the output of labor for less of a cost, they are laying off people who would otherwise have a job. Since these people no longer have a job, they will not be able to buy other goods until they can find new employment. So the economy can be hurt by too much mechanization, because machines cannot buy goods and services, only people can.” Now for those who believe in this argument, I may have missed a few of their other points, but I believe I gave you the gist of it.

If I were to take the mindset of those who believe the argument above and give it a stretch, the world in  this commercial would seem like an exemplary economic system, where almost all workers are employed. Where machines do very little work, and man can make a living, spend his earnings, and thus increase the well being of all. Why not? Why not get rid of street sweepers and have hordes of the lucky employed sweep the streets? Why not get rid of those painting trucks and have thousands of art students go around the country painting the lines we so rely on? Because it is absurd.

Henry Hazlitt addresses this argument in chapter seven of  his book:  Economics in One Lesson. (Hardcover here and Free online version here) A great example he uses is that of  a clothing manufacturer. He says that this manufacturer decides to replace half of his labor force and replaces them with machines. He can produce the same, or greater, amount of clothes with half of his original workforce plus the new machines. Hazlitt shows us:

“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.”

You betcha, many of these anti machinery folks don’t even bother to consider that the machines themselves require labor to produce. Of course, that is only the machines, we may look further at  the software, metal, buildings, and trucks that all must be built before the construction and shipping of machines can even be considered. A large part of many people’s economic views is that they only look at what is clear as day, that is, no worker no working no more, because the machine is there where he was standing. This is not a phenomena only associated with this particular argument either, but let’s get  back to our clothing manufacturer.

So, he has saved money on labor and is reaping higher profits, assuming all other things (i.e. Demand for coats, supply of coats, competition, wages, and other market factors) remain the same. Most of the anti machinery folk would slander the evil capitalist in the streets, “That foul beast profiting off our lost jobs!”. However, Mr Hazlitt goes on to show what the manufacturer could do with his new money:

After the machine has produced economies sufficient to offset its cost, the clothing manufacturer has more profits than before. (We shall assume that he merely sells his coats for the same price as his competitors, and makes no effort to undersell them.) 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.

Simply put, that money he saves he spends or invests. That is the smart thing to do with an advantage like that. (Machinery) Savings and investment is what creates long term, stable economic growth. Especially when one can engage in economies of scale and produce the same or greater amount of good with a smaller amount of labor. Machinery does not hurt society, it can temporarily hurt the workers of a given business or field of work, but overall it is totally beneficial. The money we save on cheaper goods (in Hazlitt’s example coats) the more money we can spend on other things.

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… Suppose that, though the price of overcoats was almost cutting half-from a former price, say, of $50 to a new price of $30-not a single additional coat was sold. The result would be that while consumers were as well provided with new overcoats as before, each buyer would now have $20 left over that he would not have had left over before. He will therefore spend this $20 for something else, and so provide increased employment in other lines.

I believe I have shown (With the help of a world renown economist and Audi)  the folly of the Machinery-Labor argument. Let us also consider the fact that there are some types of mechanized advances human being could never do. Without oil tankers people could not tie themselves together with rope and swim millions of barrel of oil across the sea. Without cell phones no two men can stretch a cup on a string across the Atlantic and converse. Cost saving machinery is a great boost to human prosperity. Think about it, how many advanced machines and factories do you see in Africa? Are they better off without “job stealing” machinery?

Perhaps we can offer them a stimulus program and drive a few hundred Audi’s through the Sudan.

About Shawn Kelly

Shawn is a student and father who first took to the ideas of liberty during Ron Paul's first presidential campaign. He now is pursuing a career in economics, the understanding of which he believes is paramount for those who seek a free society.
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