Suppose someone agrees to pay you $10 for every 1 foot of ditch you dig. In one day you can dig 20 feet, for $200 per day.
$10 x 20 = $200
Now let's say you hire some unemployed down on his luck worker to dig the ditch for you at $5 per foot. In one day you will have earned $300. Right?
$10 x 20 x 2 - $5 x 20 = $300
Now suppose you like this ditching digging enterprise and find other people who want ditches dug. So you hire more workers to help you dig. You find that maximum number of people you can keep hired and continue to work full time yourself is around 5 workers. In one day you earn $700/day.
$10 x 20 x 6 - $5 x 20 x 5 = $700
Now you get smart and decide that you could probably manage a whole lot more ditch diggers if you weren't pre-occupied with digging yourself, so you stop digging and spend all of your time finding new ditches to dig and finding new ditch diggers to employ. Now you learn you can manage 10 workers by yourself for $1000/day.
$10 x 20 x 10 - $5 x 20 x 10 = $1000
Not too bad for one day's work. Now let's consider if you learn about a new mechanical technology, that can dig 200 feet of ditches in one day using only one man to operate. It costs $200/day to lease. If now you agree to hire one employee for rough the same amount they were making before, plus ten percent for learning the new tool, you total return will be
$10 x 200 – ($200 + $110) = $1690
The addition of this one piece of technology has increased the value of the business by $690 dollars per day. Certainly you could spend it on frivolous things, like a bikini wax or a nose hair trimmer. But a better idea is to use this money to improve your business. The digger machine allows you to expand into other digging projects to include swimming pools, ponds, holes for new home constructions, etc. With the extra liquidity you are eligible to lease 9 diggers and hire back all the employees you laid off earlier, each with a 10 % higher salary.
In order to increase the number of projects that your customers can afford you drop the day's price for digging to around $500, increasing the amount of work your current customers can afford and increasing the number of other customers that can afford digging services. This dramatic price decrease allows you to acquire 10 times the number of jobs, making each days' earnings roughly $1900/day
$500 x 10 – ($200 x 10 + $110 x 10) = $1900
Amazing! This new technology has allowed you to increase you profits, increase the pay to your employees and decrease the cost to your customers.
By why stop there with direct benefits. As with all new technologies, the indirect benefits often balloon into 10 times the amount of wealth directly created. How? Let's look at some possible ways.
Because of the price decrease, one of your customers saved $28000 dollars on the 20 days of digging. With that savings, they were able to hire one more person to manage their business operations. Because of that new employee, the company was able to save them $50000 more that year, allowing them to hire even more employees.
Another major customer saved $50000 dollars in digging a hole for the foundation of a new apartment building. Because of the savings, they hired a more skilled construction crew, allowing the building to last an additional 20 years without major repairs.
Another customer, a poor farmer, had just enough money to irrigate his field and increase his crop production by 10% and increasing his net profit by 5%. The increase in profits allowed his wife to eat better during her pregnancy, giving birth to a beautiful and healthy baby, which may have otherwise died of malnutrition.
One of your employees saved the extra $20/day for the entire year till he had $5000 dollars in his account. With that money, he was able to put a down payment on a mortgage for his first home.
The truth is new technology and efficient business practices lead to wide spread wealth creation. Simply put, it creates value. It simply does not create squalor or poverty. Nor does it create disparities in wealth. Rather it allows more people access to wealth. The next time you hear someone decrying how new technology will hurt humans or make us poorer, would you kindly tell them to shed their SUVs, their cell phone, their doctors, their attorneys, their computers, their bug zappers, their symphonies, and their houses made with tile roofs and Pella floors and go live in a grass hut for the remainder of their short lives?
While my examples may seem simplistic, they accurately capture the essential attributes of economics and the effects of technology on the world. That is why we have increasing standards of living today.
Hey John, after overlooking your proof, i have found some flaws, or perhaps some misunderstandings.
ReplyDeletefirst off you state that the customer will pay you $10/ft dug which equals 200$/day at 20ft/day.
Then you go on to say that you hire someone to dig the same trench for you at $5/ft therefore the equation is revenue - cost = (10x20) - (5x20), however you multiplied your revenue by 2. In other words he is not digging for you, but in addition to and under you. If he did the work for you the profit is split 50/50.
As you increase your labour you are also multiply the amount of land you dig in the form
n(10x20) - n(5x20) where n is the number of workers(including urself). your revenue is growing equally proportional to cost. you, the owner's profit is only increasing at the same rate.
Then as technology is introduced you first start with one machine and one worker, so the other group of workers (n-1) dont have any job and would be unemployed for a little while, this is called Structural Unemployment, which is found in evolving economies such as in this scenario.
the last part deals with how the customer deals with his consumer surplus because of the digging company. If you save a customer 50,000$ so they can afford a better construction crew, then their initial construction crew would lose their contract to work.
I understand how you want to disprove the myth of unemployment and technology. furthermore, its understandable that if a machine can take the place of 10 people working, then 9 people are out of a job(assuming 1 person man's the machine). But with the money the company saves they can expand their business. Millions of cellphones are made so there is room to accommodate the people to make them ie. there exits more then one machine to manufacture cellphones. Also it in understood that productivity increases with technology and therefore people can get paid more for their work , like the worker in the digging machine.
Labour has its own market of supply and demand and with technology taking up people's jobs the increase in supply goes up.
I belive there are many factors to unemployment, but to keep all other things equal it must be understood that some unemployment must take place for technology. Its definitely a myth is people blame unemployment completely on technological advances. Unemployment from technology does exist, however it is short lived.
-Dave
Great comments Dave.
ReplyDeleteFirst, as a disclaimer, I view the posts on my blog to be mostly unfinished thoughts, initial ideas, and rough sketches. I'm usually aware my arguments have much room for improvement. And there may be some typos and poorly worded statements, as you've noted with precision. Thank you!
That being said, I still believe the essential economic principle stands. As you state, and I agree, there is often a short time re-adjustment of employment with new technologies. However, statements that new technologies create unemployment long-term is simply false.
definitely agree
ReplyDelete