Recently, during
an interview with Quartz Magazine, Bill Gates made a remarkable
suggestion: that robots and machinery of automation be taxed to replace the
missing taxes left unpaid by the laid-off workers the automation has
replaced. Shortly thereafter, Gates made
the same suggestion while testifying before the EU parliament in Brussels.
Gates believes
that the next twenty years will see an unprecedented rise in the number of
workers who are laid off as their jobs are increasingly eliminated by robots—so
many that the missing personal income and the resulting loss of tax revenue
will disrupt society.
This is an
almost perfect description of what economists call “creative destruction”—a
belief that new technology or manufacturing process so changes the work
environment that it brings more harm than good.
You would think
that Bill would know better, since he has been accused of committing the same
sin ever since he founded Microsoft. I
can remember when it was widely assumed that microcomputers would all but
eliminate secretaries from the work force.
Instead, as computers made the secretaries more productive, demand for
their talent increased. Over the last
few decades, the number of secretaries in the workforce has increased faster
than the population growth.
Some economists
believe that the fear of creative destruction has been the biggest obstacle to
the creation of wealth in human history.
Actually, new technology creates
prosperity that, in turn, increases employment. When railroads converted from steam to
diesel, the followers of creative destruction focused on the decline in the
employment of firemen instead of recognizing the increase in employment in the petroleum industry.
A great example
of the fallacy of creative destruction is the introduction of automated teller
machines (ATM) in the banking industry.
While the number
of tellers in individual banks did go down, the lower cost of operating a bank
branch meant that opening new neighborhood branches became profitable. As customers demanded more convenient local
branches, the number of employees increased.
Today, even with the ubiquitous ATMs, the banking industry employs more
people than ever.
Attempting to
delay technological innovation rarely works.
And, of course, history gives us a perfect example.
In the last
decades of the sixteenth century, the women of England were busy knitting every
evening. Their monarch, Queen Elizabeth,
had just decreed that all of her subjects were to wear a woolen knit cap. (Don’t laugh, remember all the strange crap
our government has passed. I live in a
town where it is illegal to walk down Main Street carrying a lunch pail, but no
one seems to know why.)
William Lee, the
Anglican Minister of Calverton, England, was upset that his wife spent more
time with her knitting than with him.
(Some accounts suggest it was actually his mistress whose time he wanted
to free.) Lee wondered if a machine with
several needles could work faster than human hands with only two needles. For years, Lee neglected his church work
while perfecting the machine he called the stocking frame knitter.
Finally, in
1589, Lee rented a building in London, set up his machine, and sought an
audience with the queen in order to secure a patent. With the help of his local parliament member,
he secured an appointment with a member of the Privy Council, who got him an
appointment to demonstrate his machine to Queen Elizabeth I.
Lee’s machine,
though it was an early model, really worked.
It could produce a finished product twelve times faster human
labor. (Remember, this was two hundred
years before the start of the industrial revolution, which was largely fueled
by the mechanization of the textile industry.
Lee’s machine, if it had been adopted, might very well have jump-started
the mechanical revolution centuries early.)
Queen Elizabeth
was not thrilled with the machine. “Thou
ailmest high Master Lee. Consider thou
what the invention could do to my poor subjects. It would assuredly bring to
them ruin by depriving them of employment, thus making them beggars.”
Though the queen
recognized the genius of his invention, and the machine offered huge gains in
efficiency, profits, and a potentially exportable product, it also threatened
creative destruction. The knitting
machine threatened social unrest that would challenge the status quo, so the
queen denied William Lee his patent.
Lee needed a
patent, or a royal monopoly to attract sufficient investment to begin mass
production of his machine. Since Queen
Elizabeth refused him, he took his invention to France, where the king gave him
a patent and almost immediately the French monarch was assassinated. In the political unrest that followed, Lee
returned to England.
Undeterred, Lee
sought a business partner. George Brooke
would put up the money, and the two men would produce knitted wool by machine,
splitting the profits for the next 22 years.
Unfortunately, Brooke was charged with treason—on an unrelated
matter—and executed.
Undaunted, Lee
continued to improve his machine. The
first model could only produce coarse woolen products with 8 stitches to the
inch, but Lee’s improvements enabled the machine to produce silk products with
20 stitches to the inch, at a rate of 600 stitches a minute. With the improved machine, Lee sought a patent
from James I, the successor to Queen Elizabeth.
Once again, the monarch was concerned about out-of-work hand-knitters
adding to the growing number of the unemployed.
Lee took his
invention back to France, but Lee died before he could make a success of his
invention. His company went bankrupt,
and the machines were sold off in London.
Too expensive for the knitters to buy, the machines were leased out to
knitters and though they proved profitable, their use grew slowly.
While Lee was
not successful himself, his knitting machines do illustrate something about
technological improvement. Queen
Elizabeth passed up an early opportunity for her country to control the textile
industry. Delaying widespread adoption
of the machines just delayed the start of a new industry and delayed profits.
English monarchs
delayed the mechanization of the textile industry not out of concern for the
benefit of the workers, but out of fear that the resulting social unrest would
affect political stability, thus endangering their reign. The monarchs ignored that in the long run,
the workers would actually benefit from the lowered cost of woolen
products.
If Bill Gates is
successful, and automation is taxed, I can predict the consequences.
Automation will
be more readily adopted overseas, where employment will go up in the expanding
manufacturing economy. As the cheaper
products are imported, locally produced goods will lose in the marketplace,
resulting in rising unemployment.
And we will
become a nation whose economy is centered around the service industry, one
where we sell each other hamburgers....Hamburgers made by the
new Epson C4L robot, made in Japan.
The law of unintended consequences always bites the politicians on the behind.
ReplyDeleteAs an entrepreneur myself, I agree with you completely. What rankles me is the common misconception among liberals that our economy is like a giant pie, and that any time one person or company takes a profit everyone else is left dividing up less. This misnotion not only ignores the economic gifts of innovation, but also overlooks the multiplier effect of the new wealth created which is approximately seven fold.
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