The Fourth Industrial Revolution and its Impact on Labour

Giovanni Caccavello // 6 January 2017

In 1821, at the height of the First Industrial Revolution, David Ricardo, one of the most influential classical economists of the late 1700s and early 1800s, published the third and final version of his most important work: “Principles of political economy and taxation “.

 

Compared with the two previous editions (the first published in 1817), the book’s content remained almost unchanged. However, in the 1821 version, Ricardo introduced a new chapter, specifically chapter XXXI, on the automation of labour, entitled “On machinery”.

 

In this controversial chapter, the Londoner economist explains how his opinion about technological innovations had changed and that the idea of “technological unemployment” (an expression officially introduced by John Maynard Keynes in 1930), was consistent with the most correct principles of political economy.

 

To put it bluntly, Ricardo would have done a better job not to publish such a chapter and probably, if he had not died at the age of 51 (in 1823), he would have published a new, fourth, edition of his “Principles”, retracting what he had written on the relationship between men and machines. In fact, as Bank of England data suggest, the average income of a full-time British worker increased by 40% from 1823 to 1873 and the U.K employment ratio moved upwards, from 43% to 47%.

 

Therefore, despite the Luddites attempts to stop technological progress and the affirmation of Marxism, over those decades the condition and well-being of the average worker improved dramatically.

 

Unfortunately, ​​Ricardo’s erroneous idea closely resemble today’s economists and commentators’. However, the problem is the following: whilst we may extend our apologies to Ricardo (who was not able to fully understand the economic principles of the first industrial revolution and its impact on the labour market), we should fight all those contemporary economists who avoid looking at the huge progress made over the last 200 and keep predicting a future where artificial intelligence will completely replace human labour.

 

In order to explain the economic progress that we have witnessed between 1800 and today (still ignored by too many intellectuals) and the relationship between capital and labour, I would like to introduce you the following graphs made by Andy Haldane, Bank of England Chief Economist, for his own speech at the Trades Union Congress (TUC) in November 2015.

These data are also available to the general public on the Bank of England website “Three Centuries of Macroeconomic data”.

 

Graph 1: Labour productivity between 1750 and 2013 (on the left); Employment share in the U.K. from 1801 to 2013 (on the right)

 

 

 

Graph 2: Average weekly hours worked in the UK and the U.S from 1856 to 2013 (on the left); Population growth and change in employment share from 1856 to 2013 (on the right)

 

Although these data have been related to the performance of the UK economy, similar trends have occurred anywhere in the so-called “Western world”. In fact, as Deirdre McCloskey writes in her wonderful trilogy entitled “The Bourgeois Era”, in all those countries that have experienced a long and lasting process of economic development (such as – for example – the UK , Italy or Singapore), average workers real wages have increased everywhere by a factor between 15 and 100 times over the last 200, 100 and 50 years.

 

Looking more closely at the data, the graphs reported above enable us to define three fundamental stylized facts of economic development:

 

– In the long run, technological progress is the main factor determining economic growth.

– From the First Industrial Revolution (1770-1830) to present days, technological advancement has created more jobs than it has destroyed.

– The transition to a more complex system of production marked the beginning of a new era, characterized by: Smithian concept of “division of labour”, Schumpeterian concept of “creative destruction”; immense growth of labour productivity and real wages; rapid reduction of weekly working hours.

 

Even today, despite all these advancements, too many people keep falling into Ricardo’s big mistake and tell us that “this time is different” and that the Fourth Industrial Revolution will naturally lead to the loss of millions of jobs. In other words, according to these economists and intellectuals, the digitization of entire industrial systems and the rise of artificial intelligence will be a disaster, to say the least.

 

From a purely economic point of view, this way of thinking turns out to be incorrect because it takes into account only one of the two effects that regulate the relationship between capital and labour, the so-called substitution effect.

 

This partial view tends to highlight only the negative aspect of the relationship between men and machines. As a result, according to conventional wisdom, new labour-saving technologies will increase unemployment over time.

 

To this potentially damaging effect, however, economic theory suggests us to add a second, very positive, force: the so-called compensation (or income) effect. As cheaper capital displaces labour, goods and services become cheaper, raising real incomes across the economy.  That boosts the demand for new goods and services and new industries to supply them.  To complete the loop, displaced labour then switches to meet this new demand, lowering unemployment.

 

As demonstrated by the economic history of the past two centuries, the compensation effect of technological progress has always neutralized the substitution effect. As in the 19th century, today this economic principle is proving to be true.

 

In a paper published in 2015 and entitled “Technological Change and Labour Market Disparities in Europe”, Gregory et al. analyse the impact of the computerization of work in 27 European countries and demonstrate how this process led to the net creation of 11,6 million jobs between 1999 and 2010.

 

Moreover, data drawn from the University of Minnesota Population Centre highlight how technological progress should be considered the main factor that led to the United States great economic transformation. If, in 1850, around 2.5 million Americans (out of a total of 5 million workers) were employed in the agricultural sector, by 2013-2014 the total number of America’s jobs amounted to approximately 145 million and only 1.5 million (1.03% of the total) of those workers were employed in agriculture.

 

This leads us to an obvious conclusion, which – notwithstanding economic history – many intellectuals will not accept: if it had not been for technological progress, many of us would probably still be cultivating their own little piece of land, while many others would definitely be unemployed.

 

Ideas, innovation and new technologies enhance man’s labour and they are among the most essential components of a free, rich and prosperous economy.

 

 

First published in “Econopoly – Il sole 24 Ore”, for the original Italian article, please follow this link.

 

Translated by Malika Bamaarouf.

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