Comparative Advantage v. Machines

This post was originally published on Angry Bear. I wrote this primarily in response to a comment on The Economist’s Free Exchange blog which picked up my original post on the likelihood of structural unemployment due to accelerating job automation technology. Free Exchange basically said we don’t have to worry about a serious unemployment problem because the principle of comparative advantage will insure that people will be  able to find jobs.

Comparative advantage is an economic concept which says that individuals (or countries) will always be better of trading with each other even if one party has an absolute advantage in everything. (See the Wikipedia entry on comparative advantage for some examples.) Comparative advantage is usually attributed to David Ricardo’s work in the early 1800s and is generally considered to be one of the biggest ideas in economics.

The point I try to make in this post is that comparative advantage may not be all that helpful when people have to compete directly with machines that hold a substantial absolute advantage, and the primary reason is that machines (or software automation applications) —unlike people or countries—can be replicated on demand.

More on the Looming Structural Unemployment Crisis, and on Comparative Advantage

In my previous post, I suggested that job automation technology might someday advance to the point where most routine or repetitive jobs will be performed by machines or software, and that, as a result, we may end up with a serious structural unemployment problem. I’d like to respond to some of the objections that were raised regarding that idea.

I thought I would start with a response at the Economist’s Free Exchange blog, which said:

… in general I am pretty sanguine about the long-term prospects for continued voluntary employment of humans. Technology isn’t free, and even if we arrive at a world where some pieces of technology are better at everything than humans, the principle of comparative advantage nonetheless suggests that people will find work.

The idea is that, since everyone has a comparative advantage in something, just about everyone should be able to find some sort of a job. Thus we can be “sanguine.” Nearly every explanation of comparative advantage I have seen involves either individual people or countries. I haven’t seen examples where machines or automation technology come into play, so I thought I’d take a shot at it here.

Suppose we have a tractor and a team of oxen. Both can be used to plow fields, pull wagons or do other things around the farm. Clearly, the tractor out-performs the oxen in every task. Still, there ought to be some area in which the oxen don’t perform quite so badly relative to the tractor. Maybe the tractor is a little less efficient at plowing smaller fields since it has to make many turns. Or maybe fuel for the tractor is much more expensive in some regions, and so the oxen ought, in those cases, to have some sort of comparative advantage. So why have oxen been completely put out of work in developed countries like the United States?

It seems to me that there are two reasons. First, there is the magnitude of the absolute advantage that the tractor has. A tractor is a disruptive technology relative to the oxen. In order to have a meaningful comparative advantage, it’s probably helpful if you can get fairly close to the competition in at least one area.

The second reason is, perhaps, even more important: tractors, being machines, can be replicated on demand. If we imagine that a shortage of tractors existed, then comparative advantage would work. The available tractors would be deployed in their most productive uses, and the remaining work might well go to the oxen. But, in reality, the farmer can acquire as many tractors as he needs to do all his work, and in fact, he has no choice but to do so in order to remain competitive with other farmers.

As another example, suppose you are a brain surgeon who is also an excellent cook. Now, you might choose to employ a cook who is not quite as good as you are because doing so would free up your time and energy to do more brain surgery. So comparative advantage works there. But suppose you develop a machine (or two machines) with a dramatic absolute advantage in both cooking and brain surgery. Then, you could replicate your machine, and pretty soon there would be no jobs for cooks or brain surgeons.

So it seems like that might be a rule: If an affordable machine (or software algorithm) achieves a dramatic absolute advantage in a job or task, it will most likely be replicated and deployed until all competitors are eliminated. Comparative advantage is not much of a defense against that.

It seems to me that over time (not next week, but over years and decades), machines and software automation applications are likely to achieve that type of dominance in a great many areas, and they will be replicated until they consume all the available work. Any enterprise that failed to deploy this new technology would be less competitive.

All of this, of course, really amounts to nothing more than a restatement of the principle of obsolescence: in the long run, disruptive new technologies don’t find an equilibrium with old technologies. Old technologies get replaced. This applies equally to biological technologies like oxen—and perhaps it will someday even apply to human workers.

That’s an idea that economics is probably not ready to accept. Interestingly, other disciplines like biology or physics don’t give any special status to people. We are assumed to be subject to the same overall rules of nature as anything else. No so, with economics. For economists, people are very special; people are labor, and people get a special “L” in all the equations. Economists assume that people—and not just a few people but the vast majority of available workers—are indispensable to the production process. That has been true historically, but will it always be true?

Then again, maybe I’ve missed something. Maybe there is an area where human workers will always have an absolute advantage: in jobs that require uniquely human qualities or creativity, artistic ability and so forth. A lot of the conventional wisdom seems to suggest that we simply need to retrain, re-educate and redeploy workers into these areas, and everything will be fine. Is that likely to be the case? I’ll look at that idea in my next post.
__________________________
Martin Ford is the author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future and has a blog at Econfuture