IV. The Threat of Productivity

Even though the distribution of most of the national income through wages and salaries tends to perpetuate the long list of social problems described in the previous chapter, over the long run the most serious cost to society may be the loss of wealth that can never be produced because of the threat to jobs posed by increasing productivity through technological innovation.

Productivity is a measure of how much wealth can be produced from a given amount of labor, capital, and raw materials. Increasing productivity means getting more output from less input. Since wages are paid on the basis of labor input and not product output, increased productivity is widely perceived as a threat to jobs. In some cases this threat is real; in other cases it can be shown to be an illusion.¹ Nevertheless, the belief in a threat is very real. It has persisted among the working classes since the Luddite riots against the Spinning Jenny in 1768, and today it represents a powerful political deterrent that effectively inhibits any national policy directed toward major productivity increases.²

Yet, the ability of modern technology to produce large amounts of goods and services at low cost is the backbone of modern civilization. The history of the industrial revolution is a chronology of the development of better and more productive machines for increasing the amount of goods and services that can be produced from a given input of labor, capital, and raw materials. During the 18th and 19th centuries, both in England and America, the substitution of machines for hand labor brought to the average citizen a degree of material prosperity, and even relative luxury that was previously undreamed of. Coal stoves for heating and cooking, glass for the windows, cotton underwear, a variety of food, earthenware dishes, soap, clean sheets on iron bedsteads–these were the early benefits of increased productivity through mass production.³

Shortly after the American Revolution, it was the increased productivity of the cotton gin and the river steamboat that transformed the southern United States into a major agricultural power. Slavery, of course, played a part, but slavery did not make cotton king. The efficient mechanical means of processing and transporting the raw cotton crop did that. The northern states grew rich and strong from the increased productivity of automated spinning and weaving machines, steel mills, and later oil refineries. The American West prospered as a result of the invention of the telegraph, the railroad, and automated farm machinery.

As early as 1853 the use of mass production, interchangeable parts, and automatic machines became known as the "American System."⁴ The primary objective of American industry was not so much to make luxury items for the rich, but to satisfy the demands of the average worker for material pleasures that indeed would have been considered luxurious in other lands.⁵ The epitome of this philosophy was reached in the production lines of Henry Ford. Early automobiles produced in Europe were handmade and expensive. Ford succeeded in increasing productivity in automotive manufacturing to the point where cars could be made inexpensive enough for working people to afford.

Today, increased productivity has become more of a necessity than a luxury. The high productivity of modern agriculture is all that stands between the earth´s exploding population and mass starvation. New hybrid seeds, modern fertilizers, pesticides, and advanced farming techniques have enabled a relatively small number of farmers to produce large quantities of high-quality food on a limited amount of arable land. If it were not for high productivity in agriculture, virtually the entire world´s population would be reduced to malnutrition and starvation.

One has only to observe the desperate poverty of primitive agricultural communities in remote regions of Africa or Asia, or recall the terrible hardships of the early American prairie farmers, to realize how close we are to the threshold of survival, and how much we depend upon modern agricultural technology. As the population doubles over the next four or five decades, there will be a larger increase in the number of people than in all of previous history. Under these conditions, higher productivity in agriculture will be absolutely necessary in order to avert catastrophic shortages and famine.⁶

High productivity in the manufacturing and service industries is also essential for adequate housing, transportation, sanitation, education, and medical care. Modern tools and factories and efficient methods for processing raw materials is what produces enough wealth over and above mere subsistence so that the average person can enjoy a decent standard of living. Future productivity increases will be required just in order to maintain the present standard of living in the face of rising population and dwindling natural resources. If we ever hope to advance beyond our present quality of life toward any of the costly but socially desirable goals such as better health care, more livable cities, and a cleaner environment, major new increases in productivity will be needed. In a world where population demands are increasing and natural resources are running short, increased productivity is the only way that a substantial decline in the quality of life can be avoided. The occurrence of worldwide shortages and rampant inflation is only the leading edge of much more serious economic problems that will inevitably result if productivity is not increased rapidly enough to meet the rising demands of emerging nations and a burgeoning world population.

It only stands to reason that the income any society enjoys cannot exceed the rate at which it creates wealth. If the people and machines in a society are inefficient and create wealth slowly, then that society will inevitably be poor. Conversely, if a society directs its work efforts productively and if machines and technological innovations are developed that increase the rate at which wealth is created, then that society will be affluent. Relative wealth and poverty within a society depend on the equity with which the income pie is sliced, but the total size of the pie itself depends on the wealth-creating capacity of the productive processes employed by the society.

Productivity and the Standard of Living

The relatively large income enjoyed by the average American worker and the high standard of living of the majority of the United States population result directly from the fact that productivity in American industry has for decades been the highest in the world.⁷ Figure IV-1 shows the relationship between productivity and growth in real income (i.e., income that is left after the effects of inflation have been subtracted) in America since 1950. As can be seen, there is a very close correlation between the two curves over the past quarter century. Data from Samuelson⁸ shows nearly the same degree of correlation going all the way back to the year 1900.

Figure IV-2 shows the same relationship for seven industrialized nations of the world. Clearly, growth in real income is dependent on growth in productivity.

The recent economic difficulties of the United States (that even before the mid-east oil embargo had given rise to balance of trade deficits, two devaluations of the dollar, sporadic shortages of critical items, and rising prices) have been due in large part to the fact that over the past ten-year period productivity gains in American industries have fallen off from their previous one hundred years´ average.⁹ During this decade American productivity increases trailed most of the industrial nations of the world, causing our international economic position to deteriorate markedly.

There is no question that American technology and productivity is still the highest in the world. However, data in Figures IV-2 and IV-3, showing the rate of United States productivity growth relative to other industrialized nations, indicates a situation that, if continued, will soon eradicate our present lead. Department of Commerce economist Michael Boretsky calculates that during the 1965 -1971 period the United States was losing its productivity advantage at a rate 2½ times as fast as it achieved its pre-eminent position in the years prior to 1950. In 1970, the United States output per capita relative to the aggregate of other countries had already declined to the level it had been at the turn of the century.¹⁰

Boretsky argues that the rise of the United States to become the dominant economic power in the world, while certainly influenced by the devastation of other countries in World War II, was primarily due to the fact that productivity growth in the United States from 1870 to 1950 averaged a mere 0.9 percent higher than the rest of the world.¹¹ The dramatic reversal of this situation to where today we trail the world average by a full 3.0 percent, and Japan by more than twice that amount, reveals a disturbing weakness in the American economy.

Foreign businesses have already begun to view America as a future source of cheap labor. Volvo and Volkswagen are now building assembly plants in the United States because of changes in the relative salaries paid to workers in Sweden, Germany, and America.¹² This is a turn of events that would have been inconceivable only ten years ago. If present trends continue, this phenomenon may grow increasingly commonplace in the years ahead. Unless productivity is increased over the coming decades, the American standard of living is certain to decline relative to the rest of the world and, quite likely, in absolute terms as well.

The Effect of Investment

In the short term, productivity tends to fluctuate with the business cycle. When plant capacity is fully utilized and employment is low, as during the early phase of a recovery period, productivity tends to rise. Similarly, at the beginning of a recession, productivity tends to fall.

In the long term, however, productivity increases derive from much more fundamental causes. Three studies by Denison, Thurow, and Kendrick attribute the vast majority (76.7 percent, 69.8 percent, and 90.7 percent respectively) of long-term productivity increases to more capital, economies of scale, or improved technology.¹³ Investment, of course, is the source of all of these. Investment spending in some cases finances the replacement of obsolete equipment or the modernization of existing plants and facilities. In other cases, investment money purchases new machinery for workers who had previously used less efficient methods. Investment spending also finances research and development of new technology that leads to better machines, less expensive materials, and more effective methods of production. Over the long run, investment in new technology is the fundamental source of all productive output over and above that which is possible by unassisted hand labor.

The data in Figures IV-4 and IV-5 indicate a strong correlation between productivity increases and the investment rate on a national scale. Those countries that invested a high percentage of their output in new factories, modernized equipment, and new technology showed a large growth in output per man-hour; those that invested less showed slower productivity growth.

This relationship is strong evidence for the theory that productivity is ultimately derived from new technology. Investment spending is the means by which a society channels its resources into research and development and by which it stimulates the diffusion of new technology through the building of new plants and modernized equipment. We produce more and better cars, ships, planes, dishwashers, computers, and television sets today than fifty years ago not because we work harder or because raw materials are more plentiful or less expensive, but because we know more and we use our knowledge to build machines and factories that produce more output with less input. It is often said that "they don´t build things like they used to" and that is true. If they did, either most workers would have to take a 90-percent pay cut, or most goods would cost ten times what they do today.

It has sometimes been argued that the higher productivity growth of Europe and Japan is a transitory phenomenon resulting from the installation of modernized equipment after the destruction of World War II. The data in Figure IV-4, however, does not support that contention. Countries totally destroyed by the war show essentially the same relationship between investment and productivity growth as those largely, or completely, spared. Furthermore, it has been more than a quarter century since the war ended, and, except for the recent worldwide recession, there has been no slackening in the growth rates of either Europe or Japan. There is, in fact, good reason to expect that the United States productivity growth will continue to trail other countries simply because we have failed to modernize our capital equipment. In Japan 70 percent of all machine tools are less than 10 years old. In West Germany the figure is 63 percent, in the Soviet Union 57-percent, and in the United States only 33 percent.¹⁴ This implies that the Japanese have replaced nearly their entire stock of machine tools three times over since the end of the war.

The simple fact is that other industrialized nations are investing at a much higher rate than we. The result, unsurprisingly, is that they have a much higher rate of productivity growth. The obvious implications are that a nation can control its productivity growth rate through its investment policy. For example, one might suggest from the data in Figure IV-4 that, if the United States were to double its investment rate, productivity growth would more than triple from its present rate of about 3 percent to over 10 percent per year.

Over the past 25 years, 3 percent annual growth in productivity has doubled the real GNP. If the present rate is continued until the turn of the century, real GNP will approximately double again. However, if the investment rate were doubled, leading to a ten-percent productivity growth as shown in Figure IV-6, real GNP would increase by more than ten by the year 2000. Present GNP is approximately $1.5 trillion. Continuing the present rate of productivity growth will yield a GNP of $3 trillion by 2000. However, ten-percent productivity growth would lead to a real GNI´ of more than $16 trillion in 1975 dollars. The difference alone is more than triple the entire world GNP in 1970.¹⁶

Clearly, this is a matter of enormous consequence. A GNP surplus of $13 trillion over what would otherwise be considered normal would mean that even the most exotic solutions to the problems of the environment would become economically feasible. We could afford to collect solar energy or dig for geothermal power anywhere on earth. We could afford to convert all industry, homes, and transportation to hydrogen fuel. We could process all sewage and farm drainage to the purity of rainwater. At the same time, we could afford to remake our cities, provide the best in health care for everyone, and guarantee adequate retirement income to all.

Of course, many economists would disagree that simply doubling the investment rate would triple productivity growth. The burden of proof, however, is on those who say it would not. It is difficult to interpret the data in Figure IV-4 in any other way.

It might be argued that recent changes in world conditions, particularly in regards to the availability of natural resources, will render the data of Figure IV-4 irrelevant to predictions concerning the next twenty-five years. However, as yet there is no evidence to indicate that the effect of investment on technological innovations and hence on productivity has lessened. In fact, quite to the contrary, there are numerous reasons (to be outlined in the next chapter) for believing that over the next two decades new technology in the field of computers and robots will make productivity even more sensitive to the rate of investment than was the case during the 1960-1972 period.

It also might be argued that the United States has no mechanism by which the investment rate could be doubled. At the present, this is true. However, if the effects would be as profound as suggested above, then it would seem that the creation of such a mechanism should be made a number one national priority.

The Threat to Jobs

In the final analysis, the principal argument against a major shift in national policy towards increasing productivity lies in the threat to employment. Increased productivity implies greater output from the same or less input. From the very beginning of the industrial revolution, increased productivity has derived principally from the substitution of machines and mechanical energy for human labor in the production process.

Automatic machines increase the amount of output that the labor force can produce. Machines are essentially helpers or servants that work for nothing over and above the price of their own purchase and maintenance. The modern industrial worker is surrounded by these helpers, and, as a result, output per man-hour is large and wages are high.

Unfortunately, the capabilities of mechanical helpers are not an unmixed blessing. The practice of distributing almost all income through wages and salaries virtually assures that automatic machines will sooner or later change roles from helpers to competitors. Human workers typically own no part of the machines with which they work. The machines belong to the company that pays the workers´ wages. Therefore, human workers benefit from the wealth-producing capabilities of automatic machines only so long as they remain employed. As machines grow more efficient, they produce more wealth, and the human workers´ wages rise accordingly. Eventually, however, the machines become proficient enough to function without human assistance. At that point, human workers serve no further function, and their inflated salaries make them a costly liability.

To an employer whose survival depends on questions of profit and loss, it matters little whether a factory employs people or machines. In fact, in many ways machines are preferable to people. Machines, unlike human workers, do not create personnel problems or generate labor disputes. Machines are willing to work twenty-four hours a day, seven days a week, fifty-two weeks a year, without coffee breaks, lunch periods, or vacation time. Machines never get bored or suffer from hangovers. Once they are adjusted properly, they repeatedly produce products that are free from defects. Furthermore, machines never pilfer material from the company storeroom. Thus, when an employer finds a situation where a machine can do a job more profitably than a human worker, it is almost inevitable that the machine will win out.

It is no wonder that labor unions and the public in general are ambivalent towards automation. Automatic machines are clearly essential to the production of the wealth upon which our current high wages, and indeed our entire way of life, is based. However, the average person benefits from these machines only so long as he remains employed. If the machines that a worker operates become too sophisticated, they can get along without him. They then become a threat to the very wages that they made possible in the first place. As a result, we have the paradoxical situation where automation is generally conceded to be a major source of our national wealth, yet new advances in automation are widely feared and often actively opposed by a large segment of the population. The average worker perceives his own personal financial future to be much more immediately determined by job security than by the general level of productivity in industry as a whole, and rightly so. After all, it is small consolation to know that productivity has risen a fraction of a percentage point if you have just lost your job.

Automation and Power: Economic and Political

There are other factors besides simple fear of losing income that contribute to public antipathy towards automation. One of these is a widespread feeling that the current trend towards machines taking over important functions in business, industry, and even government is politically dangerous. Unfortunately, the present income-distribution system makes this fear very well grounded, although not for the reasons most usually expressed. Popular science-fiction literature and movies typically depict future hordes of robots rebelling or developing psychoses that lead them to threaten their human masters. The fact is, however, that although such scare thrillers have dramatic impact, they completely miss the point of the real danger, and thus serve only to obscure the issue.

The real threat implicit in so-called superautomation derives not from any potential neuroses of the machines themselves, but from the concentration of economic and political power that will fall into the hands of machine owners. Under the present income-distribution system, the profit resulting from machine productivity accrues directly to the owners of the machines first, and only by them is it distributed via the avenue of wages and salaries to the workers. This means that each increase in automation leads to an enhancement of the power of machine owners and to a greater degree of dependency on the part of the average worker. As machines become more and more capable of operating without human assistance, the human workers become less and less essential to the actual production of wealth. A highly paid but functionally superfluous work force is vulnerable to pressures from the employer establishment. Such a workforce, even though prosperous, is politically impotent, for its prosperity exists solely at the pleasure of the machine owners.

The Concentration of Ownership

According to the Department of Commerce Survey of Current Business¹⁷ one percent of the families in the United States presently own over 50 percent by value of all corporate stock. Less than five percent of American families own more than two-thirds of all stock. Thus, less than five percent of the people in this country control almost all corporate assets, including virtually all existing industrial machinery and capital equipment. This concentration of economic power in the hands of a tiny super rich elite shows no significant tendency towards decreasing.¹⁸ The prevailing practice among large corporations is to finance new capital investment from internal cash flow (i. e., withheld earnings, depreciation, depletion, amortization allowances, and investment credits against corporate taxes) rather than through issuance of new stock. For example, from 1955 to 1965, less than 0.5 percent of aggregate new capital formation came from newly issued stock while 99.5 percent was financed through internal sources or through debt securities that would eventually be repaid through internal sources.¹⁹

It is understandable that the average worker feels uneasy at the prospect of robots and superautomation technology. The great majority of automatic machines in American industry are owned and controlled by a relatively small group of men and women who are accountable to hardly anyone but themselves. Unless some changes are made in the present system of ownership and income distribution, the next generation of automation could reduce the entire economic system to complete domination by few superrich families.

Under these circumstances it is inconceivable that the American people could be persuaded to support any large program of corporate tax cuts or investment incentives designed to increase capital investment, despite the needs for increased productivity. The benefits of increased productivity are too general and diffuse. The fear of unemployment and the concern over a growing concentration of economic power are too clear and specific. The average citizen simply does not see himself as the beneficiary of massive capital investments in big business.²⁰ The multinational corporations and the big conglomerates are perceived more as threats than as benefactors.

In such an atmosphere, really major efforts to increase productivity are politically impossible. As long as income is distributed almost exclusively as compensation for labor, massive new investments in automation technology would threaten the security of virtually every American family.

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