Innovation and inequality: the effect of introduction of machines on workers

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UNIVERSITÀ DI PISA

SCUOLA SUPERIORE DEGLI STUDI UNIVERSITARI E DI

PERFEZIONAMENTO SANT’ANNA

MASTER OF SCIENCE IN ECONOMICS

Dipartimento di Economia e Management

INNOVATION AND INEQUALITY: THE EFFECT

OF INTRODUCTION OF MACHINES ON

WORKERS

CANDIDATO:

Guido Pialli

RELATORE:

Prof. Davide Fiaschi

TESI DI LAUREA MAGISTRALE

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“To put it bluntly, the discipline of economics has yet to get over its

childish passion for mathematics and for purely theoretical and often

highly ideological speculation, at the expense of historical research and

collaboration with the other social sciences.”

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Acknowledgements

I would like to thank my supervisor, Prof. Davide Fiaschi, for his suggestions, corrections and the readiness of his comments.

I would like to say thanks to all the friends, colleagues and professors with whom I have shared this journey, which has allowed me to grow and learn.

I am grateful to my family for their daily support and to have granted me the privileged chance of continuing my studies.

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Many scholars have been studying one of the most fundamental issue in economics, the growth of nations, the way by which countries change and develop in economic terms. Of course, it becomes natural asking what is behind economic growth, that is to identify the causes of the growth process. Technical change is considered as one of the most important drivers of economic growth. There also exist different points of view on the argument, some of them which tend to consider the ultimate

causes of growth as the true drivers of change. Among these, ideology, institutions and culture are

most often seen as relevant and in tune with the viewpoint of Douglas and North, which consider the so-called proximate factors, like technical change, capital accumulation and the contribution of other factor inputs, as growth itself and not as true determinants of growth.

In any case, technical change is considered by many economists, even if ultimate, a principal driver of growth. The debate, then, has shifted to the nature of technological progress. Through history, the importance of technological progress appeared, after having been neglected for two centuries, except some contributions by Karl Marx and Joseph Shumpeter, (Dosi, Nelson, 2010)1 by 50s, with the important work of Robert Solow. However, technological progress remained embedded in the TFP interpretation, that is as residual cause of growth, stimulating Moses Abramovitz to define it “a measure of our ignorance”.

The research, then, advanced in the understanding of what underlines technological progress, and its integration in models of economic growth in which technological progress was endogenized. However, it is only in the last decades that the exceptional technological pervasiveness has renewed the debate of the effects of technology on the society. Technology and innovation have crucial implications for the wellbeing of the society, and the increasing use of technology in the production process is not without consequences for workers. Indeed, the effect on workers may be destructive

1 _{Dosi, Giovanni, and Richard R. Nelson. “Technical change and industrial dynamics as evolutionary processes”.}

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and a matter of concern, as the recent debate, which is going beyond the economic boundaries, shows. The discussion has relevant historical roots, and, in my humble opinion, it is necessary to review the historical debate on the technological unemployment. I’ll try to provide a brief summary, focusing on the contributions of the giants of economic theory, in chapter 2. Through my work, I’ll adopt a method based on the discussion of the relation between innovation and inequality focusing on three related aspects: technological unemployment, in chapter 2, functional distribution of income, in chapter 3, personal distribution of income, chapter 4.

This is not the only way by which technological progress touches the society, as it also affects the distribution of income among the agents: skilled workers, defined as those who have experienced a period of training in order to acquire skills to perform that particular job, might get benefits from a world subject to sustained technical change, while unskilled workers might be harmed by technical change.

On the other hand, it may happen that the introduction of machines would imply a substitution for skilled workers, which might find themselves as having acquired skills to be unemployed. In this case the introduction of machines would be complementary to unskilled workers. Hence, the effect of automation could be seen from a dual perspective: technology and innovation may be detrimental to workers increasing unemployment as well as affecting the distribution among agents by increasing inequalities.

The First Industrial Revolution, which showed a change in the belief about technological change, is a natural experiment to evaluate the effect of innovation on workers. Moreover, economic historians are more or less convinced that the beginning of a period of continued and sustained growth driven by technological change is located after the First Industrial Revolution, that’s why I will focus on this historical period in the third chapter and I’ll try to show why it is so important for understanding the connections between technological progress and the society. Industrial Revolution was ignited by machines which allowed Britain to increase its production and made it the leading country until the

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end of 19th Century. Just to anticipate something, in the First Industrial Revolution, technological progress and innovation represented by inventions like the steam engine, the sequence of machines which dominated the textile industry and others mechanical inventions, were beneficial for unskilled workers, since, given the easiness of the mechanisms underlined by these machines, these machines did not imply specific training or high degree of apprenticeship and they proved to be highly complementary to them.

In the last chapter, I shall go further this issue, explaining why this type of effect, called de-skilling technical change, is profoundly different from the effect of the introduction of computers and ICT technologies which affect the labor market nowadays. I shall also explain that, at least according to Bob Allen, factor inputs, in particular the abundance of natural resources and capital, as well as the high wages of British workers, played a key role in the introduction of machines and innovations: the high wages stimulated inventors to use more capital and energy than labor, trying to find new machines using energy to be worked. The role of profitability and the successful applicability of inventions is also decisive in supporting the theory of Allen on why Industrial Revolution happened in Britain and not in France or Holland.

With the Industrial Revolution, the production process changed. When technological change is introduced, or when a different production process is introduced, the composition of inputs in the standard aggregate production function changes. If we imagine a production function with only two inputs, capital and labor, a technological change may increase output by using more capital than labor, so that the share of capital on output may increase more than the labor share. Overall, the role of factor inputs may be decisive and they found to be a powerful mechanism to spur innovations. I shall deepen this issue in the third chapter, which offers an explanation of this process with a more technical formalization. At the end, of course, I will focus on the relation between innovation and inequality today, trying also to argument why the recent technological progress is completely different from the past one and its main effect of inequalities. In particular, I will focus on a particular worrying aspect of the relation between the two, the so-called “superstar effect”, which explains how a talent

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individual or a super-rich is favoured by technology, as the latter allows to talented person, in some cases the “most fortunate”, to spread their talent towards a bigger market. The most natural way to investigate the importance of market-size and the evolution of wealth inequalities is going to analyse the wealthiest individual in the world. Forbes’ billionaire database will provide an interesting insight on how the relation between innovation and wealth distribution hides some unexplored links.

2 TECHNOLOGICAL UNEMPLOYMENT: A BRIEF SUMMARY OF

A DEBATING CONCEPT

2.1 Introduction to the technological unemployment

One of the current and most controversial issue in the political and economic debate is the substitution of machines for workers. The fear of jobs losses due to the automation is regaining momentum in the last decades, also due to the extraordinary technological progress and the increasing role of ICT technologies in the production processes. The debate also relates to the mere existence of this phenomenon, given that a lot of works tend to reject the hypothesis of a reduction in welfare and jobs losses caused by the role of machines and technology. This issue is referred to as technological unemployment. Especially among economic historians, it is defined as the losses of jobs caused by technical change, due to the introduction of labour-saving techniques which imply an increasing role of machines in the production process.

The issue of technological unemployment is not a current and new concern in the political and economic debate. We may think to the losses of jobs due to technical change from the beginning of the life. Technical change, of course, has permeated the evolution of society and the development of nations. Joel Mokyr (Mokyr, 1992)2_{offers a widespread view of the evolution of technical change}

through history, as well as a description of how it was conceived and how different was its nature.

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The conception of technical change was profoundly different among societies in different historical ages, as Mokyr argues. The view we have about technology is related to its physical component and we tend to identify technology with mechanics, whereas in classical civilizations of Greeks and Romans, technology and innovations were more in tune with nonphysical findings, as geometry, coinage, alphabetization and with the art of construction and civil engineering.3

Technological unemployment has gained relevance, above all, in the era of Industrial Revolution, during which new machines to produce faster and more efficiently were at the heart of technical change. It was the first period in which technological progress embedded in machines received attention, also due to the change in the production processes: the society experienced, in the Eighteenth Century, a shift from artisanal production to factory production. Sometimes, the adoption of machines is a direct consequence of a shift towards a new technique or a new production process. The introduction of machines which use more capital or the finding of new techniques which modifies the procedural part of technology, may affect the distribution of inputs coefficients, even if, a priori, it is not certain that a change in the procedural part of a technology would imply a modification in the shares of inputs used.

As I already stressed in the introduction, in a world of sustained growth in which technological progress is one of the most important drivers, it is fundamental to analyse its implications and effects on the society. Nowadays, the issue is debating. A lot of works on the introduction of machines have emerged and the debate is not only at economic level but it has gained relevance even in non-economic contexts. A lot of books which have a widespread diffusion have been written in the last years.4

Many important personalities in scientific world expressed their opinion about the issue. Stephen Hawking has warned that increasing automation is going to decimate middle class and worse

3_{Mokyr, Joel. The lever of riches: Technological creativity and economic progress. Oxford University Press, 1992,}_page

25, taken from C.M.Cipolla,1980.

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inequalities, A.I. is going to dominate on human beings in a near future, in a prediction which resembles the catastrophic scenario presented in many movies; nonetheless, the proposal of Bill Gates of taxing the use of robots in companies has received attention in the public debate.

We cannot deny that introductions of machines could be detrimental to laborers: mechanization of production may replace workers because machines perform their duties faster and more effective, maybe with a lower cost for the producer. Nonetheless, we cannot leave out the psychological effects on the workers: the displacement from the job may raise a sense of inferiority and subjection with respect to the machine, in addition to a form of depersonalisation depicted, for example, in a humoristic way by Charlie Chaplin in “Modern Times.”

The parts have not reached a conclusion and probably, as history teaches, a conclusion will never be reached. Given the complexity and the multitude of opinions of eminent economists still dealing with this issue, it will not be a simple task for me to take the parts of one or another. What my humble and probably incomplete analysis will try to explain is that it is impossible to state for sure who is right and who is wrong; however, what I consider necessary, in my humble opinion, is to analyse this issue from an historical point view.

First, because innovation which is changing our society nowadays is completely different from the past one, as I will explain more precisely later. Second, because this phenomenon has gained relevance only in specific periods and contexts trough history, which are completely different one from another in socio-economic terms. The debate on technological unemployment probably would never had relevance without Industrial Revolution, which stimulated protests and adverse positions against the introduction of machines.

Moreover, the society is experiencing a changing technological paradigm which has to be addressed only by taking an historical perspective (Petit, 19935).

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The mechanization of Industrial Revolution stimulated Marx, Ricardo and others to take part to the debate. In order to collect the many interventions of this period I have exploited Riccardo Campa (Campa, 2017)6_{, which provides a roadmap of the debate, as well as a summary of the main}

participations of the economists of 18th and 19th centuries in the debate and, nonetheless, it has been useful for me to take the main references for the argument. The contribution given by Ricardo to the debate of the technological unemployment is one of the most popular and it is taken as a building block in addition to Marx’s Capital. I’m not saying that Ricardo and Marx are the most important authors to have dealt with this issue. As I said, the debate was very heated among the most important economists of that time. Some economists as Nassau Senior, John Stuart Mill, Robert Torrens are also cited in the Capital by Marx as the main authors of the theory of compensation (I’ll deal with this issue later on in the chapter). Their contribution to the debate deserves the same attention of the writings of Marx and Ricardo; however, taking into account of everyone who wrote about the theme is a long-lasting process, which goes beyond the scope of my thesis, so that I prefer to deepen the thoughts of those who are considered the most relevant authors in history of economic thought. Anyway, I’ll try to offer a brief and surely incomplete summary on the issue.

First of all, I would like to start my brief historical review from the symbol of the protest against the machines, the Luddites.

2.2 Luddism: the first reaction to machines

Nowadays the term Luddism is used to indicate people who dislikes, opposes to accept and refuses to understand technology. This interpretation is more in tune with a form of technophobia, the fear that technology could affect our way of life (for example, someone who voluntarily refuses to buy a

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smartphone). This use of the term Luddite is wrong, because it does not take into account the historical context in which it was born.

The meaning of Luddism is more related to the fear of the loss of jobs due to technological progress, especially for those workers whose job might be easier substituted by automation. If machines were substitutes for unskilled workers, this would imply lower wages, less jobs and more unemployment. Paul Krugman in an article for the New York Times7 made a comparison between the conditions of modern Luddites with their historical counterpart. According to Krugman, even if nowadays technological progress has raised the demand for more educated workers and the solution was, then, more education, from the 2000s inequalities in U.S.A. are changed, and highly skilled workers have the same fear as likely as unskilled ones to be dismissed. Empirical evidences on inequalities testify an increase for the 1% more paid which can hardly be solved solely by the mantra of more education. Hence, automation is going to affect even highly skilled workers, showing fearing similarities with the condition of skilled workers during Industrial Revolution.

Going back in history, the Luddism was a movement organised by some people, called Luddites, who, according to Wikipedia, “were a group of English textile workers and weavers in the 19th century who destroyed weaving machinery as a form of protest”.

The phenomenon is still debated, because there is no consensus on the causes and the motivations of the industrial protest. The debate on the nature of the Luddite movement resembles that of standard of living, which underlines a dichotomy between optimists and pessimists. In this case, the former thought that machine breaking was an irrational response to bad economic conditions which were only transitory. Standards of living, they argue, were not as bad as we think, and real wages saw a sharp increase starting from the end of the Eighteenth Century. On the other hand, pessimists argue that Luddites were not afraid of the technology itself, they were afraid of their livelihoods and their standard of living, threated by machines which would have produced output more efficiently and

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cheaper by stealing their jobs. The nature of their protest was, above all, against the harsh conditions which workers were experiencing. The industrialization process, in parallel to this, deteriorated living standards and produced negative effects on environment, health and on people. Furthermore, living standards didn’t increase until the second half of the Nineteenth Century.

The origin of the Luddites protests is located in Nottinghamshire, where both the legendary Ned Ludd, the name of a fictitious general, and the movement arose. Most historians locate it in a period ranging from 1811 to 1816, into the specific geographical areas of Nottingham, the Leicestershire and South Derbyshire, the West Riding of Yorkshire and parts of Lancashire in the North West. The protests started in 1811 during the Napoleonic Wars, a period in which unemployment and poverty afflicted workers, especially textile workers in factories. The first attack occurred

in Arnold, Nottingham, on 11 March 1811, when workers smashed textile machinery in a nearby village by asking more jobs and better wages, and then the protest spread rapidly throughout the other regions. The government repressed the protests with violence and in several times the government and the Luddites clashed.

The debate surrounding the Luddites relates to the background of the political protest, given that it is questionable that the Luddites had a political and organisational character. According to John Arcer (Arcer, 2000)8, “in order to examine and clarify the parameters of this debate, it is helpful to place

the various episodes in their complex and specific geographic and industrial contexts, whilst at the same time recognising that all three regions were experiencing common economic problems.”

According to Eric Hobsbawm, the protests in Nottinghamshire, Derbyshire and Leicestershire were put forward by the workers against the employers, in order to receive concessions to better off their conditions, affected by the high prices and low wages which they were facing. The protests of the Nottinghamshire had not political character and did not have an organisational strategy, whereas the protests in Northern regions had such political content, and from 1812 the Luddism began to take also

8_{Archer, John E. Social Unrest and Popular Protest in England, 1780-1840. Vol. 41. Cambridge University Press, 2000,}

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a multidimensional face, given that workers became more desperate and the attacks against the machines were combined with food riots, crime waves and parliamentary activity.

Eric Hobsbawm (Hobsbawm, 1952) stated that Luddites did not have hostility to machines as such, instead their movement in the forms of wrecking resembled a trade union, more precisely, a trade

bargaining by riots. He writes:

“The first sort implies no special hostility to machines as such, but is, under certain conditions, a normal means of putting pressure on employers or putters-out. As has been justly noted, the Nottinghamshire, Leicestershire and Derbyshire Luddites were using attacks upon machinery, whether new or old, as a means of coercing their employers into granting them concessions with regard to wages and other matters. This sort of wrecking was a traditional and established part of industrial conflict in the period of the domestic and manufacturing system, and the early stages of factory and mine. It was directed not only against machines, but also against raw material. finished goods and even the private property of employers, depending on what sort of damage these were most sensitive to.”9

Moreover, there does not seem to have been any political motivation behind the Luddite riots and there was no national organization. The men were merely attacking what they saw as the reason for the decline in their livelihoods. The Napoleonic Wars caused harsh working environments within the factories and a diffused poverty due to high prices and low wages.

Rosenberg (Rosenberg, 1976)10_{speaks about inducement mechanisms, that is forces which provide}

inducements to technological change. He defines these forces focusing devices, listing three examples in history of technology. Among these, he stresses as powerful focusing devices industrial conflict and industrial relations. In particular, “the apparent recalcitrance of nineteenth-century English

labor, especially skilled labor, in accepting the discipline and the terms of factory employment

9_{Hobsbawm, Eric J. "The machine breakers." Past & Present 1 (1952): 57-70.} 10_{Rosenberg, Nathan. Perspectives on technology. CUP Archive, 1976}

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threat to the firm’s profits, and this induced employers to try to economize on that factor which revealed itself to be the dearer one. The threat of strikes was a powerful force stimulating the robotization of the production process. I’ll go more in detail on this later on, speaking on the influence of economic factors in the process of innovation in the fourth chapter.

The issue of industrial conflicts was also faced by Marx in the Capital and, before that, in the Poverty

of Philosophy. In it, Marx writes:

“England, strikes have regularly given rise to the invention and application of new machines. Machines were, it may be said, the weapon employed by the capitalists to quell the revolt of specialized labour. The self-acting mule, the greatest invention of modern industry, put out of action the spinners who were in revolt.”12

Marx also deals with the Luddites in the section 5 of the Chapter 15 of the Capital, supporting the view that the revolt of the Luddites were not addressed towards the machine per se, but towards the use of it made by the capitalist. He argues: “It took both time and experience before the workpeople learnt to distinguish between machinery and its employment by capital, and to direct their attacks, not against the material instruments of production, but against the mode in which they are used.”13

Hence, according to Marx, Luddites were destroying the representation of the power of the capitalist over employees, carried on by the use of the machines to increase the production and the rate of profits.

An opposite thesis gives to the Luddites also a political dimension, which was testified, it is said, by the brutal response taken by the British Government in order to stop riots. Parliamentary acts were also adopted to put an end to the revolts. In fact, the Frame Breaking Act made the destruction of looms a capital crime punishable by death. Eventually, the harsh sentences against some members of

11_{Rosenberg, Nathan. Perspectives on technology. CUP Archive, 1976, page 117} 12_{K.Marx, Poverty of philosophy (1847), page 161.}

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the movement caused the end of the machine breaking. The increase in living standards and employment starting in the second half of the Nineteenth Century dimmed the light on this issue, and the Luddites went forgotten. The term “Luddite fallacy” was coined, in the Twentieth Century, to indicate those who are pessimistic on the long-term effects of innovation and fail to account for compensation effects. In the recent decades, however, many economists think that this fallacy may be correct and the compensation effect supported by classical economists does not hold anymore in the actual society. Now we turn on to the issue of technological unemployment and how was conceived by economists in history.

2.3 The technological unemployment according to the classical economics

Among classical economists, Adam Smith is one of the first to defend the mechanization of the production process. The position of Adam Smith is more or less related to the themes stressed in standard course of history of economic thought, such as the division of labour and specialization. Machines are a means to increase the specialization of the tasks in the productive process, so that also the productivity increases, because workers complete their tasks faster by focusing on the same operations. It is worth to notice that the causation also runs in the opposite direction: specialization of production and division of the tasks increase the technical understanding of workers of the mechanism which they operate, stimulating incremental technological progress. However, in Smith’s analysis, the welfare of workers is not affected by the mechanization of the production.

Other classical economists supported the view that workers would not be affect by incremental use of machines in the production. As I said, Marx makes a list of some of them in a passage in the

Capital.14_{These authors were supporters of the so-called theory of the compensation, as Marx has}

defined it. According to this theory, there exist some market mechanisms which offset the impact of

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labour-saving techniques. There are basically five mechanisms (Vivarelli, 2017)15 by which compensation occurs: the compensation “via new machines”, “via decrease in prices”, “via new investments”, “via new products”, “via decrease in wages”.

The compensation mechanisms “via new machines” and “via decrease in price” are the main arguments put forward by classical economists and stimulated the critique of those who opposed to the theory of compensation, above all Karl Marx.

The mechanism “via new machines” allows to the dismissed workers to be reemployed in the sector in which the new machines are produced, the capital sector. The idea is simple and it is based on the difference between process innovations (innovations which are addressed to the sector in which the innovation is made) and product innovations (innovations which are addressed to other sectors)16: some sectors introduce new machines to make product innovations, that is to create new product for the market; at the same time, the machines newly introduced are often produced in other sectors, which will reemploy the workers just dismissed in the product innovations-making sector. Usually, then, process innovations reduce employment as they reduce the quantity of factor inputs needed, whereas product innovations generate more employment because extra-labor is used (Vivarelli, Pianta 2003). 17

The second one, the mechanism “via decrease in prices”, implies that the innovations lead to a decrease in total costs of production and, consequently, to a reduction of prices of the commodities produced; the reduction of prices stimulates the demand for new products and additional employment, creating room for dismissed workers to be reemployed somewhere else. The technological unemployment is only a temporary problem.

The mechanism “via new investments” states that in the gap between the decrease in the costs of production and the decrease in prices, new investors may accumulate extra-profits and can assess to

15_{M.Piva, M.Vivarelli, Technological change and employment: were Ricardo and Marx right?}

16_{This fundamental distinction between process innovations and product innovations was introduced by Joseph}

Shumpeter.

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initiate new investment projects. This argument is attributed by Vivarelli to the first position on machinery of Ricardo, even though, as we shall see, he changed his mind on the issue.

The mechanism “via decrease in wages”, states that after a period of unemployment, given the inverse relationship between unemployment and the rate of growth of wages (Phillips’ curve), the reduction in wages increases the marginal productivity of capital and induces firms to use more labour intensive techniques.18 I’ll deal with this compensation mechanism in the last section, where the theory of Wicksell is presented. The last one, “via new product”, relies again on the Shumpeterian difference between process and product innovations. As I said, product innovations usually require more labor and tend to use extra-capital and extra-profit; moreover, the increase in products available in the market may drive their price down, in tune with the Shumpeterian growth. These abovementioned mechanisms depend extensively on the theoretical framework in which they are embedded. In fact, classical doctrine relies on Say’s Law, which guarantees that supply creates his own demand, and on the general equilibrium functioning of the markets, whose flexibility of wages and prices always guarantees the readjustment towards full employment. For example, in the Keynesian framework, where Say’s Law and the classical labor market mechanisms don’t work, in addition to the presence of bad expectations of entrepreneurs, these compensation mechanisms are completely wrong. The mechanism “via reduction in prices”, may be completely hindered by adverse expectations: if agents are going to postpone consumption due to bad expectations, unemployment due to technology may also occur in the long run. Moreover, the first effect of the introduction of machines which replace workers, is a reduction of demand and purchasing power of workers. The compensation, then, would not be immediate or it would be only partial and unemployment might persist (think, for example, to the hysteresis effect proposed by the New-Keynesians). Demand cannot be so flexible as in the minds of classical economists.

18_{It is difficult to imagine a situation in which an increase in marginal productivity of capital and its cost suddenly induces}

employers to find a technique which would substitute labor for capital. More precisely, the degree of substitutability between capital and labor was very low.

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In other words, these compensation mechanisms would work only if we assume strong predictions on the behaviour of prices, wages and expectations and markets are well-behaved.

In the last third of the Nineteenth Century, the conditions and the standard of living of the workers improved, especially in Britain, who found to be the leading country in the world; the debate, then started to dissipate and was embedded in the marginalist thought. The renaissance of the debate will occur, of course, only in the third decade of the Twentieth Century, with the unemployment issue connected to the great depression.

In the following paragraph, I’ll focus on one of the most important among classical economists, David Ricardo, even though his contribution does not lie in the classical economics framework. The debate on technological unemployment related mostly on the effects on employment derived by the mechanization and it seems that little emphasis has been put on inequalities among workers, for example in terms of distribution of income and skill premium. For a sake of clarity, it must be said that inequalities were not explicitly mentioned in the same way as they are nowadays. It must be remembered that the classical political economy tended to depict the society divided in classes, mainly trying to separate those who held capital, from which they get profits, from the workers who earned wages. The analysis, hence, mainly concerned on how profits and wages were distributed among them, resembling an extreme form of analysis of inequalities. The analysis of David Ricardo goes precisely in this direction.

2.4 David Ricardo: the conversion

One of the most relevant classical economists was surely David Ricardo. As a classical economist, in a first moment he supported the widespread view of the theory of compensation. Moreover, not only

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he shared the opinions of the classical economists, but he also developed “the first satisfactory statement of the theory of automatic compensation”19_.

However, as also stated By Ricardo himself, he never expresses his theory in any formal text. In the “Principles”, he writes: “I am not aware that I have ever published any thing respecting machinery

which is necessary for me to retract, yet I have in other ways given my support to doctrines which I now think erroneous”. 20_{Initially, then, according to Ricardo, the introduction of the machinery would}

have caused a reduction in the price of some commodities and this would have caused an equal increase in the benefits of both the capitalists and landlords21, which would have experienced an increase in profits in the short run and a participation in the general advantage of the society once profits were returned to their levels, and of labourers, “as they would have the means of buying more commodities with the same money wages, and I thought that no reduction of wages would take place, because the capitalist would have the power of demanding and employing the same quantity of labour as before..”22_{. Then, workers would have found themselves with the same level of money income but}

more employment, i.e. an higher real wage.

Even McCulloch, a close friend of Ricardo, developed a proper theory of automatic compensation. According to him, the introduction of machines causes a reduction of costs and price of commodities in that industries. Workers who are displaced are then reintroduced in other industries because the increase in money income of labourers would produce a shift of demand for products of other industries which raises the level of employment. Anyway, laborers who are substituted by machines are reemployed in other industries.

19_{Campa, Riccardo. "Technological Unemployment. A Brief History of an Idea." (2017).}

20_{D.Ricardo, “Principles of political economy and taxation”, pag.282. According to Sraffa, he gave support to the theory}

of compensation in a Parliamentary speech in 1819 concerning Robert Owen and the impact of machinery. His opinion is also present in some letters exchanged with Macculloch.

21_{Ricardo’s development of economics proceeded exactly in the classical way of dividing society in classes. The three}

classes in Ricardo’s thought were capitalists, who received profits and have to pay rents to landlords, and workers.

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Subsequently, David Ricardo in 1821 added the famous chapter 'On Machinery' to the third edition of "The Principles of Political Economy and Taxation" in which he retracted his previous statements in support of the beneficial effects on laborers. He maintained his opinions about the consequences on landlords and capitalists, however, at the same time, he changed his mind on the effects on the welfare of laborers. If a general consensus on the old position of Ricardo exists, the new position expressed in the new chapter, instead, stimulated an interesting debate. Vivarelli (Vivarelli 1995), for example, argues that new chapter does not add any novelty to Ricardo’s thought, and, even if he makes a partial reconsideration of his previous thesis, he remains a supporter of the theory of compensation.23

Many other authors (Kurz, Hollander, Davis) agree, instead, in a conversion in the opinion of Ricardo, who, even mitigating his new position with some cryptic passages, radically distanced himself from the mainstream position of classical economists.

As also stated by Hollander (1971)24, Ricardo made few explicit references to machinery before adding the new chapter XXXI, except in the “Essay on the influence of a low price of corn on the

profits of stock”, where he argues that as more efficient methods of production driven by machinery are developed or more effective distribution of resources in case of free trade is realized, the yield from a given capital would raise, stimulating its accumulation and an increase of the demand for labor.

In the new chapter XXXI, the variable which plays a key role in the new analysis of Ricardo is the gross income, the income “that upon which the labouring class mainly depend” to be distinguished by the net income, that “form which landlords and capitalist derive their income”. In particular, Ricardo realised that an increase of the net income, on which capitalists and landlords depend, is not always accompanied by an equal increase of the gross product or gross income; the reduction of gross

23_{Vivarelli, Marco. “The economics of technology and employment.” Books (1995).}

24_{Samuel Hollander, The development of Ricardo’s position on machinery, History of political economy Spring 1971,}

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income may render population abundant (in Ricardo words “redundant”) with respect to the lower level of net income and employment. In order to address the problem, it is helpful to formalize in a very simple way the problem at stake (Kurz 1984)25 :

The gross income, for Ricardo, is equal to: 𝑌 = 𝑊 + 𝑃 + 𝑅

Where W= wages, P=profits, R=rents.

The net income, the social surplus, will be equal to: 𝑆 = 𝑃 + 𝑅 = 𝑌 − 𝑊, where S=social surplus.

The paper by Kurz analyses the composition of the net and the gross income. In particular, indicating with y the vector of commodities produced, 𝛺 the vector of wage goods, 𝜋 and 𝑒 the vector of profits and rents and with s the vector of the social surplus we have:

𝑦 = 𝛺 + 𝜋 + 𝑒 𝑠 = 𝜋 + 𝑒

According to Ricardo, the new situation would imply that, subsequently to the introduction of machines, a reduction in y, an increase in s and a reduction of 𝛺 will occur. The reduction of 𝛺 would involve either a reduction in wages or a reduction in laborers employed, as argued by Ricardo (“.. the

same cause which may increase the net revenue of the country, may at the same time render the population redundant, and deteriorate the conditions of laborers”). Mathematically:

∆𝛺 = 𝛺₁− 𝛺₀ = 𝑤₁(𝐿₁− 𝐿₀) + 𝐿₀(𝑤₁− 𝑤₀) = 𝑤₁∆𝐿 + 𝐿₀∆𝑤

where 0 represents the situation before the introduction of the machine and 1 the situation afterwards. Thus, again, the introduction of machines might have a dual effect on the society: an increase in unemployment or an increase in inequalities due to the reduction of wages of laborers with respect to profits and rents granted to capitalists and landlords. This will happen depending on the level of actual wage: whenever the actual wage is above the subsistence level and the economy is at its full capacity,

25_{This mathematical formulation has been taken by}_{Kurz, Heinz D. “Ricardo and Lowe on machinery.” Eastern Economic}

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a reduction in wage will occur mitigating the reduction of employment, while a wage fixed at its subsistence level would imply a total displacement of workers.

Then, Ricardo explains in more details the effect of the introduction of machinery on the economy, using a numerical example which has been taken into account by many works on the argument. A capitalist carrying on a joint business of a farmer and manufacturer of necessities, employing capital for the value of 20000 l., of which 7000 l. as fixed capital and 13000 l. as circulating capital. The fixed capital includes buildings and infrastructure, while the circulating capital is used for wages. The profits amount to 2000 l. per year, the 10% of the capital. Each year he possesses food and necessaries for 13000 l., which are sold to the workmen; the workmen are paid in wages 13000 l. Then, “at the end of the year they replace in his possession food and necessaries of the value of 15000,

2000 of which he consumes himself, or disposes of as may best suit his pleasure and gratification. As far as these products are concerned, the gross produce for that year is 15000, and the net produce 2000.” The net product of the capitalist may be used for the private consumption of the capitalist, for buying luxury goods, or to give employment to servants, raising employment for his services. Then, Ricardo supposes that the capitalist in the following year employs half of his men to construct a machine, while others produce food and necessaries, as usual. The next year, the capitalist find himself with a machinery of the value of 7500, and food and necessaries of the value of 7500. Now the fixed capital amounts to 14500 (7000 of the previous period plus 7500, the value of the machinery), while the circulating capital has been reduced to 5500 (13000 minus the value replaced by the machine, 7500). The composition of capital at the of the period is changed: the value of the total capital is the same, however the fixed capital has been augmented by the value of the machine, whereas the circulating capital is diminished. Fixed capital is accumulated at the expense of circulating capital, those displaced do not find new employment elsewhere, creating what has been defined as technological unemployment26. The use of the machine, then, causes an increase in the

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ratio fixed/circulating capital, which “corresponds to the substitution of machinery to human labor” (Hollander, 1971).The product made by the less number of workers with the help of the machinery is less than before in gross terms, because it has been reduced from 15000 to 7500 (the circulating capital of 5500 plus 2000 of profits); however, the net product is the same as before. This is the point stressed by Ricardo: even if gross income is reduced and the level of employment is lower, the net income does not need to be less than before, and it finds to be at least equal to before, or even greater. As Ricardo writes, “.. as the power of supporting a population, and employing labour, depends always on the gross produce of a nation, and not on its net produce, there will necessarily be a diminution in the demand for labour, population will become redundant, and the situation of the labouring classes will be that of distress and poverty.” 27

Kurz made some objections to the analysis of Ricardo; however, I’m not going into detail in these aspects. What seems to be worth to notice, above all, is that workers work in the subsequent period with the machine previously produced. The crucial assumption, in this case, is that they have the suitable to skills to operate it: what is behind, therefore, is that labour is homogeneous, that is the “quality” of the labor is the same independently of its nature.

The Ricardian analysis goes on with an obscure passage in which he explains the long term effects (Ricardo does not mention a time reference) on the capitalist. He says that the reduction of prices consequent on the introduction of the machinery will determine a transferring for the capitalist from revenue into capital, which would permit to laborers to be reemployed in the sector in which the increase in capital has been moved (“As, however, the power of saving from revenue to add to capital,

must depend on the efficiency of the net revenue, to satisfy the wants of the capitalist, it could not fail to follow from the reduction in the price of commodities consequent on the introduction of machinery, that with the same wants he would have increased means of saving – increased facility of transferring revenue into capital. But with every increase of capital he would employ more laborers; and

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26 therefore, a portion of the people thrown out of work in the first instance, would be subsequently employed”).28_{In addition, he states: “if the increased production, in consequence of the employment} of the machine, was so great as to afford, in the shape of the net produce, as great a quantity of food and necessaries as existed before in the form of gross produce, there would be the same ability to employ the whole population, and therefore, there would not necessarily be any redundancy of people”. According to Davis, we should not pay too much attention to this position, otherwise Ricardo would have not added this chapter to the third edition. This passage must be considered, then, as simply a restatement of his previous thought. On the opposite, we could consider this as an

explanation of the abovementioned compensation mechanism, the mechanism “via new

investments”(Vivarelli, 2005). Insofar as the investor faces lower costs and higher profits, caused by the gap between the introduction of machines and the reabsorption of dismissed workers, it can accumulate extra-capital to be employed subsequently.

What Ricardo seems to stress, is that if the increase in the net produce is realized in such a way to increase the gross produce, instead of reducing it, the effects on the employment would be positive. Accordingly, the positive effects of laborers would realise themselves in:

o The demand for menial servants made by the capitalists, subsequent to the expenditure of his net produce for his service. This would not be realized if the net product is used for buying luxury goods. Laborers should hope that the expenditure of capitalist to not be directed to luxury goods, otherwise the net product of the capitalists would not be useful for the society and would not cause a raise in the employment level.

o The capital accumulation in terms of more savings determined by an increase in the rate of surplus value.

o The low prices of commodities.

28_{This is the main point stressed by Vivarelli, according to which Ricardo believed in the compensation mechanism “via}

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Then, for what I have catch from these pages, the welfare of laborers in terms of wages or in terms of unemployment, depends on three things: how the capitalist employs his net product, if the gross product increases or not with respect to the net product, and the productive capacity of the economy. This latter point deserves more attention, as also argued by Kurz. The reemployment of workers in the following periods shall lay in the existence of the underutilized capacity in the previous periods: if the economy operate at his full capacity, the only effect of the construction of machines shall be the reduction in wages.

In the conclusion of the chapter, Ricardo makes his position less extreme. He argues that the introduction of a machine should never be discouraged in a State. He argues:

“The statements which I have made will not, I hope, lead to the inference that machinery should not

be encouraged.”

Ricardo basically lists two reasons in support of his view. The first one deserves more attention, given that is a strong point of connection with the position of Marx on the subject and in a certain way gives the intuition of the process of introduction of labor-saving techniques depending on the composition of the factor inputs.

He argues, first of all, that, when a machine is introduced, this happens gradually and discoveries “rather operate in determining the employment of the capital which is saved and accumulated, than

in diverting capital from its actual employment”.

Usually, then, the capital employed in making the machines will be derived from the accumulated savings or capital and it is not considered as existing capital. In the former case, the most probable, the abovementioned compensation mechanism holds.

Moreover, “With every increase of capital and population, food will generally rise, on account of its

being more difficult to produce. The consequence of a rise of food will be a rise of wages, and every rise of wages will have a tendency to determine the saved capital in a greater proportion than before to the employment of the machinery. Machinery and labor are in constant competition, and the former

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28 can frequently not be employed until labour rises. ” The first statement simply expresses the fact that the presence of diminishing returns increases the prices of the products, due to the increasing difficulty in producing it. The increasing in prices will cause an increase in wages, which would stimulate a greater proportion of capital. It is worth to go deeper into this issue, because this aspect has some import connections with the induced innovation theory with which I will deal in the next chapter.

Some authors have recognized the influence of the work of John Barton in Ricardo’s change of mind. Barton deals with the substitution of fixed capital for circulating capital driven by capital accumulation. According to Barton, an expansion of aggregate capital does not always induce a population expansion. Indeed, accumulation can take the shape of sustained increase in fixed capital, while the demand for labor depends on circulating capital. However, the choice of accumulation in form of fixed capital crucially depends on the laborer’s share in total product. As price of commodities rises, wages should rise to maintain the same real wage, and then the increase in fixed capital is a response to preceding wage-rate increases.29 As we have read in the previous lines of chapter 31, the same mechanism works in Ricardo’s. The rise of food implies a rise in wages, and every rise in wages will determine a more than proportional tendency to use fixed capital more than circulating. Hence, the higher wages will have an inducement effect on the introduction of machinery, which will be introduced as fixed capital. The further thing to stress is that Ricardo had recognized the substitutability of factors and its influence on the process of innovations.

Then, according to Hollander, the work of Barton was not decisive for the development of his new theory. Ricardo has already stressed the issue even in the first edition of the Principles30.

29_{Samuel Hollander, The development of Ricardo’s position on machinery, History of political economy Spring 1971,}

105-135, page 110

30_{Hollander argues that in the chapter “On value”, Ricardo writes: the choice between capital-intensive and}

labor-intensive processes may be a matter of indifference until an increase of wages creates a preference for the former.

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The point of connection between Barton and Ricardo relates to the fact that the rate of growth of demand might increase less rapidly than the rate of growth of fixed capital. This process is known as the Ricardo effect and, as Hollander argues, it was already present in Ricardo’s mind since the first editions of the Principles. The main novelty, on the contrary, may be found in the conversion of circulating capital in fixed capital, the mechanism discussed in the numerical example.31

Ricardo also offers a theory on why in England the tendency to substitute labor for machines is higher than in America: food in America is easily provided, so its price is less than the British one, and the wages will be less, so that the tendency to introduce machinery is less. Given the fact that the increase in the price of foods does not affect the price of machinery, the use and the introduction of machinery will be stimulated pari passu with the increase in capital, because “the same cause that raises labor,

does not raise the value of the machines, and, therefore, with every augmentation of capital, a greater proportion of it is employed on machinery.” However, the increase in the demand of labour will increase less than proportional than the increase of capital, the Ricardo effect.

In other words, as we have discussed, and as also Marx afterwards will argue, the ratio fixed capital/circulating capital will be a diminishing ratio. Then, his position is at odds with that of Barton, which imagined that an increase of capital should not be followed at all by an increase in demand for labor.

The second reason put forward by Ricardo is consistent with his theory on international trade: if capital is carried abroad, a reduction in competitiveness of the country with respect to the foreign one might occur, creating a terrible situation for local worker. At the end, he concludes:

“By investing part of capital in improved machinery, there will be a diminution in the progressive

demand for labour; by exporting it in another country, the demand will be wholly annihilated.” A last issue deserves a brief investigation just to lay out the main feature of Ricardo’s philosophy. Ricardo is considered a philosophical naturalist, embedded in the doctrine according to which social

31_{Some works dealing with the issue of machinery in Ricardo explicitly start with the numerical example}

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phenomena are “ultimately governed by laws of nature”. The laissez faire policies suggested by Ricardo, above all in the context of corn laws, are a typical example of a law immutable and governed by nature. However, technological progress generates social conflict, as it might be beneficial to landlords and capitalists and detrimental to laborers. In fact, laissez-faire policy does not produce social harmony, and policies which direct the expenditure of landlords and capitalists are desirable. In any case, the policies have to respect the inalienable right of landlords and capitalists to dispose of their means in the way they prefer. Then, social harmony is no longer nature-given. What can be deemed fair is a policy which induces landlords and capitalists to use in a productive way their resources, without altering their rights, in particular, and directing them towards a pattern of expenditure which, in Ricardo’s words, would involve the employment of menial servants and the consumption of food and necessaries. But, then, it is fair to say that political economy is no longer natural. Femminis, Salanti (1995)32, on the other hand, think that Ricardo’s analysis is coherent with his philosophical background and the apparent inconsistency can be ruled out taking to account the degree of determinism of natural laws and a difference ought to be made between the determinism of the nature given policies and the laissez-faire doctrine to which Ricardo adhered.

2.5 Karl Marx: the denial of the compensation

Marx deals with the problem of technological unemployment in Chapter XV of the Capital. It is difficult to separate Marx’s opinion about this issue from his whole thought about political economy. Moreover, it is evident, especially in dealing with technological unemployment, the connection with sociology. Marx pays particular attention to the description of the life conditions of the workers inside the factory, describing the safety conditions of the factories and the physical effects on workers of the use of machines in the production process.

32_{Femminis, Gianluca, and Andrea Salanti. "Davis on Ricardo's machinery chapter: a comment." History of Political}

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It is also undeniable that the introduction of machines occurred in a period in which workers were struggling with drudgery, famine and harsh conditions and the critique of Marx to the whole social structure, which was the cause of all of this, crucially affects the narrative of technology and unemployment. However, in this chapter, Marx clearly illustrates also from an economic point of view how the introduction of the incremental mechanization of production may produce severe effects on workers’ lives.

Marx, in explaining how substitution of machines for workers occurs, makes a difference between the proper body of the machine and the tool. In the artisanal production the tool was activated by human force; with the mechanization the tool is linked to the machine. According to Marx, “the

machine proper is therefore a mechanism that, after being set in motion, performs with its tools the same operations that were formerly done by the workman with similar tools.”33_{The machine}

substitutes the workman in the sense that it substitute the force of workman in handling the machine, given that the machine handles and works more effectively and more powerfully a tool or a group of tools.

The use of the machine in the production process is justified in the measure of reducing the price of labor employed to produce the output. First of all, machinery does not create new value, but it transfers its value to the product. The value transferred is different from the value itself of the machine, given that the machine transfers its value in the measure of its “wear and tear”, and this depreciation is distributed among the number of tools that the machine makes workable and the huge number of products produced. In this sense, Marx argues that the machines work “gratuitously” (see section 2). The amount of value transferred to the product depends on the value of labor incorporated in it, so that the less the labor the less is the value. This should suggest that the use of the machinery depends on the difference between the value of the machine itself and the value of the labor replaced by the machinery itself, and it represents the degree of its productivity. However, we must consider,

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in this comparison, the value transferred to the product, since “as long as the labor spent on a

machine, and consequently the portion of its value added to the product, remains smaller than the value added by the workman to the product with his tool, there is always a difference of labour saved in favour of the machine. The productiveness of a machine is therefore measured by the human labour-power it replaces ”.

Since the machinery is used as means of reducing the price of the product, Marx states that “the

limit to his using a machine is fixed by the difference between the value of the machine and the value of the labour-power replaced by it”. In this sense, the employment of machine is profitable for the employer if and only if wages are not so low to make unprofitable the employment of the machine in the production process. Marx stresses this point even in the Theories of Surplus Value, where he argues: “.. the machine can only be employed profitably, if it.. is the (annual) product of far fewer

man than it replaces”34_.

Then, Marx focuses on the social effects of the introduction of machines on workers. The first effect is to raise the number of children and women employed in the factory. Machines substitute human strengths with the machinery, so that the capitalist does not need to employ strength and powerful men; in order to increase the value of his production, the factory system employs children and women which are paid less than adult men. One of the most unfavourable effect for the workers is related to the increase of worked hours. In order to stress this problem, Marx distinguishes between two types of depreciation of the machines: the first one is the abovementioned “tear and wear” of the machine, that is the physical depreciation due to the continued use, the second one is the “moral” depreciation, that is the loss of value determined by the competition of new machines invented or new machines produced with a lower cost. Thus, the aim of the capitalist becomes to exploit as more as possible the contribution of the machine to the production process, and, in order to do this, he will exploit workers for longer time, determining a general increase in worked hours. Otherwise, if the capitalist increases

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the number of employed workers, as a consequence an increase in the part of investment due to the machinery would occur, that is an increase of constant capital. With the increase of working day, the part of constant capital devoted to machinery would be invariant, so that this latter solution was adopted.

The increase in working hours determined a response from the society, which reacted by imposing a minimum in worked hours per day. However, and this is the second effect proposed by Marx consequent on the introduction of machines, this minimum caused an increase in the degree of work acted by the worker, that is an intensification of the working day. In particular, Marx, by providing some empirical examples, shows that the product worked in the reduced legal working day was equal to that produced previously with more hours worked. This happened holding constant the machinery, so that the increase of the product could not be ascribed to an higher velocity of the operating machines. The reduction of the legal working day was, moreover, a powerful stimulus to the improvement of the machine itself, by motivating the capitalist to find ways to increase the velocity of the machine or to increase the number of machines which a worker could operate. The worker, then, found himself to operate a greater number of machines, and saw his condition and his pain in doing his job deteriorated.

The machinery reveal itself to be a competitor of the worker, because it appropriates of the use of the tool substituting the worker, whose use-value and exchange-value go to zero.

Moreover and more importantly, Marx argues:

“But machinery not only acts as a competitor who gets the better of the workman, and is constantly on the point of making him superfluous. It is also a power inimical to him, and as such capital proclaims it from the roof tops and as such makes use of it. It is the most powerful weapon for repressing strikes, those periodical revolts of the working-class against the autocracy of capital.”

This important argument will be recalled in the next chapter, when I’ll try to deal with the spur to innovations made by the industrial conflicts and the industrial relations proposed by Rosenberg.

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What seems to me worth to notice, is that machines are not an evil per se, but it is the use done by the capitalism which make them an instrument against which workers fight. It is the use of the capitalism, which employs the machine as a tool to stop and repress strikes and riots of the workers, which were protesting against the harsh conditions in which they lived. The further improvement of the machines is another means in the hands of capitalist: it reduces the number of workers which operate the machines and it also reduces the number of machines, but it makes them more efficient, concentrating this less number in the hands of a less number of capitalists.

In the section 6 of the abovementioned chapter, Marx makes an analysis close to that of Ricardo. Supposing that a capitalist employs half capital in fixed capital and half in variable, and the subsequent employment of machinery in the production reduces the number of workers, while the left ones have to work with the machine. The substitution of laborers by machines determines an increase of constant capital with respect to the variable capital, which is turned on constant capital. Conversely to the classical theory of compensation, capital is not set free and cannot be employed in other uses. If and only if the value of the machinery is less than the value of the workforce which has been substituted by the machine itself, then a part of capital is set free and suitable for other purposes. Only in this case, it would be possible the proper compensation mechanism advanced by the classical economists. Marx explains the fallacy of the compensation mechanisms in the following: the diminution of variable capital prevents the workers to purchase means of subsistence of the same value, so that it decreases the demand for those commodities equivalent to those means of subsistence, reducing their price. At the same time, hence, also those workers working at these commodities are set free. Hence: “Instead, therefore, of proving that, when machinery frees the workman from his means of subsistence, it simultaneously converts those means into capital for his further employment, our apologists, with their cut-and-dried law of supply and demand, prove, on the contrary, that machinery throws workmen on the streets, not only in that branch of production in which it is introduced, but also in those branches in which it is not introduced.” (section 6). The

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effect, therefore, would be the opposite of that imagined by the “apologists”. The reconnection between the means of subsistence set free and the workers is not certain.

Marx also deals with the machinery aspect in the Theories of surplus value. Marx recognizes intellectual honesty to Ricardo in retracting his previous opinion on machinery effects.35The Ricardian analysis, according to Marx, is right in recognizing the fall in variable capital subsequently to the introduction of machines, even though Marx argues that this reduction will be permanent, because the rate of decrease of variable capital will continue at a faster rate relatively to the constant one. Again, this view would be perfectly in tune with the position of Hollander, which, as we noted above, argues that Ricardo had recognized the lag in the growth rate of demand for labor with respect to the capital. Marx stresses the fact that the revenue set free by the introduction of machines in that industry has no connection at all with the revenue lost by the workers. This point is, in some way, close to that expressed in the Capital. In addition to this, Marx severely critiques the fact that if the net revenue accumulated by the capitalists is employed in capital-intensive investments, a reallocation of dismissed workers cannot be realised.

Moreover, what Marx finds absurd is the conviction, attributed by Marx himself also to Ricardo, to consider the means of subsistence set free by the reduced purchasing power of the dismissed workers as immediately suitable for them. The mistake of Ricardo, as a consequence, lays in the conviction of the fact that the means of subsistence just dismissed could not find different purchasers other than the dismissed workers. He argues:

“Ricardo imagines quixotically that the entire bourgeois social mechanism is arranged so nicely that

if, for instance, ten men are discharged from their work, the means of subsistence of these workers— now set free—must definitely be consumed in one way or another by the identical ten men and that otherwise they could not be sold; as if a mass of semi-employed or completely unemployed were not