Friday, 6 November 2009

The Luddite Fallacy

When you start delving into the history of Luddism (as I have been doing), then you come across differences of opinion in economic circles on the influence that mechanisation may have on the economy. The argument is known as the so-called "Luddite Fallacy." Economists argue that technological progress will never lead to massive, long-term unemployment.

The reasoning goes more or less like this:

1. Labour-saving technology is introduced into the workplace, and some workers lose their jobs, however production also becomes more efficient.

2. More efficiency leads to lower prices for the goods and services produced, leaving consumers with more money to spend on other things.

3. Increased spending produces increased demand across nearly all industries--and that means more jobs.

4. Displaced workers then are rehired.

Apparently, that's what happened when agriculture was mechanised: food prices fell as efficiency increased, and consumers spent their extra money elsewhere, producing jobs in the manufacturing and service sectors.

The problem is - is this scenario (for that's all it is) robust enough to apply in all situations? I'm not convinced - and there are others who share my view.