Trade, Mechanization, and Displacement
By Arnold Kling
Between 1999 and 2009, these large global corporations pared 2.9 million workers from their U.S. payrolls while adding 2.4 million jobs at their foreign affiliates. That’s a reversal from the previous decade, when they boosted payrolls across the board, including increases of 4.4 million in the U.S. and 2.7 million overseas. These companies are simply doing what most small outfits cannot: They are going where the business is. Between 1999 and 2009, BEA says, sales by U.S. multinationals in the U.S. increased by 25 percent, to $7.8 trillion, but receipts from their overseas operations more than doubled, to $4.9 trillion.
When I get around to writing a full blog post on Amy Sue Bix’s book on technological unemployment, it will have lots of excerpts. I am finding it the right book at the right time for me.
There is an equivalence between mechanization and opening up new avenues of trade. Both increase average productivity. Both serve to displace existing workers. Both can be fit easily into the framework of Patterns of Sustainable Specialization and Trade.
One of Bix’s points is that mechanization displaced a lot of workers in the 1920s and 1930s. But in the 20s we had good times, as classical economics would predict. In the 30s, we had the Depression. Similarly from 1990 to 2000 we had good times, even though workers were being displaced by trade and offshoring. Currently, we are having very high unemployment.
Bix documents the constant back-and-forth between people who argued that mechanization was happening too quickly for humans to adjust and those who argued that higher productivity represented progress. I think that both sides had a point. Yes, in the end we benefit when goods and services can be provided at low cost. However, in the short run displaced workers do lose income and dignity. So, it is not quite right to tell the opponents of progress, either through mechanization or trade, just to shut up. I wish that government had a magic pill that it could prescribe to alleviate the problems of displacement. Unfortunately, the pills that it delivers seem to do little good.
The AS-AD framework would say that the hard times are due to deficient aggregate demand. The PSST framework says that the hard times are due to the inability of the market to accomplish all of the adjustments needed given the changes to the environment.
I am toying (forgive the pun) with a Rubik’s Cube metaphor for the economy. Standard models use equations as a metaphor, along with doing mathematics that applies to infinitesimal changes around equilibrium. I think this is very limiting in terms of what it can describe.
Imagine a ridiculously hard Rubik’s Cube, with each side 10×10 or 20×20. Moreover, as the player attempts to solve the cube, every once in a while a demon takes the cube away and rotates it randomly, setting up a new puzzle, before giving it back to the player. The cube never gets fully solved before the demon does its thing again.
We have good times when most of the colors are on the correct side. We have bad times when the demon is particularly devilish, or when the player makes a mistake, or when the player has to rotate pieces away from their correct side in order to set up later moves.