__________________________________________________________________ Adam Murren and Walter E . Block What Impact will Automation have on the 21 st Century Economy ? Introduction In this research paper , we investigate the impact that automation will have on the twenty-first century economy . Technological progress has expanded , and will continue to expand , the scope of work that can be performed by machines . We broadly define automation as the process by which computers or machines substitute for human labor . To examine how automation relates to unemployment , we focus on the substitution of capital for labor for the explicit purpose of decreasing labor costs . First , in section I we discuss how firms make the decision to automate and explain why the trend toward automation is likely to continue into the twenty-first century . Then , informed by economic theory , in section II we explain how markets will likely react to automation . After exploring how a free-market can be expected to respond , in section III we address potential government interventions that might be used in an attempt to mitigate the perceived negative effects of automation . We conclude in section IV wi Adam Murren is an independent scholar living in Palmsdale , California . Walter Block is Harold E . Wirth Eminent Scholar and Professor of Economics at the College of Business Administration , Loyola University , New Orleans . with an analysis of how the next wave of automation will change the economic landscape . I . What is Causing Automation ? Firms automate when the cost of performing a given task with human labor exceeds that of performing the same job using a machine . Specifically , profit maximizers will automate a process when the marginal expected benefit of doing so is greater than the marginal expected costs . We assume that this figure is positive when labor outlays are reduced by more than it costs to automate . To the extent that specific benefits and costs can be reasonably estimated , firms will include them in their calculation of net benefit . Qualitative considerations that are difficult to quantify will be considered after calculating net benefit . For example , a grocery store that is thinking about installing self-checkout machines would also include expected savings on employment lawsuits in their calculation . 1 However , it might be impractical to esti- 1 In similar manner , while machines sometimes break down , they do not talk back to their bosses , do not hassle customers , engage in sexual harassment against them , do not need coffee breaks , never leave work early , etc . Laissez-Faire , No . 46 ( Marzo 2017 ): 54-64

__________________________________________________________________ mate lost sales from customers who would rather patronize businesses that employ human cashiers . In this situation , management would decide to automate only when the expected net benefit is high enough to compensate them for the risk of losing certain customers . When firms must decide between competing strategies to achieve the same end , they tend to increase spending on whichever medium has a higher marginal effect , and make reductions on the alternative ( Froeb et al ., 2016 , p . 42 ). Automation is a strategy and , in order to explain why it is happening , we must examine the costs and benefits associated with it . Public policies that increase the cost of labor , like minimum wage laws and other regulations , escalate the pace of automation . For example , in an interview with Business Insider on March 16 , 2016 , the CEO of Carl ’ s Jr . and Hardee ’ s , Andy Puzder , referenced rising minimum wages and said that he would like to open a restaurant where “ you never see a person .” Puzder also explained that machines “... never take a vacation , they never show up late , there ’ s never a slipand-fall , or an age , sex , or race discrimination case ” ( Taylor , 2016 ). If the cost of replacing a low skilled employee is only slightly greater than the cost of employing them , then one should expect a minimum wage hike to result in their replacement . Although increases in the minimum wage could trigger the automation of certain low-skilled jobs , this trend seems almost inevitable 2 as computers 2 But not quite . If there were no minimum wage law at all , and unskilled workers could be paid $ 2 or $ 3 per hour , they might long stay more than competitive with new machinery . This sounds cruel , to be sure , but , that $ 2 or $ 3 per hour is infinitely higher than become more capable and affordable . 3 As MIT professors Erik Brynjolfsson and Andrew McAfee point out in their book The Second Machine Age : “ … there ’ s never been a worse time to be a worker with only ‘ ordinary ’ skills and abilities to offer , because computers , robots , and other digital technologies are acquiring these skills and abilities at an extraordinary rate ” ( Brynjolfsson and McAfee , 2014 , p . 10 ). The exponential growth in the amount of computing power that can be purchased for a given amount of money has come to be known as “ Moore ’ s Law .” This is based on Gordon Moore ’ s prediction in 1965 that “ the complexity for minimum component costs has increased at a rate of roughly a factor of two per year … there is no reason to believe it will not remain nearly constant for at least ten years ” ( Moore , 1965 ). It turns out that Moore was too conservative in limiting his forecast to just one decade ; in fact , “ Moore ’ s law has proved remarkably prescient for almost half a century ” ( Brynjolfsson and McAfee , 2014 , p . 40 ). The compounding effects of exponential growth have resulted in the rapid advancements in technol- 3 For more on the unemployment effects of this pernicious legislation , see Becker ( 1995 ), Block ( 2001 ), Block and Barnett ( 2002 ), Boudreaux ( 2016 ), Burkhauser , Couch and Wittenburg ( 1996 ), Caplan ( 2013a , 2013b ), Cappelli and Block ( 2012 ), Deere , Murphy and Welch ( 1995 ), Gallaway and Adie ( 1995 ), Hanke ( 2014 ), Hazlitt ( 1946 ), Howland ( 2013 ), Klein and Dompe ( 2007 ), Landsburg ( 2004 ), McCaffrey ( 2014 ), Mc- Cormick and Block ( 2000 ), Mercer ( 2015 ), Murphy ( 2015 ), Neumark ( 2015 ), Neumark and Wascher ( 1992 , 1995 ), North ( 2014 ), Powell ( 2013 ), Rothbard ( 1988 ), Rustici ( 1985 ), Sohr and Block ( 1997 ), Sowell ( 1995 ), Vedder and Gallaway ( 2001 ), Vuk ( 2006 ), Ward the zero per hour due to this legislation . ( 2016 ), Wenzel ( 2013 ) and Williams ( 1982 ). __________________________________________________________________ 55

__________________________________________________________________ ogy that will drive automation in the 21 st century economy . The likelihood that a firm will automate will continue to increase as technological progress improves the functionality of computers and machines , while simultaneously making them cheaper . As managerial economics tells us , “ the art of business consists of identifying assets in low-valued uses and devising ways to profitably move them to highervalued ones ” ( Froeb et al ., 2016 , p . 19 ). To the extent that a company can redirect spending from employment to automation and generate more value , we should expect them to do so . Profit maximizing firms use their resources efficiently to provide consumers with goods and services . As it becomes more efficient to acquire , implement and maintain machines instead of paying wages to employees , companies will do exactly that . II . How Markets React to Automation . Automation is “ … merely a new name for continued technological advance and further progress in labor-saving equipment ” ( Hazlitt , 1946 , p . 53 ). To the extent that a technological advancement enables us to produce more with the same amount of labor , the proverbial economic pie will increase . The concern is that the size of each individual ’ s slice will not increase equally , and that some people ’ s slice might even shrink as the pie grows . To examine whether or not this concern is warranted , we must carefully consider how the market will react as technology enables firms and individuals to economize on labor . When managers decide to replace human labor with a new technology , they efficiency . This initial loss of employment will first be offset by the fact that people were employed in the creation of the new technology ; however , this offset can be arbitrarily low , depending on the nature of the new breakthroughs . The effects following the firm ’ s decision to automate will likely result in sufficient increases in employment to offset the initial loss of jobs . When automation works as planned , the first firms to engage in this practice will be able to deliver their product or service at a lower cost than their competition . This ability is a competitive advantage that will enable them to earn a positive economic profit . Regardless of how the firm ’ s owners spend this profit , they will generate economic activity that will increase employment . In the long-run , competition will erode the excess profit by pushing down the price . As it falls , consumers will have more money to spend on other goods , thereby increasing employment wherever they allocate this spending . In examining the central question at hand , one should remember Henry Hazlitt ’ s advice that “ the art of economics consists in looking not merely at the immediate but at the longer effects of any act … ” ( Hazlitt , 1946 , p . 17 ). The first firm to successfully automate will exploit this advantage over its competition to increase profit . Assuming that demand is elastic , the profitmaximizing firm will increase sales by lowering its price until marginal cost equals marginal revenue ( Froeb et al ., 2016 , p . 41 ). The owners will either invest or consume the extra profit generated by automation . 4 Assuming that they in- 4 Suppose that , instead , they stick these funds under their mattresses . Then the real balance effect will come into play . Their act of hoard- will decrease their workforce to improve ing will increase the value of everyone else ’ s __________________________________________________________________ 56

__________________________________________________________________ vest in or purchase from businesses that employ people , they will indirectly stimulate employment as they spend the extra profit . As this innovative firm expands , its competitors will adopt the new technology to maintain market share and remain profitable . The industry-wide trend toward automation will increase employment for the makers of the new technology and will result in lower prices for consumers . The customers of the newly automated firms will have more money to spend , which will lead to increased employment wherever they choose to allocate their spending . Clearly , automation cannot be said , by default , to increase overall unemployment . 5 The specific workers that are displaced by automation are freed up to employ themselves in a different capacity where they can continue to fulfill consumer demand . The more difficult it is for the workers who are replaced by machines to reemploy themselves productively , the more they will suffer from automation . However , we cannot forget about the money ; this , in turn , will create more jobs . 5 Back in the 1960 ’ s , Yale Brozen wrote : “ Amateur social scientists such as Norbert Wiener ( a professional mathematician ) predicted , in 1949 , that we faced a decade or more of ruin and despair ” from the wholesale unemployment which would occur in the 1950 ’ s . Cybernation and automation were going to abolish jobs at an unprecedented rate . The prediction was reaffirmed by a parade of witnesses in the mid-1950 ’ s before a congressional committee investigating automation . Yet , the decade or more of ruin and despair from the unemployment that was going to be caused by automation appears to have been postponed by at least 17 years . Nevertheless , we still have doom criers who say that this consequence of automation will be appearing in the near future ” ( Brozen , people who find gainful employment as a result of the increased consumption and investment made possible by this process . Furthermore , we must also consider that technological advancements that make automation possible can create entirely new jobs . To illustrate this point with an example , touch-screen technology can be used to replace fast-food cashiers but many more people are employed making retail tablets and smart phones using the same technology . The net change in the quantity of jobs and workers ability to respond to the changing labor market will determine the effect that automation has on unemployment and living standards . 6 New uses for labor may come from existing industries where demand increases due to the economies generated by automation , or from new industries that are made possible by advancements in technology . The type of work that will be in higher demand as technology advances will 6 To the extent that displaced workers cannot find a way to employ themselves , they may suffer from what Keynes called technological unemployment , which he defined as “ unemployment due to our discovery of means of economizing the use of labor outrunning the pace at which we can find new uses for labor ” ( Keynes , 1930 ). But this is an economic fallacy . As long as we have not achieved post-scarcity , as long as people want more than they already have , there will be employment opportunities for all those whose marginal revenue productivity is greater than zero — i . e ., pretty much all of us , apart from those who are severely mentally handicapped , children , and the very elderly . For a critique of Keynes , see Anderson ( 2009 ), Cochran and Glahe ( 1999 ), Dempster ( 1999 ), Garrison ( 1985 , 1992 ), Hammond ( 2012 ), Hazlitt ( 1959 , 1983 ), Hoppe ( 1992 ), Hutt ( 1979 ), Murphy ( 2008 ), Ritenour ( 2000 ), Rostan ( 2010 ), Rothbard ( 1992 ) and Skousen 1966 ). ( 1992 ). __________________________________________________________________ 57