The industrial revolution in America was slow to get going, compared to that in Europe. Nevertheless, between 1800 and 1900, the per capita GDP in the U.S. multiplied by about 5 times. Did Americans work 5 times as hard in 1900 as in 1800? Of course not. Human labor was replaced by machine labor, artificial energy sources, and technological innovation.
This was nothing to what was coming in the 20th century. Between 1900 and 2000, the per capita GDP of the U.S. multiplied by about 8 times. In 200 years, the per capital wealth of the country multiplied by about 40 TIMES. Does this mean that Americans worked 40 times as hard in 2000 as in 1800? Of course not. Machine labor and technological innovation has replaced human and animal labor.
Of course, there are far more people in the country today than there were in 1800, so there is a lot more human labor available. Between 1800 and 2000 the U.S. population multiplied by about 60 times. But over the same time period, the country’s GDP multiplied by almost 2000 TIMES.
In economic discussions, we often hear about “worker productivity.” The problem is, THERE IS NO SUCH THING. There is WORKFORCE productivity, also called labor productivity, which is the ratio of productive output to input. How is this measured? One of the most common methods is per capita GDP.
“But Dave,” you might well ask, “How does this tell us how much of production is actually being generated by human workers?” Answer – It doesn’t. That’s something you won’t hear about in economic discussions, because human workers contribute very little to production. If you doubt this, just think about trying to run a supermarket business, or an oil field service company, with only human labor. No machines, no artificial energy sources. No electricity, no fossil fuels, no mechanization. Good luck. Production is not about human workers.
This is amply illustrated by a simple example. Suppose I grow watermelons. By myself, by hand, I prepare the field, plant the seeds, hoe the field, and harvest the watermelons. Every day I break my back for 8 hours to produce these watermelons. I harvest 100 melons, and sell them for $5 apiece. I have generated $500 of production. (Yes, production is measured in dollars – the number of watermelons sold is really irrelevant.) Now suppose that, instead of doing all of this by hand, I have an air-conditioned tractor with attachments to prepare the field. It takes all of an hour for me to do it. I use the tractor with different attachments to plant the seeds. This takes an hour. I use the tractor to lay down herbicides to kill the weeds. This takes an hour. And I use a mechanical harvester to harvest the melons. This takes a few hours.
The rest of the time, I sit on my butt and watch the melons grow. I sell 100 melons for $5 apiece. I have generated $500 of production.
Notice that the per capita production in these 2 scenarios is exactly the same. The difference is that in the first scenario, I break my back for months to generate the $500 of production. In the second, I spend all of 5 hours or so of actual work time, spread out over months. In fact, if we measured the productivity as a function of man-hours (which economists often do), my productivity in the second scenario is many times that in the first. Except this is a bit misleading. It’s “my” production only because I own the machines, land, and facilities that make it possible.
This is what economists and politicians mean when they talk about “worker” productivity. It has nothing to do with breaking your back. It is about the monetary value of goods and services in relation to the number of people in the economy, or the hours worked. “Worker” productivity doesn’t increase when workers work harder. It increases when machines work harder and faster and more efficiently. This has been the case all along.
“But Dave,” you might protest at this point, “If this is true, why do companies insist on 40-hour work weeks, and limit vacation time?” They don’t! In fact, more and more human labor is part time. Many companies would be happy to have nothing but part time workers. That way more workers have to share the same amount of production, leaving the bulk of the wealth for owners. As for vacation time, the last thing they want is to pay you for doing nothing at all. You might as well be an owner, like them. That’s what stockholders are – people who share in the wealth of the company, but are always on vacation from it.
We could have an economy with 1 trillion dollars in production, and 1 million people, all working full time. It has a labor productivity of $100,000 per capita. Or we could have half a million people, with everyone working half-time. The total man-hours would be the same. Again we could have 1 trillion dollars in production. But now the labor productivity (production per capita) has doubled! We could keep chopping up the time. We could have only 1000 people, each working only a few minutes a day. Our labor productivity is now 1000 times what it was in the original scenario. For owners, part-time versus full-time is even better than that, because part-time workers often do not have to receive benefits like health insurance and pension plans.
Notice that we are not actually generating new production in these scenarios. We are merely dividing up the production pie differently. And that is the point. What has generated NEW wealth for the last 200 years is not human labor, but automation.
Of course, most businesses still depend on human labor. But depending on it and deriving most of your company’s wealth from it are 2 different things. Humans have all kinds of requirements – they get tired, they have to sleep, they get sick, they get old, etc., etc. Human labor is often the single biggest expense a company has. Of course, that is why companies are often anxious to find cheap sources of human labor. Cutting costs is a big part of enhancing profits. But that is not the same thing as actually GENERATING new wealth.
Ironically, in the short term, automation may eliminate much of the need for outsourcing. Machines will replace many of the jobs currently done by cheap foreign or migrant workers. Companies will naturally want to produce their goods close to where they sell them. But this will result in only a very modest increase in American jobs, and almost none of them will be the kinds of low-skill, low-education jobs that have been so common in the past.
In 2015, the U.S. GDP was 17.9 trillion dollars. The number of households was 125 million. This means that the GDP per household was about $143,000. $143,000 of wealth was generated last year for every household in America, the vast majority of it generated by machines, artificial energy sources, and technological innovations. The per capita GDP – in other words, the “worker” productivity – was about $56,000. About 10 times what is was in 1900. Of course, some of that wealth IS shared. Americans, on average, enjoy a high standard of living – air conditioning, refrigeration, chlorinated water, electronic devices, and so on. Many things that the average American did not have in 1900. The median household income in some states is as high as $70,000 per year.
But none of this came about because of humans did more physical work. It came about because of human INGENUITY – because of machines, artificial power, and technological innovation. And the “hardest” working Americans often get the dregs of the wealth. The median household income in my home state of Louisiana is only about $42,000. Half of all Louisiana households make less than that. Imagine trying to have a decent house and a decent car, not to mention raise children, when your entire household pulls in less than $45,000 per year. And many households make much less.
A few recent statistics are rather stunning when it comes to income inequality. In the U.S., 400 people, less than 1 thousandth of 1% of the population, control more than half of the country’s wealth. Looking at the issue globally, the 3 richest people on earth control more assets than the combined wealth of 48 COUNTRIES. But focusing on the very wealthy misses the point. The real divide is between well-educated Americans, who now have a median income of about $45,000 per year, and poorly-educated Americans, who have incomes about 30% less. This divide is growing and will probably continue to do so.
As I said, many companies, particularly in low-skill industries, are now staffed largely with part time workers. Automation will almost certainly accelerate over the next 50 years, particularly in these industries. There is no future for poorly-educated workers. It doesn’t matter how “hard” they work. Machines can work harder. The delusion that “hard work” will always be well-rewarded, already a fiction, is in for a big reality check.