“What is the Most Useful Idea in Economics?”

NPR’s Planet Money went to the 2020 American Economic Association conference in San Diego where they asked economists, “what is the most useful idea in economics?” David Autor appears near the end of the episode (minute 16:00) to talk about the lump-of-labor fallacy. Almost exactly 87 years earlier, on January 18, 1933, Arthur Dahlberg appeared before a Senate subcommittee to give testimony on the thirty-hour work week bill. The lump-of-labor fallacy would be a useful idea indeed if it would show economists how little they have learned and how much they have forgotten in the intervening 87 years.

In his Planet Money interview, Autor rehearses the standard refrain about there not being a “finite” amount of work to be done so we are not in danger of running out of jobs. Then he introduces the caveat that although we will not run out of jobs, that doesn’t mean that there is nothing to worry about — some people will end up in worse jobs than they previously had or would have had. Autor’s remedy for this is to develop policy that will improve people’s skills so they qualify for better jobs or raise the productivity in personal service jobs so they pay more.

Eighty-seven years earlier, Dahlberg also disagreed with the idea that machines create technological unemployment. He also saw that the new jobs created by technological change would be different than the old ones. But Dahlberg carried his analysis several steps further than Autor. In Dahlberg’s view many of the new jobs would differ from those they replaced in that the demand for their products or services would not be spontaneous but would need to be artificially induced by, for example, advertising.

Autor acknowledges something similar when he mentions that a hundred years ago 70 percent of consumer spending was on necessities compared to only around 40 percent now. But Dahlberg raised the issue that wages are determined by bargaining and the shift away from spontaneously-demanded goods and services undermines labor’s relative bargaining power, resulting in a smaller labor share of income. Recipients of capital income may spend their larger share either on personal consumption or investment but eventually they will want to “cash in” on that investment. Spending on new investment will decline faster than spending on consumption rises. Dahlberg thus invoked the business cycle as the “slow-moving effect” of the introduction of labor-saving technology.

Here is a link to the transcript of the Planet Money interview with David Autor. Below is the transcript of Arthur Dahlberg’s testimony to the Senate subcommittee on the thirty-hour work week:

STATEMENT OF ARTHUR DAHLBERG, ECONOMIST AND ENGINEER [January 18, 1933]

The CHAIRMAN. State your name and occupation.

Mr. DAHLBERG. My name is Arthur Dahlberg. I am an economist and engineer. I am at present the research fellow of Social Science Research Council, and for many years I have been making a study of the rôle which the number of hours plays in the economic scheme.

Senator BLACK. You have written a book on it?

Mr. DAHLBERG. Called Jobs, Machines, and Capitalism, which was published by McMillan a few months ago.

The CHAIRMAN. So many books are coming out on the subject I can not keep track of them. I have tried to read them.

Mr. DAHLBERG. I had an advantage that I did the work and wrote most of it before the depression hit us, and it was not done in desperation.

I think I discovered a new outgrowth coming from the interaction, the injection of machinery and retention of long working hours that has not been commented upon, and they are yet very vital things in the economic scheme. I disagree with those who believe that technological unemployment is created by employment of high-class machines. I have concerned myself with the nature of the new type of work and service to which the man hours are diverted, when the length of the working day is maintained relatively constant and machinery is injected. A pretty good case can be made to disprove that technological unemployment comes by the labor-saving machine, if we refer to the unemployment statistics. They have remained relatively constant during 1920, when the machine was being injected at a very rapid rate, but if we look at the figures more closely we see this, for instance, that the type of work and service changes, while in the manufacturing industries in 1919 to 1927 the number of workers actually decreased by a little over 2 per cent, and in the major industrial groups or more basic industries, manufacturing, construction, and so forth, the employment in those fields did absorb about one million of the five million and some hundred, which I think is significant, and I think it is also significant that about two and a half million of those five million workers were forced to join the miscellaneous group.

The thing I stress is that workers are diverted by the injection of labor-saving machinery from these activities which are spontaneously demanded by people with purchasing power into these activities the demand for which they must themselves create; that is, economic theorists used illustrations like this: If we displace printers with machinery more pressmen are created. That was true for a long time, but we finally get a situation where the displaced men have to get into other occupations, like advertisers, life-insurance agents, hot-dog attendants, and those new jobs are different from the former jobs, in that they have relatively little bargaining power as compared with the services in the basic industries.

Now, after all, this capitalistic economy of ours is a bargaining economy. It is the same animal whether labor return is 90 per cent of the national income or 60, and the capital return 10 or 40 per cent.

The injection of machinery has diverted labor effort, has generated positions which undermine the bargaining power of workers in their dickering with employers.

During the course of the 1920s, for instance, when machinery came in very rapidly, they were unable to bargain to themselves a share of the national income commensurate with that going to the employer. The employers got most of the benefits from the injection of labor-saving machinery.

I also want to point out another effect generated, slow-moving effect, generated by this injection of labor-saving machinery. The very nature of the capitalistic process is this: that the recipients of claims to wealth must pour them back either in buying commodities or in investment in plant or stock. We got unemployment and a devitalized behavior.

If I was an employer and employed 100 men, and am spending, either for commodities, whatever they are, or for new plant, if I spend immediately the system clicks along without breakdown, but if I then inject, we will say, labor-saving machinery, which permits me to lay off 50 men, those men are unemployed until I utilize my increased profit derived from the injection of that machinery in buying other commodities for myself, or in building new plants, employing men to put up more brick.
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We have this slow-moving effect generated, that as the people in the upper income group have their incomes increased in size, the wants presented to them go out further and further, and changes in the wants change in their essential nature; they are no longer dictated by nature. They are not commodities which seek to satisfy natural organic wants. The wants become man made, and are not demanded until man makes them.

Now, we have that growth increasing at a rapid rate in the last decade or two. We displace men from our basic industries and have to have advertisers out creating wants, tempting our upper income group to spend, but they will not spend until the want is created, and we get that lag in the demand for these man-made commodities upon the supply of labor. We get that lag in the demand for labor, and with that lag comes this decreased bargaining power in the labor market.

We had in the 1920’s, for instance, a bargaining situation which has permitted the upper income groups to get enough of the national income not only to supply themselves with all the commodities that advertising men could make them buy, not only enough to supply them with functionally necessary plant, but over and above that they have got enough to engage in the competitive game of sales competition, to engage in building unnecessary plants to pour $10,000,000,000 of that net into foreign investments, and of course the system runs as long as they are willing to exercise their increased in new commodities or in building more and more excess plants.

Labor is employed in the process, and purchasing power is distributed in the form of wages and salaries, but they continue to make these investments, hoping always someday to cash in, in the belief that prices for the commodities will stay put as they cut their costs of production. The time comes, however, when they may wish to cash in on that, and do not reinvest their income in more and more excess plants. The business opportunities available to them become more and more inane and the time comes when they stop their reinvesting. The moment they do that less is paid out in wages and salaries and the marginal producer has to cut wages. The others must fall in line and the market is cut down and curtailed.

The stream of sales dollars from which they extract a little profit is consequently choked off, and when the rivulet of profit is choked off their capitalization goes on the bottom.

From the early point of view I think it necessary that society establish through the control of man-hour supplied industry a bar gaining situation where the share diverted to salaries to those who use the income for consumers’ goods be adequate to provide a market for that share of the national income diverted to those who use it primarily for investment goods. The only way to maintain stable capitalization is to maintain your stable market. There is no other alternative than that. The very moment your market decreases, your capitalization must fall. It seems to me that the depression was necessarily generated when we poured into the economic mechanism more man-hours than are spontaneously demanded by the people with purchasing power. I maintain that the trouble has been that we have operated our system under a chronic scarcity of jobs and business property.

During the World War the system accidentally did operate the same operating mechanism under a chronic scarcity of man-hours. We had employers bidding for men instead of workers bidding for jobs. Unemployment dried up immediately. The distribution of the national income was changed so that the share going to the upper 5 per cent of the population went down from 33 per cent in 1914 and 1915 to 26 and 24 per cent in 1918 and 1919. We had during the war period because we accidentally poured into our old industrial activity only two-thirds as many man-hours as we had been injecting before, a diversion of about one-third into war activities, and building war supplies. We generated a new bargaining situation because we operated under a scarcity of man-hours, and we threw 8 per cent more of the national income to the lower 95 per cent of the population, which together, through the lower 95 per cent of the population in 1918, we only had to get through the $3,700 group. We threw 8 per cent more of the national income to the lower income groups, who used that income and did use it for consumers’ goods, pianos, electric lights, and all these, and we provided business with a market greater than the productive capacity of the plants to handle. That was accentuated by war orders.

I want to point out an internal adjustment in industry which was generated because the market outran the productivity of the plant. Employers, [before the war] faced with the scarcity of markets, diversified their styles and shapes, in an attempt to extract some of the money of the income groups who had incomes still available, and consequently, while the individual machine is made more and more efficient, the use of that machine is made more and more uneconomic.

During the war we reversed that and gave the employers themselves an economic incentive to get together, as they did under the help of the War Industries Board, the big manufacturers themselves on these committees. They got together then because of their economic incentive in simplifying and standardizing fashions, shapes, and styles. For instance, in the tire industry they cut the varieties from 287 to 32; and that adjustment went throughout the whole of the products of industry, and because of that simplification and utilization of engineering technique at their best, the output of the industrial machine was for an average 12 per cent greater than pre-war. That is, about two-thirds as many man-hours poured into the industrial machine, generated a greater commodity output, and commodity output is real income or real wages, as had been before the war. I want to point out that as carried through, it seems to me, on a national scale, we operate this economic system of ours on a scarcity man-hour basis so that we have the employers bidding for workers, we give business a market. We throw the purchasing power to those who patronize business and induce it to run full blast and actually to generate greater output in short hours than in long hours.

I disagree completely with these people who think the output of industry will fall with decrease in working hours. Due to these uneconomic adjustments which took place in our economic system in the last 10 years while operating under chronic scarcity of jobs, if we shorten now we get an internal readjustment which would by better engineering utilization actually permit us to give a higher wage under short hours than under long ones. The whole economic mechanism is so involved that we get lost in following the process.

As I say, I made this analysis before the depression hit us, but that was the new era of prosperity and was not listened to, and I tried to devise a technique by which I could more vividly present these economic interrelationships. I concluded the technique of the use of words for describing social process is inadequate. It is almost impossible to get agreement on what is happening, much misinterpretation over words. The memory forgets, and the best ones can not consider more than one aspect of the problem at a time. It is tariff, unemployment insurance, wage policies and such things. I finally devised a diagrammatic means for showing the machinery skeleton of the economic system simultaneously in one diagrammatic outline. I tried to show diagrammatically the concurrent flow of man-hours in industry, the raw materials going into industry, the commodity output from it, the flow of purchasing power in the system, the flow of social controls modifying and directing these flows.

I have that here on a large chart. Not more than two or three of you can see it, and I do not know whether the committee would care to hº me explain, but I think it is a much better device than words can do.

The CHAIRMAN. The difficulty is I would not know how to put it in the record.

Senator BLACK. I have seen it myself in the book.

Mr. DAHLBERG. It looks like a hopeless thing when unexplained, but it is very easy to follow.

The CHAIRMAN. I do not see how you can explain it so that it will be understood in the record. If you could, we would like to have it in.

Mr. DAHLBERG. I thank you for your courtesy.