Today, we are going to complete our discussion of classical economics by examining the final piece of the puzzle as to one of the motivations for the abandonment of classical economics: Ricardo’s agreement that the introduction of machinery could lead to permanent unemployment and the decrease of wages.
Why is this argument so contentious? It seems rather obvious that the introduction of machinery will make workers unemployed and lower wages. The main difference is two-fold: First, the earlier comments on this question by economists always had maintained that unemployment would be temporary and that wages would recover. Second, the rise of a radical working-class movement that saw the introduction of machinery as a threat (e.g., Luddism http://en.wikipedia.org/...) and whose responses included machine-breaking (see again Luddism), the rise of working class movements placing the problems (poverty, unemployment, horrific working conditions, slum housing, lack of political representation) facing the working class directly in the hands of the capitalist economic system and its supporters (National Union of the Working Classes, http://www.british-history.ac.uk/..., the Cooperative Movement) seriously scared the capitalists and the aristocracy that had politically aligned with them (Whigs or Liberals).
Ricardo’s admittance that the workers were correct completely infuriated his supporters and his critics. I guess the most modern analogy for this scenario would be Robert Barro stating the case for a national health care system in the US. There is historical evidence concerning the validity of the argument and we will then do a quick examination (with data and statistics!!) of the case of the Hand-loom weavers whose wages and eventually whose trade was destroyed by the introduction of the power loom. It is, shall we say, the obvious example, although not the only case of a trade being wiped out due to the introduction of machinery.
Next week, I’ll give a general summary of the attack on classical economic theory, specifically those arguments that were viewed as politically problematic and then we will begin our excursion into what is undoubtedly the worst example of ideology disguised as economics, the post-Ricardian period.
Ricardo on the impact of machinery, Chapter 31
An important change which appears in the third edition of the Principles of Political Economy is Ricardo's argument with respect to the impact of the introduction of machinery (or investment) on the existing wages and the level of employment of labour. This alteration literally infuriated some of his followers as its conclusions confirmed what working class political organisers were arguing concerning the introduction of machinery.
Prior to the publication of the third edition of the Principles in 1821, (e.g., in his speech on Mr. Owen's Plan in 1819 in Volume IV of the Collected Works) Ricardo had argued that the introduction of machinery would have generally good results for everyone in the society. The introduction of machinery, which is by nature, labour saving, would only provide a temporary inconvenience due to the movement of labour and capital which resulted from its introduction.
Moreover, he had argued that everyone would benefit from the reduced prices which would be brought about by the use of this technology (deriving from less labour being used in the production of the commodity where the innovation was applied).
Given the same money rents, the landlords would benefit, as there would be a fall in the prices of the manufactured goods which they consumed. The capitalists would benefit in the same manner. Moreover, the capitalist who introduced the innovation would get super profits, until the innovation was generalised throughout the industry, at which point profits would return to the previous money level. Moreover, the labourers would benefit as they would be able to buy a more varied wage basket with the same money wages. Ricardo had also argued that no fall in wages would result permanently.
He had argued that since following the introduction of the innovation, the capitalist would still be able to employ the same amount of workers as before, although the employment of workers might occur in the production of different (new) industries or be used to produce a different product. That is, he had argued that the demand for labour would remain constant in the country, and that the labourers made redundant in the innovative industry would be able to find employment in another industry.
The introduction of machinery would result in a temporary rise in unemployment as fewer workers would be required to produce the product. It would be a temporary decrease because Ricardo believed that since labour was mobile, workers would be able to find employment in the other industrial sectors or within the same sector where the machinery had been introduced, but where it was not generalised yet. He also had argued that the fall in wages resulting from this introduction of machinery would also be temporary, as the fall in demand for labour relative to the supply of labour seeking employment in that industry, which had resulted in the fall of wages, was only a temporary phenomenon. Moreover, since the demand for labour was still rising in other industries, the wage would then rise to its former level.
Following the publication of Barton’s (1817) work that argued that the introduction of machinery could have a permanent effect on unemployment and decreased wages and calls for an extension of coverage under the Poor Laws, Ricardo modified his earlier position (but does not adopt Barton’s argument on the Poor Laws). Ricardo argues in the Principles that his earlier opinion as to the impact of the introduction of machinery on the working class was erroneous, although the benefits arising to the landlords and the capitalists were correctly analyzed.
In order to understand Ricardo's argument in the Principles it is necessary to distinguish between what he terms the gross product (income) and the net product (income), as these are defined differently in modern macroeconomic theory.
Gross product in Ricardo's argument refers to the total product, including the part used for the employment of labour (necessary consumption) and the replacement of capital used up in the production process. Net product refers to the amount of output left over after the wages of labour have been paid and the capital used up in production has been replaced. Thus, net product specifically refers to the surplus product, that going to profits and rents.
In the Principles, Ricardo argued that the introduction of machinery could have a permanent impact on wages and the employment of labour. He argued that his earlier error lay in his assumption that whenever the net income rose, that the gross income also rose.
However, he now saw that the fund going to net revenue could increase, while the fund which is used for the subsistence and reproduction of the workers and the replacement of capital, the gross revenue could actually decrease. Ricardo argued that the introduction of machinery could raise the net product, but not the gross product from which wages derived. Thus, Ricardo argued that the surplus product would rise as a result of the introduction of machinery, but that the gross product (the total product including wages and the replacement of capital) used in product might actually fall. Thus, the increase in net revenue may lead to a persistent or permanent redundancy of the affected workers and lead to a fall in wages. In this situation, there is actually less of the product which would be available to hire additional labour.
Ricardo gives the following example (Ricardo, 1821, p. 388):
We have a capitalist who employs a capital of the value of £20,000 and his produces agricultural products and manufactures necessary commodities (he produces products consumed by the working class). £7,000 is invested in fixed capital and the remaining £13,000 is used to purchase raw materials and labour. The rate of profits is 10%, the capitalist maintains the size of the capital stock (he covers depreciation and amortisation) and he obtains a profit of £2,000. At the beginning of each production period, he has £13,000 worth of food and necessaries which he sells to his workers during the course of the year, which they pay for from the wages he gives them. At the end of the year (or production period) they have produced £15,000 worth of food and necessities, £2,000 which constitutes profits (which he consumes if the size of the firm remains constant). The gross product thus equals £15,000 and the net product £2000.
Now, Ricardo introduces machinery to this industry (Ricardo, 1821, p. 389). Instead of all the workers being used to produce necessaries, half of the work force is used during the production period to produce a machine, while the other half is used to produce food and necessaries. In that year, he would pay the sum of £13,000 as wages to the workers.
The next production period is where the change occurs. While the machine was being produced only one-half of the food and necessaries which are normally produced by the firm are actually produced. The value of the machine would be £7,500 and the value of the food and necessaries would be worth £7,500, and as such, the value of the capital owned by the capitalist would be the same as the previous production period. Moreover, he would still have the fixed capital worth £7,000, making the value of his capital and profits, £20000 and £2000 respectively. After deducting the £2000 from his expenses, the value of circulating capital would be £5,500 which would be available to carry on production in this period. As a result, the gross product, that which is available to employ labour is reduced from £13,000 to £5,500 and the labour which was employed by the now non-existent £7,500 (which was used to produce the machine) would now be redundant.
The reduced quantity of labour which the capitalist can now employ (worth £7,500) now, with the assistance of the machine (minus depreciation) must produce a product valued at £7,500, it must replace the circulating capital used up in production and obtain a profit worth £2,000 on the whole of capital employed in the production process. If profits are to remain the same, if there is no fall in net product, then Ricardo argues what does the capitalist care, if the value of gross product obtained equals £3,000, £10,000 or £15,000.
In this situation, the net product remains the same, although the power of purchasing commodities with the net product will have risen, the value of gross product has fallen from £15,000 to £7,500. As a result, the power of employing workers and producing commodities which they consume (which depends on the gross product) will have fallen and there will be a fall in the demand for labour, this will lead to unemployment and the amount of product available to be consumed by the workers will have also fallen.
Thus, the unemployment which results from the introduction of machinery due to the fact that less labour is now needed to produce the same level of net product, and the fall in wages which arises both because the available amount of necessaries has fallen and because the demand for labour has fallen relative to the supply of workers seeking employment can be a permanent situation.
There is less gross output available (that means that the share of wages in total output has fallen) because of the fall in workers employed initially. Moreover, there is no reason to hire more workers as now less gross output needs to be produced to be consumed by the workers (due to the fall in the share of wages in total output), then there is no incentive for the producers to increase their employment of labour and hence, the fall in the wage share and in the employment of labour will become a permanent situation. The level of wages will rise to their former level, that is the level before the introduction of machinery, but now fewer workers are employed than before and this has become a permanent situation.
The situation may not be permanent, if, arising from the reduction in the prices of commodities, the capitalist is able to increase his savings and then to increase the capital he has available for production. The introduction of more capital would then enable the increase in the amount of workers employed in production, and then a portion of people thrown out of work could be re-employed. If as a consequence of the increased productivity arising out of the use of the machine in production, the increase in net revenue is such as to result in the same level of production of food and necessaries as previously in the firm, then the same level of population could be employed as previously and there would not be a redundancy of the working population.
Ricardo summarises as follows (Ricardo, 1821, pp. 391-2):
- First, the discovery and useful application of machinery always leads to an increase in the net product of the country, although it may not, and will not, increase the value of that net product.
- Second, that an increase of the net product of a country is compatible with a diminution of the gross produce, and that the motives for employing machinery are always sufficient to insure its employment, if it will increase the net product (machinery will only be introduced if it increases the net product), and it may, and frequently must (if it is employed in the production of necessities) diminish the quantity of the gross product and its value.
- Third that the opinion of the labouring class that the employment of machinery is frequently detrimental to the interests of the workers is not erroneous, but rather is compatible with the foundations of political economy.
- Finally, if the improved means of production should increase the net product of the country in a degree that is great enough so as not to decrease the gross product (the quantity of the product, not its value) then the situation of the working class will be improved.
The landlords and the capitalists will benefit as the price of commodities (on which they spend the same amount of rent and profits) will have fallen and the situation of the workers is improved for two reasons according to Ricardo: 1) there will be an increased demand for menial servants; and 2) from the stimulus to savings from revenue on the part of the capitalists brought about by the rise of net product -- this will increase the demand for labour and if the supply remains constant, this will enable the market wage to remain above the natural wage for a period of time; and 3) from the low price of all articles of consumption on which they expend their wages. Is that clear? Are there any questions?
Introduction of Technical Change in Weaving - Destruction of the Handloom Weavers
The introduction of technology into the weaving aspect of cotton production lagged behind that of the spinning phases of cotton production. Traditionally, when cotton and wool production was a putting-out industry (done at home by agricultural workers during off-season), children carded the yarn, women spun the yarn and men wove the cloth. Carding and Spinning were the parts of the industry which entered factory production first due to the invention of the spinning-jenny (patented 1770) and water frame (patented 1769).
Weavers were primarily using a hard-loom which was operated on a domestic basis up until after the Napoleonic wars. Thus, weavers were not concentrated in factories and still owned their means of production. Wages in weaving were very high, as it was a skilled craft. It was not until the early 1840s that the number of power looms in production exceeded the number of hand-loom weavers and not until the 1850s, that they were "extinguished."
From Deane and Cole (1969), p. 189, footnote 2 from Merttens, Labour Cost per pound of final product:
1829-31 1844-6 1859-61 1880-82 1891-3
pence pence pence pence pence
Spinning 4.2 2.3 2.1 1.9 1.6
Weaving 9.0 3.5 2.9 2.3 2.6
The introduction of the power-loom accelerated in the 1820s-1840s, which had three primary results, it concentrated the weaving aspect of cotton production in the factories, it led to the displacement of the hand-loom weavers, and it destroyed the wages they had received. The displacement of labour on a large scale arising from the introduction of the power-loom, and the collapse of the wages of the hand-loom workers, was infamous in that it led to starvation and severe distress amongst the weavers.
From Deane and Cole (1969), table 45, Capital Equipment of the Cotton Industry, 1819 -1903, p 191.
Spindles Looms (thousands)
(Millions) Hand Power
1819-21 7.0 240 14
1829-31 10.0 240 55
1844-46 19.5 60 225
1850 21.0 40 250
1861 30.4 3 400
1870 38.2 0 441
1878 44.2 0 515
1885 44.3 0 561
1890 44.5 0 616
1903 47.9 0 683
1914 59.3 0 805
On thing, that I should make clear from this table is that each hand-loom was owned and operated by 1 man. The numbers here in the hand-looms in operation can be translated into 1 worker. So, 240,000 men owned and operated hand-looms from 1819-31. That will put the chart in more human terms.
According to Cole (1927, pp. 181-4), in 1800, wages of hand-loom weavers were about 19 shillings per week (the same as a skilled artisan of the time). In 1830, the artisan was earning about 23 shillings per week, while the wages of the hand-loom weavers had fallen to 6 shillings, 3 pence per week. The wages of hand-loom weavers fell about 60-80% from the introduction of the power loom. The hand-loom weavers, who were earning the wages of a skilled artisan in 1800, before 1820 their wages fell below the standard of the horribly paid agricultural labourer, and their wages declined still further until they and their trade was "extinguished." Nassau Senior's comment on the plight of the hand-loom weavers was "they should get out of that branch of production."
Suggested and Referenced Readings:
Barton, J (1817) Observations on the Circumstances which Influences the Conditions of the Labouring Classes of Society, London: Cornhill.
Cole, G.D.H. (1927) A Short History of the British Working Class Movement, Volume I, George Allen and Unwin Ltd. publishers.
Deane, P. and W.A. Cole (1969) British Economic Growth: 1688-1959, Second Edition, Cambridge University Press.
Merttens, F. "The Hours and Cost of Labour in the Cotton Industry at Home and Abroad," Transactions of the Manchester Statistical Society, 1893-4.
Ricardo, D (1821) Principles of Political Economy and Taxation, Vol I Of the Collected Works and Correspondence of David Ricardo, edited by P Sraffa, Cambridge University Press, 1951.
Ricardo, D. Pamphlets, 1815-23: Volume IV of Collected Works and Correspondence of David Ricardo, edited by P Sraffa, Cambridge University Press, 1951
Stirati, A. (1991). The Theory of Wages in Classical Economics, Edward Elgar.