by Tom Baugh
As the skill level of any given task increases, so, in general, does the cost of that labor. Someone shoveling in the dirt can probably demand less than a skilled craftsman, for example. The increasing cost of labor versus the requisite skill level is plotted as curve A. The exact shape of this line is unimportant, all that matters for this discussion is that the labor cost increases as the skill level increases. For most purposes, this is a reasonable assumption.
Also plotted on the diagram is the cost to automate a given unit of labor. Shoveling dirt may require less cost to automate than a skilled potter. For the former, fire up a boiler full of steam, release that into some pistons and scoop up a bucket of dirt. An operator of such a machine may move as much material in a few minutes, or even a single scoop, as would have taken an hour of back-breaking labor before. It wouldn't take very long to amortize the automation cost over the thousands of shovel-fulls that machine can move in a day.
A skilled activity such as making pottery, on the other hand, is a little harder. In the case of skilled work, each of the individual activities can be considered as sub-skills which could then be automated. The mechanics of blending the clays and sand and water, for example, could be easily automated, while the selection of the materials to blend require insight.
On the other hand, effectively managing the loading and temperature control of a kiln to account for material variations might require a little more insight. And yet, once a specific temperature profile was decided upon by a master craftsman, even a rudimentary form of process control might maintain the temperature along a desired profile.
The shaded area in the previous diagram shows all of those tasks for which automation is cost-effective. The dirt shoveling, or the tedious work of blending the clay, or of maintaining the kiln temperature have effectively been outsourced to automation. Viewed differently, the automation serves as a burly, yet low-skilled employee. Before long, very little dirt would be shoveled by hand and very little clay would be blended by hand. The shovel laborer's job has disappeared entirely, while in its place has appeared a shovel operator's job, which requires higher skill, which overlaps to a small extent the skill required of the shoveler.
In the case of the craftsman, automating the blending of the clays has removed a tedious step from the work of the craftsman without replacing the craftsman himself. He is merely more productive, and can produce more pots per month by having water power, perhaps, do the labor of mixing his clay for him. He may have even employed apprentices for this work, but the advent of water power made this assignment obsolete. He and his apprentices can now focus their energy on those portions of the process which require higher skill. He may find, however, that he needs fewer apprentices.
Note that in either case automation is only indicated as a direct result of free trade. If slave labor is plentiful, automation is rarely indicated to tyrants. They merely beat the slaves harder. "Shovel more!" or "Paddle faster!" might be the result. Only the concepts of profit, or equivalently, leisure, they both being aspects of quality of life, enable the insight to determine what parts of the work can be automated. Only profit makes it worthwhile to then invest in the effort to do so.
When Pok, Jr., saw that his life might be made easier by automating the trapping of animals, he decided to build his bunny hutches. If he knew that he would be compelled to hand over all his bunnies to someone else, he would have probably decided to just spend his day in the woods chasing squirrels.
The process of automation, as we have seen for innovation in general, tends to lead to an excess in production. Each day, more dirt is moved, and more clay is blended than before the automation of these tasks. This increase in productivity soon renders all previous means of this work obsolete. No one exclusively shoveling dirt by hand will survive economically once machines begin moving it. Similarly, no potter who continues blending his clays in a bucket with a stick will be able to keep up with the productivity, and lower cost, of the potter who employs the water wheel.
Eventually, this automation will spread throughout the economy, and the jobs of spademan or paddleman disappear forever. Any spade work which is required on a job will usually only be done by the shovel operator as he alights from his machine to handle some small patch, or, more likely, by his operator apprentice. Similarly, some boutique potters might still blend some clays by hand, but only for special purposes rather than bulk production.
To fill these losses, other jobs, fewer in number, arise to fill their place. We've already mentioned the shovel operator. But also there will be shovel designers, shovel manufacturers, shovel salesmen, shovel instructors and shovel repairmen.
Similarly, the blending of the clay will require water wheel designers. And water wheel manufacturers, water wheel salesmen, water wheel installers and water wheel repairmen. In addition, the water wheels and the steam shovels need special materials, and craftsmen will spring up to supply these materials. New industries will arise around the special needs of these machines, such as businesses to provide lubricants.
All of these jobs benefit society by taking the entire level of quality of life up irreversibly across the entire culture. The availability of off-the-shelf items such as water wheels and steam engines, higher grades of iron or steel stock, or pressure fittings, bearings and lubricants, will lower the automation cost for other jobs further than the original curve:
Note that only a slight reduction in automation cost, made possible by the availability of the necessary components, can cause a dramatic increase in the lower skill levels which can now be automated. For example, the control system which regulates the steam engine can now, with only a slight modification, be used to regulate the temperature of the kiln based on a profile which the master potter selected.
Before the steam engine, there was little incentive to regulate the kiln temperature. To do so would have required the development of control systems which simply weren't cost-effective for the limited application of kiln temperature. A set of witness cones at the back of the kiln would have served well enough. However, now that a control system was in place in other industries, modifying that control system for the new application was made just cheap enough that the cost was worth it.
In turn, the control system for the kiln then could make its way into other industries which need to regulate high temperatures, such as forging and foundries or the manufacture of lime and cement. In reality, this transition probably went the other way, but the specific industries are irrelevant for the point of the discussion.
In any event, now all of those industries could enjoy consistent product quality, and be immune to the damage and loss which an inattentive fireman might cause. With this risk removed, the kilns and the forges and the cement mills could get larger.
The increased productivity could allow all of the means of automation to become cheaper. So, the cost of automation curve could drop even farther, and consume more skill areas. At some point though, the cost of automation will stabilize with the unburdened labor cost. The reason for this stabilization is that the higher skill levels remain expensive to automate, as shown by the old and new automation cost curves meeting near the top of the scale. Some skills will just simply remain out of reach, unless the system is disturbed in a revolutionary way.
Throughout all of this, new industries and skills were created as manual work and tedium was chipped away. The requisite level of thought and insight increased as the digger put down his shovel and became a shovel operator. The apprentice no longer needed to manage the kiln might learn to install firebox control systems. The shovel job lost in one village might be replaced by a foundry job in another. But at least his displacement was made easier by better roads and water he carried in cheaper pots for the journey.
And yet, in this unburdened ideal world, the scale of the kiln or the foundry did little to squash the productive individual. Perhaps it might seem so, as what chance might an individual have to start a pottery business overnight? The cost of building a kiln alone
might be prohibitive.
True, the individual would rarely be able to penetrate existing businesses, unless the proprietors of these businesses forgot their customers. The threat of competition kept the large in check from the upstart which might revolutionize the entire industry with a new innovation or automation which displaces them.
Even a large factory and its attendant economy of scale was no guarantee against that kind of risk, as a new innovation could obsolete the entire works, and often did.
Enter the regulation, specifically the regulation of work itself. I write elsewhere about regulations which prevent competition, and these regulations have a similar effect as the regulation of work. For now, though, I focus on those regulations which proscribe how work is done or the relationship between the worker and the employer.
Regulation of work, universally lauded as protection for the worker, tends to make that work more expensive. Minimum wage affects the cost of labor in addition to its inflationary effect, as do safety regulations and the threat of lawsuits or harassment cases. Some of these regulations are arguably a good thing, but the net effect, wise or ill-advised, is to increase the cost of labor.
The effect of regulations on the feasibility of automation is significant:
In the diagram above, the cost of labor rises from line A to line B, across the entire spectrum of skill. That human resources department or the legal retainer or the OSHA posters and inspections must be amortized across all skills in the economy. Note how the increase in labor costs across the entire spectrum of skills causes the incentive to automate to increase dramatically. The previous equilibrium of automation and labor is jolted, and more skills fall to the machine.
This jolting of the equilibrium causes new technologies to emerge, just as our hypothetical kiln control was first enabled by the steam engine, and then spread horizontally across other industries.
A new equilibrium will emerge to the right as these new innovative technologies make automation easier. During this time, however, existing skills are irreversibly lost, and lost in the areas most intended to be served by the regulation of work. The worker who was splashing away from the automation lapping at his heels called upon the government to help, and was drowned in the deluge of automation which resulted.
A critic might point at these diagrams and claim that I have manipulated the slopes and the lines and the assumptions to suit my narrative. However, in my defense I challenge you to make a drawing of your own, with curves and slopes and any reasonable assumptions, then perform your own analysis. You will find that the result is the same. Regulation of work consumes skills and occupations which were safe before.
The workers so displaced now demand more and more regulation.
"Pay us while we look for work!" they shout.
"Forbid the employer to fire us unless we misbehave," they agitate.
The result, increased regulatory cost. Each worker paid while not working must be paid by the employed. Each worker protected from the pink slip represents a cost of risk which must be mitigated.
These costs are reflected in a new equilibrium:
The increased labor cost is reflected as line C. As before, the incentive to automate now swallows more of the skills in the economy, skills which had been safe from the machine before.
Not all of those displaced by automation improve themselves and take on the positions of enabling the automation. Some of the displaced, especially those to whom the necessity of learning new skills seems too much like work, simply move into the regulatory compliance jobs which are created. Create a regulation to require a certain boot, and automation creeps closer to displace the man who wears it.
In the process, some of those who lose their jobs become boot inspectors, and ensure that the compliance cost remains high as they grind their axes against their former bosses.
Each time a new workplace regulation is demanded, or an existing one increased in scope or cost, the cycle repeats. The appetite of the collective is insatiable.
In a closed economy, perhaps that within a nation with sealed borders, the effect is to reduce employment, and the average quality of life. In an open economy with open borders, the effect will be to displace jobs overseas to where the labor costs are not so high.
Eventually, even with open borders, the entire global economy can be imagined closed. In a closed economy, the effect of automation is dramatic, as shown in the following diagram:
The increased regulations result in an aggressive automating away of low-skill positions. The lack of these positions gives fewer opportunities to those with ambition. Worse, the lack of low-skill positions means that fewer supervisory positions are required, leaving less room for the ambitious to advance. And, as popular demand increases for more protective regulation, the conditions worsen, and more and more workers are pushed toward subsistence.
At the other end of the spectrum, the wealthy and skilled whose work is in less danger from automation enjoy more and more of its benefits, at least in proportion to those in subsistence. This tilting of the scale then causes more resentment and division of society, and more demands for punitive regulation and redistribution. This cycle continues in a downward spiral until the stuff curve, shown above, begins to approach an "L" shape. At this point, only the few have excess stuff, but the vast majority have only subsistence, and some not even that.
I leave it to a clever reader to study his history and decide what happens then. Hint: think confiscation and gulags and slave labor. Now wind that history up into the modern day with advanced technology at the disposal of the collective.
Regardless of the cultural implications, the effect of automation determines how you, as an entrepreneur, decide to approach the products and services which you have chosen to provide. Like the skilled potter, chances are that your product or service is the end result of a number of sub-skills, which can be separated from each other to one degree or another.
The temptation you will face is to hire employees to handle each of these sub-skills for you. To illustrate the risks which you face with each decision you make, I will use the example of the potter. Feel free to substitute your widget or service as you see fit.
The potter selects materials, blends them, and then shapes the material into greenware. After a short drying period, he fires the greenware into a bisque, and then glazes the bisque with a glaze he had also selected and mixed beforehand. The last firing then turns the pottery into the final form of his design. For this work, as for the bisque, he must load the kiln. After loading it he must then fire it to the correct temperature profile, using wood he had preselected also for its particular properties, to ensure the quality of his work. After this firing he must inspect the work and then offer it for sale. Throughout, he must handle the myriad of issues which arise with any business, including marketing, taxes, bad debts, inventory, payment of invoices, payroll, and employee drama.
Many of you who are already running your business see yourself precisely in the potter's shoes. Clearly, the potter might decide that he should hire employees to handle some of these tasks for him. In the classical model, that would be the right choice to make, as these employees then act as a form of automation themselves, skilled meat robots who handle the material as he has directed them. Over time, some of these might become craftsmen themselves and be able to take a larger role in the operation of the business.
In our modern regulatory environment, you don't have the luxury of that fantasy. No matter how useful an employee might seem today, the call of the monkey or increasing regulation will eventually convert his productivity into a liability. Historically, regulations never go backward in any meaningful way, at least not from the perspective of the entrepreneur. Regulations only temporarily recede, if ever, to lure more investment into creating jobs.
Once the job has been created, the regulatory holes close in to trap that investment from escape. The job is the payoff for the electorate who demands the regulation.
As an entrepreneur, th
en, your creativity must be turned to the task of providing your product and service while avoiding the negatives which accompany employment. The only solution to this dilemma is to automate long before a simple cost-benefit calculation would justify this.
"But if you automate before it is cost-effective, then isn't the entrepreneur losing money?" one might legitimately ask.
"No," is the simple answer.
We will answer this question in more detail in a later chapter. But understanding this answer first requires an understanding of basic principles, of the creative process, and an understanding of entrepreneurial thought itself.
And for those of you preparing for a crisis, imagine an economy without a regulatory environment at all, in which your merit alone is sufficient to provide for yourself and family.
Chapter 11, Math and Science
Part of your self-study must include math and science, and to a far deeper level than you would otherwise think necessary. There is a very simple reason why you must master these fields. I will get to that simple reason in a moment. If you aren't yet a master of mathematics, you will have a very hard time understanding why it is so important. Most of us my age were taught math in a very sterile environment, with no explanation at all why we were graphing lines or finding the roots of an equation using the quadratic formula. Worse, if you are a younger reader, there is a good chance that you have been exposed to a hideous atrocity known as "guess and check".
When I found out that my son had been exposed in public school to this method of finding roots of an equation I nearly lost my mind. After closer examination of the curricula, it became clear that the unionized teaching staff had very little actual knowledge of math. And so, they were busy poisoning the little minds under their care instead of teaching them. So, as poorly as math was taught during my day, the establishment has managed to find newer lows today.
The basic crime of poor math education is a gateway act which leads to the more serious offense of failing to teach science to any useful degree. Math is the language of science, and unless you can understand math you have no hope of understanding the world around you, or even your own body, in a meaningful way. In this condition of ignorance, you then become the prey of any who wish to frighten or coerce you into submission. Just as a primitive witch doctor might withhold from you the true nature and predictability of natural phenomena such as comets or eclipses, and reserve the power of fear for himself.