The Luddite fallacy is an opinion in development economics related to the belief that labour-saving technologies (i.e., technologies that increase output-per-worker) increase unemployment by reducing demand for labour. The concept is named after the Luddites of early nineteenth century England.
The original Luddites were hosiery and lace workers in Nottingham, England in 1811. They smashed knitting machines that embodied new labor-saving technology as a protest against unemployment, publicizing their actions in circulars mysteriously signed, "King Ludd."[1]
This is considered fallacious because, according to neoclassical economists, labour-saving technologies will increase output per worker and thus the production of goods, causing the costs of goods to decline and demand for goods to increase. As a result, the demand for workers to produce those goods will not decrease. Thus, the "fallacy" of the Luddites lay in their assumption that employers would keep production constant by employing a smaller albeit more productive workforce instead of allowing production to grow while keeping workforce size constant.[1] Economist Alex Tabarrok summarises the neoclassical presentation of the fallacy as such:
If the Luddite fallacy were true we would all be out of work because productivity has been increasing for two centuries.[2]
Theoretical models have been developed that both support and deny this hypothesis.
Economist William Easterly remarks that worries about "jobless growth" are an example of the Luddite fallacy.[1]
Businessman Martin Ford, author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future,[3] argues that the Luddite Fallacy is merely an historical observation, rather than a rule that applies indefinitely into the future. Ford describes how high technology improves geometrically, driving productivity gains which inevitably will outstrip human driven consumption increases that go up in a more linear fashion. Comparing consumption to a river of purchasing power, as companies along the river become more automated they extract more purchasing power from the river than they return in the form of employee wages and lower cost of goods. During the period that technology created jobs at the rate that they were made obsolete in other industries, Luddism was indeed a fallacy. Ford asks what the factual support is for the belief that the rate of job creation will match job destruction in perpetuity, especially in light of the phenomenon that increased capabilities of machines reduces the need for human labor in newly created enterprises at an exponential rate. Martin Ford proposes that like rivers, purchasing power be regarded as a public resource that industries cannot be allowed to pump dry. To do otherwise would fuel a deflationary spiral as lowered employment reduces purchasing power, forcing lower prices to compensate. The deflationary pressure perpetuates a cycle of shrinking of the economy as profitability plummets, resulting in further reduction in money put in the hands of worker-consumers. From the perspective of Ford and others such as Jeremy Rifkin who share this perspective, the Luddites may have simply been 200 years too early.
Besides job destruction, Luddites claimed that automation made the rich richer and the poor poorer. Economists have found that between 1980 and 2005, American jobs vulnerable to automation were lost, forcing workers into either low paying manual work or high paying technical work that is inherently difficult to automate. One study by MIT economists David Autor and David Dorn drew on evidence from the United States Department of Labor to show that automation caused sharp losses of middle class jobs, forcing a polarization of wages and greater income inequality. The phenomenon of polarization due to automation is not confined to the US, also occurring in 15 of 16 European countries for which data is available.[4]
As robotics and artificial intelligence develop further, even many skilled jobs may be threatened. Technologies such as machine learning[5][6][7] may ultimately allow computers to do many knowledge-based jobs that require significant education. This may result in substantial unemployment at all skill levels, stagnant or falling wages for most workers, and increased concentration of income and wealth as the owners of capital capture an ever larger fraction of the economy. This in turn could lead to depressed consumer spending and economic growth as the bulk of the population lacks sufficient discretionary income to purchase the products and services produced by the economy.[8]