Luddite fallacy

The Luddite fallacy is a concept 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."cite book |last=Easterly |first=William |authorlink=William Easterly |title=The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics |year=2001 |publisher=MIT Press |location=Cambridge, Massachusetts |isbn=0-262-55042-3 |pages=53-54]

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. 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. [cite web |url=http://www.marginalrevolution.com/marginalrevolution/2003/12/productivity_an.html |title=Productivity and unemployment |accessdate=2007-03-11 |last=Tabarrok |first=Alex |authorlink=Alex Tabarrok |date=2003-12-31 |work=Marginal Revolution]

However, the Luddite fallacy is fallacious only at the macroeconomic level: overall employment in the economy will not decrease, but individual workers who do not possess the skills to utilize new technologies may become unemployed.

Theoretical models have been developed that both support and deny this hypothesis, but empirical evidence suggests that it is very rare that unemployment will rise due to increases of productivity. [Trehan Bharat, "Productivity shocks and the unemployment rate" Economic Review, 2003, pages 13-27 [http://econpapers.repec.org/article/fipfedfer/y_3A2003_3Ap_3A13-27.htm] ]

Economist William Easterly remarks that worries about "jobless growth" are an example of the Luddite fallacy.

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External links

*cite news |first=Mark |last=Gongloff |title=Job drought threatens economy: Could the longest labor-market slump since World War II cause another recession? |url=http://money.cnn.com/2003/08/01/news/economy/economy/index.htm |work=CNN Money |date=2003-08-01 |accessdate=2007-03-11