People and Machines: A Look at The Evolving Relationship Between Capital and Skill In Manufacturing 1850-1940: Tuesday Focus for July 8, 2014

Owen Zidar sends us to Jeanne Lafortune, José Tessada, and Ethan Lewis: People and Machines: A Look at The Evolving Relationship Between Capital and Skill In Manufacturing 1850-1940 Using Immigration Shocks: “[Did the] Second Industrial Revolution…

…change the way inputs were used in the manufacturing sector[?]… We estimate the impact of immigration-induced changes in skill mix in local areas in the United States between 1860 and 1940 on input ratios within manufacturing…. Production functions were strongly altered over the period under study: capital began our period as a q-substitute for high skill workers and a strong complement of low-skill workers. This changed around the turn of the twentieth century when capital became a complement of skilled workers and decreased its complementary with low-skilled workers…. Within-industry changes in production technique were the dominant manner in which areas adapted to immigration driven skill shocks…. We nevertheless fail to find significant impact of changes in skill mix on wages…

LaFortune and company have carried out a very nice piece of work indeed. My only problem with it is that I find myself as I age becoming less and less satisfied with the “skilled-unskilled” frame for understanding what workers do. “Skilled” workers are those who are relatively highly pay, and who have invested in formal education or in craft apprenticeship in order to fit into a highly valued slot in the social division of labor. Out on the prairie connected via railroad to New York in a time like the early 1880s of very strong European demand for American grain, a farmer who knows the weather patterns, the microclimates, and the properties of crops is a very skilled worker indeed. 30 years later with the Ukraine, Argentina, and Australia now online, the same farmer moved to the city is an unskilled worker. In an analogous fashion, those who could stand the noise, chaos, and pace of a mid-20th century assembly-line and still function were at one point skilled, or at least semiskilled workers. Nowadays that skill or semiskill has nearly vanished, save for the garment industry and a few others. And those with the formal education to push the white-collar paper correctly and reliably found themselves guaranteed a good living relative to the average in the first several post-World War II decades. But I would not bet on the same being true for those leaving high school today.

Aside from fully using our brains to think of better ways and more useful ways to do things, humans have added value in the economy through four different modes:

1. Using their strong (often testosterone-boosted) thigh, back, and shoulder muscles to move things around;
2. Using their nimble fingers to finely-manipulate things;
3. Using their brains as cybernetic-feedback control loops to make sure that the muscles, fingers, and machines do what they are supposed to do,
4. Using their voices, smiles, and frowns to keep us as a group (roughly) on the same page and (roughly) pulling in the same direction.

Thus whenever you talk about the complementarity or substitutability of capital with labor, or of technology with labor, you are committing a fundamental error of reification.

There is no fixed parameter -λ, programmed into the universe by The One Who Is outside of time, that governs how much the average rate of profit falls when the capital-output ratio increases according to some equation:

r = (K/Y)^-λ

There is not even existing out there in some Platonic reality-beyond-reality-that-is-as-real-as-reality any real time-varying stochastic -λ that econometricians could estimate.

There is only a rough empirical emergent correlation in an economy at a particular time in a particular space subject to a particular mix of shifts and changes.

Up until 1750 or so practically all of capital and technology were strong complements with all four modes–with human backs, fingers, brains, and smiles. The only possible exceptions were draft animals, which substituted to a degree for backs but were strong complements with fingers, brains, and smiles. Starting in 1750 or so the steam engine and what followed became strong substitutes for backs–but strong complements for fingers, brains, and smiles. Starting in 1910 or so the assembly line and what followed became, increasingly, strong substitutes for fingers–but strong complements for brains and smiles. And now the twenty-first century is bringing us information and communications and control-loop technologies that promise to be better as cybernetic control loops for both blue-collar machine-handling and white-collar information-sorting and routine-decision-making processes than brains. Soon, if not already, computers will be strong substitutes for brains–leaving only smiles and genuinely creative ideas as the only modes left in which human beings are complements to technology and capital, and indeed where human beings can add value.