ATMs v. Obama's Economic Ignorance

Jeffrey Ricker
President Obama made the following statement yesterday in Kansas (or was it Texas?)

"Layoffs too often became permanent, not part of the business cycle. And these changes didn't just affect blue collar workers. If you were a bank teller or a phone operator or a travel agent, you saw many in your profession replaced by ATMs and the internet."

It is not the first time that Obama has blamed automation for job losses. The man's ignorance of economics knows no bounds. Automation has always created more jobs than it replaces. It may be counterintuitive, but the effects of the division of labor often are.

The classic example for the division of labor is from Adam Smith's The Wealth of Nations where he explains the making of a simple pin. One man "could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty." Smith witnessed ten men using simple machines and a division of labor "make among them upwards of forty-eight thousand pins in a day." By simple division of labor, the output increased from 20 pins per person per day to 480 pins per person per day.

Did this efficiency displace workers? Did the tiny factory put 240 pin makers out of work? In all probability, the efficiency increased employment in the pin industry. The cost of pins is only 4 percent of what it was before, so the demand for pins will have increased dramatically. Suppose the workers make 4 shillings per day. Without the division of labor, the cost is £1 for a 100 pins. At that price, people have no need for pins; they will do without. With the division of labor, the price is 1s for 120 pins. At that price, there are all sorts of uses for pins.

Frederick Winslow Taylor explained the relation between automation and demand more explicitly in his work The Principles of Scientific Management.

"The cheapening of any article in common use almost immediately results in a largely increased demand for that article. Take the case of shoes, for instance. The introduction of machinery for doing every element of the work which was formerly done by hand has resulted in making shoes at a fraction of their former labor cost, and in selling them so cheap that now almost every man, woman, and child in the working-classes buys one or two pairs of shoes per year, and wears shoes all the time, whereas formerly each workman bought perhaps one pair of shoes every five years, and went barefoot most of the time, wearing shoes only as a luxury or as a matter of the sternest necessity. In spite of the enormously increased output of shoes per workman, which has come with shoe machinery, the demand for shoes has so increased that there are relatively more men working in the shoe industry now than ever before."

So much for 18th Century pins and 19th Century shoes, what about ATMs?

The ATM has been with us since 1972. Between 1997 and 2007, the number of ATMs in the US doubled from approximately 200,000 to 410,000. During that same period, employment in commercial banking grew by four percent. That is right, employment increased. More importantly, the average salary in commercial banking increased more than 60 percent. Do you see that? It is exactly the same result that Smith observed in 1776 and Taylor observed in 1911.

Commercial banking

1997

2007

change

employees

1,575,400

1,643,100

4%

salaries

$57.2B

$95.8B

67%

average salary

$36,300

$58,300

61%

ATMs

200,000

410,000

105%

Source: US Census Bureau and ATM Marketplace

The increase in wealth and employment from ATMs is actually much bigger still. We have not yet considered the more than 60 manufacturers of ATMs, as well as the machine maintenance services, software makers and communications networks.

Besides the ATM, the other boogeyman Obama mentions that is stealing jobs is the internet. I know that he slept through 20 years of Jeremiah Wright's sermons, but did he also sleep through the entire Dot-com Boom of the 1990s?

President Obama made the following statement yesterday in Kansas (or was it Texas?)

"Layoffs too often became permanent, not part of the business cycle. And these changes didn't just affect blue collar workers. If you were a bank teller or a phone operator or a travel agent, you saw many in your profession replaced by ATMs and the internet."

It is not the first time that Obama has blamed automation for job losses. The man's ignorance of economics knows no bounds. Automation has always created more jobs than it replaces. It may be counterintuitive, but the effects of the division of labor often are.

The classic example for the division of labor is from Adam Smith's The Wealth of Nations where he explains the making of a simple pin. One man "could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty." Smith witnessed ten men using simple machines and a division of labor "make among them upwards of forty-eight thousand pins in a day." By simple division of labor, the output increased from 20 pins per person per day to 480 pins per person per day.

Did this efficiency displace workers? Did the tiny factory put 240 pin makers out of work? In all probability, the efficiency increased employment in the pin industry. The cost of pins is only 4 percent of what it was before, so the demand for pins will have increased dramatically. Suppose the workers make 4 shillings per day. Without the division of labor, the cost is £1 for a 100 pins. At that price, people have no need for pins; they will do without. With the division of labor, the price is 1s for 120 pins. At that price, there are all sorts of uses for pins.

Frederick Winslow Taylor explained the relation between automation and demand more explicitly in his work The Principles of Scientific Management.

"The cheapening of any article in common use almost immediately results in a largely increased demand for that article. Take the case of shoes, for instance. The introduction of machinery for doing every element of the work which was formerly done by hand has resulted in making shoes at a fraction of their former labor cost, and in selling them so cheap that now almost every man, woman, and child in the working-classes buys one or two pairs of shoes per year, and wears shoes all the time, whereas formerly each workman bought perhaps one pair of shoes every five years, and went barefoot most of the time, wearing shoes only as a luxury or as a matter of the sternest necessity. In spite of the enormously increased output of shoes per workman, which has come with shoe machinery, the demand for shoes has so increased that there are relatively more men working in the shoe industry now than ever before."

So much for 18th Century pins and 19th Century shoes, what about ATMs?

The ATM has been with us since 1972. Between 1997 and 2007, the number of ATMs in the US doubled from approximately 200,000 to 410,000. During that same period, employment in commercial banking grew by four percent. That is right, employment increased. More importantly, the average salary in commercial banking increased more than 60 percent. Do you see that? It is exactly the same result that Smith observed in 1776 and Taylor observed in 1911.

Commercial banking

1997

2007

change

employees

1,575,400

1,643,100

4%

salaries

$57.2B

$95.8B

67%

average salary

$36,300

$58,300

61%

ATMs

200,000

410,000

105%

Source: US Census Bureau and ATM Marketplace

The increase in wealth and employment from ATMs is actually much bigger still. We have not yet considered the more than 60 manufacturers of ATMs, as well as the machine maintenance services, software makers and communications networks.

Besides the ATM, the other boogeyman Obama mentions that is stealing jobs is the internet. I know that he slept through 20 years of Jeremiah Wright's sermons, but did he also sleep through the entire Dot-com Boom of the 1990s?