Freeman

ARTICLE

And Now for Some GOOD Economic News!

JANUARY 01, 1982 by RUSSELL SHANNON

Russell Shannon is a professor in the Department of Economics, College of Industrial Management and Textile Science, Clemson University.

This past summer, the economic news was good. Congress and the Reagan Administration agreed on an unprecedented package of budget cuts and tax incentives designed to curb inflation and boost the economy. The Dow Jones average rose above 1000. The much- taunted “supply-side” economics had arrived, and the stock market, seeing it, found it good.

Then came the fall. Prospects of huge budget deficits and persistent double-digit inflation kept interest rates high and interest in stock purchases low. The construction industry continued to flounder, and savings and loan associations hovered on the brink of catastrophe.

What’s worse, alarming signs suggested extensive government controls and subsidies could be restored. The Reagan Administration’s agreement to limit Japanese auto imports served as a frightening precedent for other industries to seek similar trade restraints. Farm groups, having lent their support for Reagan’s tax and budget adjustments, pressed for further federal financial aid.[1] In short, the outlook became so bleak that “supply-side” economics now seemed likely to become just another version of what Carlyle called the “dismal science.”

Yet a pleasant prospect glows beneath the gloom. Harking back to the refreshing optimism expressed by Adam Smith, the founder of modern economics, it relies upon the dramatic possibilities for expanding output via the advantages of specialization, innovation, and free trade.

Smith showed what the division of labor did just to the production of pins. One pin-maker, working alone, said Smith, “could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.” But specialization changed all that. Now one man, as Smith described it, “draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head.”

Altogether, Smith said, the process of making pins had been broken up into “about eighteen distinct operations.” But with what marvellous results! Each person, Smith reported, ended up making not just 20 but the equivalent of about 4,800 pins in a day.[2] What a fabulous increase in productivity! What a strong argument for maintaining free and open markets in which to sell this prodigious output!

About a century after Adam Smith wrote, the moving assembly line further enhanced the production process. Usually we associate the name of Henry Ford and automobiles with that feat. In fact, Gustavus Swift was more instrumental and the product was meat.

As quoted by the historian Daniel J. Boorstin, Upton Sinclair described the new assembly line for processing in his novel The Jungle: “The carcass hog was strung up by machinery and sent upon another trolley ride.” It then passed between two lines of men, “each doing a certain single thing to the carcass as it came to him. One scraped the outside of a leg; another scraped the inside of the same leg. One with a swift stroke cut the throat,” and so on.[3]

Swift imaginatively combined the assembly-line dismembering of hogs with distribution of the finished product via refrigerated railroad cars. So sharply did Swift cut costs and so vastly did he increase production that he was able to market meat not only throughout the U.S. but in Europe and the Orient as well.[4]

Now another century has elapsed since Adam Smith wrote, and we find ourselves face to face with the prospect of a further momentous upsurge in productivity launched by the computer. Gene Bylinsky gave a glimpse of the amazing future that it promises in the October 5 issue of Fortune magazine.

Specifically, the innovation Bylinsky describes is called CAD/CAM (Computer Aided Design/Computer Aided Manufacturing). Bylinsky uses for an example the tubes which Northrup needs for its aircraft. Prior to the new computer process, “it took Northrup six weeks from release of engineering drawing to bent tube in hand.” But the use of CAD/CAM collapsed the time from six weeks to 18 minutes! Similarly, Pratt & Whitney report that CAD/CAM allows a 50 to one reduction in labor, and GM now “turns out car-body components such as fenders in half the time it took with manual techniques.”[5]

Of course, there are those who will despair at these fabulous prospects. What, they ask in dismay, will people do for jobs if computers mercilessly replace all those diligent workers?

One who does not share such a gloomy view is Alvin Toffler. Writing in his recent book, The Third Wave, Toffler notes: “Between 1963 and 1973 Japan had the highest rate of investment in new technology, as a percentage of value added, of any country in a seven-nation study. It also had the highest growth in employment. Britain, whose investment in machinery was the lowest, showed the greatest loss of jobs.”[6]

Now the labor unions are upset with President Reagan for his treatment of the air traffic controllers. Many people look with dismay at the perceived dismantling of government social programs by an Administration bent on balancing its budget.

But there is a vital question which must be squarely faced: Can labor unions, or social programs, or trade restrictions possibly provide for the health and welfare of American workers and consumers even a small fraction of what the innovations in technology, ranging from pin making, to meat dressing, to computer designing, have demonstrably achieved? Expressed another way, can the promises of shallow socialism and meager mercantilism ever hope to match the powerful impact of creative capitalism? The impressive evidence of the past two centuries surely suggests that the answer is “no.” []


1.   "The Ripples of a Farm Recession,” Business Week, September 28, 1981, 27.

2.   Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Modern Library, 1973; originally published in 1776), 4, 5.

3.   Daniel J. Boorstin, The Americans: The Democratic Experience (New York: Vintage Books, Random House, 1974), 319.

4.   Ibid., pp. 318-20.

5.   Gene Bylinsky, “A New Industrial Revolution Is on the Way.” Fortune, October 5, 1981, 106-14.

6.   Alvin Toffler, The Third Wave (New York: Bantam Books, 1981), 192.

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January 1982

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