Year XXVII, 1985, Number 1, Page 62
Technical Change and European Integration
WASSILY LEONTIEF
I am very happy to be here. If I am not mistaken, I think I am the only Non-European on this panel; the only American. I am a friend of the family, even of I am not a member of the family, and naturally I must be much more modest in presenting my advice and exhortations.
What I will try to do in the few minutes in which I have the opportunity to speak to you is to present certain ideas, certain thoughts, possibly even one recommendation, which are the result of the long study of the particular subject on which I was invited to speak: this is the role of technology, of technological change. I will also permit myself to indicate the particular circumstances in which I think Europe, the European economy, European society, finds itself in facing the challenge of new technology.
Now of course the concept of technology is a very complicated one, but in this connection I would use a simple definition of technology. This is how I will use the word. Other people, of course, can use it differently.
Each type of productive activity, of service activity, at any given time, uses a particular technology. A very good example is, for instance, that if you want to bake bread, you can look at a cook-book – Tante Marie in France, but I am sure there is also one like it in Italy – and it will tell you how to make bread. It will tell you what ingredients you need in order to make it, how much time, how much labour you need in order to make it; it will also indicate what the economists refer to as the capital which you need: you need an oven, you need cooking facilities, and even I suppose if you are cooking in this modern age, if your cooking produces a lot of smoke, you will need a ventilator, in order to eliminate pollution.
Any businessman who wants then to go into the bakery business must study, must know that technology. Technological change is nothing else than changes in technologies. You have a new cook-book, and new recipes. Naturally not only for making bread, but for making steel, for making automobiles, and so on.
The history of social and economic development is fuelled by change in technology. I think in the long run progress, economic and social, was based on changes in technology. And what is particularly important is that each technology requires its own economic organization. A type of economic organization which is suitable and enables you to exploit very effectively one technology, very often is not at all suitable for exploitation of another technology.
Europe still has certain feudal elements in its organization. But, and this may sound a little paradoxical, possibly Japan succeeded so well because perhaps feudal organization might be more suitable to effective exploitation of a modern technology than a kind of free-wheeling nineteenth century organization.
Now the nineteenth century technology on which Europe and the United States grew up, and which made them what we refer to as “developed countries”, was based on the exploitation of mechanical power. It was the steam engine, the gasoline engine, and then electric power, which really equipped men and women with incredible power to produce very large amounts and great varieties of goods.
The new technology is very different. You see, essentially the old technology freed us – the workers – of physical effort. Nowadays you do not hire a worker by seeing how strong his muscles are. You hire him very often if you have seen that he is smart enough.
But what does the new computer do? The new technology even permits us to free people from certain types of mental effort. And, of course, we are just beginning, we are just at the very beginning, of that process. This changes the position of man in the economy and in society.
It is very promising. It has very good hopeful aspects. I mean we might go back to the paradise when everything is simply produced without any effort. But you know in a paradise we would have some very difficult problems. Adam and Eve would have no income, no wages, because they don’t work, and so they would be in terrible trouble.
I think that this is one of the fundamental problems which we will be facing. Not at once. I will tell you later about certain research, quantitative research, factual research, which I undertook in order to estimate how, for example, new technology will affect our American economy, but there will naturally be very similar developments in other economies.
The role – it sounds paradoxical – of humans in production is diminishing slightly. This is a promise and challenge. Two years ago General Motors and Chrysler Corporation were in a terrific crisis. They began to negotiate with the trade unions about wages, and an agreement was reached very quickly because General Motors were simply able to show, to put on the negotiating table, a blueprint for an automated plant. They showed it to the workers and said: “Look here: if you don’t take the situation into account, we will construct an automatic plant, and you won’t have very many working places”.
This is a very serious problem. There are some very good aspects to it naturally: the increased productivity of labour, but it has also very serious institutional aspects. It is a problem of how our society can operate.
In the case of horses in agriculture it was very simple. We introduced tractors and we just let horses go. There is no problem there, but if horses could join the Democratic party and vote, then the political situation would be very different.
I think this will happen somewhat slowly. It will not be very fast. I will tell you, for example, that according to an analysis which I have been trying to undertake, in the United States, even by the end of this century, which is only fifteen years away, we will not have large technological unemployment. We will have a very great shift in the type of profession, in the type of training which is required, with some people with a certain type of training indeed being unemployed, and it will be necessary to retrain them.
But in part, as a matter of fact, my conclusions are due to the fact that our population growth is diminishing, and we will have far fewer young people coming into the labour market in the next sixteen years, than did in the last fifteen years. My conclusions are due to these factors rather than to a benevolent technology.
I purposely mention to you technical but simple problems, because ultimately the solutions will have to be found with a complete understanding of exactly what is happening and of what can happen later. It requires a scientific analysis, simple analysis, which can be carried out.
In the nineteenth century, the length of a day’s work was diminishing dramatically. In the United States, at the end of the last century, the average labour week was seventy-five hours; it is now, as of the last war, forty-two hours. Imagine trying to find full employment for everybody, if everybody wanted to work seventy-five hours a week. It would be impossible, and unnecessary.
I think, as time goes on, slowly but steadily we will have to diminish the working time – not per week necessarily. People will join the labour force later because of preliminary training, they will retire earlier, and so on... I do not want to go into details on that now. But there will be serious problems. What kind of income will they have?
Returning to my horses, you know we could easily in the United States maintain twenty million working horses in agriculture if we wanted to. We would simply declare that it is necessary for our national defence to have twenty million horses. I assure you that our Congress would vote, it would vote fifty billion dollars, and everything would be settled.
Here would come the problems of morality. And the problem of moral convictions. If you grow up in an atmosphere where you can save your soul only by working seventy-five hours a week, you will be terribly unhappy, and society will be unhappy, everybody else will be unhappy, if you can work for only forty hours or less. This produces terrific tensions; very great social, moral, cultural difficulties which I think we will have to go through. We will have to go forward, and change our attitudes, and this is very difficult.
You see, the self-interest, the profit motive, is still the main driving force, and if you begin supporting horses, despite the fact that they don’t work too much, you feel very badly about it; and certainly you will feel very badly about people under these conditions.
But you know we are doing this already. What is social security? It is really an incomes policy. What is medical care? Free medical care? An incomes policy. What is environmental protection which is incredibly expensive? An incomes policy. I permitted myself just the other day to publish a little article in the “New York Times”. There has been a great deal of discussion on our taxation system and on our budget. I took the liberty of observing that when we in the United States – and you in Europe much earlier – introduced income taxes, we made them progressive because this was an admission that we were just slightly trying to have income policies and to slightly reduce the difference between the different incomes. But now, even in the United States, and certainly in Europe, income policies are conducted not on the revenue side of government budget, but on the expenditure side of government budget. It is social security, medical care and all other activities which are financed on expenditure which really matter and from this point of view I even permitted myself to say that income tax produces very great difficulties, moral difficulties, evasion and so on, and that I favour flat sale taxes, which can be slightly progressive in a sense. Luxury goods could be taxed more. But this, by the way, will not at all attack savings. Somebody has to save, and whether I do it, or the rich men do it, if he can do it, let him do it... if he didn’t do it, then I would have to do it.
Now, let me go a little further. Since it is a slow process, it is very important to see ahead, because these changes are very slow, very difficult, and it is very important to look ahead. I know Japan very well. I have worked in many different countries. The interesting thing for example is that in the United States the average return on invested capital is about twenty to twenty five per cent. I do not mean the rate of interest, just like a business per cent return on capital. In other words our businessman investor expects to get back his capital in about four and a half years. So he really is not very worried about what will happen over and beyond those four and a half years. He uses a rather short horizon.
In Japan, interestingly enough, return on capital is much slower. It is nearer to around twelve per cent. So they can get their capital return only in about fifteen years. They are forced to look ahead.
Modern technology requires capital investment which certainly can be justified only if you look very much ahead. I always say that we have a tendency to drive with our parking lights on, while the Japanese drive with their high beam on, and this makes a very great difference. It is terribly important.
Our company president can lose his job in the United States if he does not show profits in three successive quarters. With modern technology, however, you have to look much further than three quarters, in order to organize it well.
Now there is no doubt that the introduction of new technology requires a very great shift in investments, in occupation, in the territorial division of labour. And shifts can always produce great benefits to some people, and also in the process of transition squeeze some other people. Shifts are always very painful and this is why it is often preferred – and the previous speaker, my friend Prof. Albert, indicated this – in Europe to sit back quietly and not budge too much. But this, of course, is one of the greatest dangers.
And here I make a very specific remark, which is addressed to you who are interested in the unification of Europe, and particularly in economic integration. Even if technology were not to change at all, in the next twenty years, let us say, there were to be no technological changes, economic integration could still benefit Europe incredibly, because there would be simply a division of labour between the different industries, a better concentration, better coordination, which would be of great benefit to Europe.
But at the same time without any technological change there is a very strong resistance to it because many groups, at least temporarily, would suffer from it. This is, I think, the main reason for the resistance of special groups, and why you do not have much integration.
Now let us take another hypothesis simply to indicate certain ideas. Imagine Europe as being already unified, with very strong technological change, shifts. This too would impose very great hardships on some people, on some industries, who would have to curtail, because they are no longer up-to-date. But there would be great increases in productivity and welfare in the most dynamic sectors. What I say is this: even if you did not integrate, the technological changes, which you will have to undertake, will force you to make great adjustments. So there is a very great advantage for you to carry out simultaneously technological change and integration. I think this would be a very good kind of policy decision, a very good way of looking at what Europe can do in the coming five, ten, fifteen, twenty years. You have to adjust anyhow, so you might as well adjust to the new technology, and integrate at the same time. You will have to pay a price for each of these changes separately, because there is some price. But the price will be lesser if Europe is united and able to provide effective government as regards the process of change.
And now, just because I am after all a technician, I am not a politician – I have my political and philosophical opinions, but I prefer to express them among my friends around the coffee table and not declare them before you – I think that one important thing for any type of consistent policy is first of all to know your own situation, to explore what the alternative possibilities are. And I am struck in my own country and I think this possibly applies to Europe as well: we have grandiose political plans, grandiose proposals, but we really do not know what might happen.
We build our goals without investigating the road which we must pursue step by step. This should be the role for the economist. The economist should just inform the politicians of the possibilities. And here I say very apologetically that I think old-fashioned economics is not very helpful, they are mostly philosophical, they use some figures more like indices. I mean if you are interested in knowing how heat works, to simply look at the thermometer is not sufficient. You have to understand the entire mechanism of that process.
I think that the introduction of computers, the initiation of what we call the information age, will and should and has already begun to revolutionize economic science. It can now take on tasks and perform tasks which it had been unable to do up to now.
Economics was very deductive. It was almost philosophical. You discussed tendencies and what not. At the moment when you speak of production and consumption, which are specific processes, with modern computing machines it is possible to handle millions of figures. I use a computing machine which can make eight hundred million multiplications in one second.
In other words that is not a problem. It is not a problem at all. The problem is to formulate analytical tools, to know how to handle the figures, how to make sense of the figures. And this is my job. This is the job of science; and secondly to get the figures.
In the pecking order between these three activities, computing machines are like air. You have enough of them now, and there is no problem. It is very cheap, considering the other expenses. To construct a theory, to know, in other words, how and what models to build – we are accustomed to it now and there is one important change which is taking place. In the old days it used to be said that you could either describe the forest in general, or you could describe the individual tree. You had that choice, and it was a very disagreeable choice, because if you described just one tree, you did not know what happened to the other trees, and so you got into trouble.
But if you speak about the forest in general, you really do not use factual information. You use a symbolical language. There is no such thing as an economy as a whole. There are particular plants, particular policies, particular industries, particular processes... anybody who is in actual business knows this.
But now we are entering the stage where we can begin to describe the forest in terms of the particular trees. We can get the information and have the whole picture in sufficient detail to be able to make not only political speeches but to actually help individual businesses and industries to make their choices, given that information and keeping it in account.
This I think was one of the reasons why Japan succeeded in utilizing new technologies, which they did not invent. They got them, and used them. I know that in my field the way in which the Japanese collect information, the great discipline, the great thoroughness, and the way in which they use it, gets concrete results.
It is much easier to get other people to accept your particular recommendations, if you base them not on philosophical convictions, but on fact. I do not say these recommendations will, but that they might, be introduced. Renault knows exactly what kind of car it will produce five years from now. It is already in the book. It might not produce it, but if it does, it knows what car it will be.
The same thing applies to other industries. With very modest resources, I collected some information on that. The businessman can then cross out, he can plan his course; he has the technology, he has the cooking recipe, he knows the price of flour and salt and the cost of the cook’s labour; he knows how much the oven costs and the cost of alternatives. He can compute, and this gives a more efficient picture, one of greater value.
Of course the new technology, if you really introduce it, increases income. But there you have still, and this is what all the quarrel is about, the question: will you use it only to increase the return on capital? Or will you use it also to increase real wages? Usually some kind of a compromise is reached. If you try to do both, you simply produce inflation, of course. But it is much easier to discuss between business and labour the introduction of new technology, if you can show in complete figures, what the possibilities are. Reasonable people can agree, if they have presented to them realistically the alternatives. And this, of course, the Japanese do. Business and government analyze different industries. They say: let us go for the small car. Let us close down our shipyard... and they show the figures. And they do it, because it is not just philosophical discussion.
For example, this type of thing has been done in Europe. It is very interesting to see how different countries handle situations. It happened about ten years ago: it was the introduction of new technologies into the printing industry. There was a great wave of new technology, when the clumsy old linotype machines were thrown out, and all kinds of new photographic processes were introduced.
In the United States it brought terrible strikes. Many workers lost their jobs, and some publications really went bankrupt because of it. The same thing applied to England. In Austria, they got together and business and trade unions asked the Academy of Sciences, which has an economic division, to analyze the situation, to collate the cooking recipe, and to analyze and not make one projection, but to describe alternatives.
Among those alternatives, for example, was the alternative of whether to produce the new equipment in Austria, or to import it, which, of course, would mean increasing exports. They analyzed it, showed the alternatives to the people immediately concerned, of course labour and management, and they then reached an agreement. There was no strike. They did not discuss principles, but analyzed the actual situation. This can be done.
I think that one of the moves which Europe could make, which you in Europe could do, is to just sponsor that type of research. It is, in a sense, technological research, but different from purely engineering research. It can be done. Of course, it is extremely expensive. It is much more expensive than writing general economic papers. But it can be done.
Much of the information will come not from central statistical offices, but from industry itself. Industry knows what... in other words you begin to observe the trees and then you have a pretty good idea.
You don’t make one projection. I never make one projection. There are always alternative choices. I illustrate my idea of what this type of research can do with a kind of anecdotal example. Imagine a friend calls me up one day and says: I would like to invite you and your wife to a very good restaurant. Do you have time tomorrow? If the restaurant is very good, I usually have time! But then imagine that my friend tells me: Can you tell me exactly what your tastes are, so that I can already in advance order all the dishes that we will be served? I will say: No – my dear. I cannot describe my tastes; give me the choice. Give me the menu.
An economist, this is the type of research which I suggest, will give the company, the entrepreneur, the trade unions, which play such an important role, a description, a realistic description of the alternatives. They won’t have to understand philosophy, or higher mathematics, it can be described in a very simple way, like in a cook-book.
Then, of course, I do not say that there is some simple principle of choice. Some economists say: “You maximize utility; you maximize national income”. But it is too dangerous to say that, because the criteria of choice are very different. There are very many circumstances, which an economist is not capable of evaluating or he should not pretend that he can make a choice between alternative dishes. What he should be able to give you when you order a dish is to really deliver it. The trouble with economics is that you have a big menu, and the cook cannot cook any of the dishes. Whatever the people name, it is always goulash.
I know that I have used up my time. If there is a little discussion, I would be delighted to try to answer your questions. But I think that it would be a very great thing. Because you know two countries do it now: Japan does it on an incredible scale. In Japan, for example, they have the so-called input/output tables, work which interests me. In the United States it is a small division in the Department of Commerce. In Japan thirteen ministries, under a Cabinet Committee, do the work and last summer the statistical office of Japan was transferred to the so-called central management agency which really decides the economic policy.
This does not restrict your freedom. It does not mean interfering with your decisions. It means giving you a very clear picture of what is and is not possible, so that you can then make your choice.
It is very expensive. Near Geneva they have a great laboratory[1] – by the way one of the great successes of Europe – it was a great investment, but you had the results. Now, it would be a great innovation if Europe decided – and this you can do quickly.
[1]Leontief alludes to the Nobel prize jointly awarded in 1985 to the European researchers Rubbia and van der Meer for physics.
