The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

We often think about technological change assuming the aggregate amount of work is fixed, and therefore what is displaced by automation will increase unemployment. Economists sometimes refer to this as ‘the lump of labour’ fallacy – that there is only so much work to go around. To the extent that progress makes products cheaper, there could be more demand for them, and the overall quantum of human work can even increase. The new work will, however, be different. Of course, this means some kinds of workers will no longer be needed, at least in their old jobs – the afore-mentioned accountant, for example. Even so, as routine work gets automated, there is more demand for skilled people who can handle the nonroutine exception that is thrown up.5 In Ford’s time, mechanics who truly understood cars could set up repair shops, where they diagnosed and fixed the unique problems that each mass-produced Model T developed through wear and tear. Similarly, the accountant who can go beyond the routine can find employment at the tax-preparation agency or the tax-software firm to handle special-situation queries – for an additional fee. Since such accountants don’t really do routine work anymore, they need more capabilities and enthusiasm than the ordinary accountant, but may be better rewarded for it. Thus the direct effect of technological change,

Lump of labour fallacy