Recall President Obama’s strange ATM problem from last year:
There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.
Now, economists think productivity is a good thing. And automation improves productivity. As economist Paul Krugman famously put it, “Productivity in the economy is almost the only thing that matters.”
Take the example of the tractor. What if the tractor had never been invented? What would be the economic impact of having to farm without that machine? It is a counterfactual explored in a new academic paper, “Engines of Growth: Farm Tractors and Twentieth-Century U.S. Economic Welfare” by economists Richard Steckel and William White.
How has the tractor made our lives better?
– The efficiency of tractors in performing farm tasks has dramatically reduced the inputs required in producing the food we eat.
– The long secular decline in relative food prices has allowed increased consumption of other goods, even among the poorest in our society. Labor released from agriculture has long since been absorbed into manufacturing and services, fueling growth in these areas.
– Agricultural surpluses, stimulated by mechanization and yield improvements from the green revolution in farming, have helped feed people throughout the world.
To illustrate these points, the paper first looks at the world of 1910:
In that year, more than 32 million people lived on the nation’s farms, comprising 35 percent of the total population. Of these, the census records 12.1 million as farm workers, or about one third of the total work force of 38 million. The decade between 1910 and 1920 marked the peak of animal-powered farming in the United States. Farmers employed more than 21 million horses and 5 million mules to produce the nation’s crops. Of the total land area in the continental United States in 1910, farmland comprised almost half, representing 879 million acres. Slightly more than a third of this, or 310 million acres, were used for growing crops, the remainder being woodland, pasture, land for structures, and unimproved areas. Agricultural output was sufficient to provide an exportable surplus of cotton, tobacco, grains, and animal products totaling $900 million, slightly exceeding farm product imports.
Ford introduced its first tractor in 1917. And, as the above chart shows, machine might began replacing animal muscle.
Now let’s jump ahead to 1954:
The population of the United States had increased by 80 percent to 165 million, while farms had lost more than 40 percent of their people. Despite these changes, the amount of land used to grow field crops was little altered. The total reported for the census year of 1954 was 329 million acres, a 6 percent increase from 1909, and only 30 million less than the all-time high reached in 1929. Large decreases in corn and cotton acreage were balanced by the 18 million acres of soybeans and 16 million acres of grain sorghum added to the nation’s output mix. Exports of farm products totaled $3.1 billion, again dominated by cotton, wheat, and tobacco.
So, the paper asks, how much poorer would the United States have been in 1954 had the tractor not been invented:
Specifically, a hypothetical economy is explored, one forced to grow crops with horse and mule power, as was the case in the actual 1910 economy. … In this paper we show that agricultural mechanization as embodied in the tractor and related equipment made a significant contribution to the growth of U.S. output. The social savings is calculated at $29.2 billion, or 8.0 percent of U.S. GNP in 1954.
Once the dominant design emerged in the 1930s, tractors were able to deliver mobile power with a far lower cost in terms of labor, at a comparable expenditure of capital, and without consuming a large portion of the output in the process. … In most pre-industrial economies, the food supply imperative causes almost the entire economy to be devoted to agriculture. Any improvement to farm productivity will have a huge impact on the wealth of the population, as long as there is alternate employment for the resources released from agriculture. The United States, in its first century as a nation, although well on its way to industrialization, had a large proportion of its population engaged in agriculture. … it might have been impossible to feed the 1954 population of the country without the two agricultural productivity shocks, mechanization and yield improvement.
Now, to put all that in 2012 numbers, 8% of today’s economy equals $1.2 trillion. Indeed, the economists think the tractor was more important in boosting growth than the railroad. As the Library of Economics and Liberty puts it: “If a country wants its standard of living to rise over the long run, its labor productivity has to go up. And for that to happen, it either has to save more or innovate.” The tractor was a major innovation. And if we want the U.S. economy to produce as much prosperity in the next 100 years as it did the past century, we’ll need a few more major innovations—even bigger than the ATM.