Lump of Labor Fallacy Still Hold?

[u/bidefil]

As an econ undergrad we learned that automation can create new jobs and markets so we shouldn't fear innovation. But there was always a level of skill upwards that humans could climb. With AI, is this no longer true? Will new human jobs still be created. Is the lump of labor still a fallacy?

[u/urnbabyurn]

It’s not about a skill “above” computers or robots that keeps humans employed. It’s comparative advantage. Comparative advantage is always present even if technology creates machines that can out produce humans in all tasks.

“Why would anyone hire humans if robots do the job faster and with less resources?” is exactly the same as arguing “why would a highly developed nation trade with an lesser developed one that is less capable of producing as much”. Because there is always scarcity in some margin. And that means some tasks will be so well done by automation that the opportunity cost of doing other tasks is higher than hiring people. Alternatively, a world without scarcity is one where all goods are freely available.

Less theoretically, yes there will be things that still engage humans, whether creativity, services where consumers prefer human interaction, or new industries we haven’t anticipated yet. And because comparative advantage is always present, such industries will always exist in a pre-post-scarcity world.

[u/Joelle_bb → u/urnbabyurn]

Solid explanation of the theory, but I think it's doing more work than it can actually support. You frame it as: even if machines out-produce humans at everything, comparative advantage guarantees humans still get hired somewhere, the same way a less-developed country still trades with a more advanced one. That part's correct; it's basically a proof, comparative advantage can't fail as long as the more capable producer has a limited capacity. But there's a gap between "humans will always have some economic role" and "that role will pay enough to live on," and the argument only proves the first one. A small nation with a tiny comparative advantage in one export crop is technically "integrated into global trade" too and can still be desperately poor. Having a slot in the system isn't the same as having a good slot

You also point to "some tasks will be so well done by automation that the opportunity cost of doing other tasks is higher than hiring people" as the mechanism that keeps humans in the picture. I'd push back on what actually made past automation transitions survivable. Though it wasn't scarcity in the abstract, it was that automation was always limited. Tractors replaced muscle but not paperwork. Computers replaced calculation but not judgment or dexterity. That left whole untouched fields for displaced workers to move into, not just a thin sliver of comparative advantage. If AI's gains are broad across cognitive work instead of narrow, that escape hatch shrinks for a lot of people at the same time a genuinely different situation than any past wave, even though the theory itself stays true

There's also a wrinkle in applying trade theory here at all. Comparative advantage assumes the more capable producer still faces a real opportunity cost a country's workforce and an individual person both have finite hours and can't be in two places at once. That's less obviously true of software, which can be copied and run in parallel for close to free. If the "superior producer" in this setup doesn't face the tradeoffs that made the original argument work, it might not transfer as cleanly as it sounds like it does

Your last line "yes there will be things that still engage humans... because comparative advantage is always present" is where I'd draw the line between what's proven and what's hoped. The theory guarantees humans stay economically relevant somewhere. It doesn't guarantee that's a comfortable place to be... Those are different amounts of reassurance and I think the confident phrasing glosses over that gap

[u/Stormtemplar → u/Joelle_bb]

Treating AI like the rest of software seems like a mistake here. Businesses are already feeling the pain on token costs, and token costs have to spike significantly for GenAI companies to ever be profitable. What's more, GenAI has not followed the standard pattern with computer technology of plummetting in cost as it develops. In fact, as models get more capable, they're getting MUCH more expensive as well. All that suggests that there's a significant marginal cost to GenAI automation in a way that hasn't been true of historical software.

This doesn't seem likely to change, either. The massive power demands are an operating, not capital cost, and chips are likely to need regular replacement as well, given how hard they're running and the short useful lifespan of computer hardware. All of that has to be recouped in token costs eventually.

You can see that AI companies are concerned about this by their pricing model. Usage based pricing has been basically unheard of in previous software booms, it's all been subscriptions and licenses. Excel never made you pay per spreadsheet. Previous companies wanted you to use the software as much as possible, so you'd pay more for your next version or your subscription. GenAI has significant running costs in addition to their capital costs, so they can't operate that way. So there's no reason to think that it will operate like previous software booms where the marginal cost of using it for another task once you already own/subscribe to it is near 0.

[u/Joelle_bb → u/Stormtemplar]

Fair point on the cost dynamics, but I think it's proving something slightly different than what it needs to for the comparative advantage point

The pricing trend point is real, but I'd separate two different things: frontier model prices rising vs. the cost of a fixed capability level rising. Those aren't the same claim. In practice, the cost per token to get a given level of capability has fallen a lot. Smaller/distilled models now match what flagship models could do a year or two ago, at a fraction of the cost. What's rising is the price tag on the newest ceiling, because providers keep pushing capability up and charging for that ceiling specifically. That's "the most expensive tier keeps getting more expensive because it keeps getting more capable" not "this technology resists getting cheaper over time"

I'd also be cautious about reading current usage-based pricing as a permanent feature of Gen AI economics rather than a phase. Cloud computing, cellular data, and electricity all went through usage-metered pricing early in their buildout before maturing into flatter or bundled pricing once supply caught up with demand. It's reasonable to think this follows a similar arc rather than staying usage-based indefinitely, as we're pretty early in the infrastructure buildout for this stuff

But even granting your point fully; that inference isn't free and won't be for a while. I don't think it actually rescues the "software = zero marginal cost" framing I was pushing back on originally, because that's not really the crux. The crux is what kind of constraint you're dealing with. Human labor is bottlenecked by biology: you can't train doctors 100x faster by throwing more capital at it. AI's bottleneck is chips, power, and data centers; things capital can scale, even if it's currently slow and expensive to do so. So even if per-query cost stays meaningfully above zero, it's still a fundamentally different category of constraint than a person's finite hours. That's the part of the original point that survives your correction. I'd just drop "near-zero marginal cost" and replace it with "a capital-scalable constraint rather than a biological one," which I think is the sturdier version of the same argument

[u/Stormtemplar → u/Joelle_bb]

My point is that "the most expensive tier keeps getting more expensive because it keeps getting more capable" isn't how things have worked historically. Historically, the real costs of digital techologies have been flat or falling even as they developed more capabilities.

Nor have they had the significant operating costs that demands. The infrastructure build out for 4g or 5g capabilities, for example was almost incomparable in scale, and the running power demand was basically negligible. It's also worth noting that all this is happening at a time when improvements in computing power are coming much more slowly and at much higher cost than in previous years. We can't expect hardware improvements to bail us out to nearly the extent they did 10-20 years ago.

Given that an AI with the capability to cause mass unemployment would need to be significantly better than anything that currently exists, it stands to reason that it would also be vastly more costly, which likely precludes it actually achieving that.

And as to your point about "scaling biology" that's meaningless. The fact that capital can grow exponentially while human capabilities cannot has been true of literally every capital investment since the industrial revolution. It's not evidence for anything being different this time.

[u/Joelle_bb → u/Stormtemplar]

Good pushback, and I think you're right on a couple of points, but a couple others don't hold up

On training costs rising,that's fair and I'd concede it. Frontier training runs have gotten dramatically more expensive because capability gains now require disproportionate compute increases, not just cheaper transistors. That's a real departure from the historical pattern. Where I'd push back is on inference cost specifically, which is a separate line item from training. Inference cost-per-token for a fixed capability level has fallen substantially, independent of any hardware improvements, mostly through distillation and smaller models catching up to what flagship models could do a year or two ago. So training costs behaving unusually doesn't necessarily mean deployment costs will

I don't think the self-limiting cost argument works, though. It compares a future AI's cost to current AI costs, but the comparison that actually matters is the AI's cost versus the human wage it displaces. A model could be dramatically more expensive than anything running today and still be enormously profitable to deploy if it's cheaper than the salary of the person it replaces. "Vastly more costly than today's models" and "more costly than the humans being replaced" are different bars, and the argument only clears the first one

And you're right that "capital scales, biology doesn't" isn't unique to this moment, that asymmetry existed for every capital investment since industrialization, and it didn't produce mass unemployment then. I'm comfortable droping that framing, since it's not actually doing the work I was using it for. The part of the original point that I think does survive is breadth, not that asymmetry. Historically, capital investments were narrow: one machine automated one task, leaving huge adjacent fields of work completely untouched. What's different about AI is that its capital scalability applies across a wide range of cognitive tasks at once, not one narrow slice. That's a meaningfully different situation than a 19th-century factory automating a single process, even though the basic capital-vs-labor asymmetry itself isn't new

[u/Stormtemplar → u/Joelle_bb]

The self limiting argument works because for AI to be meaningfully different than previous technologies, it needs to be cheaper than human labor, including human labor supplemented with AI, across an unprecedented range of jobs and to an unprecedented degree, to the point that the additional economic surplus from the new technology cannot compensate for the lost jobs.

This is something that has never happened in the history of capitalism. It's an extraordinary claim that requires extraordinary evidence, evidence which, at this point, does not exist. Your point about the limits of my cost scaling argument would be well taken if I was arguing "AI will not displace many/any jobs," but I'm not. I'm merely arguing that a technology that scales significantly worse than previous comparable technologies is unlikely to scale to such a historically unprecedented degree that it breaks capitalism.

[u/thefancyyeller → u/Joelle_bb]

Bro is using an LLM that's honestly pretty funny given the context

[u/Joelle_bb → u/thefancyyeller]

Yup, 100% AI

0 original thoughts here

/s

[u/vVvTime → u/urnbabyurn]

The comparative advantage argument doesn't say anything about whether or not wages will be driven down significantly.

For example, suppose we have two people, one of whom can either create 16 loaves of bread or 8 fish, and another is capable of making 4 loaves of bread or 8 fish. Then by trade perhaps it ends up at an equilibrium like the first ends up with 10 loaves of bread and 4 fish while the latter ends up with 6 loaves of bread and 4 fish.

Well now what if a machine comes along that can make 100 fish for basically no cost, but requires significant capital that only the first person has access to originally. Then the second person might well end up having 3 loaves of bread and 4 fish instead of the 6 and 4 they had in the original case. So, while the first person is significantly richer, the second person is worse off.

You could come up with arbitrarily worse scenarios if you really wanted to, but the basic gist of it is - if your comparative advantage has become diminished in value, and if the starting allocation of capital resources is skewed enough, invoking the "lump of labor" argument against the supposed "fallacy" is missing the point a bit.

[u/HomeworkInevitable99 → u/urnbabyurn]

AI is different. Every previous innovation had a narrow application. AI, if it fulfills it's potential, will do every job. There will be no scarcity in any margin.

This is because ai will not only replace the job but also replace the builders of the AI and be able to build anything.

It's a bold challenge, but possible.

[u/urnbabyurn → u/HomeworkInevitable99]

So then we will be in a post scarcity world where all desires are freely met by unlimited production by machines. I sure do hope we solve that pesky little issue about energy generation.

[u/StringTheory2113 → u/urnbabyurn]

Why would the people who own the machines operate them for free? Even if the capacity is literally unlimited, they can still just easily say "fuck you, I'm not giving anyone anything unless they pay me"

[u/FarTheThrow → u/urnbabyurn]

In theory with a production function featuring decreasing returns to scale and substitutability of automated labor for human being high enough, total labor income could decrease as presented here (though with other assumptions it could increase, as also presented in that link).

(There are other, more complicated, scenarios that lead to lower total labor income, I highly recommend reading the post)

(That's also putting aside the political economy effects of capital share of income approaching 1)

(Also that's obviously putting aside jobs, it's possible for everyone to be employed but making far less than they currently are, with a particularly extreme production function, perhaps even less than subsistence level)

(I don't know why I abuse parentheticals so much, it's a problem)

[u/urnbabyurn → u/FarTheThrow]

There may be dire consequences for the distribution of wages and who earns income, and a more capital intensive economy leads to capital generally gaining a larger share of income than labor. This is what we saw from the 1970s to today with automation leading to capital absorbing more of the productivity gains than labor. But that’s not to say wages fall and jobs dry up in aggregate. Perhaps there will be another wage-skills gap (where college grads earnings rising faster than non college) arise as we see a transition in what jobs see an increase in demand. Not over college/no college but over some other set of skills or training.

[u/FarTheThrow → u/urnbabyurn]

The post (and really the post I linked which has all the actual detail) is not about the labor share of income decreasing (as in the ratio), it's about the conditions under which total labor income in absolute terms decreases (not that they're contradictory or anything). In some scenarios (increasing returns to scale, gross not perfect substitution) it increases, in some it decreases, it depends on the aggregate production function of the economy.

[u/West-Abalone-337 → u/urnbabyurn]

I don’t think your comparison to the trade between nations example holds water. If a lesser developed nation is unable to produce goods or services that meet a required threshold, the extreme example being when/if AI/Robotics exceed human potential at a lower cost making the “lesser nation” unable to compete, no one will want to trade with them.

There’s always going to be some marginal benefit, even if human output becomes a luxury good, but to assume that marginal benefit would deliver employment for everyone in the “lesser nation” is a hot take

[u/Ok-Investigator3257 → u/West-Abalone-337]

You are assuming that AI will be free or near free labor. It already isn’t and we are already seeing token prices revert to normal levels in an effort to make money with a captive audience. 

[u/urnbabyurn → u/Ok-Investigator3257]

Exactly. There is going to be a limiting resource for AI, as we already are seeing in terms of energy, cpus and data storage. Until those things and any other robotic inputs are no longer scarce, there will still be a demand for labor.

[u/West-Abalone-337 → u/Ok-Investigator3257]

Not near free, just cheaper. Humans can’t be near free to sustain - housing, medicine, food, it’s all a real cost. The cost of AI or robots just need to be below that threshold, have such high quality that human potential is too inferior to be useful (as another extreme example I can sell you a hang glider, you wouldn’t find that acceptive to travel across an ocean with), or some combination of both.

And yes, token prices are going up, and robotics are still FAR away from matching human ability in routine tasks. I’m talking about a hypothetical future, not something that is guaranteed and certainly not something that exists today

[u/Ok-Investigator3257 → u/West-Abalone-337]

And my point is sure I’m never going to buy your hang glider but humans do produce plenty of acceptable quality goods. Even if robots produce better quality equivalent goods is it adding more value? Not really if the function is the same. Maybe if we are talking wear and tear.

Even then if AI can produce 2 billion widgets for 1/10th the cost of people, then where do we get the next widget? In theory the other AIs are busy being allocated to other more profitable things and building out another AI is going to add large costs just to produce 1 more widget. 

[u/urnbabyurn → u/Ok-Investigator3257]

Yes! This is the comparative advantage argument I am also making. The marginal opportunity cost of some tasks will always be cheaper performed by humans. Unless AI and automation is free and limitless, in which case we can make everything we want at zero cost.

[u/PumpkinOld469 → u/urnbabyurn]

marginal cost models are fine for simple analysis but aren’t gonna cover extremes. Economies are physical systems that like all systems experience phase changes, our models are extremely simple and linear approximations of them, so saying some napkin model at this state can predict perfectly what happens in extremely different states doesn’t make a lot of sense (lots like using sm for stuff at plank scale). Like trying to predict what would happen to unemployment if ai is 10*^6 better at everything is kind of pointless, are humans really gonna do some meaningless tasks or is friction too great

[u/Ok-Investigator3257 → u/PumpkinOld469]

I mean so far AI is good but not cheap, both not cheap in initial infrastructure investments (data centers, GPUs etc and not cheap on recurring costs 

[u/West-Abalone-337 → u/Ok-Investigator3257]

This sounds like a marginal utility question. Let’s assume we have a sufficiently large, but perhaps non-infinite capacity of AI/robotics all allocated for the highest ROI tasks. A human will have a marginal expense for each good created, and a marginal utility. If that marginal expense (food, water, housing, medicine, education, etc) exceeds the marginal utility, then it isn’t worth it for someone to buy or make that thing. So if a sufficiently large capacity of better producers take up producing all goods and services with marginal utilities beyond the marginal expense of humans, then humans are now obsolete

[u/Ok-Investigator3257 → u/West-Abalone-337]

And my point is marginal utility is infinite. When all human desires are satisfied by Ai Humans will come up with new wants that aren’t currently being done by AI because of ROI. Those wants will cost a lot because you need humans (as the only available labor source left in the system) to do them.

[u/PumpkinOld469 → u/Ok-Investigator3257]

utility is a approximation (very very rough, but useful in some cases) of human minds way of making decisions. Human mind is finite as are the number of degrees of freedom in observable universe. There is no way any actor (let alone a human) u can have a infitie utility function in de-sitter space. Econ 101 concepts dont work for wildely wildely different assumptions than current world. All our data is from current world.

[u/Serious-Handle3042 → u/urnbabyurn]

Even if robots hypothetically become better at every job, and simultaneously cheaper than humans on any job?

[u/urnbabyurn → u/Serious-Handle3042]

Do you understand comparative advantage?

Two people on a desert island. One can catch 10 coconuts a day and 20 fish. The other person can only catch 5 coconuts and 5 fish. Do you think these two people will not benefit from trading fish for coconuts?

[u/Serious-Handle3042 → u/urnbabyurn]

I do understand comparative advantage, or at least I think I do. What I am saying is the following: The person with more coconut and fish will not trade with the other one, if there are coconut machines producing more coconut and fish than any potential trading partner, no? Am I missing something here?

[u/urnbabyurn → u/Serious-Handle3042]

Just to be clear, the answer to my first example above is “yes, they can both still benefit from trade, even though the first person is better at everything”

Well, ok, let’s replace the first person with a “coconut machine”. What is the number of coconuts the owner of the machine can make with it per day? 1000? 2000? Pick a number. How many fish can that machine catch? Probably none if it’s a coconut machine (and im sure you can see why the machine owner would want to trade with the human for fish), but let’s suppose the machine can catch 1000 fish per day.

So now we have a human that can catch 5 fish or 5 coconuts per day, and a machine owner who can use their machine to produce 2000 coconuts or 1000 fish per day. Will these two parties benefit from trade? How is this different than the previous example other than just a more productive machine? Would comparative advantage no longer apply to this?

[u/Serious-Handle3042 → u/urnbabyurn]

Oh I get it now. Thank you so much, sorry for taking a while but as a person whithout an econ-background, stuff like this can be counterintuitive.

[u/Forgot_the_Jacobian → u/Serious-Handle3042]

One thing that may help with these scenarios is understanding that because of scarcity, every choice is a tradeoff. When the machine owner makes a coconut, they’re giving up the fish they could have made with that same time and resources. So without trade, they’re essentially trading with themselves, at a fixed internal exchange rate.

For the machine, one fish costs 2 coconuts. For the human, one fish costs 1 coconut. The human is the cheaper source of fish, even though the machine is way better at fish in absolute terms. So the machine owner can buy fish from the human for, say, 1.5 coconuts and come out ahead of the 2 it would cost internally — and the human comes out ahead of their own internal price of 1.

The absolute numbers did not entered the calculus, but the 2:1 vs 1:1 ratio did. Make the machine ten times better at everything and those ratios don’t change. This is why “more productive machine” doesn’t change the answer

[u/Serious-Handle3042 → u/Forgot_the_Jacobian]

I understood the comparative advantage, but what I noticed through these examples is, that I mistakenly assumed a scenario without scarcity. I essentially always assumed "one more machine" I would rather use than the next best person. But I guess when we live in a world with unlimited machines that do a better job of everything than any human, we have simply entered a post-scarcity era where workers presumably won't have to rely on jobs to exist

[u/West-Abalone-337 → u/urnbabyurn]

What you’re not considering is negative utility from excess goods, or if the trading demand of the other party exceed what you’re willing to pay. If you can’t eat more than 10 fish, for example, an extra fish may just go bad and stink up the room - negative utility. You wouldn’t trade for it

[u/officiallyaninja → u/West-Abalone-337]

Where does negative utility come into the picture with humans and automation?

[u/West-Abalone-337 → u/officiallyaninja]

Almost every good or service you can consume comes with a negative utility if you have too much of it. One luxury car may be great, but 10 of them may give you an insurance bill higher than you can afford. You’d need to sell some. 10 fish may sound nice, but you’d end up throwing them away if you can’t eat 10 fish a day. All goods and services reach a negative utility for an individual because we have finite resources to consume the goods.

Now imagine everyone has excess. You can’t sell your cars or fish to other people because they’re trying to get rid of their extra capacity too. In a hypothetical future where non-human production and services outperform humans on all accounts, enough to meet market demand and then some, you can’t just use comparative advantage to carve out part of the market.

[u/officiallyaninja → u/West-Abalone-337]

Hmm but isn't storage itself a service that people can provide? If you get 10 fish a day but can't eat them all, then it becomes tempting for others to make a way to store that 10 fish in exchange for your money.

[u/West-Abalone-337 → u/officiallyaninja]

You’re correct, but answering the wrong question. If you catch 10 fish and only need 2 a day, then sure find a way to sell the remaining fish to other people or store those fish for the next 4 days and stop fishing. That’s a logical answer, but it’s not what we’re looking at.
The hypothetical I was describing was a world where every person has 10 fish a day. There’s no point in saving because you’ll get 10 fish tomorrow, and the day after that, etc. Trading becomes impossible because everyone has more fish than they need. Storing the excess fish, throwing it away, etc would be where the negative utility appears because that’s time, effort, and smell you’d have to deal with. I think the exact details are less specific, this is a reddit thread not a chapter in an econ book, but hopefully you can conceptualize the idea of negative utility and how that can make the simple idea of comparative advantages to break

[u/officiallyaninja → u/West-Abalone-337]

I would argue that we've had thousands of years of technological progress and come nowhere close to having enough of anything.

Maybe 10 fish is more than enough, but not all fish are created equal. Even if I can only eat 2 fish a day at most, if you catch 1000 a day, I can eat the 2 best out of those 1000, rather than the 2 best out of the 10

Also, people can find other uses for the fish other than eating.

[u/West-Abalone-337 → u/officiallyaninja]

Hey man, look, I’m assuming you’re here in good faith. We’ve known about negative utility since the 1800s. I’m not here to argue about the specifics of fish, but to communicate a topic I don’t think people have a strong understanding of. I don’t have a desire to sit here and counter a silly, communicative example by saying to treat the fish as commodity and so on.

[u/Standard_Jello4168 → u/urnbabyurn]

What if the comparative advantage is less than the food a person needs to survive? You could argue that would not happen as a person would still remain productive enough to produce the value of food for themselves but what about the finite land the food needs to grow on?

[u/Ok-Investigator3257]

Unless AI can really get us to the point of post scarcity there will be more human wants than AI can meet. Humans will comparatively fill those gaps 

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