Operating Economics: The Lump of Labor Fallacy
Why New Jobs Will Appear Despite Our Protestations
Origins of the Fallacy
The Lump of Labor Fallacy emerged from the industrial turmoil of the 1890s, when economist David Frederick Schloss first identified what he called "the theory of the Lump of Labour" as fundamentally flawed thinking. Schloss observed that workers and employers mistakenly believed there was "a certain fixed amount of work to be done," leading to the erroneous conclusion that any job taken by new technology or workers must reduce opportunities for others.
Ironically, Schloss himself supported the eight-hour day movement, his target was not labor reform but the zero-sum mindset that ignored how productivity and economic output could expand.
The concept gained theoretical foundation through the Cambridge School economists. Alfred Marshall developed the framework showing how labor demand derives from consumer demand for goods and services, while Arthur Pigou extended this analysis to unemployment and welfare economics. Their work demonstrated that labor markets are dynamic systems, not static pools, where productivity gains can simultaneously displace specific tasks while expanding overall economic activity, labor and output.
The Bridge: This foundational insight, that displacement and growth can occur together would be tested repeatedly across history, starting with the most dramatic sectoral shift of all: the British Agricultural Revolution.
The Agricultural Revolution: The First Great Displacement
Between 1597 and 1850, agriculture's share of the male workforce plummeted from approximately 64% to just 22%, the smallest proportion globally. Millions of workers were displaced as mechanization, crop rotation innovations, and selective breeding dramatically increased productivity.
Yet this massive sectoral shift did not produce permanent unemployment. Agricultural output grew 4.5-fold between 1300 and 1850, while labor productivity doubled between 1500 and 1700 alone. The displaced agricultural workers became the foundation for Britain’s Industrial Revolution, fueling manufacturing, mining, and urban services.
Market-Shift: This wasn’t just a change in how work was done, it was a redefining of the market for agricultural labor. Demand collapsed in one market while rising in entirely new ones, forcing workers to follow opportunity rather than cling to shrinking roles.
Just as farming innovations freed workers to power the Industrial Revolution, AI’s automation of certain tasks may become the foundation for entirely new industries we can’t yet imagine.
Industrial Revolution: Creative Destruction in Textiles
By the late 18th century, mechanized spinning and weaving reshaped entire industries. Hand spinning, which once employed up to 20% of women and children, began vanishing in the 1780s. Power looms caused wages for handloom weavers to collapse 60–80% between 1820 and 1840.
The Luddite movement (1811–1817) arose as skilled workers sought to ensure productivity gains were shared fairly. Even David Ricardo reversed his early optimism, acknowledging in 1821 that machinery could indeed harm workers’ interests in the short term.
Market-Shift: The textile sector didn’t disappear—it evolved into a new market structure where scale, speed, and cost control mattered more than artisanal craftsmanship. Workers who adapted to the new value drivers survived; those who stayed tied to the old market structure fell behind.
As with the power loom, AI could transform productivity while hitting specific professions hard, making fair transition policies crucial.
The Personal Computer Revolution
The 1980s–1990s brought rapid computer adoption—secretary computer use jumped from 46% to 77% between 1984 and 1989, eliminating secretarial pools and forcing managers to learn new skills. Yet net employment grew as computers expanded job scopes and enabled entirely new industries in software, IT services, and hardware.
Market-Shift: The market for clerical work shrank almost overnight, while the market for digital tools, services, and skills surged. Winning meant moving into the markets that were growing, not defending those that were disappearing.
Like the PC, AI could expand the scope of most jobs, creating higher-value responsibilities alongside automation.
Internet Adoption and Geographic Concentration
From 1990 to 2000, Internet hosts exploded from 313,000 to over 43 million, enabling e-commerce and digital services. But benefits were geographically concentrated in already-prosperous urban areas with the skills and infrastructure to leverage the technology.
Market-Shift: The Internet created entirely new markets and profit centers, many of which never reached rural areas or traditional industries. Geography itself became a competitive advantage or disadvantage.
AI’s benefits may similarly cluster in regions and companies with the skills, data, and capital to use it effectively.
Mobile and the Gig Economy
Platforms like Uber, Airbnb, and TaskRabbit enabled millions to monetize underused assets. Yet gig work earnings declined over time in saturated markets, showing that technology-driven work can still face market pressure and volatility.
Only a few years earlier, the idea of summoning a stranger’s car through an app or renting out a spare bedroom to travelers would have seemed implausible or risky. When matched with shifting consumer preferences and greater comfort with digital transactions, these once-unlikely concepts unlocked massive new business opportunities, fundamentally reshaping the global hospitality and transportation markets.
Market-Shift: The early gig platforms launched lucrative new markets, but competition, platform policies, and pricing pressure eventually commoditized much of that work. The winners were those who pivoted into higher-value niches rather than riding the downward slope.
AI-powered platforms may follow the same pattern—opening new earning opportunities but also increasing competition and driving down rates over time.
Market Implications for the AI Era
Five Historical Lessons for Modern Operators:
Sectoral Displacement Is Temporary – Jobs vanish in specific sectors, but new industries emerge to absorb workers.
Complementarity Beats Substitution – Technologies that enhance human capability create the most sustainable growth.
Geography and Skills Shape Gains – Economic benefits concentrate where capacity to leverage new tools exists.
Policy Shapes Outcomes – Demand stimulus and transition support outperform technology bans.
Fear Outpaces Reality – Long-term employment impact is often less dire than predicted.
Markets change, not just jobs. Each historical case shows that when technology changes the nature of work, it often changes the market for that work even faster. The winning operators were those who understood when their market was no longer returning value, exited before decline set in, and redeployed resources into markets with fresh demand.
Operators & Founder Imperatives
To navigate AI adoption and market shifts successfully:
Track Market Signals Relentlessly – Identify early when demand is migrating to new markets or when pricing pressure signals commoditization.
Pivot Before the Decline Is Obvious – The biggest wins come from moving early, not reacting late.
Invest in Complementary Skills and Infrastructure – Build the capacity to operate in new markets as they emerge.
Accept When a Market Is Finished – Don’t cling to a sector whose economics have permanently shifted.
Create Value Beyond Efficiency – The most defensible positions will come from offering something AI cannot easily replicate.
The Operating Perspective
Work is not a fixed pie, nor are the markets where the work is done. History tells us stories about how technology changes how work is done and decides which work matters and which markets thrive. Operators need to understand these movements. Founder needs to take advantage of them.
If the market you knew is gone, stop trying to win in it. Find the work that matters now, build for the market that exists, and be ready to move again when it changes.
John Brewton documents the history and future of operating companies at Operating by John Brewton. After selling his family’s B2B industrial distribution company in 2021, he has been helping business owners, founders, and investors optimize their operations ever since. His work and strategic advice have generated +$500M in enterprise value. He is the founder of 6A East Partners, a research and advisory firm asking the question: What is the future of companies? He still cringes at his early LinkedIn posts and loves making content each and every day, despite the protestations of his beloved wife, Fabiola…at times.
Good piece, I intend to repost and connect to acamedia and public education and make the link between "Accept When a Market is Finished" and "Pivot before the decline is Obvious" (also, "Track Market Signals Relentlessly") - appreciate the insight!
one of the best read in current mixed economic dynamics.
This is epic-If the market you knew is gone, stop trying to win in it. Find the work that matters now, build for the market that exists, and be ready to move again when it changes.