This is the question of our time, and of past times as well. I do not have an answer for our time, but the 20th century has an answer for the last time this question dominated society – at the onset of the industrial revolutions of the 18th century (in the UK) and the late 19th century (in the US).
In short, the economy survived automation as technologies spread, skills caught up, and new institutions were set up as the modes of production evolved. The transition was not smooth, however, but the economy survived and ultimately thrived.
History’s Example: A Difficult yet Fruitful Transition
When steam engines, combustion, electrification, and other path-breaking technologies drove many labor-intensive jobs into the hands of machines during the 1800s, there was widespread fear that agriculture-based economies won’t survive automation. Indeed, there was a severe disruption in the modes of production from agriculture to manufacturing. Capitalism itself was under scrutiny as it had not yet evolved to address its negative externalities. Karl Marx and Friedrich Engels published the Communist Manifesto, envisioning an economy that puts labor ahead of capital. By the 1930s, a Great Depression cast a dark cloud over the US and the industrialized economies of the West. The Soviet Union espoused communism, and a battle of ideas took over the world.
Over the course of the 20th century, however, capitalist economies (with the help of some socialist principles) around the world adjusted to the new modes of production. New institutions were created to prevent banking crises, strengthen worker bargaining power, widen the social safety net and support intellectual property rights. Technology diffused throughout the industrialized nations and productivity and average incomes shot up while income inequality plummeted (also due to the war).
New jobs were created to complement these new modes of production – both technical and non-technical. New machines needed maintenance and repair people, and new factories with new machines needed new managers and operators.
Not only did the economy survive automation, it thrived. This adjustment, however, took time and was by no means a smooth one. It took close to a century for workers to acquire new skills, it took a Great Depression for new institutions to be created to design and support optimal laws that protect workers, companies, and the nation, and it took a tragic war for the battle of ideas to be won.
Looking ahead, we are in the midst of a new transformation in the modes of production. In the past, machine power replaced human and animal power. Now, machine power is replacing brain power as the amount of data and information generated by digital technologies explodes. What new jobs will be created? What new institutions and laws are needed? How will we measure output? Do we need a new concept of economic growth? After all, GDP and the national accounting system was first developed in the 20th century (thanks to groundbreaking work by Simon Kuznets in the US) and designed for an industrial economy. Now, the role of the information economy is becoming dominant. It is in our hands to make this transformation smoother than the last one.
For a very well-written (for both economists and non-economists) historical account of “technological anxiety”, I refer you to the following paper:
The History of Technological Anxiety and the Future of Economic Growth: Is This Time Different?