Tuesday, January 11, 2011

Businesses don't create jobs

I recently hired my first employee. I may be hiring two more by the end of this month. Most people would say I've just created 3 jobs.

They would be wrong.

My business provides a service in a more efficient way than the competition, allowing one person to do the work of two. So whenever I get enough new business to hire another person, the competition has to lay off two people. So rather than creating jobs, as my business is successful it accomplishes a net destruction of jobs.

And that's the way business works. Every business innovation since the Industrial Revolution has been about destroying jobs by deploying labor-saving techniques. (Actually, that's probably been true since before the Industrial Revolution, but things really took off at that point.)

You see, the true source of jobs is demand, i.e. the desire of people to receive goods and services. People have practically unlimited wants, and it takes work to satisfy those wants. The purpose of competitive enterprise is to find ways to satisfy those wants using less and less work. The more jobs business destroys, the more society is able to satisfy the wants of people using the limited resources available.

The problem is, demand is more than simply somebody wanting something. For business to take the initiative to find a better way to do something, they must believe that they are going to receive something in return, usually money. Simply wanting something by itself is not enough to generate demand...a person must want something AND have something to give in exchange. Then you have demand, and it's that demand that actually creates jobs.

So in a perfect world, businesses destroy jobs, freeing those people up to do other jobs and meet other needs by performing new jobs...more productive jobs. As long as they are able to transition into new jobs relatively quickly, then overall demand will be maintained and more jobs will continually be created for the people whose jobs are destroyed by business. But, in the real world, it's entirely possible that people whose jobs are destroyed in this process might not be able to find a new job for some time. This would happen if the wealth from the new processes accrues to a small group of people, and the demand for goods/services from this small group of people does not rise fast enough to offset the lost demand from the people who lost jobs. As a result, the overall level of demand might drop, or at least not rise fast enough to create jobs at a fast enough pace to replace the jobs being killed by business. The wealth will steadily accrue into fewer and fewer hands as fewer people are needed to satisfy the overall demand of society.

In fact, looking at history would suggest that what I've just described is the natural order of things. The Great Depression occurred just as the US reached historically high levels of income disparity. The Great Recession occurred when the US returned to such historically high levels. Looking at other nations around the world and through history does not reveal many examples of highly affluent societies with high levels of income inequality.

The obvious solution when the system gets "gummed up" in this way would seem fairly logical. A massive redistribution of wealth.

In fact, this is exactly what occurred to end the Great Depression. First, New Deal programs were enacted that raised taxes and provided jobs for many unemployed people, and this created real GDP growth of about 10% annually for almost a decade, a feat never matched before or since in this country. However, the New Deal was followed by WWII, which in economics terms was simply a larger version of the New Deal. Even more wealth was confiscated from the richest members of society, and even more jobs were created for everybody else, and furthermore people had very little to spend money on because so many materials were going to the war effort. Once WWII ended, wealth had been massively redistributed in our nation, and healthy long-term growth returned to the economy for decades.

Of course, the idea is not new...it's actually at least as old as the Old Testament of the Bible. Even in ancient Hebrew society, the law called for a Jubilee to occur every 50 years. During this jubilee year, debts were cancelled and land was redistributed. It's interesting that for well over 3,000 years now, it has been obvious that societies "naturally" experience a concentration of wealth that becomes unhealthy for the entire economy. Over 3,000 years ago, societies saw the need to periodically push the "reset" button on the economy.

Businesses destroy jobs. Demand creates jobs. When business does its job well, it will destroy nearly all of the jobs in society, which will eliminate nearly all of the demand in society. For a competitive free enterprise system to work in the long run, it has to be reset from time to time. So why does our society continue to strongly resist such policies even though they're the obvious solution to our current economic problems?


Anonymous Another Anonymous said...

Good post. David Ricardo made the point of the deflationary effect of technological progress first. According to Michael Hudson, Jubilees were mainly to counter the effect of compound interest.

3:53 PM  

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