“CREATING JOBS’ – WHAT A FALLACY!

My colleague Steven Spencer has reminded me of an anecdote relayed by the owner of a brand new Corvette sports car.

A bystander speculated, “I wonder how many people could have been fed with the money that sports car cost?”

The owner replied: “ I really don’t know the answer to that one. But what I do know is that it actually did feed many families in Bowling Green, Kentucky, where it was built. It also fed the people who make the tires; it fed people who make all the components that go into it, as well as those who mined the copper for the wires, not to mention feeding the people at Caterpillar in Decatur, Ill., where they make the vehicles that haul the copper ore. It fed the truckers who conveyed the car from the plant to the dealer, and fed the people working at the dealership, and their families.

“So, I admit, I really don’t know how many people could have been fed with the money I paid for that car. But it does tell me what happens at the point where economics and human nature meet: when you buy something, you put money in people’s pockets, reward their skills and give them dignity. This occurs quite naturally when you freely give your money in exchange for something you value. And it is certainly preferable to depriving able-bodied people of their dignity and self-worth by giving them something for nothing.”

A telling exchange, no doubt. Personally, I agree that people’s skills are rewarded in any exchange that is freely transacted, but I’m not sure that we can “give” them dignity. I would rather put it that we can ensure that their dignity, a natural human attribute, is not undermined. But even that conveys a sense of “doing”, whereas any economic exchange, free from coercion, is so natural that dignity, as such, need hardly enter the picture at all.

What is seen, and what is not seen

This story does, however, contain the essence of a related economic phenomenon: that which is seen, and that which is not seen. What the cynical bystander sees is a gleaming new Chevrolet Corvette sports car, and his mechanical mental reaction about feeding families betrays the scope of his myopic vision.

The owner’s reply, however, has the potential to alert him to the vast possibilities of the unseen. Last May Alasdair Macleod posted an essay based on the insights of the 19th Century French economist Frederic Bastiat on the importance of this distinction.

Bastiat tells of a shopkeeper whose son accidently smashes a windowpane, which the shopkeeper must pay for. Witnesses console the shopkeeper by pointing out that if windows were never broken glaziers would soon go out of business. According to this line of reasoning, breaking windows is ultimately a good thing since it brings profitable work in its train, creates jobs and causes money to circulate.

All of which is fair comment when focusing on what is “seen” - but it misses out the “unseen” alternative uses to which the shopkeeper may have preferred to put his money. For the shopkeeper, spending his money on a replacement window was a waste of resources. Given the option, he would have had any number of preferred expenditures, possibly involving new products that would add more value. But because those options are unseen, we cannot know what the more productive outlays would have yielded.

Can politicians “create” jobs?

This story is worth remembering when you hear politicians boasting policies that “create jobs”. This populist drivel is a short, but logical, step from the idea of paying boys to smash windows. But we know instinctively that we cannot vandalise our way to economic growth and prosperity, any more than we can leave Hurricane Irma do the smashing for us, and provide a massive boost to the economy.  

Yet the single word ”jobs” is the stock response when those of a certain political persuasion are quizzed about their policy priorities, should they find themselves in office. Policies like this are recognisably in the Keynesian mould, particularly when you recall one of his most memorable suggestions:

"The government should pay people to dig holes in the ground and then fill them up."
To which others would reply: "That's stupid - why not pay people to build roads and schools?"
Keynes: "Fine, pay them to build schools. The point is it doesn't matter what they do - as long as the government is creating jobs.”

Although this line of argument may strike you as completely nuts, you may be surprised to know that, even today, respected economists, including at least one Nobel prizewinner, assure us that destruction can be positive. After all, reparation and reconstruction provide employment and, with it, demand – as if that were the be-all-and-end-all of economic considerations. Not a thought for whether any of that employment is productive in the sense of creating something original that people would willingly pay for. The seen is prioritized over the unseen.

Uncosted infrastructure

Nor do some politicians and economists confine the scope of their job-creation fantasies to the positive aspects of destruction. They also favour construction as an important channel for spending public money, even when it involves dubious, uncosted infrastructure projects that cost millions even before leaving the drawing board. Their criteria would be utterly different if they were talking about their own money.  

Not seen, is the money collected from taxpayers to pay for it. Also not seen is how those citizens, left to exercise their own free will, would choose to spend their money.

Much government expenditure is no doubt of great value to the community, but since, by its nature, it cannot be subjected to objective economic calculation, its initial conception, and its progression towards eventual completion, is often haphazard and invariably involves huge waste. Nine out of every ten projects suffer cost overruns. Underestimating cost, and overestimating demand, blights the economics of infrastructure.

Few would deny that a modern, community-petitioned, facility that eases the plight of elderly, impoverished and disabled citizens is a worthwhile outcome. But for every such project you may have to suffer a fanciful mock Gothic clocktower on the embankment, or yet another local government funded shopping mall dedicated to the worship of Mammon: amplifiers blaring mind-numbing “music”, cinema complexes, mobile phone upgrade centres, popcorn and burger stands, and innumerable glitzy jewellery and fashion houses. Yet again, that’s what you see.

What is not seen is how the council got a hold on the community’s land in the first place. Think of all those ratepayers who paid for this project but never voted for it. Is that how they would have chosen to spend their money? Would they choose to pay for the inescapable corruption that accompanies so many grants of planning consent? We read about it day after day, until we become inured. We shrug… that’s the way of it. We have lost “sight” of the alternatives because they lie in the realm of the unseen.

The jobs fallacy

The fallacy underlying the whole charade begins with the belief that creating jobs creates demand - and that demand will, on its own, generate economic growth. However, that doesn’t happen, and it’s not how economic growth occurs anyway. Remember: (i) it is in the nature of the human condition that there can never be a shortage of demand; but (ii) if it is not preceded by commercially evaluated production, demand is completely useless and can never be satisfied.

The frustrating fact is that the government’s method of “creating” demand is entirely artificial and follows the only route it knows: credit expansion. When the treasury, with the connivance of the Bank of England, inflates government debt, all that extra money swills around the banking system. That’s what is seen.

What is not seen is the uneven impact it has on asset prices. The first receivers of the extra money indulge in a buying frenzy that causes property prices to shoot sky-high, well beyond the reach of the vast majority. Later, when the inflationary effect of the flood of new money filters into price levels generally, we are all made poorer, by the day. This is what is happening right now. Just look.

Natural law dictates that this bogus economics must fail: it always has, and always will. But that doesn’t stop politicians from trying again. George Santayana observed that those who fail to learn from history are doomed to repeat it.