Jobs! Jobs! Jobs!

(Facts, Fictions, Fallacies)

The biggest spotlight in public policy today, especially due to the dismal economic climate, is the level of employment in the economy.  Professional economists and citizens alike eagerly await the latest government statistics on “job growth” or more accurately, job losses.  Despite these abundantly clear signals of economic and personal pain, establishment mouthpieces still have the effrontery to proclaim “the recession has passed.”

This claim is all the more ironic, as the siren song of political economy to always increase the amount of jobs in a nation, regardless of climate.  Jobs are politically popular – from pork-barrel spending projects that enrich a single district[1], to massive public works programs, the jobs fetish of politicians and mainstream economists knows no bounds.  The epitome of this viewpoint was the quip by the king of make-work programs, British economist John Maynard Keynes, who advocated the government in tough times to “pay people to dig holes and fill them back up again.”[2] Bear in mind, lest we forget, “we’re all Keynesians again.”[3] The Keynesian viewpoint manifests itself in the Obama-Geithner-Bernanke triumvirate over economic policy.  These views are currently being encapsulated in President Obama’s propaganda campaign for a second new round of fiscal stimulus, known as the “jobs bill” to succeed the dubious $787,000,000,000 stimulus package in 2008.

While there might be a strong empirical correlation between the total number of jobs and total economic output (or their respective growth rates), it does not necessarily imply causation.  Sycophantic Keynesians and their devout adherents in Washington make an offering at the jobs-altar with the sacrifice of causal economic laws.  It is not the jobs that are the underlying engine of growth in an economy, but the savings and wealth that they produce.

While there are many fallacies in putting “jobs” on a pedestal, this article will deal with two of the most important: First, that jobs are intrinsically more valuable than the income they provide, and that thus everyone must have one; and second, that the free market naturally tends towards less than “full employment” in the long-run (the brunt of the Keynesian onslaught).

Before addressing the specific theoretical problems in the Keynesian system, every citizen in America, knowledgeable or not, should ask themselves one question: “Why should we ever trust the same people who promised us unprecedented prosperity and made an absolute mess of things to provide the solution to the problems they created?”

Jobs, or Wealth?

There is nothing special about jobs per se.  Everyone in the former Soviet Union had a job.  Every slave in the American South had a job.  Even prisoners in the American prison system have jobs.  Were they any better off for having such a privilege?

If someone really wanted a job, they could simply work for free, or even at a negative wage, paying their “employer” for the privilege of working.  All else equal, this notion seems absolutely absurd, and rightfully so.  Working is a pain, a disutility compared with having fun.  Since we are naturally averse to pain and we’d rather be having fun, we view labor as an evil, but one necessary for survival.

Through this reductio ad absurdum, we see that it is not the jobs in and of themselves that people are concerned with, but the income earned from those jobs.  Since we observe that nobody will work for free or will pay their employer for a job, this is a safe proposition.  We desire to work only so that we may bring home the paycheck which we subsequently use to pay the mortgage and to furnish ourselves with whatever commodities we desire.

Secondly, does anyone truly care if there are 100,000,000 or 100,000,001 jobs in the economy?  Can one even tell the difference?  On the other hand, it is no contest whether one would prefer cheaper and more choices of goods to more expensive and scarcer goods.  To return to a Keynesian classic, what value does digging a hole and filling it back in provide for a consumer?  A consumer is much better off if that person digging a hole were building a computer or researching a cure for cancer, or whatever else will satisfy their own demand.

Is There An Unemployment Problem in the Free Market?

Perhaps the greatest debate in all of economics is the extent to which the free market is stable and self-sufficient.  Since the dawn of classical economics, the free market has had its powerful detractors, such from the dismal Rev. Thomas Malthus, to the revolutionary Karl Marx, to the ubiquitous John Maynard Keynes.  The largest modern anti-capitalist faction, the Keynesians, argue that there is an inherent instability in the free market system: chronic under-consumption and under-spending tends to lead to large bouts of unemployment and depressions.  Further, they argue that the vast majority of economic theory “assumes full employment,” largely negating universal economic laws due to this faulty “assumption.”  Consequently, they argue that “the rules of the game are thrown out” during times of depression, and only massive government interventions can redeem the economy.

Ignoring the morass of problems, fallacies, and paradoxes in Mr. Keynes’ system, his tome begs the question: Why is there ever unemployment?  The real answer lies obscured underneath economic myths and political propaganda.

As demonstrated above, the problem is not over jobs per se, but over wages.  By declaring there is an innate unemployment problem without referring at all to wages is an absolutely barren assertion.  On par, one might as well declare that “there’s an inherent defect in sufficiently selling iPhones!”  Without mentioning the fact that the price of iPhones might be $900 a piece, it’s just an unsubstantiated opinion.  When the integral function of price is actually considered in the alleged problem, the solution becomes readily apparent.  Not a single iPhone need go unsold if the seller is willing to lower the price to meet the consumers’ demands.  The only “iPhone problem” of “over-produced/under-consumed gluts” that can result is if the seller is unwilling to part with the iPhone for less than the obscenely high $900.

This is precisely equivalent to the alleged “unemployment problem,” we only shift our analysis from the iPhone market to the labor market.  Since labor is scarcer than land, it will always be fully employed, provided the labors are willing.  As we have just seen, the relevant question is only, at what price?

If an unskilled worker demands to be paid $100 an hour he will not be employed.  He clearly does not have advanced skills required to contribute to production at that high value.  The “solution,” of course is for him to lower his demanded wage.  On the free market, this tends to result in each worker be paid their discounted marginal value product (DMVP).  Translating from Economese, this is the monetary value that a worker contributes to the production of a product, and keeping in mind that the worker is typically paid before the good is produced and sold.  All else equal, the more capital invested in an industry, and/or the greater skills a worker has, the higher the real wage the worker will be paid as a result.

“But what about the skilled worker who can’t find work?”  This of course is only the result of the skilled worker demanding an excessive wage.  Imagine if all of UConn were to demand jobs in advanced rocket science and only advanced rocket science.  “Unemployment” in Storrs would consequently skyrocket.

Artificially Created Unemployment

Unemployment on the free market is always and everywhere a problem of volition.  It is only a problem if the laborer wills it by making tenuous demands and refusing to concede.

However, we do not live in a free market.  Ever-present government intervention always and everywhere adds to unemployment, regardless of the number of jobs it “creates.”  If the wage rate is the variable that equates the supply and demand for labor so that everyone who wants to be employed will be, any attempts to artificially screw with the wage rate will create unnecessary unemployment.  Government regulation and intervention in the labor market thus does all the more harm and all the less good:  Subsidies and insurance to the unemployed increase the incentives not to seek work.  Barriers to entry, such as minimum wages[4], licensing, and other various legal hoops one must jump through necessarily distort the market wage rate, excluding entire segments of the population from work.  Politically popular legislation that supports labor unions, additionally excludes workers from entering the work force.

At the same time, while government is destroying jobs, it seeks to offset this distortion by “creating” jobs through public works programs, government bureaucracies, and other superfluous activities.  Without even mentioning the infuriating inefficiency of such government jobs, only two things need be said about government jobs.[5] First, they are not paid wages according to the preferences of consumers in the free market, but out of taxation seized at gunpoint from the unwitting public.  Taxation destroys consumers’ utility and demand for goods (and the jobs that would have potentially made them) by literally robbing the purchasing power of any given consumer.[6] Thus, government is always and everywhere destroying jobs, and can only attempt to make up a small portion of the glut it has created itself.[7] Second, their work does not represent any valuation or desire on the part of consumers, but only the government’s arbitrary choices.  Tax money is funneled to projects of the government’s (and/or interest groups who presently control government) choosing.  The jobs created are, by definition, therefore not the same that free-willing consumers would choose by voluntary consent.

Natural Unemployment

There is also a natural rate of unemployment, and Keynesians typically concede this.  There are those frictionally unemployed—people searching for jobs, changing between jobs, anticipating seasonal jobs, and so on.  There are also those who just don’t want a job.

Due to the dynamics of a free market, industries, technologies, and market structures are ever-changing and ever-evolving.  Horse-and-buggies get replaced by automobiles, which get replaced by airlines.  Who would protect the buggy-driver’s job if it means you prevent the growth of the car industry?  While it is of course a human tragedy, this is the nature of progress—the new replaces the old in what Joseph Schumpeter termed “creative destruction.”  What is the poor buggy-driver to do, then?  There are always new cutting-edge industries with high profits for him to enter into.  These new goods and the accumulation of capital actually save labor, requiring us to expend less energy to have more goods, and thus raise the standard of living of everyone.  Should the buggy-driver refuse to work anywhere else, then his unemployment is his fault, and his fault alone.  A technologically progressing society is better off without his obsolete profession.

Since there are always differentials in profits across industries in any market economy, there is always an incentive for people to play arbitrage and leave their low-earning jobs for the high-earning ones.  Thus, the market economy beautifully emerges to even out the amount of profit.  Since all variables are constantly changing, and the future is always uncertain, this reduction of profits is an unrealized tendency – creating great mobility in jobs across industries.

Artificial Wage Rates

Even after following Keynesian policies, why have we never experienced full employment?  The Keynesian dream of full employment is actually the description of a bubble economy.  For in the free market, there are always frictional changes as certain industries progress, others spring up, and others die.  Any time seemingly everyone in the economy is employed, wages and profits are rising across the board, and everyone is getting wealthy with the least amount of effort – it is too good to be true.  This is the quintessential boom period fueled by inflationary bank credit, as we have seen in the 1920s, 1990s, and mid-2000s.  What comes next is the necessary bust, which will restore the economy back to health by purging all the malinvestment.[8]

Unfortunately, those in government do not understand the business cycle, and seek to expand the inflationary boom by keeping wages and prices artificially high, interest rates low, and credit (and debt) free-flowing.  These devastating policies only lengthen the bust period, prolonging a depression and high unemployment rates.  These policies are unfortunately popular for government, since it not only increases its own authority over the economy, but it also increases its prestige, by claiming to swoop in and save the day against the evil [insert stereotypical scapegoat] with vigorous action.

The fact all enlightened peoples must awaken to is that every social problem is the result of a market distortion, and at the root of every market distortion is government.

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[1] All politicians rail against the excessive evils of pork, but make exceptions of course for projects to benefit their own district.

[2] This often actual phrase, which is often misquoted, can be found in John Maynard Keynes.  General Theory of Employment, Wages, and Interest.  1936  Ch. 16 Sec III.

[3] George Melloan.  We’re All Keynesians Again.  The Wall Street Journal. 13 January 2009. <http://online.wsj.com/article/SB123180502788675359.html>

[4] The ubiquitous minimum wage, contrary to popular belief in such a “humanitarian” undertaking, has done more than anything else to increase unemployment, and is taught in every Economics 101 class as a textbook example of how government increases the problem of unemployment.  Additionally, any attempt to hire a worker willing to work at below the minimum wage will be met by a government show of violence.

[5] See Ryan Safner, Profits AND People.  New Liberty: Vol II Issue 2.

[6] Inflation, caused by massive government budget deficits, borrowing, and printing of money (all of which are textbook Keynesian policies, by the way) has precisely the same effect.

[7] And the gap is never closed – the government has to pay its salaries and take a cut for itself.

[8] Anyone who wants to understand what causes the business cycle should Google “Austrian Business Cycle Theory.”