EU needs to create value not jobs

2012-05-02

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Most European political parties on the spectrum, from right to left, with all the permutations in between, have their own agenda on how to create jobs. Notwithstanding their superficial disagreements, they all more or less base their proposals on the axiom that policies for “job creation” are a priori beneficial. They assert that people will have work to do, which is good for the economy as they get money which they later spend, thus offering work to others. Active job creation has positive externalities and can yield great benefits, they say. It is one of the key steps to our prosperity and social coherence. It clearly is among the priorities of EU policy.

These and other similar fancies along these lines, are undoubtedly quite fashionable lately, either because they appeal to the masses of desperate voters or because they fit perfectly to the kind of bureaucratic palaver and political speech we listen to these days about “fostering growth”. A closer look at these arguments and their underlying axiom, will show that there are deep misunderstandings at the heart of the debate, interwoven with a tangle of fallacies.

Value creation is superior to job creation

Starting from the axiom, that job creation is an end in itself, I may say that it is misplaced, for it excludes the qualitative aspect of the matter. As a corrective of this error, the truism must be stressed that an economy/society progresses not through the creation of jobs per se, but rather by the creation of value, which then leads to more employment and profit opportunities.

The invention of the internet for instance was a creation of value that has so far helped immensely in all sorts of ways in the advancement of our society – and it has in this respect created a large number of jobs in the process (for relevant further reading consider Joseph Schumpeter’s “Capitalism, Socialism and Democracy”). In a similar fashion, the establishment of a leading university, must also be seen as an accumulation of value. Indeed the same applies for all other investments that yield long-term benefits and produce true positive externalities.

Though this might sound as a mere detail, especially to those knights in shining armor who appear to battle for the toiling peoples and the unemployed; it must not be treated as such.

Understanding the qualitative superiority of value creation over job creation, is essential to distinguish between prudent and opportunistic policy-making.

Creating jobs is the easiest task for policy-makers

For a better perspective on the above remarks, consider a couple of illustrative scenaria. First, suppose I am the European Commission and I have at my disposal 100 million euro that I am willing to allocate in policies that will give employment to people. If I want to create jobs right away, I, as Commission, can use my available funds to hire individuals into digging ditches, breaking windows, demolishing buildings and constructing them all over again etc. These are all jobs for the people. But what will the added value of such unproductive labors be? Dubious at best, since people would be occupying their selves with activities that do not yield any extra profit to broader society, without considering the implicit and explicit costs.

The gist is that creating jobs is in fact the easiest task for any policy-maker, if the qualitative aspect were to be excluded; odd as this might sound.

Those anxious to defend job creation as such, without its qualitative dimension, will attempt to demonstrate that these people will get their money and spend it, thus stimulating the economy. Such ideas purport to show that even if the qualitative aspect is completely omitted there still are many benefits to be drawn out of such a policy and it must therefore be carried forward regardless of qualitative concerns. The answer to such reveries, was given by Frederic Bastiat nearly two centuries ago. But allow me to quote Milton Friedman on the matter, unaccustomed as I may be to agree with him. Friedman answered simply and succinctly to this proposal in the video below:

Understandably job creation in itself is not what we should really be looking at. The issue is more profound.

Creating value yields stable and sustainable benefits

Now consider a second scenario. What if the Commission were to use those supposed 100 million euro mentioned above, to invest in projects that would yield long-term benefits and would ensure a steady return of benefits and job opportunities? In other words what if the Commission used that money to create value?

For instance, in the “April 21st-27th 2012” edition of The Economist there is a special report on the third industrial revolution and the relatively new technology of 3D printers. In the report (this is indeed a must read) it is argued, among others, that:

As manufacturing goes digital, it will change out of all recognition… And some of the business of making things will return to the rich countries… Millions of small and medium-sized firms will benefit from new materials, cheaper robots, smarter software, an abudance of online services and 3D printers…

These new means of production can bring about a re-industrialization in the west, further rationalize production and allow space for new employment positions, among many other benefits that need not be fully documented in this article.

Clearly the benefits over the longer-term would be significantly more if the Commission were to use the 100 million euro of our hypothetical scenario to facilitate this digitilization of production rather than wasting funds in the short-sighted “digging ditches”-“job creation” approach.

Political opportunism and fallacious theories

The reason however job creation is preferred, despite its drawbacks, has to do with political opportunism and with fallacious assumptions, methods and theories of mainstream economics.

The political dimension is crystal clear and straightforward, since politicians need to win votes in present time or in the nearer future, thus they always have an inclination to prefer short-term gains, regardless of their actual long-term impact. A politician demonstrates his/her alleged omnipotence and unflinching devotion to social concerns by providing immediate “solutions” to key issues such as unemployment; thus there always is a strong incentive for short-term “effective remedies”. The political figure who will favor policies with long-term yields is the exception to the norm, though indeed a welcome one.

The economic fallacies are more subtle and far-reaching. Many economists, at least ever since the time of Leon Walras, have their thinking diluted by the pernicious illusion of using the mental tool of equilibrium to construct models that supposedly resemble the real world. Thus in mainstream economic parlance we have the fictions and figments of the “steady state”, the “general equilibrium”, “perfect competition”, “full employment” etc.

There is much that is wrong with these chimerical concepts and terminology, since the real world never operates under an equilibrium but at a disequilibrium or multiple disequilibria; competition is always imperfect; information is from the outset asymmetric; employment is never “full” and these familiar, magically shaped, geometric curves do not represent human action and real economic agents, but soulless automatons operating in utopian conditions.

When standard economists insist on making policy recommendations along the lines of the “steady state”, they inevitably err fundamentally into treating the real world disequilibrium as inherently vicious and problematic. Therefore they try to devise methods of restoring the general equilibrium, of bringing employment to its “full potential” by “creating jobs”; and of correcting the perceived failures by manipulating competition in such a way so as to combat “imperfect competition” and bring about “transparency” in the availability of information.

This crass misinterpretation of real world phenomena, can only lead to false assumptions and conclusions that distort reality further. It thus is no surprise when one perverse policy compounds another, thanks to the nostrums of such experts (the Great Recession should have given pause for second thoughts to everyone in the discipline – George Soros is perfectly correct to criticize economists for their inherently erroneous methods).

Job creation has long now been carried out by the EU

After all, apart from the logical and theoretical objections that can be raised, we know that the EU has always been operating along the lines of “creating jobs”, in a rather cavalier manner. Towards that end it has devised all sorts of schemes, plans, programmes and has established all kinds of specialized agencies, quangos and other do-gooder groups that provide subsidies, protections, privileges, pampers, benefits etc. ultimately for the sake of creating this “desirable” effect of creating and sustaining jobs.

Scarce resources are being wasted or misallocated, unproductive ventures and malinvestments are maintained, inefficient entrepreneurship and technological backwardness are rewarded, bureaucracy is aggrandized and the chilling effects of overregulation are exacerbated.

The dismal record of EU red tape and bungling points to the need for a thorough revision of such “job creating” policies – not towards their continuation, as it is falsely asserted. Unfortunately to this date the EU and many of its member-states have mostly overlooked the importance of value creation, with tragic effects in some cases I may say (Greece for instance).

This uneconomic way of utilizing funds must end, whatever its causes may be. What we are in need of here in the EU is value creation. For as long as we look into “job creation”, without any interest whatsoever in its intrinsic quality and implicit costs, we will continue to be missing the whole picture. Only added value can open up employment opportunities on a solid and sustainable basis, yielding long-term benefits and creating truly benign externalities. Only the creation of value benefits society and brings progress.

Image source: Europost