I know that the broken window fallacy is brought up a lot here, but i was wondering what actually leads to job creation. Obviously for instance people littering provides a job for a cleaner, but this doesn't lead to an increase in total jobs in an economy because the money someone spent hiring the cleaner could have been spent elsewhere. But when you apply this logic to any other industry, could you not argue that said industry doesn't provide any net gain in jobs in an economy? take for example mcdonalds. If the chain didn't exist, then people would have simply spent their money elsewhere (burger king or walmart etc.) and the total number of jobs in the economy would not have gone down.
So, how do you distinguish between job creation and simply job transfers within an economy? What exactly leads for there to be more employment in an economy rather than simply a re-allocation?
This turns out to be a deeper q than I thought at first glance.
There are several topics here.
The first is how to get all those unemployed people jobs. All schools of economics agree that there is but one way to get this done, which is to get to the heart of the problem. Which is that those guys are unemployed because, although plenty of people need workers [wouldn't you like a maid to cook and clean for you?], the price of hiring them is too high. In the old days, when all a worker got was money, the solution was lowering their pay. Nowadays the govt has made the price of hiring someone high in other ways, such as benefits and taxes and exposure to lawsuits from the employee.
Also a new problem has been introduced. In the old days, the benefits of having a job outweighed the benefits of being unemployed. For many people this is no longer the case, since they get free gifts from the govt for being unemployed which will cease the moment they get a job.
The second topic is what is the best use of this horde of workers, chomping at the bit to get out there and do something? The answer is, whatever people will pay them for. In fancy words, the free market allocates resources, including labor, in the way most satisfying to the public. There is no magic here. The public just won't pay for anything else but what they want.
A third topic is the proposed Keynesian solution to unemployment, hiring people to do useless things. This is not so much a job for the employee as enslavement of the taxpayer. He is being forced to give away his money for something he would never voluntarily pay for. This harms the economy in several ways, which we won't go into here.
A fourth topic is littering. Once the litter is there, and people are willing to pay to have it cleaned, then cleaning it is a productive job. But had the place been kept clean by being careful in the first place, the money would have been used to hire those workers to do something else people want, say build a house.
So it's a question of consumer preference. Are you willing to pay for the joys of being a slob and pay the restaurant you drop your napkins in to clean up after you, or would you prefer to use your money on something else?
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It's easy to refute an argument if you first misrepresent it. William Keizer
"Saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization." - L Von Mises
Dave does a good job of setting the stage, but I have a feeling anyone with the question of the OP would feel unsatisfied.
To answer the question directly, the way you distinguish between the two is by who is behind the job and how they "created" it. Yes, it's true, there are limited resources in the world, and economics is all about how, when, and why those resources get used. And yes, in a technical sense, any job utilizes resources that could have gone to something else. In other words, everything has opportunity cost. The point is what is the "best" use of those resources? "Best" being determined by efficiency, demand, and supply.
Any time coercion is involved, human preferences are being disregarded, and someone is being exploited (that is, one person is gaining by another person losing). We know this to be true because if the arrangement were truly the desire of the exploited man, coercion wouldn't be necessary, and he wouldn't be considered exploited. When you voluntarily buy a small carton of milk for a dollar, you win, because you gave away something and got something you wanted more in return...you wanted the milk more than the dollar (otherwise you wouldn't have made the trade) The store owner wins as well...because he wanted the dollar more than the milk. Trade is made of win. That's why you get the strange double "thank you" when a transaction takes place...you tell the store owner "thank you" when he hands you the milk, and he tells you the same as you leave. (h/t John Stossel)
The point of any job is (supposed to be) to maximize wealth...not to "have a job". It is wealth that is of importance...not employment.
One of the main problems people have with understanding the world is the fallacy of looking at employment as an ends instead of a means. Hazlitt covers this very well in chapter 10 of Economics in One Lesson. (It's less than 700 words. Definitely read it.) Coincidentally, it was a Henry Hazlitt Memorial Lecture in which Peter Schiff said "what good are jobs without 'stuff'? That's slavery!" The point is most people don't work a job because that's what they'd most like to be doing. They do it so that they might acquire things they desire (either directly through producing them themselves, or indirectly through trade). In other words the whole point of a "job" is the end product it results in...not the job itself. But as Hazlitt points out: "Everywhere the means is erected into the end, and the end itself is forgotten."
If someone created a pill that made everyone immune to every possible disease, illness, and infection...that would eliminate a lot of work for doctors. In fact, a lot of doctors, most nurses, and every worker in the pharmaceutical industry would be out of a job. Does that mean we shouldn't invent such a pill? Does that mean if such an invention were created, we should keep it off the market? The luddites would say "yes"...because they look at employment as an ends in itself. They are too short sighted to see the big picture.
The same argument could be made for police. If everyone obeyed the law, every policeman would be out of job. So really, criminals are doing a public service. (Just like the hoodlum who breaks windows.) Maybe we should encourage more crime?
The point is you perform a job to get a certain desired result. If the result can be created without devoting as much (or any) resources to it, what is the point of the job? Again, as Hazlitt says: "The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor."
In the case of "what produces a net gain of jobs", the real answer is, almost anything can do that. The point of the broken window fallacy is not to claim that some job was destroyed so that a glazier could have one. The point is to illustrate gains or losses in production...in desired stuff in existence. When the hooligan broke the window and the man had to spend resources to replace it, the point is without the vandalism, the man would have had a window and a suit. But now he only has a window.
When the government coerces resources away from one area, and puts them into another, it automatically means that those resources are not being utilized to their highest and best use. (Again, as determined by efficiency, demand, and supply.) This probably means there actually are more jobs destroyed than those that are created, thus creating a net job loss (which, as we can see is the case with the stimulus, where millions of dollars were spent to create only a few thousand (and sometimes only a few hundred) jobs. As you can see, this means more money was spent and less people were employed. Kind of like how with an average of $300k per classroom, a lot more than one teacher could be hired...but obviously, there's only one. And she certainly doesn't get $300k.)
But even supposing the coercion "created" just as many jobs as it destroyed, it still means the world is poorer overall, because again, it necessarily means that resources have been taken away from their preferred use, and diverted to something else...meaning wealth has been destroyed.
Right now we're at almost 17% U-6 unemployment. That's a lot of people without full time jobs. We could clear that up really quick. Let's have a bunch of men with guns take money from everyone they can, and then offer to pay anyone who doesn't already have a job to...count grains of sand on the beach. Bam. Virtually 0% unemployment. Problem solved, right? (You know, we actually tried this last year. Except it wasn't grains of sand they were counting, it was other Americans.)
Again, it's not about net jobs...the focus needs to be on net production. What is being produced, and how much. If you can answer that, then you'll see which arrangement offers better conditions.
Very nice explanation John. I am halfway through Henry Hazlitt economics in one lesson. Hazlitt was amazing at transmitting ideas.
danbeaulieu:I am halfway through Henry Hazlitt economics in one lesson. Hazlitt was amazing at transmitting ideas.
I just realized I ended up suggesting them more than once, but yeah, once you get through that one I highly recommend Lessons for the Young Economist and How an Economy Grows and Why it Crashes (checkout the cool promo).
Notice before you get to your next book, I recommend a few lectures. They're at the bottom of that post.
thanks john, I'll bookmark these.
Job creation is an interesting and very misunderstood concept.
All that matters in the actual creation of jobs is the productivity of the employee to the firm as opposed to the cost of hiring the employee, so long as this is believed to be positive and there's low uncertainty about the future, then the employee will be hired. So it's conceivable that the United States could be thrust back to the capital structure it had 200 years ago and (so long as we assume that the food supply is still high enough and wages don't fall below what it takes to feed people) it could still remain at full employment. So long as each person employed was willing to accept the new equilibrium real wage rate then full employment would persist, although real wages would fall a hundred fold.
So as for the thrust of your question there really is no such thing as job creation so long as wages are fully flexible, if people are willing to accept low enough wages then jobs will open up to take in every single person on earth, however because of the fact that this doesn't happen in our world then the accumulation of productive capital will most likely lead to new job creation. Let's say that we have Mike, Mike is unemployed and he will continue either living off of his savings or off of his parents or whatever (it's not an outlandish scenario in our day) because he can't find a job which will pay what he feels he is worth. If capital increases or the structure of production becomes more efficient at providing desired goods then real wages will rise and its likely that Mike will feel the need to go back to work. In a free economy this would be unlikely however, as most are likely to be employed anyway. There's also the chance of people leaving the labor force as real wages rise and they can live more comfortably off of their spouse.
So in short in the world of "homo economicus" you are totally correct, job growth will remain totally stagnant in the long run at full employment. In the real world there are variables, such as insufficient real wages which can be rectified by increasing the capital stock. In the conceivable free market, however, it’s conceivable that jobs would be relatively stagnant as well.
Thanks a lot for these answers.
A related follow up question would be suppose we could get everything in an economy done with 99% of the population working, so that 1% of the population do not need to do any work (this could be due to increased automation). Firstly, before you refer to the lump of labor fallacy, i realise that obviously in the last 200 years increased automation hasn't led to increased unemployment, but surely with the increase mechanisation of many industries this will happen eventually? Not every person put out of work by automation will be able to be relocated. So when this happens, is there not a role for the state to guarantee a minimum income for these people?
In such an economy everyone who wasn't an owner of the productive factors and of special services would be dirt poor because there would be such an amazing abundance of labor that only the owners of the factors of production, people possessing innate traits (movie stars, sportsplayers ECT), and people in exceptionally difficult jobs would receive much money, all other occupations would see their wages bid down to rock bottom. Most likely people would leave the workforce and live off of mutual aid and charity, which would provide at least as comfortable a life as we enjoy now. This world would be almost post scarcity and so one philanthropist can guarantee a million people what would be considered today to be massive riches.
Edit
The prediction about rock bottom wages only holds true if people do not leave the workforce. The decrease in supply would lead to a leftward shift of the supply curve and an increase in price. It would become workforce V. free time.
Edit Edit (lol)
I would like to make it clear that this is exceptionally unlikely of ever happening if only because people might demand humans in things like the entertainment business.
The Bomb19:suppose we could get everything in an economy done
What does this mean?
Not every person put out of work by automation will be able to be relocated.
I do not see why not. The number of possible jobs is limitless. What is limited, is the number of jobs people want to have. So this is really a question of managing expectations. Yes, if every person insists on being a movie star with a 7-digit salary, then some of people are bound to be unemployed.
So when this happens, is there not a role for the state to guarantee a minimum income for these people?
When people are not hired as movie stars, is there not a role for them to rob their more "lucky" neighbours?
I know i didn't explain the concept well, but suppose tomorrow everyone woke up and found their job had been replaced by a hoard of robots who could do the task just as good. Suppose also that you needed just one person to maintain and fix all of those robots. On the one hand you argue that is good, because people have more leisure and have to work less but then 99% of the population don't have a source of income. Wealth would be concentrated in the hands of this one individual. Would the state not have a role to guarantee an income for everyone else?
Obviously this day is long off, but think about the increased automation of supermarkets as an example. I have heard a few economist mention this as a reason why the recovery is a jobless one (that is a different debate though)
@The Bomb
You have to understand that not only would robots have to have every job that currently exists, but it has to be every job that people could ever demand. In this case wealth would become incredibly concentrated and overall output would shrink dramatically if people did not spread the wealth in one way or another.
The state would not necessarily have to do this, there are other concievable method. It would be the most efficient at doing this, and the most likely to f*** it up.
I hate how when people look at the free market they see the consumer as a mindless sheep.
Who let the company become that large in the first place? Why didn't consumers institute some contractual safeguards against this? If you see a trend toward increasing automation and are afraid of this apocalyptic world, by all means, make a contract with the company owner that says that he will distribute goods out for free.
Companies don't grow in a vacuum. Stop forgetting that.