Congress is “debating” a “stimulus” plan to “create jobs” at a time when the economy is in crisis. Pundits are exhorting the government to create employment opportunities, and we see government attempting to bail out failing companies in the name of “saving jobs.”
While he could not have predicted the present crisis when he first wrote “7 Fallacies of Economics” in 1981, nonetheless the wisdom from FEE President Lawrence Reed is relevant. About government job creation, Reed writes:
Although production is essential to consumption, let’s not put the proverbial cart before the horse. We produce in order that we may consume, not the other way around.
I enjoy writing and teaching but I enjoy sunning in Acapulco even more. I have labored to produce this piece and to teach its principles in my classes instead of going to Acapulco first because I know that’s the only way I’ll ever get out of Michigan. Writing and teaching are the means; sunning in Acapulco is the end.
A free economy is a dynamic economy. It is the site of what the economist Joseph Schumpeter called “creative destruction.” New ideas supplant old ideas, new products and methods replace old products and methods, and whole new industries render obsolete old industries.
This occurs because production must constantly change shape to conform with the changing shape of consumer demand. As Henry Hazlitt has written, “it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow.”
A bad economist who falls prey to this ancient fallacy is like the fabled pharaoh who thought pyramid-building was healthy in and of itself; or the politician who promotes leaf-raking where there are no leaves to be raked, just to keep people “busy.”
It seems that whenever an industry gets in trouble, some people cry that it must be preserved “at all costs.” They would pour millions or billions of dollars in subsidies on the industry to prevent the market’s verdict from being heard. The bad economist will join the chorus and ignore the deleterious impact that would befall the consumer.
The good economist, on the other hand, does not confuse ends with means. He understands that production is important only because consumption is even more so. Want an example of this fallacy at work? How about the many proposals to prevent consumers from buying Japanese autos in order to “protect” the American auto industry from competition?
Indeed, that last statement rings true today, as the government tries to keep the domestic automobile industry afloat although these firms no longer can turn a profit and most buyers prefer cars made by foreign producers. Unfortunately, many economists have joined the “bailout chorus,” including the latest Nobel Prize winner in economics, Paul Krugman, who has demanded that government run trillion-dollar deficits and spend the economy into “prosperity.”
The problem, as Reed so aptly pointed out, is that jobs simply are a means to the end of consumption; they are not ends in themselves. People become confused because they fail to recognize the connection between production and consumption. Yes, jobs produce income for individuals, but they can provide real income only if the job contributes to the production of goods people are willing to purchase.
In today’s political economy, so-called jobs programs are aimed at producing goods that people don’t want or at least would not purchase on an open market. For example, most of the alleged “green jobs” that might be created in this latest wave of proposed spending would be for producing expensive and inefficient “energy” goods such as huge electricity-generating windmills. Likewise, the biofuels that are heavily subsidized involve diverting huge amounts of resources from uses more valued by consumers to lower-valued uses.
Ironically, most “jobs” programs, by diverting resources, actually destroy employment opportunities on a large scale. That is why the nation’s unemployment rate during the New Deal stayed in double-digits. Jobs for their own sake do not create wealth; they destroy it.
Next Week: The fallacy of the “free lunch”
