Politicians, Innovation & The Paradox Of Job Creation

Innovation

from the disruption-and-broken-windows dept

There’s been a ton of talk from politicians lately about the importance of “creating jobs.” This comes from both major political parties, of course. We’ve seen the Democrats jump heavily on the jobs agenda and the Republicans have been hyping up their ability to create jobs as well. A few months ago, This American Life produced a fantastic episode on the hilariousness of politicians claiming that they’re going to “create” jobs, with a focus on Wisconsin Governor Scott Walker (one of the few stories about him that has nothing to do with unions).

All of this talk about “job creation” from politicians has really been bugging me… with the only really “honest” politician I’ve seen being the totally ignored Presidential candidate and former New Mexico Governor, Gary Johnson. After the National Review praised him for being “the best job creator of them all,” (based on jobs numbers associated with all the GOP Presidential candidates), rather than accepting the cheap political accolade, Johnson responded by rejecting the crown:

“The fact is, I can unequivocally say that I did not create a single job while I was governor.”

Instead, he noted that it was “entrepreneurs and businesses” that created the jobs, and all he tried to do was keep obstacles out of the way.

Still, it is true that governments can create jobs. It’s just that they’re almost never the jobs that actually help the economy. The government can hire 20 million people to move piles of dirt around or to just sit around if it wants. That will “create jobs.” But it won’t be good for the economy, because those people are not productive for the economy. They won’t be adding value or producing something of value that expands the economy.

This, of course, was famously explained a century and a half ago by Frederic Bastiat, who explained the fallacy of the broken window as an economic or “jobs” stimulator. And, yet, it’s still oh so tempting for politicians to jump on this train. But the problem for those who buy into the “broken windows fallacy,” is that they make really bad decisions on “jobs,” because they create the easiest jobs to create, which will almost always add the least value to the economy (and most likely take away value from the economy).

It’s why you get amazing statements from President Obama (who really must know better) in which he talks about ATMs meaning fewer jobs for tellers and auto check-in kiosks at airports that mean fewer jobs for airline employees. But this turns out to be wrong in oh-so-many ways. First, it’s just wrong on the facts:

At the dawn of the self-service banking age in 1985, for example, the United States had 60,000 automated teller machines and 485,000 bank tellers. In 2002, the United States had 352,000 ATMs–and 527,000 bank tellers. ATMs notwithstanding, banks do a lot more than they used to and have a lot more branches than they used to.

It’s “easy” to claim that technology “destroys” jobs, but it’s never the case in practice. It may change jobs, but increased efficiency creates jobs through economic growth. There are all sorts of complex economic proofs of this in action, but the simplest way to understand it (and there’s lots of both empirical and formulaic proof to back this up) is that when you increase efficiency, you can produce more for less, and thus, by the very definition, you have increased the size of the overall pie. Now plenty of people can (and do!) quibble about how that pie is divided and allocated, but arguing that jobs are destroyed by technology is a red herring.

It’s for that reason that I’m a bit surprised to see Jeff Jarvis more or less jumping on this bandwagon by claiming that “we’re going to have a jobless future”:

Our new economy is shrinking because technology leads to efficiency over growth. That is the notion I want to explore now.

Pick an industry: newspapers, say. Untold thousands of jobs have been destroyed and they will not come back. Yes, new jobs will be created by entrepreneurs — that is precisely why I teach entrepreneurial journalism. But in the net, the news industry — make that the news ecosystem — will employ fewer people in companies. There will still be news but it will be far more efficient, thanks to the internet.

Take retail. Borders. Circuit City. Sharper Image. KB Toys. CompUSA. Dead. Every main street and every mall has empty stores that are not going to be filled. Buying things locally for immediate gratification will be a premium service because it is far more efficient — in terms of inventory cost, real estate, staffing — to consolidate and fulfill merchandise at a distance. Wal-Mart isn’t killing retailing. Amazon is. Transparent pricing online will reduce prices and profitability yet more. Retail will be more efficient.

While I agree with Jarvis on many, many things, he’s missing half of the equation here, and doing a sort of reverse “broken window fallacy.” He’s looking at jobs that are changing, but not looking at the massive new opportunities it creates. Eric Reasons points me to my own post which touches on this.

It’s easy to look at how jobs appear to “disappear” in a dynamic market. Whether it’s the tellers President Obama is talking about, or the “journalists” that Jarvis talks about. But that ignores all of the new jobs created around the new efficiencies. Take, for example, the fears that a telephone switching network would wreak havoc on our economy, decades ago. After all, telephone companies employed thousands of operators whose job it was to “connect calls.” Automate that, and all of those women (and they were predominantly women) were “out of work.” Devastating, right? Well, no, actually. Not at all.

A switched telephone network not only made the phone system more valuable and useful (increasing its usage), but opened up all sorts of new opportunities for businesses and jobs. At a basic level, you could just note that call centers were suddenly possible, as was the ability to do customer service (and, annoyingly, telemarketing) on a large scale. But, it also did much more. A switched telephone network also paved the way to an eventual internet system, which has led to a huge revolution, millions upon millions of jobs, and the fact that you are reading this today.

The idea that technology leads to efficiency over growth is preposterous. Efficiency is growth. But it’s not always obvious how or where that growth occurs.

And that’s why I think there’s something of a paradox of job creation. The job creation we really want for the economy is the job creation that initially looks bad. It’s the job creation that worries Obama and Jarvis, in that they believe it’s somehow “taking away jobs.” And yet, it’s not. It’s actively creating more jobs — it’s just not as obvious how or where, but they are being created, without question. Instead, the focus is put on the exact wrong kinds of jobs. You hear things about stimulus projects that grant money or protectionism to certain industries. On the face, that appears to create jobs, because those companies that are recipients of that support “hire” more people. But it’s at the expense of productive and economic growth that would create real long term jobs and real long term opportunity.

So the best way to create jobs is the politically impossible plan of increasing efficiency, which may appear to replace jobs, even as it’s creating many more. It means allowing real competition to take place, rather than propping up a few big legacy players. It means supporting true innovation, through encouraging startups and entrepreneurship, rather than rewarding the legacy players who seek to hold back the innovators. Job creation is a paradox. Anything politicians do to try to force it almost always does the opposite.

Filed Under: broken windows, economics, efficiency, job creation, jobs, politicians, politics, productivity