Well, first of all, I am not an economist, so if you want to use these ideas to run an entire economy.. well, if we’re being perfectly honest, you could do worse. Many have. Witness what became of economies run by Marx. But you could also do better. Probably.
Feel free to tell me I’m wrong and how. Also to send me large amounts of cash. And Brandy.
This came about because of a brief discussion that was being had on Twitter. I didn’t contribute in any profound (or useful?) way, but I thought it might be helpful to flesh out the couple of things I said in a format where I have more than 140 characters to work with. This qualifies. And it is indeed rather fleshy, at this point.
The question before me is does increasing employment (toward full employment) in the United States increase employment in other nations.
Well, first of all, what does full employment mean? What it doesn’t mean is that we are all punching a time-clock and drawing a paycheck. That would not actually be optimal. Full employment means that everyone who needs or wants more of the total supply of the limited and presently available resources is productively employed toward that end. Productively is key, as their should be more of the net of human desires after you’re finished than before you started. It shouldn’t really matter what people value, so long as it doesn’t cause any uncompensated harm. This applies to people who’s job it is to destroy things as well, as long as this is in line with human desire. So yes, wrecking ball operators produce value.
This doesn’t mean that everyone has a job in the sense that they’re paid money. Households may elect to divide the labor in any productive way. Management of household affairs, raising children, yard work, dishes, laundry are all legitimate needs, and filling those needs personally counts toward the total labor done. You can hire people do to these things, or do them yourself. Of course, if you hire them, you’d want to be earning enough extra due to their efforts to pay for their work. How this is done is down to efficiency and preference. Likewise the management and lending of assets is no less part of the necessary work of humanity.
What I don’t count as work basically comes down to theft (you’re actually decreasing the value of other’s work, and thus their incentive to work, and thus, ultimately, the total goods available to us all) and useless government tasks paid for with tax dollars. Which ones are useless? Beyond the scope of this already too long post, but feel free to browse my others. There are a few others, gambling as a revenue source rather than an entertainment, for instance. Anything that involves getting resources from others in ways they didn’t consent to. Though I suppose people who gamble for other people’s entertainment (dealers in blackjack, for instance) are still fine.
Now, having established to some small degree what employment means, what are some of the factors which limit employment? Lack of skills, lack of capital, poor location to utilize skills, changing market, crime, the cost of government directly (in taxes) and indirectly (in regulation.) Competition from paid non-work. Competition for investment from the government (as bonds are considered low risk relative to most other investment opportunities, which are much more likely to increase the sum total of human wealth.)
Lack of skills is easy enough to resolve, it just requires time. Money, too, but that is really the same thing. There are many jobs that don’t require much knowledge, or provide training, or are otherwise obtainable. Learning new skills increases the competition for jobs, which would tend to slightly depress the pay for those jobs toward a new optimum. Depressing the pay would also reduce the cost of the goods produced, which would slightly increase the buying power of money. Thus education is slightly deflationary even before depletion of all available labor sets in (which is also deflationary), but shuhh.
Lack of capital- any capital item, there is a labor sweet spot, where if you have fewer or greater number of workers, the cost per good or service produced is greater. To increase production further efficiently, you need more or different capital goods. Capital goods can be obtained with loans or with savings. In either case, if this should happen is determined by the expected new earnings potential, and bounded by risk.
Having one stove and four cooks would not produce four times as much as having one stove with one cook. Having twenty cooks might even produce less than with one cook. With time, if the market is willing to pay for you to run your operation with the average total cost per item above the optimum, you would logically obtain more capital with whatever funds are available, and employ people more efficiently. You’ll buy a second stove, open a second location, or, by some other means, increase your capacity to meet the market’s demand. If this asset increases your need for labor, it would increase the competition in the market for labor and thus the demand for labor. As long as the demand for employment is high the market will tend to meet that demand if it is not overly constrained.
Competition for labor (a labor shortage) would of course increase wages, which would increase buying power somewhat, as workers would have more cash, and there would be more goods to buy with that cash. The relative increase in the supply of goods relative to the supply of cash would be somewhat deflationary, though ultimately prices would eventually settle such that those paid least are willing to work for their pay.
The value of goods and currency are always scaled from the average needs of those paid the least, so long as they work willingly. For a market to reach the point at which it is competitive for labor, the price of goods would generally be cheep because producers are trying to reach optimum production efficiency. Generally speaking, if society is producing vastly more, then members of society will also be able to obtain somewhat more for relatively less work. This even applies to the least well compensated. This is obvious, comparing their living standards to those from a hundred years prior.
For industries where American labor could not produce the good efficiently purchasing would shift overseas, but in the end, as American production efficiency would also increase with expended capital, the actual cost of goods would start to drop relative to foreign goods, which in turn would mean that the US labor market should be able to support itself expand in external markets as well.
That said, increased purchasing of foreign goods would encourage those foreign entities to employ further capital. Encourage, and enable. This would aid in reducing cost, and increasing employment. The end result is a richer world. As far as capital equipment goes, some of it would be bought from the US, along with certain raw materials and other resources. As they come closer to our levels of income they’d purchase more goods from US, as the cost of labor in their own nations would be more in line with ours. This would increase demand for American goods, driving up the price a bit again, which would largely be absorbed by labor.
Ultimately the total supply of goods available in the world would increase, and while others would consume more of them, the amount of increased production would be as large or larger than the increased consumption. The over all share of goods produced per hour of labor would certainly increase, both at home and abroad.
Poor location is a difficult problem to solve. In particular, the reason that houses in Detroit can be had for hundreds or thousands of dollars is that in a sense, a house behaves like a firm. It’s value is reflected in it’s ability to produce value. In this sense, for it’s residents to earn money. A building you have to travel 80 miles from to do low paying work is obviously not worth anything. If there were suddenly available jobs, it’s value would appreciate rapidly. Teddy Roosevelt’s father dealt the location problem by going to the poor kids in the cities, offering them an opportunity, taking them the west, and teaching them useful skills relating to cattle. Or farming. This would certainly stir up some accusations from the left today, but in principle, it’s doable, so long as there is work.
Many businesses will help in relocation expenses, if your skill set is valuable. But then, the people who most need a job don’t have a skill set, and that is the problem. Well, more correctly, that is A problem.
A changing market of course changes the optimal assignment of labor. If people want more of something or want less of it, if it takes fewer people to produce an automobile or more people to dig a well, all of this is resolved though competition at various levels. This is easy to say, but of course there is suffering. Of course when people stop using a particular technology, or goods produced using a particular technology, the people who made their living producing that technology, or off the things produced by it will suffer. I imagine there are a lot of people who made wagon wheels which are out of work. When is the last time you saw a telegraph operator? But that isn’t especially relevant. Remaining competitive requires change. That change will temporarily cause disruptions in segments of the market is inevitable, but that doesn’t make the change itself worthwhile.
Crime is another factor reducing employment. It is a much more prevalent factor in poorer nations. Generally, the only reason to work is to meet ones wants and needs, and in anticipation of one’s future wants and needs. A risk to one’s life reduces the value of the future, since you can’t be guaranteed a future. Theft of an item is not much different than your life simply being shorter by the number of hours it took you to work to buy it. Likewise, if your expectations for the future are negligible, crime becomes more attractive. To have a positive view of the future, you must see a means of advancing. Of course, people locked in government assistance have no means of advancing, and thus a negative view of the future. This probably increases the level of crime in those areas, as people who are merely poor but hopeful rarely commit criminal acts except out of extreme necessity.
Excepting crime, the above, in general all tends toward full employment. Humans learn new skills in order to work. They work and earn money, increasing their level of skill, thus the value of their work, thus their compensation. As they rise in affluence, they buy more, abandoning inferior goods. In any case, the net consumption (in the sense of purchases) of the population should equal it’s production for any level of population. But then we start to hit a problem.
unnecessary consumption and price controls
All government action which is not limited to protecting liberty reduces the efficiency of the market. I am not saying that we should do away with regulation, I simply point out that they have a cost which does not necessarily correspond to society’s preferences. Likewise, tax, while necessary to provide the basic services of the government, there is considerable disagreement over what those services are. Finally, government exerts pressure on wages, driving them higher than they need to be. This can be in either supporting union viewpoints, or in requiring a minimum wage. In other, subtler ways, as well.
This increases the cost of producing goods, and thus reduces the number that can be produced at any price point. The world-market’s price point is relevant, since if two goods are the same they should have the same price, often setting the number producible in the US to of that good to essentially zero. Each of them has a cost which increases the cost of our goods on the market, both to ourselves and abroad.
All this would merely reduce our relative share of the global market. Well, okay, price controls on wages would indeed make it such that some people wouldn’t be able to work at all. All work has value, which is set by society as a whole, based on our relative personal price preferences. The least skilled (or able) would have difficulty producing a wage appropriate to manual labor. In any case, if we merely reduced our relative global market share we’d hardly sell abroad, except those goods which can only be gotten here, and we’d consume relatively more of our own product. Employment levels would still tend toward optimum levels. But wait, there’s more.
As I mentioned above, capital goods need to be paid for, and they are typically paid for either through savings or by borrowing. In the case of savings, if the savings are relatively liquid, it isn’t a problem. Borrowing though is a different issue. In borrowing, you have to compete for some of the unused excess which has been produced. Rather a lot of it is sitting in government bonds. Well, for the most part, due to government meddling, the financial market is pretty much a glass palace, anyway.
The government subsidizes not working. With this, the cost of working becomes more expensive than not working. I can say this, because the essence of money is time. Someone traded some of their time to get it. If you can get it without spending time, or get the same amount while spending time, it would be insane to give up time you didn’t have to. You’d come out behind. If you work 40 hours a week for $1000 vs working 1 hour a week for $1000, obviously the 1 hour is the better deal. And depending on the level to which you value time, it may be that 40 hours at $1000 is worth less than 1 hour at $500. Even if only 1 hour is available, vs overtime being available for the other course. Even if you only had one opportunity between the two of them, many would take the $500 hour.
Comments on full employment and trade
Generally speaking, as the level of US employment increased, the level of goods and services the US has available for sale must also increase. If we are focused on maximizing the outcomes for individual citizens, then there is no reason to spurn international trade. If you can get new shoes for $20 vs $40 and they are of the same desirability, it would be foolish to choose the more expensive ones. If the market wasn’t tremendously distorted, the lack of US shoe manufacturing wouldn’t impact the ability of our potential cobbler to achieve gainful employment. It becomes obvious that if we had more expendable wealth, we would also spend more of it abroad.
Purchasing goods made abroad would encourage capital investment abroad, which would in turn increase the cost of their labor, as labor becomes able to produce relatively more with the same amount of time. Goods where the only advantage they had was cheaper labor would gradually shift back toward us, and/or to other, less developed markets. This would generally increase the world’s wealth. As I’ve mentioned before, lack of a future increases crime, a chance at advancement offers a future. So increasing world employment should also reduce world crime. That the worlds wealth would increase is a given, as the world’s wealth is what is being added to what has been produced, but which has not yet lost it’s value.
inflation and deflation
Inflation is when the value of money drops, and happens when people’s demand for money is less than the supply of money. This should happen for one of three reasons. Something is increasing the supply of money. Lack of faith by the people in the value of money. A supply of labor that exceeds a dwindling demand for labor.
The first is fairly straightforward, and may happen in two ways. The government, one way or another, prints more money. It may be that it it tries to obfuscate it in one way or another, but ultimately an increase in the cash supply means that a greater amount of cash represents a lessor amount of goods. Alternately banks (usually with government backing) lend money that they don’t actually possess. Because of federal reassurances, runs on banks pretty much don’t happen anymore, so their policies have gotten a bit wonky. As banks increase in size, the amount of their lending would also increase, so they would contribute to inflation in a fashion related to their size.
Lack of faith is well documented. When someone has money and they’re aware of how quickly it’s value will depreciate, they want to exchange it with some other good (who’s value, at least in the personal sense, would presumably be relatively fixed) as quickly as possible. But then, that is also true for the person who gets the money. No one wants money, so there is more of it than available goods which are consumed at an alarming rate. The goods produced are not increasing, but they are being purchased rapidly. Sellers must increase their profit margin dramatically, as in hours or days they’d need to re-adjust the price. As long as the government isn’t printing money this is finite and self correcting. But the problem is at this point the government is typically paying salaries with printed money. Marginal stores, unable to keep up with the price of their inputs and the price their customers are willing to pay fail, decreasing the demand for labor, leading us to..
When the number of functioning businesses is in decline, money’s relative value would fall. The total goods which can be purchased would be decreasing, where as the cash supply would not be. This feeds into lack of faith in the value of currency above, completing the death spiral.
Deflation is when the value of money rises, and happens when people’s demand for money is greater than the supply of money. This should happen also for one of three reasons. Something is decreasing the supply of money. Market wide depletion of savings. A demand for labor that exceeds the supply of labor.
If the Fed destroys money for long enough to tighten the supply, a smaller amount of money would represent a greater amount of goods. Since supply and demand would work to adjust the costs of goods and labor to fit the new value of money, any ill effects from this would be blessedly short. If we assume the market behaves rationally, anyway. Alternately, there could be a rash of systemic bank failures, though this would typically cause other problems which would make the slight deflationary effects lost in the noise. In particular, there would likely be other business failures which would produce inflation, by reducing the supply of marketable goods relative to the (remaining) currency supply.
Typically, people store away a certain part of their earnings for a rainy day. If people were to either change their savings preferences in mass, or to have abated their savings across society they would divert relatively more of their earnings into savings vs goods on the market. This would normally happen in a period which was already deflationary, (the other side of inflation is the discouragement of savings) so it is a bit of a double whammy. The difficulty here is that labor is very reluctant to let their wages be reduced, even if their buying power is going up, so it can be a bit trying for business. Otherwise, the inflation due to saving would be short lived, only until their savings level matched their savings preference, at which point they’d be diverting their pay back into normal patterns. During this time, of course, the market must reduce the cost of goods in order to compete for a diminished supply of expendable income. This is reflected in a necessity to reduce labor cost or capacity. Of course, any job losses would move pressure in an inflationary direction, described above. It should find equilibrium fairly rapidly.
Finally, if business needs just a bit more labor to optimally meet it’s capital requirements to reach the lowest average total cost of their good or service, they would tend to raise wages slightly in order to attract more people. This would be met by others competitively raising wages. If the money available on the market is fixed, this would diminish the supply of money, however, they would be constrained by the average total costs, which is of course affected by the cost of labor, and this too would reach an equilibrium. The price of goods would drop on the whole, as the supply would increase with the additional labor (otherwise you wouldn’t have hired more people) increasing the competitive position of American goods on the international market, after a bit of a inflationary hiccup. The increase in demand at the new price point would put some upward pressure on price, it too would find equilibrium among all the potential purchasing decisions among all the people.