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An analysis of productivity vs. employment,
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This review is from: Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy (Kindle Edition)This book challenges the idea that rising productivity is the engine of increasing standards of living and wealth. Increases in productivity are said to elevate the standard of living in three ways:
1. Increased productivity causes prices to fall, thereby increasing workers' purchasing power. Because labor is 70% of the purchase price of most products, reducing labor lowers costs.
2. The people who are put out of work by increased productivity in the old industries will be forced to seek employment in new industries. A free market economy will allocate labor and capital to its most efficient uses. Surplus labor and capital that results from improving productivity in one industry will cause labor and capital to migrate to labor-short and capital-short industries in other sectors of the economy, including those based on new technologies. Productivity in old industries spurs development of new industries.
3. Increasing productivity causes wages to increase. For example, in a machine shop several machinists earning $25 an hour might be put out of work by a computerized lathe. However, an engineer earning $70 an hour has to be hired to program the computerized lathe. Other skilled laborers will be hired to construct the computerized lathe. Thus, the workers who lose their jobs to automation are replaced by higher paid workers building and operating productivity enhancing equipment.
But is the theory correct? After all, every major financial collapse has occurred during times of rapidly increasing productivity:
* During the post-Civil War boom of the 1870s through 1890s the country developed an efficient economy based on the railroads' creation of national markets and national economies of scales. The result was the Depression of 1894-1897 when the military had to be called out to suppress anarchy by rioting mobs of unemployed and the country endured a real threat of a civil war between Labor and Capital.
* During the 1920s the productivity of modern mass production churned out millions of autos, radios, consumer appliances, and a new infrastructure based on highways and electric power plants This was followed by the Great Depression.
* During the 1980s and 1990s productivity was increased by advancing information and communications technologies. This has resulted in the massive unemployment that followed the "Y2K" collapse. Today there is more productivity and less employment in the USA than in decades.
During each of these occasions the economy failed as agriculture, trade, and industry shut down and threw tens of millions out of employment. There was a real fear that all institutions of civilization including banking, business, and the government itself would fail. People feared the return of a stone-age economy and "law of the jungle." So how can productivity be good if it destroys civilization and puts the entire population at risk of starvation? This paradox of stupendously productive economies pauperizing the entire population has been discussed at least since the 1879 when the book PROGRESS AND POVERTY was published. Now 130 years later we're still talking about it.
Anecdotal evidence seems to indicate that productivity destroys employment. When a company installs a new piece of equipment the first thing management is going to say is, "Make the machine pay for itself. Lay some people off." Labor-saving machinery is installed for the express purpose of putting people out of work. When people are out of work they aren't earning money to buy the products that the machines produce, so the economy fails. The hallmark of a depression is a factory of stupendous productivity that stands idle because nobody has money to purchase the products that it produces.
How do we reconcile between the diametrically opposing theory that productivity creates jobs vs. the historical and anecdotal evidence that productivity destroys it? This is the question the book seeks to answer.
The authors answer this question in CHAPTER 4. WHAT IS TO BE DONE? PRESCRIPTIONS AND RECOMMENDATIONS
Their recommendations are:
* Invest more in education. Pay teachers more money. Make teachers more accountable by paying them for performance, not tenure.
* Increase the H1B program. Bring more skilled workers in here from overseas, the idea being that skilled workers create synergies when they work with each other.
* Teach entrepreneurship broadly as a necessary life-skill, not just in elite business schools.
* Invest in more infrastructure, improving highways and communications.
* Increase government spending on basic research in the health and sciences.
* Lower taxes and regulations on business, so as to increase their incentives to hire.
* Make labor cheaper by eliminating social security taxes. Nationalize healthcare so that companies don't have to pay for it.
* Reform the patent system so that it is easier to file patents.
I commend the authors for suggesting a carefully crafted apolitical agenda that will appeal to both Conservative Republicans and Liberal Democrats. For example Liberal Democrats will like the idea of paying teachers more money. Conservatives will like the idea of holding them accountable for performance. Liberals will like the idea of spending more money on hiring their unionized friends to upgrade infrastructure. Conservatives will like the idea of lowering taxes on business and allowing them to hire cheap labor.
However, the agenda is self-contradictory. Spending more government money on education and infrastructure can't happen unless taxes are INCREASED. Social Security and national healthcare can't be maintained if payroll taxes are eliminated. Where IS the money going to come from? The authors are advocating a low-wage agenda to encourage more hiring. How are employees going to pay taxes if they're working at minimum wage?
the book made me wonder if we should not take the DIRECT approach of mitigating the effects of productivity displacing workers beyond the rate at which the economy can reemploy them?
* Productivity improves the standard of living so long as it is implemented slowly. The normal attrition rate in employment is about 3% a year as employees retire from the workforce. Productivity improvement enhances employment as long as it puts fewer than 3% of people out of work each year. When productivity improvements put more than 3% of the people out of work the economy will falter. To carry this example to an extreme, suppose it were possible for one machine operated by one employee to produce all the goods and services that are currently produced. In that event we'd have one person working and 150 million unemployed. The economy would fail. Productivity can't be allowed to put more than 3% of the labor force out of work each year.
* Productivity increases augment the economy when WORKERS SHARE THE VALUE OF THE INCREASE. Workers should receive pay raises when their productivity increases. However, this is not the usual case. Productivity often puts people out of work entirely, lowering their pay to zero. A person with no income can't afford to buy any products, no matter how efficiently they are produced.
The Great Depression of the 1930s educated the country to the dangers of productivity being misused to destroy employment. FDR's New Deal was oriented toward DECREASING productivity by exempting companies from anti-trust laws if they agreed to recognize labor unions. Companies were allowed to engage in price-fixing cartels whereby prices were inflated in return for allowing unions to subdivide jobs so as to decrease productivity. This anti-productivity program restored profitability to business and improved wages for labor. The minimum wage was also imposed to force companies to pass on more of the value of their production to their laborers. These measures restored the balance between capital and labor and set us up for the post-World War II economic boom.
I wonder whether we should mitigate the negative jobs-destoying and waves-depressing aspects of productivity improvements by:
1. Raising the minimum wage to $20 an hour. This will force companies to pass more of the value of their enterprises to their workers. The economy can only prosper when workers earn enough money to purchase what they produce. A $7.50 minimum wage doesn't provide enough purchasing power to keep the economy in balance. INC. MAGAZINE, which is about as pro-business a publication as one can find pointed on it its February 2011 issue "Our way or Norway" that Norway has a minimum wage of around $20 an hour as well as laws that encourage companies to maintain employment. Norway supposedly has more entrepreneurs per capita than we do, so the higher minimum wage and employee- protections in the law may be more constructive than is generally believed.
2. Discouraging companies from laying people off. Perhaps companies that use productivity-enhancing techniques as a vehicle for laying off their employees should pay penalties and excise taxes to pay for the unemployment that burdens the rest of us. If companies had to pay the true cost of the unemployment they create they would be forced to limit the implementation of productivity-enhancing equipment to 3% a year. They would be encouraged to retrain employees instead of dumping them on the street.
Productivity improvements only grow the economy when they benefit LABOR as well as CAPITAL. I believe our problem now is that productivity increases almost exclusively benefit capital at the expense of labor. CAPITAL is garnering an increasing share of the nation's wealth accruing as profits while LABOR is experiencing diminishing wealth as employment opportunities decrease and wages fall. Let's enact legislation to bring labor and capital into balance by limiting companies' ability to use productivity-enhancing technologies to put people out of work.
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Initial post: Nov 2, 2011 12:55:20 PM PDT
Emmanuel Goldstein says:
I find this a very thoughtful and insightful comment, offering a more original solution to our growing unemployment crisis than the book being reviewed or a similar recent book, The Lights in the Tunnel. I'd like to get a copy of A Pragmatic Design and just wish it were available on some format other than Kindle!
In reply to an earlier post on Nov 2, 2011 1:50:40 PM PDT
Last edited by the author on Nov 2, 2011 1:55:35 PM PDT
The point most of our economists and politicians are missing is that productivity growth alone will not put people back to work and grow the economy because productivity growth alone does not put money in people's pockets that will enable them to buy what is produced. The economy can only prosper when the value that is added by increasing productivity is divided fairly between Capital and Labor.
I make that point in my book A PRAGMATIC DESIGN FOR A SUSTAINABLE ECONOMY and then recommend ways to channel some of the value to labor such as by increasing the minimum wage and by imposing a sliding income tax on corporations, heavily taxing those companies that use productivity-enhancing technologies to put their existing employees out of work. Companies need to be encouraged to use productivity-enhancing technologies to improve the QUALITY of their business operations, not just to create massive unemployment by destroying their employees' jobs.
My book is only available in Kindle format, but software that enables the PC, Mac, and IPAD to read Kindle books are available as FREE downloads from Amazon.
I read Kindle Edition books on my PC because I find it faster and easier on my eyes than flipping pages of a physical book. Kindle books can be searched electronically, which helps you locate subject matter in a book instantly without flipping back and forth through an index. Also, copyrights expire after 70 years so there is much classic literature available from Amazon in Kindle Edition for free or at a very low cost. I also like being able to carry my entire library with me wherever I go on my PC or IPAD instead of carrying around hundreds of physical books.
Here's a link for the free Kindle download software that will enable PC's, Macs, etc. to emulate Kindles:
The free Kindle emulators are located under the heading FREE KINDLE READING APPS near the top left of the page.
Thank you again for your interest in the ideas I mentioned in the critique of this book.
Posted on Nov 3, 2011 10:49:48 AM PDT
Very, very thoughtful. I've been a rocket scientist for more that 40 years involved in K-12 science fairs as a mentor. The problem with MIT and Harvard professors is that they believe everyone can go to Harvard and MIT and respond to real life accordingly. They can't through no fault of their own. I have seen and lived it for the last 30 years. All the recommendations provided may work for the 10% of the population, but not the rest.
I am also an entrepreneur who started and sold two technology companies and 2 business units within those companies. For lots of money. I can tell you that tax break and regulations have nothing to do with hiring: it is demand for the product. Period. Let me repeat: we never hired, nor do I know of any company that ever hired, because of tax breaks - it is current or future demand for our products that drives hiring. And layoffs due to automation? - why do you think the "robot" technology businesses are doing so well? There is a great demand for their robotic products because using AI/robots cuts the cost of doing business far more than any penalty for unemployment ever could increase it.
In reply to an earlier post on Nov 3, 2011 11:48:59 AM PDT
Last edited by the author on Nov 3, 2011 11:53:25 AM PDT
Dactyl, I don't think anybody can fault the introduction of automated systems and robots for reducing the demand for labor. What can be faulted is the RAPIDITY with which these new technologies are used to eliminate employment. I noticed in my career that up until the mid 1980s it was rare for companies to bring in a computer system for the purpose of putting people out of work. The company management would say to the employees, "The computer is here to make you more PRODUCTIVE. We want you to spend more of your time doing higher-level analysis and less time crunching the numbers. The computer will automate the order entry, fulfillment, and shipping. We want you to spend more time on the phone with your customers resolving their problems." Companies used automated systems to increase quality, not to lower costs by putting people out of work.
People who had been with a company for many years did not lose their jobs when automated systems were introduced. They either upgraded their job responsibilities or in some cases they just coasted on doing very little until they retired. In those days companeis viewed employment as a social responsibility (perhaps because so many managers had come of age during the Great Depression) and companies were very reluctant to put people out of work.
After the mid 1980s we began to hear companies talk about "downsizing, rightsizing, cost reductions, work force reductions, early retirement, employee buyouts" and so on. At that point in time companies shifted their objectives of productivity-enhancing technologies from upgrading their employees' jobs to removing their employees from the workplace. I saw companies liquidate their over-50 people with the "30 / 50 plan" which said, "Either you people over age 50 or with 30 years experience take early retirement or we'll fire you." The employees were put out of work to fend for themselves late in their careers when it was difficult or impossible to find other employment. Instead of working until age 65 we had many millions of people early retired in their 50s. We have a weak economy because these people don't have the money they used to have to keep up demand. They aren't paying the taxes they used to pay, so the government is going to be in perpetual budget deficit until it defaults on its debt.
It's thus the changing OBJECTIVE of robotics and computer automation that worries me. Instead of using these technologies to upgrade employees' skills and keep them on the payroll they are being used to cut short employees' careers and thereby weakening the economy for everybody. I've got nothing against companies using productivity-enhancing technology, but I do believe they owe their employees who have been loyal to them for decades the opportunity to continue working until they retire. In my view this is an area where social responsiblity and just plain human decency should trump the quest to maximize every last penny of profits.
In my view capitalism gets overturned when the majority of people sense that it has lost its sense of humanity and social responsibility. People do not like to be dehumanized under any system, whether it is communism, fascism, or capitalism. If enough people sense that their employers are viewing them as nothing more than another raw material that is to be used up and then discarded, then they will vote in a socialist government that severely constrains the ability of employers to put people out of work. I hope that day never comes. I hope employers, especially the big corporations, will uses a little common sense in treating their employees like human beings before there is a move toward socializing the economy.
I also agree 100% with your statement that companies do not hire because of tax breaks, but because of demand. IMO it is foolish to try to give companies more tax breaks when we have already given them so much of what they said they always wanted. IMO the best way to stimulate demand is to raise the minimum wage to provide workers more income, to discourage employes from putting people out of work, and to raise taxes so that the governments' commitments can be sustained.
I'm a Conservative Republican voter, but IMO at the present time big business is abusing its power and threatening everybody's well-being. We need to be doing the OPPOSITE of what they want if we want to restore prosperity.
Posted on Nov 15, 2011 9:22:28 AM PST
Mr Sewell, you do have some original views. Thanks.
Posted on Nov 21, 2011 1:25:36 AM PST
Your review is excellent but your opinions [the prescription] are as flawed as the authors. This is very dangerous. Let me elaborate:
DESCRIPTION VS. PRESCRIPTION
The facts in the book are great. The interpretation of the facts are to be distinguished when the remedy is offered.
Jobs will be displaced.
This has happened in every age of man. That is not a revelation but it is good to get it from him. His remedy is the worst "evil
". This is the problem between those that give good description [e.g. about I.Q or the state of a nation] and then give the worst remedy [e.g. Hitler: to cure Germany, his remedy is Statism and ethnic cleansing. Even allies did NOT mind his remedy, but they minded the fact he invaded others and threatened England]. Rifkin is of equal evil, like Stalin suggesting a social system. Be ware of evil, because it is Not like in the movies coming at you in one-go. It slowly creeps up like a toad in boiling water, like a virus. Any Statism is evil.
What is the 'cure' ? The fact one must recognise changing times in one's job. AND therefore expand one's skill set to areas of potential value, particularly watching trends. One must learn. One must experiment by offering value to others. One must adapt and change if it is not working. That is the key.
Secondly: in every generation it is IMPOSSIBLE TO PERCEIVE what the future [technology] holds, otherwise people would be doing it. Planes could NOT fly. It took the Wright brothers to invent it. It took a while and others TO COMMERCIALISE it. The key is laissez-faire free economy where people CAN create value and because they retain their wages, so they have enough to invest in new ideas.
Finally: consider this. If mass jobs disappear but new technology appears, then people without jobs can not partake and purchase the offers output by these new technologies. They would not have enough money!
Therefore it would either mean:
1. No more new technologies [companies going bust] OR
2. Smart people using new technologies to create value for others such that these others had enough money to grow.
Gary Valnerchuck offers wine critique. His customer base does not pay him a dime for that! He is a millionaire. Promoters pay him. He also makes money from selling the fact he has a huge customer base [different business]. He is already living in the world I am talking about above.
By the way, I have never said I can - and no one can - predict all the new technologies and jobs of tomorrow. But I have inducted that INEVITABLY there MUST be new jobs, and this has ALWAYS taken place! There MUST be new jobs BECAUSE :
1. There are virtually infinite problems. Wherever there are problems there are those offering solutions. This means value. This means jobs and customers (who purchase the solution to their problem).
2. Those who solve problems get richer [MR. A]. But that develops COMPETITION [MR.B]. Therefore for MR.A to keep ahead of the curve he must use his profits to hire and produce more solutions [more problem solving]. In order for MR.B to get ahead he too must do that and/or do it cheaper than MR.A and/or loan a lot of money to be as big as MR. A in one leap, and then pay back the loan by selling the product-or-service cheaper OR BETTER (e.g. Apple) than Mr. A .
In sum total, whatever the state of change in an economy:
A. VALUE CREATION is INEVITABLE.
B. This means customers (who purchase the value) and production/business (who produce the value).
C. It may mean people start off in boutique (e.g THOMAS EDISON) but they and/or others grow into large businesses (e.g. GE:General Electric) that hire many others.
It doesn't matter about the "age of man" [information age or other]. The above is, was and always must be the way - there can be NO TECHNOLOGY without purchasers [directly as customers who pay OR indirectly as advertisers, but these advertisers themselves MUST be able to sell their products to customers].
Absolute final point. Whenever there are POOR/ER people, there IS A MARKET PLACE! Even poor/er people MUST eat, drink [water and/or other items], have medicine to buy, etc. IN one way [capitalist business is the main way] or other [social business like MOHAMMAD YUNIS, Nobel Prize winner] , there is growth [note: social business is part of CAPITALISM and NOT socialism. A social business man like Yunis is MASSIVE PROFIT-MAKER for self, AND the social company that reinvests it].
In reply to an earlier post on Nov 21, 2011 12:29:41 PM PST
Adel Anwar, I agree philosophically with most of what you posted. We do live in a free economy, and wherever there is freedom the rewards are great, but there is also risk. The risk of course is that technologies do change and jobs do become obsolete. Individuals who fail to adopt become unemployable and companies that fail to be progressive go out of business. That's part of what makes the capitalist system appear to be so magical in harnessing ideas to create wealth.
However, in all things there must be a sense of proportion. A person who seeks excellence in sports must be prepared to experience a lot of pain in hardening his/her body and achieving excellence in the skillset of the sport that he/she wants to master. But that DOESN'T mean that the athlete should cripple or even kill him/herself by working to the point of heart failure or crippling muscle failure. A major part of athletics is knowing when to STOP. It doesn't do an athlete any good to drop dead by trying to do too much all at once.
Our economy is like that too. Productivity is beneficial so long as it is introduced at a pace sufficient for the workforce to adapt. It is not beneficial when it puts more people out of work than new technologies can absorb and thereby kills the economy. Business killed the economy in 1929 and only government intervention via FDR's New Deal saved us from a Communist or Fascist revolution. Business tried to kill the economy in 2008 and only the intervention of the government running multi-trillion dollar deficits prevented a total collapse.
In recent years there has been a mania among corporations to destroy as many jobs as possible. These days companies are NOT using productivity-enhancing technologies to upgrade the jobs of their employees. They are bringing in new technologies to destroy jobs.
If they don't knock it off we are going to go into a mode of a perpetually declining economy where every year we have fewer jobs = less purchasing power = fewer jobs = less purchasing power = fewer jobs. Remember that the hallmark of a depression is a factory of stupendous productivity that stands idle because nobody is earning money to buy what it produces.
IMO the answer to this problem need not be draconian. It can consist of moderate actions such as:
1. Raising the minimum wage. If companies are going to use automation to destroy the value of skilled labor, then the value of unskilled labor should be increased, such that a person displaced into ringing the register at a retail job gets paid the same rate as that person got paid operating a machine at a factory that was automated or move overseas.
2. Requiring companies to pay the cost of the unemployment they create. It is a myth to say that companies create jobs. Today most companies, especially the big ones, destroy more jobs than they create. The objective of today's corporation is to buy out its smaller competitors in order to put their people out of work, acquiring their customer lists, but not their costs of doing business.
For example, when company "A" buys smaller companies "B" and "C" company "A" is going to eliminate most of the "overhead" staff at "B" and "C" and consolidate the work at company "A''s headquarters. The accountants, engineers, and IT staff of company "B" and "C" will be put out of unemployment.
Company "A" will use computer and communications technology to become more efficient by doing more business with less staff than was the case when all three companies competed. Company "A" will also increase its profit by raising prices now that it has bought out the competition. This is NOT a win/win situation of improving productivity that grows the economy. It is a WIN/LOSE situation whereby the owners and execs at company "A" increase their profit while the employees at companies "B" and "C" lose their livelihoods and consumers suffer higher prices and less competition.
Most companies today are "growing" by mergers and acquisitions, not growing organically by creating new and improved products. Even though productivity appears to have increased, it is a losing proposition for the economy as a whole. Companies that engage in predator M/A and aggressive layoffs should be made to PAY for the unemployment they create. I say, "Tax any company that lays people off at 90% of its profits for the next five years." If management wants to use technology as a weapon against its employees, then let them pay for the cost of putting these people out of work.
In reply to an earlier post on Nov 21, 2011 1:49:18 PM PST
Last edited by the author on Nov 21, 2011 2:56:59 PM PST
Alan, I read your posting with care. Thank you for your thoughtful answer and please keep it coming! As you can guess, I am going to politely disagree and more important show where you are (with respect) incorrect but further what is the correct course of action. Therefore you will get theory-and-practical methods.
1. Paragraph 1 by you is very nice. Paragraph 2 gives a metaphor in order to relate it to your argument and advance your argument. Indeed, the metaphor is wonderful for the purpose of the reader (myself) rapidly grasping your argument and therefore I thank you! However, the metaphor is not-analogous with the economy, it is comparing "apples with oranges" [metaphor].
2. You state : "Productivity is beneficial so long as it is introduced at a pace sufficient for the workforce to adapt."
The assumption here is that some institution has the power to decide "at what pace" to introduce productivity. My contention is that the only institution with such power would be government, and government must "never, never, never" interfere in the economic affairs of man. The purpose of government by/for/of the people is to protect man's inalienable right to life, liberty and the pursuit of happiness against the use of force, by using such arms of government such as the police, the military and the law courts.
But when government interferes in economic affairs [outside protection] then it can only do so by using 'force' against one man (or group) in order to benefit another man (or group).
Now back to the argument about 'pacing': in a self organising laissez-faire market place, the pace is de facto set at the optimum level at all times when all factors are taken in account. For example - to get concrete not just theoretical:
- if I introduce a host of Ferrari cars in the poorest nation and there is no one to buy the Ferrari, then either:
i. I lose out OR
ii. I must reduce the price such that people can indeed buy yet I must be able to turn a profit OR
iii. I can decide to introduce the Ferrari in a nation that has indeed got buyers, such that I can turn a profit. But then the poor nation does not get the Ferrari. Does anyone do business in the poor nation ? Yes.
One can introduce vehicles that people can indeed afford to purchase such as:
Toyota AND/OR second hand vehicles from richer nations introduced 'en masse' to capture profits.
The main point is this [without getting lost in the forest I present above]: richer or poorer, there is always a marketplace.The producer must always seek to turn a profit and therefore is compelled to introduce goods (and services, hereinafter just called goods) that people can indeed purchase.
Now let's develop this further. The producer [MR.A] will get richer and therefore produce more goods of the same type and/or different types for different [financial] niches of customers with the resulting profits. This will instantly create competition [MR. B] who will probably try to under-cut Mr. A whilst seeking to turn a profit too. If Mr. B is also able to earn a profit, more competition will enter the market place [Mr. C and so forth]. Mr. A and other will try to competitively "own" the marketplace, and in so doing,they must create products that are "better and cheaper: and for that they must grow/expand, hire more people and so forth. These people that are hired will be able to purchase goods with their earnings (and/or with loans that are given due to their employment), some or many of whom may need vehicles too! You can see the makings of a thriving economy: a self organising economic market place, where the pace is de facto set at the best rates.
There needs to be absolute zero government interference [and besides any such interference is immoral: the use of force against one party in the name of the other].
3. You cite "killed" business in 1929. Let's be more specific: in between 1906-1916 government for the first time interfered in economics by introducing taxation starting at 1% of the rich (a sheer crime on heroes like Carnegie, Rockefeller etc.). As is the nature of crime, the taxation rate just continued to grow.
By 1929, the 'consequences' of such interference [as you propose] led to the great depression, which is but "natural".
In order to keep my argument "simple", let me withdraw the above insight ! Let me presuppose that "any/every" economic system will result in "black swans" [highly improbable but definitely possible events like a crash] - like complexity models that were advanced by Per Bak.
Then I will further create and advance the argument, that is wonderful because it is particularly during recession that new more efficient businesses arise, being able to set up in locations where older established businesses have shut down [e.g. modernly so many Borders bookstores shut down, meaning that new players can take up that space. Also a few years back many Starbucks locations shut down, and so did many realtor companies and their locations. I saw the way that 'new' businesses took over those locations, such as an independent coffee shop in a old Starbucks location. I saw how this independent coffee shop turned over profits and then expanded by offering franchises! All within a very short time!]
The main point: in an economy at every point of time [T1, T2, T3, T4 etc.] there are efficient and inefficient businesses. Some of these inefficient will go out of business because people are not purchasing their goods. This enables other businesses to grow, and yet others to come into existence.
The fact that businesses go out of business means the following:
i. An employee must NEVER assume and must not be led to assume that they have life-long employment. "Therefore" with the new assumption, the employee MUST take action: which means "reinvesting y% of their income into savings, insurance and so forth" AND/or developing their skill-set in case of that business and/or entire industry [e.g cartoon-ist] going out of business.
Man is always self-responsible for their life, liberty and the pursuit of happiness.
Those cartoonists that did develop computer animation skills would have continued to be employed.
In both academic economics and in the popular world, "black swans" are ignored. However, there are always many prudent people with no knowledge of black swans that do indeed save and invest for the longer term.
4. I will presume Your argument is that surely in light of the above [black swan or other] it means government support is required. The answer is in the negative because even with government intervention, there will be "black swans" ! However "because" government interferes with taxation (and inflation which is another form of taxation: government printing money it does Not have and using that, thereby diluting the currency causing the price of goods to rise), it means that people who "would have had more money saved up for recession days after black swans" find themselves with NOT ENOUGH MONEY AND NOT ENOUGH JOBS.
If the richer were Not taxed then the richer could and would use their excess profits to compete even more zealously thereby creating new jobs faster than ever before. But now - due to taxation - even the richer (corporation or person) does not have as much wealth as they would otherwise have had, had they never been taxed, and therefore could create new jobs by competing with new products. How would this work? Go back to point 1 above: to see how optimal economics in a laissez-faire society works.
To summarise "thus far":
i. I have assumed that "black swans" and downward cycles occur in both laissez-faire economics and in your government-involved economic society. I have further therefore put forward the argument that in a laissez-faire market place:
a. people can prepare for black swans with [part of] the extra income they retain AND
b. the richer would create new jobs for their existing products or new products as they continue to zealously compete.
However in a government-involved economy, it would/does take "some time" for the economy to get back into recovery mode AND it is sheerly unfair that those who create such growth, the heroes are 'taxed' and that is communistically [commune, society, social] redistributed by an inefficient entity [government] to the 'people'. This type of commune [communism] is known as egalitarianism. It is pure 'evil' [in the name of the good] just as Nazism [national socialism] is pure evil in the name of the good [Hitler's followers genuinely thought they were doing good and they were largely Christians too].
Now back to your argument , if Amazon allows this many words.....
5. Your argument in paragraph 4 and 5 shall now be addressed. To summarise: you are stating that many companies seek technologies which enable them to fire many people. For example: a good accounting software can enable one to get rid of many accountants, and only have a few (and hopefully these few are located in India so they are paid far less) making the corporation very profitable indeed. I AGREE WITH YOU!
However, this is where we disagree. I see the above as a GREAT thing: it is the job of any corporation to MAXIMIZE profits [for the longer term] in any way legally possible [i.e. where force nor fraud is used].
If you look at my argument, then you will counter-argue: then what are people to do? If 500 accountants are fired because the company has purchased a great software AND outsourced, what will the 500 do?
The 500 must find work elsewhere. Some can offer their services to people at a competitive rate bearing in mind many in society still need an accountant despite cheaper software programs. Others have to do other jobs [e.g. waiter]. Others can expand their knowledge set such as by learning "law" [for example] and then be "extremely valuable as a dual-qualified expert" who can therefore be in a more advantageous position to save corporations money and this can not be outsourced!
Those that become waiters [e.g. 200] but wish to desperately work as accountants must use their extra time to [i] look for openings and/or [ii] expand their knowledge such that they can work in niche areas of accounting and/or [iii] set up accounting firms to out-compete incumbents and/or [iv] use their accounting knowledge to get into other entrepreneurial business where they see an advantage by virtue of their superior accounting skills and insights.
Is what I am suggesting "reasonable" or pure bunk? To answer this question: I ask you "what happened to all those people fired from ENRON?" Its been a few years now. "What happened to all those people fired from WorldCom"? What happened to all those people "down sized from IBM" ? What happened to all those people fired from PAN AM including pilots and stewardess' ?
These people did not die or evaporate off the face of the earth [by and large] . They did many of the things I propose above: taking on the same job in different airline; taken on "similar" job in the same and/or different industry (e.g hotel); taking on "new jobs" in the same or different industries; learning new skills to thrive in their new economy and reality. The market place self organised.
Your argument for Minimum wage is rejected. Government must NEVER, NEVER,NEVER, NEVER interfere in economics affairs of SOVEREIGN MAN. Alan, you are SOVEREIGN. No one is above you. You have the inalienable right to life, liberty and the pursuit of happiness. You are SELF-RESPONSIBLE . A government of/by/for the people is required to protect your rights against force or fraud of another [and /or of government]. We are the U.S.A. not a nation owned by the crown! I can not FORCE you, a sovereign man to give up my property that you FAIRLY EARNED, by force of law [taxation] and then do the most evil thing possible: redistribute it in the name of the good [inject communism] to myself and others ! Believe me, I would love to do that, force people to give up their property for me, and live in a castle ! MANY HUMANS WOULD LOVE THAT POWER: and therefore OUR FOUNDING FATHERS developed the most perfect constitution on earth, a secular nation of SOVEREIGN individuals.
CHOICE is the essential component of freedom. FORCE is the anti-thesis of freedom (e.g minimum wage laws, taxation, etc.).
As for minimum wage: if McDonalds wish to pay $1 [and many others too] then I can choose to accept OR REJECT that job, and take on OTHER jobs. If I accept this job and so do masses, then McDonalds will SAVE a lot and therefore would be able to REDUCE the prices [and so too all other businesses, in order to zealously compete against their competitors]. This means the $1 would be equivalent to a much larger amount anyway! No minimum wage nonsense [use of force] is required.
Alan, you must NEVER NEVER NEVER compromise on FREEDOM. Make no mistake, your arguments are equivalent to all forms of Statism: "justification" for the use of undue force [e.g. those that support Royalty, of which there are many; or support communism, of which there continues to be many, etc.]
Freedom is NOT tradable, it is INALIENABLE. You can not grant it to me nor me to you [by the use of force]. It is your right. You are sovereign man. It is time that you exercise your rights, with no logical inconsistency and contradiction anymore.
In a laissez-faire society, there would be virtually ZERO homelessness, think about it . People that are homeless and hungry would find work at the lowest wages quite easily! It is your economics that is both inconsistent and creates a society where the absolute poor find themselves feeling stuck. No ?
You talk about companies growing by M & As. However this is instantly reflected by a deflation of stock prices! The system balances out!
SUMMARY: there are many different variations of concrete models, and we can spend enormous time arguing. Therefore higher level concepts are required that address the right way. I have presented the prescription, the higher level concept above: laissez-faire economics. Freedom, in one word. Democratic government to protect the sovereign rights of man.
In reply to an earlier post on Nov 22, 2011 7:54:38 AM PST
Last edited by the author on Nov 22, 2011 8:00:20 AM PST
Adel, forgive the terseness of my reply...I'm traveling this week and don't have much time. When I get home I will save your post and read it thoroughly to make sure I understand your points in detail. Let me respond to just one point for now:
<<My contention is that the only institution with such power would be government, and government must "never, never, never" interfere in the economic affairs of man.>>
The entire history of civilization has been government "interfering" with the economic affairs of man. In the brief history of the United States our own government has:
1. Outlawed slavery despite the howls of protest from slaveowners that owning other human beings as slaves was the most sacred form of property.
2. Outlawed child labor, despite howls of protest from factory owners that they could not make a profit unless they were able to employ children at a dime a day.
3. Reduced the work week from 72 hours to 60 hours then to 40 despite howls of protest from business owners that they could not afford to hire on more labor to make up for the reduced hours.
4. Imposed a minimum wage and the requirement to pay time-and-a-half for hours worked over 40 despite more howls of protest from the business owners that paying higher wages would run them out of business.
As government intervened in each of these areas to improve the lot of labor the profits of business not only did not diminish but actually increased! The prosperity of the country, including the business owners, increased when slavery was ended, when child labor was outlawed, when the work week was reduced, and when the minimum wage was increased.
WHY has prosperity increased for everyone at each point of government intervention in the economy? It is because the government FORCED business to look beyond its self interest. Business was required to pay its workers more money for less onerous working conditions, and the purchasing power of the people increased. With increased purchasing power the people bought more goods and services and the business owners prospered more than ever.
Thus, two quick points:
1. Government has ALWAYS "intervened" to give labor a fair shake in the labor markets --- to insure that they are paid a reasonable wage and are treated with human decency. Business owners are no longer allowed to make slaves of people or send young children to their deaths working in the salt mines. I don't think that government "intervention" has been at all a bad thing in forcing business owners to operate at some minimal level of human decency.
2. Business, when left to operate on its selfish interests, always ends up destroying the economy. They did it in 1929 by turning the financial markets into a den of corruption and fraud, and they did it again in 2008.
3. Business has also undermined the economy by aggressively putting people out of work. The executives at each business are acting selfishly to maximize their profits by minimizing their payroll. They have been very aggressively in putting people in their 50's out of work instead of letting them finish their careers and of laying off their production workers and hiring them back as hourly "contractors" for less pay and benefits.
The cumulative effect of all this selfish behavior is to recreate the GREAT DEPRESSION when everybody, including business owners suffer. We are 15,000,000 to 20,000,000 jobs short of full employment. We are 15,000,000 to 20,000,000 who SHOULD be earning livelihoods and paying taxes to the government to fund theirs and others retirement and other social welfare obligations. We have 15 to 20 million people who SHOULD be working and contributing to the national economy who are now sucking up our national resources with unemployment, food stamps, and other benefits.
Business, through its selfishness, has destroyed employment and burdened the honest people of the country with paying for the unemployment that business owners, in their lust for a fast buck, created. This is the situation that enables Socialists and Communists to be taken seriously. Their prescriptions are always the radical curtailment of business's freedom to operate, including expropriation and nationalization.
All's I'm saying is that business executives, in their zeal to steal everybody else's wealth via financial fraud and to destroy their employees' jobs and thereby making it impossible for honest people to find gainful employment, are setting the table for their own demise.
Sell, so much for my "terse" reply! Thanks again for your comments. I understand exactly where you are coming from, and often felt the same way when I was a small business owner. Now that I have seen how many large companies operate my opinions have changed. Too many large companies ARE abusive of their employees and they are hurting the economy by creating financial frauds and unemployment. Our economy may require much more government "intervention" if we ever expect improvement.
In reply to an earlier post on Nov 22, 2011 10:01:20 AM PST
Last edited by the author on Nov 22, 2011 10:11:18 AM PST
PART 1 OF 2.
Thanks for another very well written and thought out reply. Have a GREAT Thanksgiving and travels! Also forgive any area of my reply that also appears terse. I admit putting in effort but not perfection.
1. Government's job is the protection of sovereign rights of man. This must be distinguished between 'illicit interference in economic affairs of man".
a. Freeing slaves is legitimate interference. Every man is sovereign. Of course, not every agreed with this and it took time, even warfare and many years later a civil rights movement to get equal rights
b. Outlawing child labor was another "higher level concept and thinking" by government: grasping that the child has rights but is not yet self responsible in the same standard in all things at all times like an adult.
c. Changing the work week AND the minimum wage are two different crimes in my opinion. This is Not legitimate interference because it is regulating others using force [law].
By the way, there are negative consequences and it puts one party at an advantage over another. Namely: people who wish to earn can Not so easily earn anymore from any one firm. Firms - like Starbucks - will arrange the work week of the employee such that they do NOT get overtime. Therefore people WHO WOULD HAVE WORKED [for normal wage] can NOT even work EXTRA hours anymore due to these laws.
My argument is not because of "consequences" , because there are arguably positive consequences too of such laws !
Let's look at another analogy. I am against CONSCRIPTION. It is the use of force agains free man. However there are POSITIVE consequences behind conscription too . Many other nations have this including Israel.
My argument is a moral one. That man is FREE, free to choose how to live their life, FREE TO CONTRACT with other man in any way that one so likes, free to offer $1 or 50 cents or 1 penny PER HOUR IN A JOB and another man is FREE to reject such terms and FREE to work with corporations that offer THE MOST for that specific job and it is THIS [the better] corporation that will get ahead . The "better" corporation is defined as an OPTIMAL corporation in freedom-economics.
Therefore the corporation that OVERPAYS [e.g. MOM/POP store ]will lose out because they can NOT compete with others that HAVE workers paid the least and therefore GOODS that are CHEAPER [e.g. Walmart]
Summary: I make a MORAL argument, that you are SOVEREIGN.
2. You said "WHY has prosperity increased for everyone at each point of government intervention in the economy?"
Those that support Hitler would equally have made this statement! It is a logical fallacy involved misconnecting the effect [improved economic improvement] with the cause. The cause was never government intervention [except points, a and b, above].
The cause is free man being allowed to exercise their mind to form deals and work in order to survive and get ahead. In the U.S. , man is not "their position of birth" like other nations but rather their "merit". Rich or poor: the poor man has the ability to get ahead, to attempt to achieve dreams, including material wealth and all that enables such a man to do. This is due to capitalism.
BTW whenever I use the word capitalism, I am using it in the correct way: pure capitalism. Mixed-capitalism is to be distinguished: where communism is injected into capitalism, the use of force against free man, against you, a sovereign citizen.
3. You said "Government has ALWAYS "intervened" to give labor a fair shake in the labor markets --- to insure that they are paid a reasonable wage and are treated with human decency. " You sound like the clergy, that will say whatever nice words , despite logical fallacy to gain power, to impose force against other humans [e.g. burn the woman for being proactive and label such a woman a witch. Or you sound like Hitler, annihilate Jews for doing their BEST to earn the most and pay the least. The masses agreed with Hitler. He was logically wrong as are you].
I repeat: any interference in order to ensure the sovereign right of man is a 'must' otherwise ether is no point to government. Any interference beyond that is illicit and the use of force against sovereign man.
If labor is allowed to organise into groups that represent them, this is free and fair. If these groups are given unusual powers by law against corporation, then it is the use of force , where one party has unusual power and rights (to negotiate) against another party.
4. You said "Business, when left to operate on its selfish interests, always ends up destroying the economy. They did it in 1929 by turning the financial markets into a den of corruption and fraud, and they did it again in 2008."
This is gross distortion by you. It is free man engaged in their zealous selfish interest [a good thing] that enabled the U.S. to become the richest most powerful nation on earth. I told you in the above reply:
i. It was the interference from government that resulted in economic calamity. I proved it to you.
ii. I THEN WITHDREW MY ARGUMENT [!] because I knew you would not accept it. I showed you a second line of argument, whereby I told you that "let us assume Per Bak is correct and that EVERY SYSTEM will result in black swans: highly improbably but possible events like temporary or permanent economic collapse". I went onto show you that "therefore" the right of sovereign man still stands.
You have not addressed those points. Instead, in a closed mind, highly biased manner, you have repeated some of your earlier points. Do you realise you are biased and closed minded ? I doubt it . You are equivalent to a religious fundemantalist that it does Not really matter "what I say", it does Not matter what "others say', all that matters is Y-O-U having flawed and erroneous points of view AND if you can have it your way, IMPOSING FORCE against others, sovereign citizens because you understand the language of FORCE, not freedom.
The founding fathers understood this human trait. It is very natural. So I am not berating you above. That is in fact why we need a government of/by/for the people to prevent the use of force by one party with their opinion against another party.
To summarise: you are ENTITLED to believe anything like pigs fly. That is enshrined in the constitution. But you are not permitted to use "FORCE" to get your beliefs.
Alas, it is true that "force" has been used against free man to :
i. regulate [e.g minimum wage nonsense, the friend of European socialism];
ii. taxation directly and indirectly. The latter with diluting the currency by printing money that is not even there, so the only way to pay it back is to raise prices [inflation] and/or taxation against present man and even unborn citizens of the future!