To Create Jobs, We Must Destroy Them First

"The proportion between the real recompence of labour in different countries, it must be remembered, is naturally regulated, not by their actual wealth or poverty, but by their advancing, stationary, or declining condition." Adam Smith, The Wealth of Nations, p. 218

With unemployment seemingly stuck in the 9% range, editorial pages are overrun these days with opinion pieces by well-meaning commentators eager to promote their ideas on how to "create jobs". Sadly, they're almost to an article a total waste of the reader's time.

From the left we read that jobs will created if governments will just spend more. From the right, those blinded by the money illusion think more oil drilling is the source of full employment, and then the truly dense support tax deductions in return for companies adding employees.

Both sides miss the big picture in leading off with the goal of "creating jobs." That's because successful companies that employ lots of individuals get that way by virtue of regularly destroying them. More to the point, economic plans designed to create jobs will always fail because jobs are a cost. As such, the paradoxical truth is that the fastest path to true job creation is one that seeks to reduce labor costs through job cuts.

To understand why, we must remember that all jobs are a function of investment. Investment is first and foremost attracted to profits, so when philosopher kings talk up their plans for creating jobs, they're missing the essential point that investors seek commercial situations where companies can produce as much as possible with as little in the way of labor costs as possible.

Considering modern high-flying companies, Amazon didn't attract venture investment in the ‘90s because Jeff Bezos promised to hire lots of people.  Instead, the world's foremost online retailer took in growth capital precisely because Amazon would require much less in the way of labor input to sell an enormous number of goods.

Fast forward to the present, Amazon's ability to do more with less has it in expansion mode thanks to investors eager to fund its revolutionary approach to retailing. So while Amazon employs a much higher number of employees today relative to its inception, its rising employee count is a function of it being circumspect in its hiring compared to the amount of product it is able to move.

Considering Google, as Forbes publisher Rich Karlgaard long ago noted, its search engine is essentially powered by "30 cheap computer servers." Google's genius to some degree is a business model underlay by prosaic, very inexpensive equipment, as opposed to a mass of expensive employees who can call in sick, demand raises, or quit. Servers don't quit, though if they break, they're cheap to replace.

Of course today Google too can claim a high number of employees because its growth and profitability are a lure for investors intrigued by a business plan that achieves so much with so little human input. In short, Google has a lot of employees precisely because its advanced approach to profits reveals a keen understanding within the innovator about how to destroy or mechanize work previously done by actual humans.

Looking at public policy more broadly, our government suffers from the same hubris as the myriad members of the commentariat who profess to know how to reduce unemployment. In our government's case, its arrogant presumption is that it will "save jobs" by virtue of using the levers at its disposal to lighten the blow of the recession. For doing this, Washington is strangling job creation.

That's the case because painful as they are, recessions are very necessary for reversing all the malinvestment and misuses of labor that brought on the downturn to begin with. Recessions are a cure because they ensure that no more capital will be destroyed and no more labor wasted on what the markets don't want. That is, if we allow them.

But with compassionate politicians armed with the money of others doing their naïve best to blunt the effects of a much-needed downturn (an eerie replay of the 1930s), the result is that capital remains locked up in the failed economic concepts of yesterday such that it can't as readily reach the winning concepts of tomorrow. To put it plainly, if allowed to have its full impact a recession would initially drive up unemployment, only to quickly drive it down as capital migrates away from the failures to the more promising concepts that free markets direct it to.

Under happier circumstances in which politicians would sit back and do nothing (a fanciful notion, but this is essentially what happened in 1920-21), our government wouldn't be propping up the housing, banking and automobile industries, and for not doing so, limited capital would find better uses. The latter, combined with the inevitable investment a rush to new ideas would attract, is what would bring down unemployment. But to do this, we'd have to experience heavy job loss first, and politicians won't allow that to happen; their disoriented stubborness paradoxically keeping unemployment much higher than it otherwise would be.

All of the above is highly problematic as it applies to job creation. Indeed, as Adam Smith so sagely observed long ago, investment and the jobs the latter creates are functions of the economy's direction; forward or backward. Investment migrates toward forward looking economies.

At present Washington's unwillingness to let the downturn run its course so that we can advance, combined with a bipartisan view that companies must form to "create jobs", means that we're moving backward. Backward moving economies are tautologically a capital repellent, so until we get real on the most basic of concepts, the job growth so many want will remain a distant object.