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The Job Paradox

Most efforts to reduce poverty and create economic development center on creating jobs based on investments of capital. This is risky because it puts what is invested at risk. The probability is that the business will fail.

Creating jobs is difficult because starting a business is a difficult and risky business. It is difficult for goverments to design programs and policies that encourage the private sector to create jobs because the businesses will likely fail and the taxes provided will be lost. Creating jobs is difficult because it requires investment capital that is difficult to come by. The more jobs we try and create the more capital it takes. The risk is so great sometimes that the loss of the investment is catastrophic.

We all see the value of full employment. Even if we do not think full employment possible within the present system. While no one thinks their unemployment is a good thing the fact is that unemployment must benefit someone or it would not exist.

The economy is built on exchanges of goods and services. Currency use facilitates trade but at heart the economy is a system of barter. The use of money allows a standard asset to denominate the value of the product or service bought or sold.

We are led to believe that the modern economy has moved far beyond barter. A modern economy has many financial tools and complex ways of transacting business. If we believe the modern economy no longer engages in direct barter we are right. All but the most primitive economies are too complex for direct barter.

However, if we think the modern economy has a new way to create wealth then we are wrong. What happens in a modern economy is not significantly different than what happens when an arrow head is exchanged for a pot. Indeed the less our transactions look like barter the more likely they are to create problems.

At heart the economy is an exchange of goods and services. Money, at least in its present form, is just a quantified commodity, an asset created in multiples of itself to serve as a numerical intermediatary in the exchange process. Goods and services are bartered for a given quantity of money and a given quantity of money is bartered for a specific amounts of product or services.

Money because it has value as a means of exchange has value in and of itself. To have money is to have access to the goods and services of the economy. Money thus is not just used as a means of exchange but is sought and obtained in its own right in many different and sometimes illegal ways. Fraud, robbery, counterfeiting, drug dealing, prostitution, the manufacture of knock offs and generally shoddy merchandise are all used to obtain money. The ways of getting money are legion and added to constantly. Every step taken to prevent fraud becomes it seems another way to engage in fraud. 

To get money by working means a job needs to be created for you. This job and you are just a means to an end. To ensure that this end is acheived, which is to make a profit, your employer views employees as an expense and will seek to pay as little as possible while requiring from the employee as much work as possible.

Also, to ensure that the business remains competative the owner will design processes and proceedures for you to follow at a rate of speed that encourages the employee to circumvent the rules and proceedures just to lighten the workload. Often the way of doing the job is not considered the best way of doing it by the one doing it but may reflect other considerations.

The employer wants to make a cheaper product than those producing similar products. A producer needs to beat out or meet the competition on price because the consumer is usually attracted to the cheaper alternative. The consumers focus on saving money often results from being employed by a company that pays the lowest wages legally possible.

Since it does not always pay to use cheaper or lower quality materials and technology required to lower production costs the wages of the employee presents an area in which costs can be reduced.

If the company was on an island where no imports were possible and all citizens worked at the one factory lowering wages would not increase profits - such a move would reduce income for the consumer of the factories products. If the company did not pay the workers sufficient income to buy the products produced the company would have fewer sales. If one understands the implications of this one will understand the principles that govern Exchanges.

In a closed market there is no advantage to creating unemployment. Nor would there be much incentive to cheapen products or take other short cuts. The pressure would be on each person to do their best to produce the best product possible - the cost of producing the best product would be immaterial since the entire cost of the process would be contained in the work the islanders did to produce it. The choice for the island economy would be to produce a lot of shoddy goods or fewer high quality goods.

The situation is made clearer by thinking of an economy that produces food. The output of the island has to be consumed by the island it is a closed economy or market. Money would only be useful to ensure each person obtained only their fair share. If money was issued as wages the workers would need to be paid enough to purchase the output or it would go to waste. A rational business exists in homostatic balance as species exist in balance with the ecosystem.

But no one has to buy what a businesses produces in the free market. Businesses are compelled to be profit orientated if they are to persist.

But despite it being able to sell its product only to people who have incomes businesses eliminate jobs where possible because it is not specifically dependent on its employees to purchase its products. Products are cheapened whenever and whereever possible to reduce prices and increase profits. This is often short-sighted and done to the detriment of all including the consumer, worker and the business itself but profits generally matter most in the short term.

It is difficult to create jobs because creating jobs increases risk. Often profitability means a business must grow or die.While most sole-ownership companies go bankrupt within five years not even major corporations are likely to last beyond 60 years. General Electric is an anomoly.

Creating jobs is viewed as an expense. It may be an unavoidable expense but still an expense that can only be justified when production can no longer be increased by any other means. It is not that the purpose of a business is to create jobs often the opposite course of action seems preferred. We ought not to wonder if the rate of job creation appears slow or non-existent. The fewer jobs created the less capacity there is to purchase goods and services.

Lots of people need jobs in depressed areas but they are not people for whom creating jobs is profitable because they do not have income to purchase products and services in the amounts most businesses require.

Creating jobs is good for the economy but they are an expense for the company that creates them. Creating jobs oftens seems the inverse to the profit motive. The cost of creating jobs is borne by the company but the benefits accrue to society. On the other hand, lowering employment or wages creates savings for the employer but the costs in reduced Demand impacts the economy.

A worker is a specific cost to the compay for which he works. The way businesses do their accounts an employee is a drain on the companies Balance Sheet. But the worker is not a particular life form. Workers have two roles. Workers are also consumers and consumers are generally employees. As a consumer the worker is the key to the  prosperity of the company. As individuals most of us attempt to be both a good consumer and a valuable emloyee.

Our role as worker means we are expected to produce as much product in as short a time as possible for as little wages as possible. As a consumer we are expected to purchase as much quality merchandise as our income allows. This dichotomy is often resolved by debt. The consumer makes up for the workers shortfall by borrowing money to fund consumption activities.

As we accept wage cuts and forgo raises our ability to consume descends down to essentials and the cheapest brands. The process can be likened to kicking ourselves down a path we do not wish to go.

Businesses are put in the position of having to supply goods and services to an ever decreasing pool of liquidity. To maintain Demand often means the Company is required to force down the wages on which the consumer depends. The process produces the interesting scenario of unemployed people cheering on the wage cutting efforts of business and government because the people whose wages are being cut are considered (by their lower wage compatriots) to be over paid. On the other hand it is the Demand represented by these highly paid representatives of the workforce that holds the potential to create the jobs the unemployed need. If every worker in the economy was paid minimum wage one would find it easier to hire an electrician but would there be a need for electricians if incomes were too low to maintain a reasonable lifestyle?

Wages are not the issue and education is not the issue nor is motivation. Governments promote education and train people to do particular trades and in so doing they create competition for jobs and this may result in lower wages. The Trades know this and try and limit the numbers being trained.

This is part of the job paradox. Governments try to reduce unemployment but it is by eliminating jobs and increasing unemployment that wages are kept low. If this was done in an organized way theoretically prices would raise lock step with the increase in wages but more probable as employment reached capacity higher costs would eat into profits and make it difficult to replace aging capital. 

When jobs are created at a good pace workers start to demand higher wages. Since the economy is based on competition for resources a reduced supply of labour translates into higher prices. If jobs are being created then greater investment must take place. This puts upward pressure on the price of money or what we refer to as the rate of interest. As interest rates increase inflation moves upwards and at some point the upward spiralling of prices becomes unsustainable and the economy implodes.

If it was a matter of businesses paying more for wages and prices inching higher to compensate for higher costs the trend could go on forever. But of course there is always a contradiction in every one dimensional pattern of change. Expansion in the labour force and in productive facilities requires increased expenditures of capital, but debt repayment takes money out of the economy. This contracts the economy. The only way the economy can continue to expand if more money is supplied, which requires more debt. But profiteering creates a competition between the owners of liquid capital and the owners of fixed capital, each one looking for a larger slice of the pie to compensate for the risk that price climbs create. At some peoint an impasse is reached and this is what turns inflation into economic contraction.

Banks do not wish to contribute to inflation because inflation eats away at the value of earlier loans. Banks do not want their loans paid back with cheap money. However this is a delicate business because the only thing worse than inflation is deflation at least in the eyes of bankers. If prices decline and debtors are no longer able to meet their payments defaults occur and the assets on whcih the loans were made also become unsaleable. This is the component of the 2008 collapse that made it such a serious event. Loans could not be repaid but these loans were made on the basis of real estate the decline of which precipitated the default.

Banks want to and need to increase debt to compensate for the payment of interest but not so much that it will cause a rate of inflation that will make more lending difficult.

It is not possible to keep a debt-fueled economy in balance. There is a basic instability in lending money to pay interest on previous debt.

A concurrent strategy is for banks to allow the money supply to grow slightly less than is needed to compensate for money lost in debt repayments. In effect wages and other costs are pared down to allow for a greater percentage of income to go towards debt repayment. As more money is drained from the productive sector in the form of debt repayments the financial sector grows. But this to is inherently unstable as people cannot eat money.

Reducing available jobs while maintaining productivity increases profits and reduces the Demand for higher quality consumer goods that is one that might have a longer lifespan. This is what we see happening in depressed economies everywhere. Even as the economy collapses the prosperity of the wealthy increase. More and more money is created on less and less work and debt takes up the slack, that is the unemployed live on debt while the rich live on the interest created by the debt and buy up depressed assets.

If jobs are created in sufficient numbers in a Capitalist economy the worker wins in the form of higher wages and better benefits, but the consumer and employer loses. If jobs are lost and wages lowerd consumer prices are likely to decline somewhat or increase at a lower rate as profits increase but the worker loses. The paradox is this, the consumer and the worker are one and the same. The choice appears to be do we hurt the consumer and help the worker or help the consumer and harm the worker? An odd set of choices.

But how far can wages decrease as the poor live off of borrowing and government benefits? We are pushing the economy towards cheap foreign imports and manufacturers overseas to maintain profits and increase consumption. Even now in many towns and cities the industrial core is vanishing. Yet, there is no benefit to the community in this move to services and niche marketing.

At the center of this paradox is the banks and their control over investment. Learn to invest what you have, know and can do in a private market that poses no risk because it rejects leveraged investing. Contact us today.

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