The Fallacy of Luddite Economics

We are told that by this Wall Street Journal article that business spending on machines than labor is bad news for the US economy. (bold emphasis added)

The man-vs-machine situation, however, presents a huge negative to the outlook. In an economy based on consumer spending, the lack of jobs and income growth means consumers can’t spend.

Businesses’ preference for equipment — while understandable from a cost perspective — is also a big reason why policymakers are stymied to find ways to ignite job creation.

Indeed, the Federal Reserve‘s pursuit of low interest rates only widens the cost gap. That’s because it cheapens the borrowing costs for capital projects while doing little to hold down payroll expenses.

The reasons cited why businesses spending have been substantially tilted towards machinery have rightly been attributed to political factors:

Aside from the Fed’s policies, again from the same article, (bold added)

You can’t fault companies for investing in new machinery rather than hiring new workers. As two news reports detail, labor costs are rising, a function of both private and public pressures.

First, employers face a jump in health insurance costs. The Kaiser Family Foundation reported a 9% average increase in the premiums paid by employers this year. The average yearly cost to cover a family hit a record $15,073, up sharply from $13,770 in 2010.

Second, companies must deal with higher taxes to replenish state unemployment-benefit coffers. According to Wednesday’s Wall Street Journal, employers will get hit by higher tax bills as many states have to pay back Washington for benefit money borrowed during the recession.

So while politics has been a factor, this misses out the more important factor: Investments in machines are about added productivity and a higher standard of living, which eventually brings about more jobs.

The great Henry Hazlitt demolishes this myth in the must read classic Economics in One Lesson p.41-42. Here is an excerpt: [bold emphasis added, italics original]

it is a misconception to think of the function or result of machines as primarily one of creating jobs. The real result of the machine is to increase production, to raise the standard of living, to increase economic welfare. It is no trick to employ everybody, even (or especially) in the most primitive economy. Full employment—very full employment; long, weary, back-breaking employment—is characteristic of precisely the nations that are most retarded industrially. Where full employment already exists, new machines, inventions, and discoveries cannot—until there has been time for an increase in population—bring more employment. They are likely to bring more unemployment (but this time I am speaking of voluntary and not involuntary unemployment) because people can now afford to work fewer hours, while children and the overaged no longer need to work.

What machines do, to repeat, is to bring an increase in production and an increase in the standard of living. They may do this in either of two ways. They do it by making goods cheaper for consumers (as in our illustration of the overcoats), or they do it by increasing wages because they increase the productivity of the workers. In other words, they either increase money wages or, by reducing prices, they increase the goods and services that the same money wages will buy. Sometimes they do both. What actually happens will depend in large part upon the monetary policy pursued in a country. But in any case, machines, inventions, and discoveries increase real wages.

By the article’s main premises—where consumption drives the economy and where machines signify a threat to consumption—then we must conclude that the medieval era or even the stone age would be a much wealthier and ideal society than today.

Price Freeze Policies Will Hurt Consumers

There is no better way to flaunt nonsensical populist policies than in the aftermath of a calamity.

This from today's Inquirer.net

``Profiteering businessmen, beware.

``The Department of Trade and Industry (DTI) has placed a ceiling on all prices of basic commodities in supermarkets and wet markets to prevent unscrupulous business owners from taking advantage of the shortage of basic commodities in the wake of Storm “Ondoy” (international codename: Ketsana).

``During Monday’s emergency meeting of the National Price Coordinating Council, Trade Secretary Peter Favila said that apart from basic necessities, he would ask President Gloria Macapagal-Arroyo to freeze the prices of prime commodities, including batteries and construction materials."

One, the article paints entrepreneurs or business entities as generally "greedy" while governments as equitable. Yeah, right...that's why our government had been ranked as one of the worst in corruption in Asia.

Two, officials believe that they can subvert the natural laws of economics and allocate resources better than the marketplace.

They refuse to admit that governments are the least effective way to direct resources to its optimal use. They should learn from Cuba's failed collective agricultural policies.

Price controls or "anti price gouging regulations" in contrast to popular wisdom worsens, and does not enhance, society's predicament.

How?

One, these regulations are likely to serve as disincentive for producers or providers of goods and services to sell. Probably, they would rather hoard the stuff.

Two, it prevents pricing signals to spur production or supply to respond to changes in demand.

Three, below market prices induces significant increases in demand.

As Henry Hazlitt explains in Economics in One Lesson,

``Now we cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. The second consequence is to reduce the supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. But in addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business. Even the most efficient producers may be called upon to turn out their product at a loss.

``If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. But this is precisely the opposite of what the government regulators originally wanted to do. For it is the very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply."

Fourth, black markets are likely to emerge out of the shortages.

Fifth, more regulations will breed more corruption. Some officials will probably keep a blind eye on entities selling at "high" prices but with a "take".

Lastly, restrictions in the marketplace will even lead to further restrictions, distortions and shortages in the economy.

Again from Henry Hazlitt, ``Some of these consequences in time become apparent to the regulators, who then adopt various other devices and controls in an attempt to avert them. Among these devices are rationing, cost-control, subsidies, and universal price-fixing."

For a professional academic economist serving as President of the country, who we presume is aware of these risks, the obvious knee jerk regulatory response reflects not for the economic wellbeing of its constituents, but as political advertisement for the coming elections.