So there’s a story about post-Soviet Russia, of a tourist looking over at some urban green space being landscaped and seeing about ten guys with weed-whackers, laboriously cutting the grass. He asks why it isn’t one man, pushing a gas lawnmower that barely costs more than one of the tools currently in use, getting the job done faster and cheaper. “Mumble mumble…EMPLOYMENT!” comes the answer. The men’s employer is paying ten paychecks instead of one, because it is somebody’s goal (probably a policy goal) to increase paychecks. In effect, the use of the wrong tool for the job is here a welfare program.
And here we are, right in the teeth of an apparent paradox that absolutely confounds an unfortunate number of people. Because “Unemployment,” is the most immediately observed economic evil, make-work measures of this kind that actually discard productivity, are regarded as helpful economic treatments. The Free Market guys obviously mock this, saying, “Well, if it’s that easy to solve our economic problems, why not shut down the power plants and put everything back on muscle power? If retarding the use of productive technology is a net gain, then all invention and economic growth must be an economic evil, while stagnation and destruction are a good.” Work productivity can be reduced indefinitely, and very easily, through the breaking of tools, the forgetting of skills, through mismanagement, waste, and laziness; but what fool would call these economic positives? What Left-wing economist would remark on the favorable economic indicator he sees in a large number of drunk workmen, incompetent managers, broken machines, and untrained hands? Yet many would remark favorably on this policy of using of the wrong tool, though it is plainly the same thing: The reduction of productive competence. To increase employment merely by reducing productivity is visibly a fool’s errand at the limit; it is less visibly, though no less truly, an error in any reduced measure. To increase work by reducing its usefulness is to sacrifice the ends for the benefit of the means; it is to throw the baby out to better keep the bathwater. It is perhaps the most basic goal of humanity to get better quality of life for less work ; to deliberately increase work inputs for lesser outputs is pure madness.
The paradox is merely an error about employment itself; we know that reducing the productivity of work must (if carried to the limit) destroy the standard of living by eroding the production of all the things we work for. The naive analysis of hiring men to use the wrong tool for the job seems to contradict this rule in the immediate case; there are nine extra men being enriched where a lawnmower would only enrich one, a large visible benefit. This is only the naive assessment, however, because the labor cost of landscaping has simultaneously been increased tenfold, the consumer and supplier are now looking at different costs than they previously were. Depending on the competitiveness of the market and the sensitivity of the consumers to the price, this added cost will be split between consumers and the employers of these men, and in either case, the quantity of landscaping sold will be reduced. This will reduce the total jobs available to these workers, even as the number of jobs involved in any particular project increases. They are receiving a wider slice of a much smaller pie.
Moreover, we must consider the effect on actual output; if mowed lawns are valuable, we are hampering their mowing by using the wrong tool and increasing the labor absorbed by this process. At the same time, we are re-routing resources away from other valuable uses, ie the jobs those men could be doing or the activities they could be simply enjoying. We are also putting a rather crushing check on investment in improvements in the science of landscaping because inefficiency is mandated. Not only are today’s lawnmowers forbidden, but we will never see a machine brought to market that puts the problem of shaggy lawns entirely behind us; the advancement of lawn care is ended as soon as an archaic process becomes permanently mandatory. Consider if such a policy were pursued in all trades; if not only landscapers, but farmers, manufacturers, housing constructors, clothiers, etc. were all held to some method that discarded or reduced mechanization, in order to boost employment. The problem becomes immediately apparent: The increased employment entirely fails to improve the quality of life of the public, because production has been so reduced as to diminish the buying power of wages more than wages have increased. How do we know that real wages are reduced on net in this situation? We know it because to successfully de-mechanize the economy is an identical thing to going back to pre-mechanized production. We have seen what happens when all production is done by hand, or is done with reduced or limited tools, before modern production methods were introduced, and the result is simply poverty. Every productive technology that has passed the test of the market has done so by producing a net positive, by giving more valuable output per unit of costly input. Thus, to discard the most recent productive advances is to discard gains more quickly than we can reclaim losses. To abandon the latest (market-tested) method is to abandon the most efficient thing discovered so far, which, by definition, will involve the greatest destructive effect on outputs in exchange for the least savings on inputs. It is the least cost-effective reform conceivable.
Now there is an entirely opposite problem, which might help to illustrate this unemployment issue. What if, instead of ten men with weed-whackers, or one man with a lawnmower, we saw a robot fly up on GPS control, radiation warnings visible on the sides of its self-contained reactor, carbon-fiber props whirring away under precise autonomous control, and cut every blade of grass to an identical height with its CO2 laser? Well, we’ve gone past the one man with the lawnmower who could do the work of ten, to the far extreme. Where the lawnmower is a slight increase in capital equipment providing great labor savings in terms of output, the Mowbot is a radical increase in capital equipment, reducing ongoing labor costs to zero. But this too is an economic error given the present state of nuclear reactor, cutting laser, and autonomous-flight technology (this illustration may not hold true after numerous major advances in these fields, but in 2014, it should make its point). The problem is the enormity of the capital investment itself can never be paid for with output; in order for a machine with a million dollar cutting tool and a multimillion dollar power source (and multimillion dollar waste disposal burdens) to pay for itself in cut grass, it would have to trim millions and millions of lawns in a very short time period in order to stay ahead of new growth. It would have to travel thousands of miles to hit a sufficient number of sites, and yet return within weeks to the original sites, or else fall behind the performance of the local kids with their local lawnmower. The capital investment to build a Mowbot is technically labor saving (or job-killing, if you prefer the term) in that less men may be employed in grass-cutting, but it is not an efficiency gain, even though it seems to be the same sort of improvement over the lawnmower as the lawnmower was an improvement over the weed-whacker. The vast initial investment, as you might perceive, does not simply represent fiat paper flowing this way or that; the reactor that powers the Mowbot could be put to much better use, use that nets positive returns. The engineering hours that were spent creating a faster way to cut grass would have been better spent on harder challenges, just as the grass-cutting hours spent using weed-whackers could have been better spent at a different trade. The exotic materials that the Mowbot requires (but the basic lawnmower does not) are all useful for other purposes; dedicating them to a job that a little labor and a lawnmower already has basically solved essentially takes supply away from aerospace etc. and increases the cost of other advanced technology by making the materials a little scarcer. In short, the price tag is not arbitrary: To spend millions of dollars on a machine to cut grass is to dedicate a large portion of the resources of the economy to one of its smallest problems. All that money represents scarce, costly, real inputs of labor, expertise, and material. Are we sure this is how we want to use them?
This is where the usefulness of the Free Price really shines. The above problem is an extreme version of Mises’s Socialist Calculation Problem, made extreme to make it obvious; when the case is less extreme it becomes actually difficult to solve. If we have a variety of means available to us for the cutting of grass, ranging from the most labor-intensive (hand shears, say) to the most capital-intensive (building a Mowbot) somewhere roughly around the middle there lies an optimum, where we are using up the least scarce inputs to get the most valued outputs we can. But where is the optimum? In order to find it we must compare solutions that use so many pounds of steel, so many of plastic, so much fuel, and so much labor with ones that use less steel, no plastic, more labor, and some completely other inputs like electric power or copper, with still others that may involve no identical factors, but may instead rely on herbicide and skilled labor where the others rely on general labor. We are comparing heterogeneous inputs. And since all these inputs can be used for other purposes, we are not able to realistically compare them in isolation; the priority of other lines of production relative to lawn care is an essential part of our calculation, just as a major part of the obvious error of the Mowbot is that it takes high-priority material away from jet engines and submarines. This means that the optimum level of labor-saving technology in lawn care depends on the economy as a whole, and not merely on calculations limited to the trade itself. To illustrate, in a society that uses electricity liberally but is isolated from aluminum supplies, copper will be hugely needed by the electrical infrastructure and so the optimum technology for lawn care will be much less copper-intensive than it would be in a different society which is rich in alternatives to copper. In the Free Market, we see this as one land where copper is expensive, and one land where copper is cheap. These relative prices reflect the relative scarcity of the material itself among the needs of that particular economy at that particular stage of development: The most direct and sure way to compare heterogeneous inputs is to allow them to be bought and sold freely so that their free market prices can be found, so that anyone using them has both the knowledge and incentive to use the least scarce (expensive) combination of inputs he can for any given level of output. In fact, the profit and loss calculation done by a business in a Free Market, actually reflects how effectively the business has produced high value outputs out of low cost inputs. The more scarce and valued by consumers is a product, the higher will be its sales price. The less scarce are the inputs consumed in its production (making it out of paper instead of platinum) the lower the costs. The net profit reflects efficiency in producing value given the exact set of inputs available, as an alternative to all their other uses, and thus a powerful incentive to make the very most of what we have and to allocate resources across different industries in tune with the consumers’ scale of preference for different types of products. This is how the production of lawnmower technology has avoided absorbing Uranium, carbon fiber, Rhodium, Gold, etc. even where such advanced inputs could meaningfully improve the performance of the machines. The consumer does not value the improvements to his lawnmower’s performance nearly as much as he values the gains that can be made in aerospace with advanced materials, because he does not value an easily trimmed lawn as much as he values transatlantic travel. And he expresses this by his spending behavior, by the sales volumes and prices of the two products. If lawn care were a holy and sacred cause for millions, greater volume of sales and a greater demand for higher-end, more expensive machines would increase the returns on investment in improving the technology, both by the sinking in of hours and expertise and by the allocation of scarcer resources. Ultimately, the Mowbot is an error, but there are two conceivable circumstances in which it would not be: First, if the cost of the advanced technology fell so low that the additional investment was small, and thus easily paid for by the increased performance. The other circumstance is if the public actually cared so intensely for the quality of lawn care that they would voluntarily pay vast sums for those same performance gains, thus repaying the investment. Either a reduction of cost, or an increase in demand, are real-world reflections of a major change in circumstance, meaning either that nuclear power, carbon dioxide lasers, carbon fiber, computer control, etc. are now massively plentiful; or else that the public now values lawn care so intensely that we are more than justified in reallocating all these technologies away from their present uses and towards this desired purpose. The price mechanism signals either change robustly throughout the economy, both as guidance and incentive, and transparently brings about the effect that (to paraphrase Hayek) the wisest central planner just may manage to achieve, perhaps once in a lifetime.
[The “scarcity” I refer to in the above paragraph, when applied to inputs, represents not the absolute quantities of the inputs available, nor even their quantities versus an aggregate demand, but their availability for our use given the intensity of the demand for them in alternate uses. This concept is identical to the cost of inputs as seen by a supplier who combines them to produce products, where the Free Market prevails. I emphasize this so-called “scarcity,” however, in consideration of the fact that the Free Market does not prevail, and that monetary cost detaches from this, its underlying reality, as soon as subsidies, taxes, or regulations are applied. The distinction should be merely semantic, but is unfortunately not, as the acts of reformers so constantly strive desperately to produce mirages where clear sight is needed. Free of interference, the cost of inputs is a perfect aggregation of every opportunity cost of dedicating those inputs to any particular use, known to any participant in a market.]
What we’re getting to here is that there is a balance in the level of investment needed for any particular market, and that the aggregation of knowledge involved in the price mechanism allows us to find it by combining millions of people’s subjective valuations of radically different goods, along with the hardness of work and the desirability of the product. Investment in new, labor saving technology is neither to be arbitrarily increased (as in a Keynesian investment growth model) nor arbitrarily reduced (as in the make-work program of weedwhackers) but throttled to the proper level by the desire of the consumers to bear the costs of investment in order to enjoy the fruits of its output. Hayek famously proposed that the general public signals industry whether to produce for immediate consumption, or invest for future production, by the consumers’ decision whether to save or spend. When consumers are spending like mad, producers will rightly be tempted to expand their production to meet demand, but they emphatically should not reduce their immediate production in order to prepare for the future; the consumers are spending today, not holding out for tomorrow, and so producers should dedicate their full or nearly full attention to the short run. The scarcer are savings, the fewer long term projects are going to be profitable; we can see this two ways. First, if consumers have not saved any funds, they will not be able to expand their consumption when the projects bear fruit; new projects will be completed and not find buyers. Secondly, and more fundamentally, the physical resources being consumed in satisfying immediate consumer demand will not be actually available for use in the long term projects. If large numbers of long term industrialization and construction projects are started at the same time as immediate production is also going forward at maximum speed, we head toward a collision of interests where we run short of the inputs that both are simultaneously trying to use, which usually expresses itself in a spike in price of these inputs and the sudden and crushing news that the long term projects will not, in fact, be profitable. This error is impossible where monetary authorities do not “stimulate” the economy at all, because the unprofitable projects are choked at the beginning, not the end. Where money is sound, its scarcity acts as a reflection of the scarcity of real things. A scarcity of savings properly signals a scarcity of unconsumed resources, unless the money is manipulated (as is the case today), destroying this “stop” signal and leading investors down unsustainable paths.
Keynes thought that the way to avoid the Malthusian doom of starvation by overpopulation, was to make production grow geometrically, at a pace that causes it to lead population growth. This lead to his general policy prescription of stimulating investment through monetary control, and our present central bank system. Today, we have a negative savings rate and a positive rate of investment, because the two are essentially unrelated numbers under this system; the connection between investment and savings is severed, and the rate of investment is determined by central bank policy. There are two problems with this, and one is the crown jewel of the Austrian “I told you so” banner: The boom and bust cycle. If it is true (as Hayek said) that investment wildly in excess of savings is doomed to shortages of both inputs and buyers, then stimulated investment will have a general tendency to produce periods of illusory wealth (as the stimulus is absorbed and converted into wages and consumption) followed by waves of collapsing business ventures. It is widely disputed by mainstream economists whether such a crash is actually possible. Some say that what we saw between 2005 and 2010 was totally unrelated to stimulus, while others contend that it was a natural consequence of stimulus not being stimulating enough. For my part, I suspect Hayek was onto something.
The second problem is one that environmentalists partially grasp, and that is the simple unwisdom of an unlimited and ever-accelerating growth of the economy. The environmentalists look at the intended growth of production along a geometric curve, and point to the obvious fact that if production consumes, in any proportion, resources which are finite in supply, then infinite growth is a recipe for bringing a disaster on ourselves by the quickest possible means. In a related concern, as production must continuously outstrip population in the geometric growth model, per-capita production must continuously increase. Now obviously the main means by which this is achieved is through capital investment, but as we have seen, there is the danger of unemployment. Either we introduce machines which substitute for men and leave them no place in the system of production, or, if we do not fully substitute for them, whatever human resources are actually consumed in the production process must be more and more aggressively consumed. If per-capita production must grow and accelerate in growth, we have only two courses open to us with regard to individual men: To unemploy them, or to overuse them. This, in my view, is the true danger of answering the question, “How much capital investment?” always with the answer, “More.” We have overinvested, and we suffer from both of these effects (exhibited on the one hand as unemployment and on the other, mostly as alcoholism and suicide). We could enjoy the real version of the apparent benefit of stepping back from the lawnmower to the weed-whacker, simply by ending the scale stimulus policies that have essentially pushed us past the lawnmower and towards the Mowbot. The level of investment, and the level of technology, and the level of unemployment, and the level of strain imposed on an individual worker, all grow together; this must be a throttled process and not one of infinite acceleration. And indeed, anyone who sees the appeal of relatively backwards societies may perceive the fact that if the majority of some islanders are unwilling to abandon the benefits of their nation’s low level of capitalization at the cost of that lifestyle which many industrial workers envy, they are making a rational choice. They may wish for benefits of industrialization from time to time, but if the cost-benefit analysis doesn’t work, they are under no obligation to adopt Western methods that do not net them what they judge subjectively to be a gain. And without a central bank policy to stimulate investment, inflate prices, drive up rents, promote debt, and ultimately drive workers into the yoke familiar to the mortgage-bound American, the islanders may easily continue indefinitely at a level of capitalization that is suited to their preference for leisure or for productive activities with natural benefits that outweigh the benefits of industrial methods; hunting and fishing spring to mind, as vacation for Western workers but a normal day for primitive peoples. As long as Malthus’s prediction of the growth of population is not inevitable (as history has shown it is not), then his doom is averted that way. We may throttle the level of industrialization to suitability to the public’s values through the market, without dooming ourselves to starvation.
Price signals, whether for savings or technology, are essential for finding a balance where the level of consumption is justified in terms of the needs and wants it satisfies versus the resources consumed in that satisfaction. To detach investment from saving through central banking is to artificially drive up the level of investment, moving us towards the wasteful creation of Mowbots. To mandate the use of inefficient tools as a make work program is to artificially drive down the level of investment, preventing employment where it would otherwise be possible, and wasting resources that could be used to improve lives. Only the Free Market actually arrives at lawns being mowed strictly by lawn mowers, consuming the least resources possible to achieve the desired level of satisfaction with the shortness of the grass.