Senator John Kerry has suggested that companies that "take their jobs" overseas are traitors and complains that not enough jobs are being created under President Bush’s tenure. Unfortunately, a candidate for President would not be making such statements unless a lot of people thought the same way, which shows how poorly understood our economic system is.
First and foremost, the purpose of a business is not to provide jobs, but rather to produce goods and services. If the purpose of a company were to create jobs, then I would form the Wolfram Canal Digging Company, hire thousands of people, give them spoons, and dig a canal across the state of Michigan.
To view the purpose of a company from another perspective, suppose I invented a magic auto-manufacturing machine. It can create automobiles without any costly inputs, and in particular no labor. I simply set the dial for 100 automobiles and in the next hour out they come. Of course, such a machine would not create jobs. In fact it would eliminate many jobs in the automobile industry. Should I destroy my machine because of this? Would the world be better off if we had more of such machines or less?
(To appreciate the dramatic possibilities of this scenario, see "The Man in the White Suit," starring Alec Guinness.)
The current economic recovery – nonfarm employment increased by more than 300,000 jobs in March – has been a bit like the magic auto-manufacturing machine. Worker productivity – that is, output per hour worked – in the manufacturing sector has risen to new heights. This has, in many ways, been due to new technology and new methods of keeping track of inventory, methods of production, etc.
So we have seen GDP growth at the highest levels in twenty years, which means the country as a whole is richer. This growth in productivity means that workers that were producing some manufactured goods, such as automobiles, can be released to produce something else, something new. Labor has been saved because firms have had the incentive to invest in machinery and technology that makes it possible to produce goods with less labor.
Now not everyone gains from this process, and not always right away. The labor that has been "saved" or "freed up" to produce new things might be your 53-year-old father who has worked at GM for 30 years. This is how capitalism works. Its dynamism means that it is also disruptive to families and individuals who must adjust to changing market conditions.
If we sacrificed this dynamism in an attempt to preserve jobs starting in 1950, we would still be listening to our music on turntables, and using typewriters and carbon paper. If we started to "preserve jobs" before the Industrial Revolution, most of us would still be on farms in families with high mortality rates. Note also that if businesses fail to innovate and find less expensive ways to produce, their owners will find they no longer have income to feed their children.
Another way we have found to make goods less expensively is to take advantage of a vast new pool of workers who for decades have been limited by the fact that they were working in a very inefficient economic system — centrally planned economies, such as those in Eastern Europe.
These workers are now able to work in economies that are moving into market capitalism. Companies can now place factories in places like India and make use of the skilled and unskilled labor there to produce less expensive goods for Americans. Since the Indians will now be more productive with the use of capital that was not there before, Indians will become wealthier and earn higher wages over the long run. This is exactly what happened in Japan over the last 50 years.
Again, there will be workers who will have to find something else to do. But the reality is that they will find something else to do, since there will be enormous opportunities to produce goods for the Indians who will now be wealthy enough to buy our goods.
For many families this will mean short-term losses. But for the vast majority of Americans it will mean increased wealth. In fact, foreign companies have found it so beneficial to locate in the U.S. that the number of people employed by foreign companies in the U.S. far exceeds the number of people employed by U.S. firms overseas. Examples include the Novartis Company moving its research and development operation from Switzerland to Massachusetts and Samsung building a $500 million plant in Texas. Insourcing to the U.S. created 6.4 million jobs in 2001, with 34% of these jobs in the manufacturing sector.
The economic recovery that is being accomplished through tax cuts, particularly lower capital gains taxes, and free trade is in a transition stage. More goods are being produced with the need for less labor. But we are already seeing the increased opportunities to produce new things being realized. We can expect job growth to continue throughout the year as workers make the transition into new employment opportunities.
Gary Wolfram, Ph.D., is the George Munson Professor of Political Economy at Hillsdale College and an adjunct scholar for the Mackinac Center for Public Policy, a nonprofit research and educational institute.