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
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
(To appreciate the dramatic possibilities of this scenario,
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
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
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
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.