12/13/2011

What is a “Job Creator”?

There is considerable political noise surrounding the idea of job creation. The right wing uses the “job creator” argument to push the position that increasing taxes on the rich will burden job creators and deter from future job creation.  The other side tries to show that we should increase taxes on the rich and reduce taxes on the real job creators – the consumers.  This is another common case of filtering economics through a political filter in order to validate a preconceived bias. 

A capitalist economy has, in the extreme aggregate, a theoretical level of infinite demand.  Entrepreneurs and capitalists meet that demand by creating goods and services with the hopes of generating a profit.  Importantly, the consumer and supplier are two sides of the same coin.  Henry Ford doesn’t exist without demand for automobiles.  Apple doesn’t exist without demand for iPhones.

If there is no demand for the goods and services in a capitalist economy then there can be no capitalists and there can be no corporations that employ workers.  So, the argument over “job creators” is a chicken and egg argument. 

You buy an iPhone from Apple because the product will serve some role that you demand in your life.  This gives Apple the potential to generate a profit and leverage their business operation, expand their business, employ more workers and generate higher profits.     But what role does the entrepreneur serve in the capitalist economy besides meeting demand and generating profits? Entrepreneurs make our lives more efficient by providing us all with the ultimate luxury – time.

Some people believe money is wealth and that money will lead to increased happiness.  Of course, this confuses the idea of money.  Money is not wealth and money does not create happiness.   If you were unconstrained by time you could, in theory, consume all that the entrepreneur can produce. Of course, the greatest luxury of all is quite finite.  We are always constrained by time.   The entrepreneur offers us the opportunity to take advantage of the ultimate luxury by giving us more time.

This provides insight as to exactly how the entrepreneurial process creates wealth.  Alexander Graham Bell is one of the greatest innovators in American history. He created a more efficient way to communicate by inventing the telephone.  Clearly, communication is vital part of human life.  And in theory, there is infinite demand over the long-term to communicate. At some point, Mr. Bell sat down and probably said something like – “it would be far more efficient if I could talk to Mr. Smith immediately as opposed to having to send him a telegram”.

What Bell did was to fill a demand by inventing a product which helped consumers meet this demand. He didn't necessarily create jobs independent of his consumers- there were plenty of messengers and telegraph operators already employed and working. What Mr. Bell did do was to give his consumers more time to consume other goods and services.  He reduced the toil and trouble of having to acquire things by providing them with a product that made their lives more efficient and productive. There are numerous examples of the way that a simple innovation such as Bell’s helps us to improve productivity, efficiency and ultimately our standard of living.

The key point here is that improvements in our standards of living provide us more time to do the things we think will help us achieve happiness. The consumer and the producer are two sides of the same coin. What the entrepreneur does is help to increase the size of the coin by helping to meet demand through innovation -- which increases our productivity, ultimately allowing us to consume more goods and services and resulting in more employment.   Without the role of the entrepreneur we are merely a society trading wealth amongst each other.

The danger of the current political debate is that we are pitting the 1% against the 99% without understanding that we are all really the 100%.  Could the 1% afford to pay more in taxes and “redistribute the wealth”?  Probably. I've been an advocate of reforming the tax code for a long time. However,  I am not in favor of raising anyone’s taxes in the middle of a  weak economy. And as a sovereign fiat currency issuer we don’t have to "finance it" by taking more money from someone else.

More importantly, we should not demonize the entrepreneurs who help create goods and services which increase everyone’s standards of living.  We should applaud their efforts and encourage it,  and try to make it easier for others to be entrepreneurial and create their own products and hire new employees. What we should demonize is the crony Capitalist who  gambles in the casino of Wall Street without actually improving the standard of living of customers.   But let’s not demonize the wealthy who have contributed to improving our standard of living.  In doing so, we only end up reducing the standard of living of us all.