The Hazlitt Series
This latest stewardship post is a continuation of our monthly exploration and modern application of the economic writer Henry Hazlitt, and his seminal work, Economics in One Lesson. This work draws heavily upon the insights of the great French economist Frederic Bastiat. His key insight was to look at that which is not seen. So, for example, do not simply look at the benefits of a trade restriction of say wool, but also look at the costs to the rest of the economy. Hazlitt updates this insight with a more modern take to look not just at the short-run effects on a small group, but also the long-term effects for the whole economy. Hazlitt then applies this lesson to a variety of topics. Each installment will pay homage to this superbly clear economic thinker and writer by applying each of his applications to our world today.
The Fallacy
This month we focus on a continuing economic fallacy, the idea that a more efficient way of doing things destroys jobs, and a less efficient way of doing things creates them. This springs from the fallacy of the fear of machines that we dealt with last month. A corollary to this fallacy is the spurious notion that there is only a fixed amount of work to do in the world, so we should spread that work around.
The way this is proposed in the regulatory or political process is to mandate a certain minimum number of employees for various regulated industries. We can see this applied in the present day to the railroad industry, a business that has long been heavily regulated by the government. There has been a proposal put forward from the Federal Railroad Administration to mandate that there be at least two crew members aboard all trains. This is currently making its way through the regulatory process. The railroads have begun to advocate for one person crews as the technology is there to be able to safely operate a locomotive with a single crewmember. This type of proposal has long been a part of union activity and is known pejoratively as “featherbedding”. It often amounts to micromanaging (and unnecessarily increasing) the division of labor. You see this in union shops all the time, when, for example, a rule requires a union electrician to change a light bulb, or a union licensed plumber to unclog a toilet.
The Reality
The reality is that some groups, primarily unions, may benefit from these policies but they will raise production costs. When one looks at it logically one will find that this results in, on net, less work being done, and fewer goods produced.
Let’s look at the example Hazlitt uses, a household forced to employ 2 to do the work of one. This household would have less money to spend on other goods. Getting your bathroom tile fixed at twice the cost means you cannot go buy the sweater you wanted to acquire. That is, the days labor of the tile setter would be offset by the days labor of the sweater maker. The household is worse off; they could have had new tile and the sweater. Instead, all they get is the new tile.
Other Sad Realities
Another way this fallacy is introduced into the world is by shortening the work week by law, to attempt to create more jobs. There are two scenarios to do this. One is to reduce the work week from say 40 hours to 30 hours with no change in the hourly wage rate. During periods of unemployment this might add some jobs (there are better ways to avoid and/or deal with artificially high unemployment rates).
In any event, this type of policy is unlikely to produce situations whereby businesses maintain the same payroll as before, unless each industry has the same percentage unemployed, and its workers are as productive. This is a highly unlikely scenario. Even if we assumed this unlikely scenario, there would be no net increase in hours worked or in goods produced. There would be more workers employed but each would be working less hours therefore no net increase in hours worked. That is, total payrolls, and actual purchasing power will be the same. What would end up happening is that the workers previously employed will subsidize those previously unemployed because the previously employed workers will be working fewer hours and taking home less pay.
The second way to implement this scheme is to reduce the hours worked but compensate the workers with a higher wage rate. This variation on this scheme truly exposes the irrationality of the idea. It will absolutely raise the costs of production for businesses. In a flexible labor market if workers were getting less than was possible, they could, and would get a higher wage rate. We have seen wage competition raise the average wage rate across multiple industries in the last several years, confirming this reality. If workers are getting the highest wage rate possible on the market, then production costs cannot go higher.
The result will then be higher unemployment as businesses must cut back. Look at it this way; if an additional worker produces, say an additional $10 per hour of revenue but the business is forced to pay that worker $15 per hour, then that worker is not going to get hired or stay employed. The least efficient firms will be thrown out of business and/or the least efficient workers thrown out of work. Also, business will look to automate in a way that they would not have in the absence of this deranged policy.
Overall production will then be reduced. The resulting higher production costs will raise prices and lower real wages. Then the higher unemployment that will follow will lower demand and prices. Briefly, some, Keynes in fact, explicitly argued this, advocating an inflationary policy to compensate for the reduced hours worked. This will lower real wage rates, which takes us back to the first scenario for “spreading the work”. We will deal with inflation itself in a later essay.
Real World Confirmation
There is real world confirmation of the fallacy in these types of programs. France has, since 2000 legally mandated a 35 hour work week. The government of France also caps the total working hours per week at 44, and mandates extensive vacation days. Not surprisingly France has an extensive social welfare program to help those who cannot make ends meet because of restrictions on hours worked. So, has any of this produced positive results? Not really. The unemployment rate in France has remained stubbornly high compared to the US. This is true even during times of nominal economic growth. As this link shows there was a sharp drop in unemployment in France during the 1990s, then after the 2000 program was put in place it stopped dropping, and did not go lower than 7%. Certainly, there are other reasons for French economic underperformance (all relating to government interference in the market) yet it is clear that the spread the work scheme only added to the deadweight in their economy.
The only way real progress can be made economically is to liberalize the labor market, reduce the unproductive governmental burden on the economy and allow a sustainable honest market to emerge. Ending all such antiquated “spread the work” schemes is as good a place to start as any. Remember good faith-based stewardship is only possible when recognizing economic realities.
Praise Be to God
