Job creation, Meritocracy and Democracy

Meritocracy and democracy are different criteria, and as such are capable of conflicting with each other. The issue of job creation is centered squarely on this conflict.

On one hand, you have the libertarian allegorical where

Prof. Friedman visited China in the early 1960s and was taken by a government official to see a public works project. Chinese workers were building a canal. Friedman was struck by seeing everyone digging the canal with shovels. Friedman asked the official, “why no heavy earth-moving equipment?” The official said, “oh, this is a jobs program.” So Friedman then says to the official, “then why don’t you just give them spoons instead of shovels to create even more jobs?”

which tells us that employment isn’t desirable in of itself–it is value creation which is needed in the long run. Job creation using public money is tantamount to wealth distribution, which at best reduces the incentive for people to work hard to accumulate wealth, and slows down the economy as a result, and at worst destroys value by funding activities for which the output is of less value than the input.

This isn’t the only viable conceptual model, however. Unequal distribution of resources leads to problems too. There is the more theoretical toy model approach to seeing this, but also accounts that address the effect of monopolies (or oligopolies) on productive competition.

That last article, “Who Broke America‚Äôs Jobs Machine?,” tries to pin the lack of job creation in the US on the concentration of market power in big corporates. It breaks down the overall effect into three factors:

  • Corporate consolidation
  • Innovation by acquisition
  • Lack of antitrust enforcement

The consolidation factor is most interesting to me.

In support of monopoly is the Schumpeterian justification, that the concentration of wealth in the hands of good capital allocators (be they monopolies or the wealthy minority) is what allows investment to take place proper, since surplus is what enables creative high-risk-high-return capital use.

The article weighs in against consolidation, and I understand the argument advanced as such:

  1. In competition, managers search for processes to create value–these are processes that create higher value output from lower value input. Such processes¬† usually work for a time until others discover the same process and through competition / supply-and-demand cause the input values to rise while causing the output values to fall, eventually bringing the profit to zero
  2. Concentrated industry dynamics (by virtue of changes in managerial risk aversion implicit in the principal-agent contracts formed between managers and dispersed owners) incentivize managers to focus a lot less on how to discover new value-creating processes, which are risky, and to instead focus more on setting up competitive barriers to prolong the profitable lifetime of existing processes.

Basically, if somehow it is more profitable to the controlling individuals (the managers) to struggle for a bigger slice (rent seek), rather than enlarge the pie, the pie will grow slower.

All these hypotheses are plausible to me–clear empirical borders between them will have to be drawn for their relative truth-hood to be ascertained.

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