Sunday, September 04, 2011

Economics v Management

Let’s say that you own the business that was featured on CBS News last week, manufacturing raised floors for computer installations. Your business is holding its own, but barely, and you are certainly not hiring anybody. The reason you’re not hiring is that you don’t have any work for the new hires to do, can’t foresee that you will have that new work, and while you do have a decent cash reserve, your profit is marginal.

Now the government passes a regulation which regulates ozone and renders your production equipment obsolete, forcing you to invest large sums of money in new production equipment which is non-polluting.
What do you do?

According to Paul Krugman, you cheerfully spend your cash reserve on new equipment so that you are exactly where you were, with a business that is not growing, that has marginal profit, but which now has no cash reserve. An economist at Princeton might do that, but I know of no actual businessmen who would do that.

The problem is that for people like Paul Krugman a “growing economy” means merely that money is moving around. Where that money is moving and who is moving it is irrelevant, merely the amount of movement is the issue. That’s why they think in terms of trying force businesses to spend large on capital equipment. It is movement of money in large amounts.

To you and me a “growing economy” means people getting jobs. That doesn’t mean requiring that computer flooring maker to spend money on new equipment, but rather managing to arrange for him to sell more computer floors so that he will hire new people. He will hire more people not because Paul Krugman told him to, or because any laws got passed, but because he needs them to make the additional floors he is selling.

Krugman not only fails to see that from our perspective, but he fails to see that the money which is being spent on new equipment is money which becomes unavailable to hire new people when, and if, the employer ever decides to do so. After that he can buy the new equipment because it will now be economically favorable for him to do so. He has more money coming in because he has more employees producing flooring for him.

The problem with listening to economists is twofold. They do not define the economy as you and I do, and as such their goals are different than ours. They merely seek the movement of money and, while they pay lip service to job creation, when it comes down to it they revert to their bottom line of the movement of money, and that is Wall Street, not Main Street.

The other side of the problem is that they advise and predict regarding business activity without the slightest idea of real world business management needs.

1 comment:

Arthur said...

My economics teacher would have thought a growing economy was one that was producing an increasing amount of goods & services as time went on, not one that produced an increasing number of jobs. I note that, like your definition, it has NOTHING to do with how much money moves where, much less with stock prices.
Unfortunately, all too often it has nothing to do with jobs creation either. Indeed, as with your client's automated painting process ("No Easy Answers", 03 September), increased productivity often eliminates jobs.
On the other hand, I am sure that part of Krugman's rational is that the new equipment expenditures really would increase jobs. Too bad it was at the equipment manufacturer who was producing and (hopefully) hiring, not the flooring manufacturer. And probably not hiring as many as the flooring guy would have ended up laying off. Why is every one so surprised that this "recovery" isn't producing jobs. The recovery after the last recession (about 10 years ago) didn't either.

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