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The Great Job Rain Forest

In my earlier post on job creation, I lazily opened with this line:

The US economy grows jobs steadily.

It’s a standard way of thinking about the economy as an engine or machine that creates jobs the way a factory makes cars.  The sentence conjures up an image of the economy as something over there, separate from the rest of us.  When the economy is healthy, it creates jobs.  When it’s unhealthy, it struggles to create jobs or worse, destroys jobs.

It’s a very misleading metaphor.  Job creation is the result of millions of decisions made by millions of people pursuing dreams and profits.  When the environment for pursuing those dreams encourages risk-taking, jobs get created as long as people want to work.  When the environment discourages risk-taking, people who want to work may not find it as easily.

Job creation in the United States is a function of population growth, the incentives for work and investment built into our tax system, our culture and the demographics of the work force.  It has little or nothing to do with the wisdom of the President.  I hate it when a President says something like "My administration has created x million jobs."  Job creation has little or nothing to do with the wisdom of Alan Greenspan (though he, like the President can muck things up with indecisive or erratic decisions).  It has little or nothing to do with the trade deficit or China.

A similar confusion occurs when we talk about creating "high-paying jobs" as if jobs were boxes and your salary depends on which box you’re working in.  Your salary depends on your skills and your alternatives.  If you don’t understand this, you think that something is wrong with Wal-Mart because its salaries are below average.  Wal-Mart’s salaries are below average because its work force, on average, has below average skills.

Much of these misunderstandings come from our desire to believe that every phenomenon that exists must be the result of someone’s conscious desire that it exist.  One of the greatest lessons from reading Hayek is that there are things that are the result of conscious action on our part, there are things that are not consciously designed and then there are things that are in between—phenomena where there is conscious planning by some individuals but no one individual or group consciously controls the full result.  Wages and prices are examples.  You may think you set the price of your house when you put it up for sale, but if you wish to actually sell it, you have to set a price that reflects competing houses of similar quality that are on the market.  No one sets the market price of houses.  It emerges from the decisions of buyers and sellers made in the environment of regulations and taxes in a particular housing market.

The amount of income inequality is another example.  Just because we can measure a particular level of income inequality at a point in time, does not mean that someone has chosen it.  It is the result of millions of decisions.  We can influence the amount of inequality through public policy just as we can influence the prices of houses in the Washington, DC area.  We can change tax policy or employment regulations to encourage or discourage job creation.  But because the economy is not a box factory, attempts to change the environment of job creation are likely to have unintended, unpredictable consequences.  The economy is not an engine where more gasoline or more oxygen have predictable consequences for the speed of the engine and little else.

The lesson here is to avoid metaphors taken from physics and engineering that are inevitably cause and effect metaphors and think instead of metaphors from biology where results emerge from the actions of multiple interactions in a complex system.  Think rain forest not engine.

At least I said in that earlier post that the economy "grows" jobs.  Sounds something like a rain forest.  But the problem isn’t the verb.  It’s the noun "economy" doing the growing like a farmer  growing wheat.  The economy can’t do things.  It is the result of individuals "doing."