When Labor Is Capital: The Limits of Keynesian Policy || The American
Much of today’s American workforce is engaged in roundabout production, which Böhm-Bawerk equated with capital. There is no longer a meaningful distinction between labor and capital. Labor is capital.
If labor is capital, then we have lost the automatic tight connection between spending and employment. Firms can vary their output with little or no variation in employment. This explains how we can have a “jobless recovery,” meaning a large percentage increase in output without a comparable percentage increase in employment. For firms in today’s economy, labor represents an investment. Firms hire workers in order to develop capabilities that will eventually produce output more efficiently. The return on an investment in workers may take as long or longer to realize as the return on investment in a machine. The return on investing in workers may be at least as uncertain as the return on investing in equipment.
Investments are risky. Many investments, perhaps a majority, will fail to earn a fair return. Thus, old jobs are constantly being lost and new ones are created….
The “jobs lost” (the cumulative net difference) during this recession are only a fraction of the typical job losses in a two-year period. What is atypical is that jobs gained have fallen short of jobs lost. That is, the number of new investments in workers has fallen short of the number of previous investments deemed to have been unprofitable.
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The Keynesian prescription for a recession is to increase government spending. Even if the resulting output is not valuable…, the thinking is that this will stimulate productive output. Again, this is based on the theory that economic activity is spending. Supposedly, spending will encourage more spending, through the “multiplier” effect.
From our more Austrian perspective, the Keynesian prescription will fail. Government spending tends to create or reinforce unsustainable patterns of production—temporary housing booms, transitory increases in auto sales, and the like. However, there is no reason to expect unsustainable patterns of production to stimulate the creation of sustainable patterns of specialization and trade. If anything, it would seem likely that government support for unsustainable patterns of production could make the market’s recalculation problem more confusing. It will delay long-term recovery, rather than hasten it.
