Tuesday, June 28, 2011

Free Markets | Can They Provide Jobs?

....We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just Powers from the consent of the governed,...." Declaration of Independence, July 4, 1776
During this weekend of celebrating our countries birth we should pause, remember why this country was created in the first place and judge whether we are currently living by these principles. My conclusion is we can do better.

If we have a government as stated by Abraham Lincoln in 1863 "-- of the people, by the people, for the people, ........" government must assist in finding a way to create opportunity and jobs for the masses that are unemployed. We have a structural and competitive unemployment problem in this country and collectively we must solve it. The free market cannot solve it alone.

According to the McKinsey Global Institute, giant Multi-National Companies (MNC's) accounted for 31% of our economic growth since 1990. Their quest for profit optimization and market control is no longer congruent with the interest of the "people". This is not the fault of the MNC's, but rather the fault of the government not being one of the people, by the people and for the people.

First, we must demand government do its job.The free market system as initially described by Adam Smith, coincidentally also in 1776 in his book The Wealth of Nations, was adopted by our new nation. A principle role of government was to assure that markets were not stolen from "the people" by tyranny, both foreign and domestic. In this area, our government has been lax in protecting markets from domestic attack..

Some will argue that to compete in global markets, size matters. This is not true; technology is such today that most things being be done by large organizations can now be done by smaller ones. The benefits of economies of scale have diminished because of technology. More important than size; it is performance that counts. Smaller companies can be more flexible and thus perform better. This in turn will result in more jobs and less disparity in income amongst workers.

Secondly, part of the long-term problem is that the well paying jobs being created require knowledge and we are falling in this regard. Knowledge is gained by education and experience. As the world economy is demanding more knowledge, education in this country is slipping. Not long ago the United States was considered to have the best education system in the world. We are now ranked 17th and falling.

At the start of last century, if you had a strong back and initiative you could make a middle class wage. This was because of the relatively low sophistication of the economy and all economies were regionalized rather than globalized as they are today.

We need to invest in education, both as individuals and as a country. Investment is defined as an asset or item that is purchased with the hope that it will generate income or appreciate in the future. Prior generations invested in hand tools and machinery to make things. Now, as individuals and a country we need to invest in education. We have a no more important asset than our minds. If we do not nurture minds, our country will lose its economic standing in the world.

Thirdly, no one has come up with a good solution to compete for the lower paying jobs that are being captured by the citizens in poorer countries. The problem is structural in that it cost more to live in our society versus the poorer countries in the world and our less privileged citizens cannot live on the wages offered in other countries.

Because we have no solution, does not mean there is none. Government, the private sector and education must collectively work on a solution. Germany seems to be doing a better job than we are. Why is that? Perhaps we need to amend our welfare system so the unemployed have an economic incentive to take these jobs. We will not solve this problem unless we make it a priority and work on it.

Protectionism will not work. It only works if you need nothing from the rest of the world. The middle east and Russia has most of the oil. Afghanistan has most of the lithium, South America has most of the lumber. The Internet, air travel and telecommunications has made the world more interdependent.

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