Plant closures and left-wing fallacies
Gerard Jackson
Tariffs and the state of the textile, clothing and footwear industries should serve to remind us that socialist and statist economic fallacies are a bit like weeds, no matter how much intellectual hoeing we do they constantly return to pester us. One particularly hardy statist weed is the one that invariably springs to life whenever plant closures are set to take effect.
One reader raised the case of BHP, stating, quite correctly, that once the plant closed $1.5 billion was added to the company's shares. He followed this with the example of General Motors who, it is claimed, made record profits in the first quarter of 1997, even though sales had fallen by 27,000 units. The 'record profits' were evidently made by cutting its workforce by 10,000. The apparent point of these examples was to show that competition, i.e., capitalism, was making profits by shedding labor, adding to an ever increasing pool of unemployed.
The first thing to notice about this view is that it rests on the fallacy of composition. This is the mistake of thinking that what holds for one or several holds for all. Hence if a number of large concerns are shedding labour the economy must be shedding labour, even though at the time America's unemployment rate was approaching 4 per cent. Enough said, I think, about this particular fallacy.
OK, so BHP shares rose. But this was only because the market believed that closing an inefficient plant would lead to a more efficient allocation of the company's resources. The socialist solution is to pour massive subsidies into these companies just to retain their present workforces. This overlooks the fact that it is not the money that matters but the resources it commands.
By pouring money into loss-making plants we would be misdirecting scarce capital to them. The cost of this subsidisation process, the real costs, would be all the other alternative investments, and all the jobs and incomes that went with them, that would now have to be sacrificed. This is a fact to which many socialists are totally blind.
The same basically goes for General Motors. The alternative to staff cutting and productivity increases was bankruptcy and the sacking of the entire workforce. Would that have been a better solution? I don't think so. As for record profits. If the company immediately made real profits from this action then the efficiency gains must have been enormous. But profits are capital gains. Were capital gains made? What, for example, was the real rate of return on the company's capital? Odd that leftwing critics never supplied the relevant figures. Now let us to put the record straight regarding General Motors.
Now leftwing activists are dishonest to a pathological degree and General Motors is an example of this diseased behaviour. Net profits for 1997 were 3.76 per cent of revenue compared with Ford's 4.5 per cent, despite the fact that GM sold 1.84 million more vehicles than Ford. The Profit figures are not surprising considering that unit output per worker was 27.3 at GM while for Ford it stood at 45.6. Moreover, from 1990 to 1992 GM lost a staggering $US30 billion. None of these facts were quoted by GM's leftwing critics. To do so would have destroyed their mischievous allegations that the company was 'profiteering' by exploiting workers.
Investments are made to satisfy consumer wants; jobs are literally incidental to this process. Now freezing investments and misdirecting capital in the form of subsidies would have the most dreadful effect on living standards and growth. Imagine what would have happened if railways had been banned to protect canals or if cotton mills had been banned to protect homespun yarn or if employment levels had been maintained in agriculture.
What these socialists and social democrats decry as capitalist greed and excess is actually part of the costs of progress. That does not mean we should not help those who sometimes bear a disproportionate, though short term, burden of these costs. But let us not forget that resisting these dynamic changes would only lower economic and social welfare. How anyone can seriously suggest that we go down this path after more than 70 years of catastrophic socialist 'experiments' should beggar belief.
Finally, I was asked why markets got jumpy when unemployment fell, and wasn't this a sign that markets are basically anti-job and anti-worker. No it is not. What the jumpiness showed was that the market has a long memory.
For some years falls in unemployment were followed by rising price levels, balance of payments problems, rising interest rates, devaluations, etc. Hence, falling unemployment was seen as a danger sign. (Notice that during the 1990s boom falling unemployment in America did not cause markets to anticipate economic problems, though in the present circumstances it might have been a good idea if it had).
While our politicians ignore the lessons of economic history and economics the socialist likes of Tim Holden, Victoria's Manufacturing and Export Minister, will continue to support tariff and other interventionist policies that would waste our scarce capital resources.
Gerard Jackson is Brookes' Economics Editor
BrookesNews.Com
Saturday 14 June 2003