Tariff nonsense and ALP stupidity

Gerard Jackson
BrookesNews.Com
Monday 24 October 2005

The economic illiterates who are running –– or should I say ruining? –– Victoria have been demanding that the Federal assume direction of industry. (It used to be called central planning, now it’s called industry policy). Tim Holding, Manufacturing and Export Minister, wants our textile, clothing and footwear industries “to adopt a high-value-added structure by moving away from a commodity-style output to focus more on high-value-added export-orientated productions”.

The leftwing Holden is evidently suffering from what I call the value-added fetish. Like so many others of a similar mind he confuses value added with profitability. But this raises an important point: if value-added is a measure of profitability, firms will move capital and labour into these lines of production and compete away the profits. So why aren’t firms creating a more “value-added structure” in the TFC industries? Could it be that they have not done so because they prefer solvency to bankruptcy?

Economic theory, something Holden and his fellow Labourites is ignorant of, suggests that the greater the ratio of capital to labour in a firm the higher value-added will be. This is because as firms become more capital intensive labour costs as a proportion of total costs fall.

The problem for the TFC industries should be blindingly obvious. They are labour intensive by nature. To turn them into the kind of “value-added structure” Holden seems to have in mind would require investing in the kind of technology that does not exist.

Assuming that this technology did exist and the industry heavily and successfully, from a financial angle, invested in it then it would have to shed a considerable amount of labour unless the increased productivity sufficiently lowered prices as to increase demand to the degree that the same amount of labour would be demanded.

(To deduce from this argument that technology causes unemployment would be to fall into the trap of the fallacy of composition. The overall effect of technology is to increase the aggregate real demand for labour, even if the demand for labour might fall in certain industries. See George Terborgh’s The Automation Hysteria, W. W. Norton & Company Inc., 1966)

But Holden’s argument is based on the desirability of maintaining employment in these industries. It never occurs to his political ilk that firms exist to meet the demand for goods and services, not to create jobs. Moreover, capital is always scarce, regardless of what monetary cranks claim. Therefore if the state directs resources into the TFC industries it has to deny those resources to other industries where they are more highly valued.

The likes of Holden obviously assume that if the TFC industries develop a high value-added structure they must automatically become more profitable. There are absolutely no grounds to support this assumption. Any accountant or economist worthy of the name could have told him, if he had bothered to ask, that profit and loss figures reveal absolutely nothing about any firm’s level of value-added.

Anyway, as I have already pointed out, demanding these industries become more value-added is the same as ordering them to be more capital intensive.

What all this boils down to is that our Minister for Manufacturing and Export does not have a bloody clue. So much for intelligent economic management.

Gerard Jackson is Brookes’ economics editor