The concern bears

We\’re very concerned about what has been said here. Ho yus.

The prime minister\’s adviser on enterprise has told the cabinet that the economic downturn is an excellent time for new businesses to boost profits and grow because labour is cheap, the Observer can reveal.

Lord Young, a cabinet minister under the late Baroness Thatcher, who is the only aide with his own office in Downing Street, told ministers that the low wage levels in a recession made larger financial returns easier to achieve. His comments are contained in a report to be published this week, on which the cabinet was briefed last Tuesday.

Young, who has already been forced to resign from his position once before for downplaying the impact of the recession on people, writes: \”The rise in the number of businesses in recent years shows that a recession can be an excellent time to start a business.

\”Competitors who fall by the wayside enable well-run firms to expand and increase market share. Factors of production such as premises and labour can be cheaper and higher quality, meaning that return on investment can be greater.\”

A Downing Street spokesman said Young was merely stating a \”factual point and nothing else\”. But the comments were described as \”appalling and ill-timed\” by union leaders, with job-market figures due out next week expected to show that the initial resilience of employment has faded while wages are being severely tightened.

What\’s appalling and ill timed about that? It\’s a statement of the bleedin\’ obvious.

And no, it\’s not against (or for) any particular school of economics. The classicals would argue that noting this firms will invest, jobs will come and the recession will be over. Keynesians would argue that a bit of pump priming is needed before firms do this. But absolutely everyone is arguing that this is what we want to happen: firms to invest, jobs to be created and the recession to end (OK, so it\’s not a recession but….).

7 comments on “The concern bears

  1. You are of course presuming increasing employment & a growing economy are an unarguable benefit.
    Under a socialist government they are.
    Under any other form of government they are not.
    It has nothing whatsoever to do with what is in the best interests of the country & its inhabitants. It is purely what is in the interest of politicians. We are all here to provide for their welfare. We have no other purpose. Doesn’t it make you feel proud?

  2. This is one of the reasons Austrian economics gets so little traction. Nobody likes to be told that the best response to a crash is to let the liquidation happen for the reasons given in the article. They consider it immoral.

  3. There is ,of course, the problem of demand : not a lot of well-paid people around = nobody to buy your stuff =why the banks are n’t lending start-ups any money.
    As JK Galbraith saw our situation “Soon the banks were flush with lendable funds. All that remained was for customers to come to the banks. Now came a terrible discovery .The customers would n’t come. Even at the lowest (loan interest) rate they did n’t think they could make money. And the banks would n’t lend to those who were so foolish as to believe they could.” Problem is he was talking about the Hoover era in 1932.

  4. And as usual, you have the government meddling actually being counterproductive. This time round we have the minimum wage making it harder to hire people on low wages. So businesses can’t start up with low wages until they kick off. They are forced to kick off first.

  5. DBC-

    Initially, yes, demand is low. Because people have less money. So they’re being sensible and saving it.

    But the liquidation allows prices to fall. This allows people to buy more stuff with the money they have. It allows new businesses to start up, to then supply more stuff. And you get a positive feedback.

    If you don’t let that happen, the depression will grind on and on, just as it did in the 1930s. Roosevelt didn’t save the US economy. He wrecked it for a decade.

    The point is this; it’s subjective value again. When a “crash” occurs, it means a lot of people have predicted the future value of something (tulips, railways, houses) incorrectly. Their subjective values of the tulips, railways and houses have irreversibly changed.

    It is nothing to do with aggregate output; it is due to too much of the economy being devoted to producing something which is now far less valuable than they thought it was going to be (tulips, etc). THe only cure for this is to let that part of the economy- including those secondary parts that were serving it (tulip shops, tulip delivery wagons, the sandwich shop next to the tulip shop etc) liquidate. Because they are not needed any more.

    It’s not an aggregate demand problem. And of course demand for borrowing money collapses. It should do.

  6. @Ian B
    Economic Apocalypse Now! Not a vote winner in a democracy surely?
    Dunno where all these savers are going to emerge from post-Meltdown. The banks are going to be the first to go and people’s savings with them, including the corporate sector’s. With no jobs people would not get by from week to week .meanwhile some prices ,like for instance,houses are going to be sticky and not come down very quicly,as Gesell said.UK house prices are still not down to a level that would clear the market post Crunch : the turnover has shrunk to keep prices up.
    I do not think it is entirely subjective to wish to keep a roof over your family’s head and food on the table.No amount of mind (subjectivity) over (objective)matter is going to disguise the fact that you’re homeless and going hungry.
    Gesell had an elaborate theory ,plagiarised by Keynes, that showed that labour deteriorated in a depression very swiftly (starved) but the other factors of production like land and money did n’t. The aim of his scheme was to make the value of money and land deteriorate too. There is something in that.

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