Ron Johnson, running for reelection to a third term as Senator from Wisconsin, and Tim Michels, candidate for Governor, are proud of their achievements as business people. But when they claim to be "job creators" they run afoul of economic principles discovered by Adam Smith and refined by 250 years of rigorous economic thought.
Entrepreneurs invest in and organize the production and sale of goods and services. They build their enterprises with a combination of ingenuity, vision, smarts, risk-bearing, and often with great personal sweat. Theirs is a key role in a complex market process that creates jobs, but they do not act alone, creating jobs out of nothing in a modern-day version of the biblical parable of the "loaves and fishes."
Since the time of Adam Smith, the economics profession has explained that entrepreneurs are interdependent, not independent. They rely on the actions of a host of others to provide many of the inputs they need to both build and operate their enterprises. Economics explains how markets employ the decentralized price system to coordinate the interdependence of entrepreneurs with other elements in the economy.
In a market system, entrepreneurs do not have job creation as a primary objective; they are profit-seekers. If it is profitable to add employees, they will do that. But if it is more profitable to outsource jobs, or substitute capital equipment for labor, entrepreneurs will do those things instead of increasing employment.
Moreover, entrepreneurs demonstrate their need for infrastructure services when they locate near them. They do not have to build the infrastructure their firms use. If they need freeway access, they locate near one. If they need internet access, they make sure that the broadband is competitive where they locate. The public sector is responsible for those goods and services that must be shared, such as bridges, streets and roads, sewer and water, computer superhighway, barge lanes, and school buildings, paid for with taxes and user charges. Other infrastructure, such as internet service and utilities, are a combination of public enterprises and regulated private enterprises.
Business firms also require market-provided resources, such as capital and labor, which must either be made or bought by the firm. What the worker brings to the job – experience, literacy, manual or computer skills, punctuality, education – are the product of countless activities that took place in the time before the worker was hired. Even the high school and kindergarten teachers play a role in the sequence of investments that formed the "human capital" possessed by an employee. These essential ingredients are not created by the entrepreneur, they are purchased by the entrepreneur through the employment contract.
Entrepreneurs are necessary for job creation; they are not sufficient. No one is sufficient; the elements of the market process -- entrepreneurs, workers, education, training, experience, infrastructure, the legal system, etc. – – together are necessary and sufficient to create jobs. So who creates jobs? Not any of the necessary but not sufficient elements acting independently; all of the necessary elements together are sufficient.
So the real issue is whether success in business connotes a transferable skill that will lead to success in leadership positions in the public sector such a senator or governor. Johnson and Michels assume that the transferability of their business acumen is self-evident. Not so. The same market forces that foster interdependence also incentivize people to specialize, not generalize; entrepreneurs are encouraged to deepen their knowledge of their own business -- including the markets that serve that business -- but not the economy generally. Yes, it’s important for Governors and Senators to have intuition and instincts to understand the private sector but that's no guarantee that they will understand the public sector.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.
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