Democratic candidate Sen. Elizabeth Warren, D-Mass., will be along to tell us soon there’s something wrong with capitalism. Activision Blizzard, the games studio, has just had a record year in terms of revenues, profits are good, and yet, it’s laying off 8 percent of its workforce. How can this be?
Isn’t it the duty of the company to reinvest those profits back into the workforce in the form of higher wages, more jobs, in effect to plough the money back into what made it in the first place? This being what the “Good Senator” continually tells us, along with others who whine upon the same point. There’s something wrong with corporations paying out profits to stockholders with buybacks and dividends instead of further spending upon creating that middle class that “Made America Great.”
There is indeed something wrong here, but it’s the understanding of how capitalism and large companies interact which is misunderstood. We actually desire to get the money out of those large companies because that’s not where jobs growth is, and it’s jobs growth which leads to wage growth.
We all agree that it’s creating more jobs which increases wages. When different employers have to compete with each other for the workers they want, then that competition occurs in the form of better job offers. Note: The U.S. just hit a record-high number of job openings. That’s why we all wonder where the wage growth is these days, we’ve already got what we consider to be full employment.
So, what we want to know is, who creates the new jobs? Where is the net job generation happening in the economy? It’s not in large companies and never has been. They’re as likely to be laying off workers as here with Activision. It used to be that we thought it was small companies that carried the load, and that’s true, to an extent, but not really.
The real job creators are new companies. The full paper is here, and no, it’s not new divisions of large companies, not new expansions of them, nor their moving into new lines of work. New companies perform the job creation in the economy.
So, again, we’d like new job creation, for that’s what raises the workers’ wages. We’d like to recycle the capital and profits from past successes into job creation. But it’s those new firms which do that. So, take the money out of the established companies and put it into the new ones; we positively insist upon buybacks and dividends, that is.
We can put this another way around too. As we know, central planning of the economy doesn’t work. This is true, whether it’s from a politician’s office, a bureaucrat’s, or a CEO’s. The best we can do is leave us people out here to try and experiment and see what does actually work. So, when we have a success, the best we can do is return the profits from that success to those who identified it in the first place, those who invested in it. Then, ask them to try another turn of the roulette wheel. After all, we would like the capital to be invested by those who have a track record of success at investing, wouldn’t we?
Given who creates jobs in an economy, what therefore raises wages, we desire that profits come out of established and into new companies. Paying those profits as dividends and buybacks is thus what makes us richer, not something to complain about as all too many do.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
