How supposed job losses can actually mean rising prosperity

Narendra Modi and Arvind Kejriwal have one thing in common. Both have said “no” to majority foreign direct investment in retail markets. Modi’s rationale is obvious : the BJP has always been the party of small traders, and so he is backing the aam bania over the aam admi. But why has the Aam Aadmi Party also given priority to traders and middlemen over consumers? Because, says Kejriwal, this will affect employment.

Really? Supermarkets have indeed killed small shops in rich countries like the US. But in fast-growing developing countries like China and Indonesia, supermarkets and small shops have flourished together. Why should India be any different?

India already has dozens of large Indian-owned retail chains. These are struggling to compete against small shops, and some have suffered big losses. Walmart lost hundreds of crores in its joint venture with the Mittals, without killing small shops. Why, then, raise the bogey of job losses?

Prosperity is created by rising productivity, which by definition means producing more from less labour and capital. Rising productivity surely causes some job losses, but creates jobs elsewhere.

To understand this fully, consider the following. To protect jobs, should we ban computers, which have displaced millions of clerical jobs? Why not ban cellphones which have killed the camera industry? Why not ban washing machines, which have hugely reduced jobs in washing? Why not abolish vacuum cleaners which substitute poor sweepers? Why not abolish luggage with wheels, which deprives coolies of jobs? Why not abolish tractors and harvest combines, which take jobs away from agricultural workers, the poorest of the poor? Why not abolish cars and motorcycles, which have displaced labour-intensive horse carts and bullock carts?

Answer: Indian workers were not better off in the old days without machines or tractors, they were much poorer. Why did job-killing machines and mega-companies create prosperity rather than poverty? Because their development steadily replaced low-wage jobs with higher-wage jobs, improving living standards.

All technological and managerial progress kills old jobs and creates new ones. To focus only the lost jobs is a recipe for staying poor, something demonstrated by the Luddites in the 19th century. The creation of textile machinery in Britain caused massive job losses in traditional handlooms. So, the Luddites smashed textile factories in an idealistic effort to protect jobs. They didn’t realize that by stalling the industrial revolution — which ultimately raised living standards tenfold — they were actually keeping people poor.

Economist Joseph Schumpeter demonstrated that capitalism succeeds because of creative destruction. It constantly destroys old jobs and creates new ones. This constantly replaces lower-productivity jobs with higher-productivity jobs, and so the entire economy becomes more productive.

The US loses over three million jobs every month but creates another three million new ones, and this churning has made it the world’s top economy. The US has safety nets for those who get displaced. India needs safety nets too. But it must also encourage every mechanism that improves productivity, seeing it as a blessing and not a curse.

Myopic idealists like the Luddites could only see the immediate job losses of technological change, not the huge productivity gains. Kejriwal needs to avoid Luddite illusions in banning any activity, including foreign-majority retail chains. These can succeed only by reducing prices for the aam admi. Can the AAP actually be against that?

Let us suppose that by cutting out middlemen and reaping some new technological gains, foreign-owned chains can reduce prices 20%. This will certainly mean some job losses in competing small shops. But it also means that consumers will have an additional 20% in their pockets, which they will spend on additional goods and services This will create a multitude of jobs in producing those additional goods and services. Rising productivity is always a good thing.

To truly serve the aam admi, Kejriwal must encourage investment and competition of all sorts (including that from foreign companies). Fast economic growth is by far the most important factor that raises living standards. This needs to be supplemented by government provision of high-quality public goods including roads, schools, health clinics, safety nets and retraining facilities. India’s biggest problem today is the lousy quality of public goods. This is what the AAP must focus on, not on Luddite illusions.

Modi is no Luddite. He knows what needs to be done, but chooses cynically to woo the aam bania in opposing FDI in retail. If he really listens to small shopkeepers, he will find that their biggest problem by far is lack of bank credit, not competition from hypermarkets. Why not focus on that?

5 thoughts on “How supposed job losses can actually mean rising prosperity

  • 2014.Feb.28 at 02:29
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    Sir, you have presented some very good argument for FDI in retail but I also, like a few above, think your views on this subject are not perfect.

    I agree with all the merits of Capitalism you argue for but why does your article ignore the basic situation around which the decision of FDI was passed. The UPA govt with its singular focus on higher economic growth through higher investment had wanted to use FDI in retail as another tool for increasing foreign investments leading to economic growth rather than developments and job opportunities. Those were secondary concerns.

    Keeping in mind this view, I would relate more to AAP’s argument for blocking FDI rather than BJP’s. While the latter is actually trying to save small traders by taking a populist stand, the former makes a better argument against foreign companies monopolizing the market with few big players who enter the market through govt support and actually hold the ability to influence policymaking in their favor. Like was done in the farming sector with the Seed Law.
    Mr. Kejriwal has opposed FDI but has embraced the pvt sector investment and shown interest towards easing procedures that can help the local private sector in India develop and expand more easily to create more jobs.

    Your argument ‘…cutting out middlemen and reaping some new technological gains, foreign-owned chains can reduce prices 20%’. Sounds very noble but has the experience of the past 15 years showed us anything similar? Globalizing and Foreign Investments have only brought inflation to higher levels and made us move at the rate the World Bank or IMF would like us to move rather than moving at the pace of the local consumer demand. Judging by the way the global economy has been doing, and the rate at which India is moving towards catching up with it, can we really guantee that this extra 20% will go into the customers pocket and not add to the corporate profits?

    I think the Kejriwal team has rightfully opposed Foreign Investment in Retail, they have not opposed Big Format Retail if the Retailers can come under the purview of a common law and order system which we all know is not the case with current supersized corporates in India.

    I think denying the opportunity and incentive for expansion to local retailers by making them incompetent in front of foreign companies who will get special aid and incentives is where the problem with FDI in retail lies.

    BJP’s argument against FDI doesnot promote fair trade it only shows populism but AAP has taken a more mature stand over this issue.

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  • 2014.Jan.28 at 13:39
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    In my opinion we should not follow capitalism blindly. I support the comments made by Mr. Srikant, “capitalism certainly has its merits, but there is such a thing as too much capitalism, and this article dangerously leans towards that”. One should not forget that the present no. 1 World Economy of US is built over the graves of the local Indigenous Red Indians like The Mohicans etc. The ancestors of present day Capitalists of US were ruthless and they killed them barbarously and brought all the natural resources like coal etc. under their control. Now they: Capitalists and their supporters boast “Higher Standard of Living (HSL)”. Should it be repeated in India, the merciless killing of Indians? And should we boast HSL in India after that?

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  • 2014.Jan.24 at 22:57
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    A very nice article..thanks a ton for this..I specially liked ” To focus only the lost jobs is a recipe for staying poor, something demonstrated by the Luddites in the 19th century. “

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  • 2014.Jan.24 at 10:31
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    Sir, capitalism certainly has its merits, but there is such a thing as too much capitalism, and this article dangerously leans towards that.

    The general premise that when efficiency cuts down employment, the employees will eventually land up producing something else isn’t flawed. But look at some of the things we are “producing” now — holidays to moon and Mars, transportation of various endemic species of food items halfway across the globe for a little more variety on plates, not to mention shiploads of sophisticated nuclear weapons.

    If this is the kind of things freed up labour is diverted to, it does occur that maybe people weren’t really worse off producing less, inefficiently. A phrase a friend of mine coined, “pleasureless overconsumption” comes to my mind. Or maybe one could say “valueless overproduction”.

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  • 2014.Jan.22 at 12:24
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    Totally agree with you…

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