Why job losses are good for us

In the debate over multi-brand foreign direct investment (FDI) in retail, opponents repeatedly highlighted potentially large job losses and closures for small retailers (kirana shops). Astonishingly, even the left asserted that the interests of the aam bania were more important than those of the aam aadmi.

Proponents of FDI cited studies by NCAER and others suggesting little evidence of mass job losses. The rate of closure of kirana shops near big retailers was estimated at 4.2%, lower than international standards. The vast majority of retailers carried on. Another study (Reardon and Gulati, 2008) showed that in China and Indonesia, traditional and modern retail stores coexisted and grew together.

However, no FDI proponent declared baldly that job losses for uncompetitive players might be an excellent thing. This would be politically incorrect. Yet, the entire success of the market system rests on constantly weeding out enterprises and sectors that are uncompetitive, and replacing them with more competitive ones. That\’s how capitalism constantly improves productivity, creating higher living standards.

New technology and new forms of business organisation have constantly created new products, better quality and lower prices. These have constantly created new winners, triumphing over new losers. Job loss is a short-term tragedy for the losers, and sometimes a long-term one. Business closures are equally tragic for individual owners.

Yet, humankind has gained immeasurably from the long-term gains of economic churning, and so have many displaced workers and businessmen in the medium-to-long run. The Luddites in England in the 19th century tried to wreck textile machinery that could produce very cheap cloth, killing the livelihood of traditional weavers. In the last 200 years, as the textile industry modernised, it became increasingly automated . Ever-fewer workers were required for each metre of cloth.

Exactly the same was true of industries across the board — the displacement of both workers and businesses was massive. And yet, the end-result has been the most spectacular rise in living standards in history over the last 200 years, up over 700%. The gains have been the biggest in the West, but have been enormous even in countries late to the industrial revolution, like India.

Would humanity have been better off if do-gooders like the Luddites — the equivalent of those opposing modern retail in India — had been able to stop the use of machinery or technology that killed jobs? Not at all. They would have saved old jobs and industries but at the expense of high productivity new jobs and industries that were the key to prosperity, even among those not connected directly with the industries concerned.

My own industry, the media, has seen huge changes. The first press I saw in my youth was a letterpress: individual letters of metal were manually put together to form a page, a very labour-intensive process. Many jobs were lost when this gave way to the linotype, and still more when photographic machines replaced this.

Yet, the industry employs far more people today than it did 45 years ago, and the new jobs are much better paid than the old ones. Why do tragedies at the individual level translate into massive gains at the national level? Because if our overall aim is to have higher incomes for everybody, that entails more capital per person and newer technology per person.

A modern textile worker operates a machine worth several crores, whereas his old counterpart operated a handloom worth a lakh at current prices. The modern textile worker has an output several times higher than the handloom operator and, thus, garners an income several times higher. There is, of course, a transitional problem. Workers losing their jobs get welfare benefits while they find new jobs, even in the most capitalist countries.

Retraining is also helpful for those losing jobs. Yet, the key aim must be increasing overall productivity, using fewer workers to produce more and better goods at cheaper prices. This is what economist Joseph Schumpeter called creative destruction. The market process constantly destroys the old and uncompetitive, replacing them with the new and competitive.

The US has always been among the most competitive economies because it destroys around three million jobs every month — that\’s right, every month — and creates three million new ones. The churn leads to everrising productivity. The sons of British handloom workers would not have been better off had they stayed in the handloom business.

Nor will the sons of Indian kirana store owners be better off if they remain as such for all time. Whatever the merits or demerits of foreign retail chains, the killing of kirana stores by Wal-Mart is not a key issue.

In the next 30 years, most retail chains and kirana stores are going to be killed by e-commerce. An increasing share of retail purchases is moving online globally, since this is the most efficient method. The technology of the internet cannot be reversed, and so you will not get long debates in Parliament on the terrible job losses and displacement caused by e-commerce. It will simply happen, and India will be the better for it.