Mommy, Where Do Jobs Come From?

imagesIf you’ve spent time listening to campaign ads, the media, party pundits and strategists you are probably clueless on the subject of job creation. I would like to help you with that.

In discussing business, and the economy, economists talks about factors of production. The factors of production are land, labor, capital and entrepreneurship. When combined, factors of production result in output for profit.

  • Land includes minerals and raw materials used in producing goods and services, as well as the earth on which the factory or office building is built.
  • Labor is the mix of  laborers (the folks that are engaged in producing your goods or services) and the general workers necessary to run a business. We break labor down into two categories direct labor and indirect labor. Direct labor are the workers that are directly involved with producing your goods and services. Indirect labor are senior managers, office works, sales, advertising, accounting, etc. In other words, everything else needed to run and operate the business.
  • Capital refers to your building, machinery, computers, financial capital (money in the bank or investments). Capital like raw materials is consumed in doing business.
  • Entrepreneurship is the individual that has the idea for a business. The Entrepreneur pays rents to the factors of production. He or she pays for raw materials, land, labor (direct and indirect). He or she also pays for capital. Financial capital is normally paid for with interest payments to a bank or other lender, you may also pay for capital by assigning a part ownership in the business ( e.g. someone buys a machine for you in exchange for 10% ownership in your company, or  someone may agree to lend you $10 million at 3% interest plus 20% ownership of your company. Paying for financial capital can take many forms and it’s almost always negotiable). In any case, the entrepreneur will seek to keep the cost of financial capital as low as possible; very much like costs for all the other factors of production.

These are the things necessary to create a business; they all depend on one another equally. It is the classical symbiotic relationship.

Unlike other factors of production, financial capital tends to have an enormous ego – regrettably unsupported by merit. So, when you hear money managers or equity fund managers lay claim to “creating jobs” take that as oral flatulence. Very much like statements claiming that you, the entrepreneur, did not build your business.

Money managers or equity fund management companies invest other people’s money (OPM) (sometimes their own too) in businesses. For that, they receive rents in the form of interest payments, equity ownership or any combination thereof. Financial capital’s only concern is recovery of the principal investment  at the highest attainable return on investment, commensurate with the risk of the investment. As I said earlier, those returns can take the form of interest payments and/or an equity position (shares in the business). When financial capital accepts an equity position, as rent, its primary concern is in achieving the highest possible share price, which allows them to recover the principal investment plus a suitable return. Period!

So, who is creating the jobs?

It is the entrepreneur who gains access to, and combines factors of production; creating the proper mix and paying the proper rent (price), that allows him or her to supply demand for goods and services at a profit.

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