Saturday, July 17, 2010

Egypt-inspired thoughts on productivity

Jude Wanniski, one of my mentors and perhaps the most prolific writer on the interaction between politics and economics, once related to me an allegory about productivity that has stayed with me for many years. (I'm sure he got it from someone else, but I can't remember right now.) I was reminded of this a few days ago when I was visiting the site of the Russian monument to cooperation with Egypt that stands near the Aswan High Dam.

The original allegory goes something like this, though I'm sure to mangle it: A politician and a union boss are walking by a construction site. They see two giant machines excavating the ground in preparation for the foundation of a large building. Each machine is operated by a single person. The union boss laments that if it weren't for the machines, there could be hundreds of workers digging the foundation with shovels, creating so many more jobs and (presumably) so much more prosperity. The politician sneers, and says, "just think how many thousands of people could be employed here if it weren't for shovels, and they had to dig the foundation with their hands!"

What this illustrates is that the economically illiterate don't understand the virtues of productivity. It is always better to find a way to do something with fewer people. Why have thousands scooping sand out of the ground, when one could do the job with a big earth mover? If thousands weren't needed to perform a task that could be accomplished by just one, then the thousands could spend their time doing something else, and we would all be better off.

And so it was that I was reminded of this when I walked up to the Russian monument and saw three workers sitting on the grass on each side of the entrance, cutting the grass by holding it with the fingers of their left hand and cutting it with a knife held in their right. I saw another example on the way to the airport in Luxor this morning, when I spotted a half dozen workers sweeping debris from the side of the highway (a few miles long at least) with push brooms. Undoubtedly there are at least a few politicians in Egypt who are reluctant to replace those workers with lawn mowers and street sweeping machines, out of concern for the jobs that might be otherwise lost. If only they would think about how much more productive those workers could be (and how much more they could earn) if they could be part of a more worthwhile enterprise.

Yes, many will be thinking that the real problem is that Egypt doesn't have the money to buy lawn mowers and street sweeping machines. But that is what politicians here should be focusing on. It takes capital to buy machines that increase workers' productivity, so attracting capital to Egypt should be job #1 for smart politicians. Here's how: Enforce the rule of law. Enforce property rights. Eliminate corruption. Promote free markets. Offer incentives to new investment by keeping taxes low and flat. Minimize the expansion of government and regulatory burdens. Avoid social engineering and tax breaks for favored industries. Make Egypt a haven for investment, and watch living standards rise. With enough capital, capitalists would be quick to grab workers off the streets and teach them to operate the productive machinery.

Instead, I am left to ponder, especially after visiting the Egyptian Museum in Cairo this afternoon, just how it is that a civilization so advanced 3-4,000 years ago that it figured out how to transport millions of tons of stone over hundreds of miles, and how to erect massive edifices that have survived for millennia, could today be struggling to catch up with the accomplishments that are driving so many other countries to levels of prosperity that give the common man a level of comfort and prosperity that was unavailable to even the most powerful of Pharaohs? (King Tut's bed would make any camper cringe.)

UPDATE: Good friend Don Luskin reminds me that the allegory I was trying to remember here was originally told by Milton Friedman.

10 comments:

Mark Gerber said...

Thanks for sharing your travel inspired throughts. Of course, I agree completely with the point you're making, but it seems your allegory needs to be augmented for our current "progressive" era by adding this line to the end:
The speaker of the house laughs and says, "But imagine how many jobs we could create if instead of paying people to dig with their hands, we pay them not work at all!" I can only wonder what Uncle Milton do about this!

Benjamin said...

The version I heard was that some Eurasian socialist state had created a make-work project for returning veterans after WWII. They were using shovels to dig ditches along roads. Milton Friedman asked why they were not using small bulldozers. He was answered they wanted to create jobs. So Friedman asked, "Well, why not have the men dig with spoons?"

Still, I doubt make-work projects cause nearly the mis-allocation of capital that does, say, the home mortgage interest tax deduction. This deduction becomes larger the higher one's income, and the more-expensvie the house (or houses) purchased. It is an unlimited deduction.

Yet, if someone suggests whacking the home mortgage interest tax deduction, I bet the reply would be, 'But the homebuilding industry creates jobs."

What would MF says about that?

So many states, such as Egypt or Iraq, or Afghanistan, crush their own economies and population through corrupt and elite-serving governments.

Thank goodness we have a free press in the United States.



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Benjamin said...

Extremely important paper published by the St. Louis Fed here:

http://research.stlouisfed.org/wp/2010/2010-018.pdf

Scott Grannis said...

Mark: that's indeed a worth addition to the story.

Jeff said...

Scott;

I'm not sure if you have ever offered an opinon on this before.....What is your thoughts/opinions on Bob Chapman who writes the International Forecaster. His thoughts are quite distressing, but his reasoning seems clear....but it's very frightening.

Louis Cyphre said...

What you say about Egypt applies 100% to Argentina.

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