Market “Solutions” as Social Engineering

In an article on the HBR Blog Network yesterday, The Market needs a Market Maker, Tammy Johns writes about the competency mismatch in the labor market. This is correct observation: there is at the same time a great surplus and a great shortage of labor. The reason for this is that the existing labor does not have the skills and competencies that employers seek, which causes both unemployment and suboptimal production. The labor market simply isn’t functioning.

Johns offers a Grand Idea for how to solve the problem: a centralized labor market maker, “a team that proactively manages supply and demand.” While this may intuitively seem like supplying a force of which the market seems short, it is quite a Soviet-style solution. And it completely disregards the question of why the labor market isn’t functioning, and what we may learn from the “strange” present state of it. In other words, to solve the problem, shouldn’t we first ask why there is too much supply and too much demand at the same time?

So why doesn’t Johns ask this question? We don’t know. But we can answer it. Rather than appointing a “maker” to force supply and demand to equilibrium (a point toward which one would expect market forces to lead), it can easily be shown that the problem in the market is due to the boom-bust cycle. The available, employable labor is educated according to the misguided structures of production during the boom – which in retrospect were unsustainable. We are therefore currently in a situation where we know that there is a huge social malinvestment in skill and education.

This is actually what also happened during the Great Depression. While we read about very high unemployment during the depression, what we do not often hear is that unemployment was very high for some and not at all high for others. They experienced then what we experience now: a structural malinvestment in skill that comes crushing down in need of correction as the true market demand for products and services is finally revealed.

Nobody is interested in hiring coachmen in the age of automobiles. But this is in itself not a problem, since society doesn’t instantaneously shift from horse-and-carriage to automobiles. The shift is gradual, so while there is unemployment for some individuals it is not a structural problem. And we wouldn’t expect a whole generation to seek apprenticeships to be coachmen while society is tending toward automobiles. We have a structural problem if, for whatever reason, supply of coachmen is artificially kept way above the market rate.

Johns’s is here to, when the problem becomes apparent, institute a resourceful (and omniscient?) government team to reeducate the apprentices and make everybody into automobile mechanics. But is this a prudent solution? It doesn’t address the cause but only attempts to do away with the symptom, and who knows what problems we might face after driving a whole generation into becoming Ford Model T mechanics? Perhaps we find ourselves in a situation where we have further progress and innovation so that the Model T is replaced with a new car – with a whole generation of Model T mechanics but nobody to deal with the new types of automobiles.

A “labor market maker” is but a kind of theoretical political entrepreneurship that amounts to nothing less than social engineering. And there is much evidence that the current problem in the labor market is not a problem of the market – but of politics and social engineering. Is more of the same thing really a solution to the problem? Probably not. To solve the problem we must understand what caused it, which means we must turn to economic theories of what caused the boom – and what caused the bust.

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