Miles Kimball and Noah Smith on Job Creation

This short Twitter discussion with Noah about “job creation” came out of his reading of “Rich People Do Create Jobs: 10 Tweets” In our discussion, we identified 4 senses in which rich people or entrepreneurs can create jobs (that is, increase labor demand) in companies they fund or lead. In this discussion, I was thinking of labor demand warranted by the extra output the firm will be able to produce if it has another hour of a worker’s effort. Economists call that extra output from another work-hour the marginal product of labor.

  1. Putting in time and effort to organize the firm’s activities in a way that raises the marginal product of a worker.
  2. Taking risks that could turn out badly for the entrepreneur or rich person, but could also turn out well and then have the potential to raise the marginal product of a worker.
  3. Providing funding from their savings that makes machines, factories, training, brand-awareness, or some other form of capital for the firm possible–all of which raise the marginal product of labor.

In addition, members of the government who make wise decisions about economic policy can be said to create jobs.  

In our discussion, we talk about three possible ways an entrepreneur or rich person might approach risk and uncertainty:

  1. In a fully rational way, which I call “Bayesian”.
  2. In a way that is especially averse to uncertain situations where the odds are hard to know. This is called “ambiguity aversion” or aversion to “Knightian uncertainty.” Many economic theorists (both abstract theorists and applied theorists) are interested in ambiguity aversion these days.
  3. In an overoptimistic or overconfident way.

Noah makes what I think is an unwarranted leap that the combination of ambiguity aversion and overconfidence is similar in its effects to being a rational and sensible Bayesian with no ambiguity aversion. Or at least that is how I interpret his word “exactly.”

There is one technical error in our discussion. When there is too much capital, it is possible that more capital could be a bad thing overall, since keeping the capital stock up in the face of depreciation costs more than what the capital produces (the gross marginal product of the capital). But even in that situation, extra capital normally raises the value of having extra labor. The extra capital is a bad thing, but less of a bad thing if there is more labor, so the extra capital raises labor demand. 

Update: Isomorphismes tweeted a link to this wonderful article about the principle that it is the consumption of the rich we should worry about, not their income or wealth: