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When the ANC government introduced a suit of changes to labour laws in 2010 aimed at saving jobs; the business sector in South Africa warned that it would lead to job losses. If you speak to the owners of large factories or any business that employs a number of people in the country; they often tell you how much of their time is taken up in dealing with rigid labour issues and that the laws serve as a disincentive to employ a large workforce. They say the laws have had the opposite effect of what the Government set out to achieve; it does protect jobs but it does not lead to the creation of jobs. In this article by South African-born Anthony Levine, who lived in California, but has now settled in Israel, takes a look at how labour effects the economic principle of supply and demand and comes up with the idea of the God of Economics, which dictates that the demand for labour goes down, if the cost of labour goes up. “It doesn’t care about the people involved, whether they are good or bad, rich or poor, whether they are black or white, whether they are handicapped, old or young.” Levine says attacks on employers that provide jobs is “insanity” and suggests that South Africa could become a mini-China if the holy cow of worker’s rights could be abolished. “Keep it and the 75% (unofficial) unemployment rate will take down the country.” Levine also says South Africa should not fixate on the large gap between rich and poor; “it has no negative impact on the poor.” – Linda van Tilburg
Labour and the God of Economics
By Anthony Levine*
One the conclusions that I have come to in life is that there exists a god that is all-powerful and that enforces the basic law of economics. By basic law of economics, I am referring to the law that price or cost, supply and demand for any product, must balance. If you increase price; demand will go down, if you increase supply; price will go down, etc. The basic idea is that if you decrease the price of a product more people will be willing to buy it, and vice versa. A product who’s demand increases or decreases substantially with price is known as a product with “elastic” demand. Demand for food, for example, remains about the same irrespective of price and therefore has “inelastic” demand.
This law acts on society like a god, by any definition of a god: You can’t touch it, you can’t smell it, you can’t see it, you can’t feel it – but it is everywhere at the same time, acting on everything. It acts on all products however small (like the price of an apple at the grocery store) up to the largest commercial enterprise. It is the same in all societies everywhere.
The God of Economics wants its law to balance, no matter what, and it does not care about anything else. It doesn’t care about the people involved, whether they are good or bad, rich or poor, whether they are black or white, whether they are handicapped, old or young. It just wants its law obeyed and it will punish those who don’t obey it and reward those who do obey it.
The difference between the Left and the Right, between Socialism and Capitalism, is mainly about how much they are prepared to obey this law. There is a range of how well this law is obeyed. It is not an all or nothing thing. The more this law is obeyed, the more the God of Economics will reward the person or society. Conversely the more this law is disobeyed, the more the God of Economics will punish and destroy.
You may wonder under the circumstances, why anyone would not want to obey this law fully, given the rewards and the punishments? The reason is labour. The god of economics regards human labour as just another cost of production, no different to steel or screws or any other of the inputs of production. It does not regard labour as people that deserve special treatment.
The law simply says if the cost of labour goes up, or even the hassles associated with dealing with labour (after all this is a cost of management time), the demand for labour will go down.
It becomes an issue of “workers’ rights”: Workers’ rights falls into the general category of what most governments perceive as their duty to “protect and help the poor and the vulnerable members of society”. It seems like a noble goal, but the God of Economics wants you to first create value (goods and services) before it will give you anything back. The God of Economics says that there is no way you can uplift the poor through social services and workers rights, no matter how much money you throw at it. You cannot make the poor richer this way, you can only make the rich poorer. The only way to help a poor person is to give him or her a job. Having or not having a job for a working age person is the difference between life and death. A person with a job has pride, money, social contacts and a social environment – a place to go to every day, and is gaining experience for his or her next job. A person without a job just tries to get through the day – does not have a life.
Ok, so how does the God of Economics allow a poor person to earn the right to be rich enough to have a life of comfort, with a house or apartment and a happy, optimistic safe family?
It works like this: Take the model of the immigrant family coming to America with very little. The husband gets a job as a street sweeper and the wife takes in washing or works in some sweat-shop. But they make enough money together to buy a small house and provide a stable family environment to launch the next generation. Maybe even a bit of extra cash to help the kids get a better education.
Skeptical? I am an engineer working at one of the world’s top high-tech companies in Israel. Two of my engineering colleagues at this company are senior electronics engineering leaders. The one’s father is a bus driver and the other’s father is a taxi driver. Their father’s father was probably also a street sweeper. So in just a few generations we have people who arrived with nothing (they were Jews kicked out of Iraq and all their possessions confiscated), see their sons in the top jobs of Israeli industry.
You start with a job, any job, no matter how menial and use this to improve the lives of the next generation. There is no other way to build a successful person, family, or country.
Ok, so where do jobs come from? Well, from employers. This simple fact seems to escape many people. Employers are often demonised as the “fat-cat bad guys that just exploit their workers”. “These people (the employers) must be cut down to size, their Ferrari’s confiscated and their evil practices of out-of-control greed stopped.”
To attack the one segment of society that provides the all important jobs, is insanity. Governments can generously give workers “rights”, but it is the employer that actually has to provide the rights. To make it more difficult for him or her to employ by increasing the cost and hassles of employees, is just insanity if you need to increase the supply of jobs.
The common misconception is that demand for labour is inelastic. The assumption made by many governments is that employers have to employ to run their businesses. So they just have to take it on the chin – do what the law requires. This assumption is wrong. Employers have wide discretion on their employment level. They can automate, manufacture overseas, discontinue labour-intensive products, downsize …
Case study 1: South Africa
South Africa in particular went bananas with workers rights in the Labour Relations Act of 1996, in order to correct the historical wrongs done to the Blacks during the years of Apartheid. It seemed like the right thing to do, but “the road to hell is paved with good intentions”. We are now witnessing a titanic struggle between the SA government and the God of Economics, that is busy laying waste to the entire country.
I was a factory manager at a large electronics company in South Africa. I was also the company’s technical director and therefore part of the inner circle of top management. Our factory staff went from 200 workers before the Labour Relations Act (LRA), to 80 afterwards. Like employers everywhere in South Africa, after the LRA we initiated a program of extensive automation, discontinuing marginally profitable products, did not develop new products that would require extra workers, moved manufacturing to China and lastly, importing instead of local manufacture where ever we could. Everybody lost; the workers, the company and the country, and these were the poorest of the poor workers I am talking about.
Before the LRA there was just the Basic Conditions of Employment Act. This law said you had to pay your employees on time and give some minimum vacation and sick leave. That was it. You could hire and fire willy-nilly and sometimes we did.
Pay was low. I was told to “push” the workers to get good production. However that sounded too much like hard work to me and so I introduced a bonus system. I set a reasonable target level and then paid the team the labour unit cost of each additional product built, so it didn’t cost the company any more. Production doubled and their pay doubled. By the way; these were all uneducated men and women. I doubt any even had a Matric. Yet they had no problem quickly learning the work of building and testing what was quite sophisticated RF electronics. And they wanted to work. Each new job brought hundreds of applicants to our doors.
Then came the LRA. It brought super first-world labour laws to South Africa: Complex requirements for disciplinary procedures, unions, industrial councils, a whole tier of labour courts. Everything you did became tricky. If a worker was caught stealing and you fired him without the proper procedures, he would be reinstated by the labour court, sometimes a year later, with full back-pay. The company hired an expensive labour lawyer. Instead of managing the factory, I was now spending a lot of time dealing with worker reps, unions and the expensive labour lawyer.
To cut a long story short, employers stopped employing, even going negative. The economic equation did not balance. With a huge supply of labour, labour costs should have become low, otherwise demand would not increase to absorb the increased supply.
Workers salaries did increase dramatically, but now each working worker (aka the worker elite) was feeding 10 unemployed family members at home. The God of Economics would not let the worker earn more than his or her true economic value!
So, abolish the LRA and South Africa will be a mini-China within a few years. Keep it and the 75% (unofficial) unemployment rate will take down the country. The country is awash in guns. Low employment means low taxes for the government – so no money to fund a large police force. Unfortunately workers rights has become a holy cow in SA. “We will not build the economy on the backs of slave labour,” to quote a previous Labour minister, now the Finance minister.
Case study 2: Japan
Japan began its high-tech modernisation effort in the mid 1960’s. It started slowly with cheap toys and other gimmicks. Then came cheap cameras and cars. We would laugh and call them “Jap crap” then.
But Japan had a strategy. They constantly improved their products and their production facilities. Every month a new model appeared – still “Jap crap” but slightly better. Suddenly, you looked around and Canons and Nikons had replaced Kodak and Polaroid. Toyota was the worlds biggest carmaker, not General Motors. More electronic parts were being made by Hitachi than by Texas Instruments.
I was living in San Diego, California, in the early 1980’s when Japan’s burst into twentieth century business was at its peak. Americans were in a state of shock. Everything they bought was Made in Japan. What happened to American economic dominance in the world? The transistor was invented at bell Labs in America, but it was the Japanese who commercialised it with transistor radios and audio equipment. The Yen skyrocketed in value and Japanese began buying expensive American real estate. It was Pearl Harbor 2 and this time the Japanese were winning. Worse, Japanese managers were long-term planners. They had five-year plans. American managers had three-month plans; determined by their quarterly results and how it would affect their stock price. The Japanese business juggernaut seemed unstoppable.
By 1990 Japan had the highest GDP per person in the world and the world’s third largest economy. Then something strange happened. Japan’s phenomenal growth faltered and stopped. It wasn’t just a temporary pause. Japan’s industry stagnated and no financial stimulus package or government intervention could revive it. Japan watched as the high-tech wonders of the 21st century passed it by. Cellphones, AI, big data, medical breakthroughs, the internet and even cars were now dominated by Europe, America and South Korea. By 2013 Japan’s public debt was the highest in the world per capita and equal to twice its annual GDP. Add in an ageing population and you had a country in trouble.
What happened to this nation of clever people with a disciplined and hard-working workforce? The God of Economics had looked at Japan and had seen something that it did not like.
Japanese industry had brought to modern company life a feudal relic of the Samurai known as Shūshin koyō; company patrimony in exchange for worker loyalty. Companies promised to provide employment for life and other social benefits, in exchange for absolute worker loyalty. It was a mutual pledge for life. Labour was not based on supply and demand verses salary.
The system worked well at first, but when the world economy changed to the fast moving internet information age, many factories became obsolete overnight. Companies could not shed workers, neither could workers move to the more promising new industries.
The system’s built-in time bomb of labour inflexibility killed any future growth of the country.
The gap between the rich and the poor
I want to tell you a story: There was an island in the pacific of poor fisherman. They eked out a living on the few fish that they caught in their old boats and the few vegetables and corn they could grow in the dry climate, with their few agricultural instruments. But they were a very happy and contented bunch – their gap between the rich and the poor was virtually nothing.
Then one day Bill Gates (the founder of Microsoft) moved to the island. The people were devastated. The gap between the rich and the poor was now astronomical.
Bill Gates decided to make even more money for himself and so he built a factory to process the fish. The people now had jobs and a steady income. Roads appeared and hospitals. Now that the people had money they could improve their boats and agricultural techniques. The people prospered and child death rates plummeted, but still the gap between the rich and the poor remained stubbornly high.
They called a meeting of their top economists, but they could not find a solution. Then one old man (who still remembered the good old days) stood up and said:
“I have two things to say: One; the gap between the rich and the poor is a lot of bullshit. It exists, but has no negative impact on the poor. And, two, economic theory tells you that a large gap between the rich and the poor is a requirement to lift the poor out of poverty. Only the rich have money left over to invest and create jobs.”
- Anthony Levine obtained his degree in Electrical Engineering from Wits in 1974. He then went on to do his Masters in EE at UCLA in Los Angeles. After this, he returned briefly to Johannesburg where he married his wife Jenny. They returned to California with the plan to get some work experience and ended up living in San Diego for 11 years. He also started an MBA at San Diego State University, did the core courses (economics, finance, marketing) but did not complete the degree. In 1988, they returned to South Africa with three kids where he worked for Ellies Electronics for 12 years as Technical Director. Finally in 2002, they immigrated to Israel (with four kids now) and have lived there ever since. In Israel, Anthony works for Apple as an embedded firmware engineer in their R&D centre in Hertzlia.
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