Jul 26, 2020

Economists don’t create jobs, entrepreneurs do

written by Lisa Eason

Freelancers become entrepreneurs when they take on their first employees. It is a momentous step — giving someone a job, assuming the responsibility of paying their wages every month. No one else in society creates jobs like entrepreneurs do. They are the real engine of any dynamic economy. Most big companies are not net creators of jobs — and government only creates jobs funded by taxes paid by other workers.

This matters much more than it did, as Britain faces an unemployment disaster. Once the full consequences of lockdown become apparent — when the furlough schemes end in October — I fear there may be four million or more out of work: a quadrupling from the record low levels of unemployment in January. This will be a huge drain on the national finances and will cause a social crisis unprecedented in modern times. Because Britain has had relatively low levels of unemployment for over 20 years, we have forgotten the misery and instability that flow from mass worklessness.

It has always disappointed me how poorly economists understand entrepreneurs, and how weakly they appreciate how jobs are generated — and destroyed. These dismal scientists sit in their ivory towers and peddle theoretical papers in obscure journals that provide almost no practical clues about stimulating business and job creation. Think tanks and civil servants in the Treasury do their best, but in reality recovery mostly depends on entrepreneurs regaining confidence and starting and growing companies — whatever the policymakers do.

While founders and owners are resilient and resourceful by nature, many are demoralised. Quite a lot are close to despair. They are used to controlling their own destiny and being in charge. However, extended enforced closures, and arbitrary and incoherent Covid-19 rules, have thrown hundreds of thousands of businesses into disarray. Animal spirits are depleted, as are cash reserves. Few will be inclined to take risks, and most will be looking to shed overheads and costs — including people.

I have spent more than 30 years building companies and hiring people — and, sadly, sometimes making them redundant. Giving people jobs is one of the most satisfying aspects of growing a business; laying people off is the worst. In a social and moral sense, the most important and irreplaceable function of entrepreneurs and investors is that they enable society to earn a living by inventing productive work. Without paying work, any community dies: it cannot foot the bills of life, nor does it have a purpose. Idleness leads only to trouble and hardship.

I have mostly been involved in labour-intensive industries such as retailing, catering, tourism and leisure. These are sociable sectors, with a high service element that requires people. But the regulatory and legal burdens of being an employer only ever grow: tax, administration and litigation risks expand remorselessly. It is no coincidence that many of the companies to have done well during lockdown tend to employ relatively few people — in particular tech firms in sectors such as software, pharmaceuticals, digital media and so forth. Success in these industries will never make up for the lay-offs across the labour-intensive service industries.

Moreover, every employer is now more aware of the advantages of automation. Just as modern factories are largely “staffed” by robots, so everything from kitchens to studios to workshops will see more artificial intelligence and fewer staff. Those insisting on working from home may well see it backfire: their bosses will find that the work can be outsourced, offshored or automated, even in areas such as advanced professional services. All companies are looking at costs and efficiencies. Most businesses I know are cutting staff.

Society has evolved a quasi-apartheid system during the pandemic: “key workers” have been raised to heroic status, while the rest must clap. The vast majority of so-called key workers are in the public sector. That’s wonderful, but meanwhile many in the private sector have had to accept significant pay cuts or have been made redundant. Those on low incomes and the young have borne the brunt of this.

Perhaps the key workers in the private sector are the entrepreneurs who can reverse this dreadful trend of large scale lay-offs. We must hope they can devise new firms that hire staff, generate exports, pay tax and rebuild our battered economy, and turn around enterprises battered by the lockdown.

High structural unemployment means an unhappy, unhealthy, impoverished country. We must fight to avoid this fate.