John Kay on the job-creation fallacy

12 August, 2010

John Kay’s article this week in the FT (“A good economist knows the true value of the arts”) was up to his usual high standard. 

Many people underestimate the contribution disease makes to the economy. In Britain, more than a million people are employed to diagnose and treat disease and care for the ill. Thousands of people build hospitals and surgeries, and many small and medium-size enterprises manufacture hospital supplies. Illness contributes about 10 per cent of the UK’s economy: the government does not do enough to promote disease.

Such reasoning is identical to that of studies sitting on my desk that purport to measure the economic contribution of sport, tourism and the arts. These studies point to the number of jobs created, and the ancillary activities needed to make the activities possible. They add up the incomes that result. Reporting the total with pride, the sponsors hope to persuade us not just that sport, tourism and the arts make life better, but that they contribute to something called “the economy”.

The analogy illustrates the obvious fallacy. What the exercises measure is not the benefits of the activities they applaud, but their cost; and the value of an activity is not what it costs, but the amount by which its benefit exceeds its costs. The economic contribution of sport is in the pleasure participants and spectators derive, and the resulting gains in health and longevity. That value is diminished, not increased, by the resources that need to be diverted from other purposes.

We are used to seeing self-serving economic studies in this country, in which the alleged job-creation effects of particular activities are used to argue for special treatment or subsidies.  I have commented on a particular example of this already, where the Irish Insurance Federation tried to argue that up to 2,000 jobs in the life and pensions industry could be lost due to the Government’s planned changes to pension tax relief.  Self-serving claims that a sector needs special treatment to avoid job losses are rarely valid;  in fact, such claims should by definition lead to the particular cause that expresses them being treated with greater suspicion.

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