Tuesday, September 03, 2013

Back to the future with Adam Smith ?

"Cheap labour has become a substitute for investment". says Jeremy Warner in the Daily Telegraph.  This takes us back to Adam Smith where the entrepreneur notionally balanced the four factors of production Land, Labour, Capital and Enterprise. Decisions were made as to whether accumulated savings (or borrowings) should be spent on Labour or invested in fixed Assets such as Land or Plant and Machinery. It never was anything but a useful shorthand and the idea that in 2013 businessmen sit down and say "Shall we buy an Asset or just hire a few more cheap Poles" is ludicrous!

(1) Immigrants aren't cheap. The same minimum wage and other employment conditions apply to a Pole as to a Brit (illegals aside).

(2) Investment IS cheap. Interest rates remain at an all time low and if buying an Asset is required then it costs little to do so.

In business there is certainly some debate as to whether revenue expenditure (eg on Staff) is preferable to capital expenditure on assets. But to suggest that this is anything but a minor issue on the margins of business decision-making is not true. 

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