Prevailing opinion in Germany has found new evidence for its case against capitalism. Nokia, the well-known Finnish producer of communication technologies, attempts to shut down their operations in Bochum, Germany, and move them to Romania. 2300 jobs are directly at stake and many more employed by sub-contractors will lose their job, too. The public immediately returned their verdict: The robber-barons ... guilty, the speculator ... guilty, the management ... guilty ...; all are held responsible for conspiring against the working class, for exploiting the common man, for reaping labour’s product and added value by their supreme powers.
In other words: the German public has no idea about the way the economy works, what jobs really are, what prices do, what profit is for. They have a poor understanding about the role of financial markets and the vital role they play in allocating scarce means with alternative uses to the various ends pursued. Media, politics and intellectuals stubbornly misunderstands that the maximization of profits implies the advance of general welfare. Accordingly, Jürgen Rüttgers, the new hero of social romanticism (and political pragmatism), predicts that German patriots will - as consumers - penalize Nokia by restraining their consumption. Logic, however, runs the other way. The plants and factories in Bochum are closed exactly because consumers (worldwide) penalize Nokia for staying there. This is made felt to Nokia by shrinking profits relative to other possible investment alternatives.
If you want to make profits you have to subordinate yourself to the valuations of the consumer. Revenue reflects the value of things created, is a measure of increasing consumer welfare. But there is no such thing as a free lunch. To produce value, you have to employ and thus outbid scarce factors of production - such as skilled labour - which could have been employed otherwise, i.e., in the production of an alternative good. Thus, money costs reflect the value of the things surrendered. Now, if revenues are higher then outlays, that is, if you earn a profit, the good you supply generates consumer welfare higher than the welfare lost by surrendering alternative lines of production. The market process, the price system, thus allocates recourses to the most efficient use. Efficiency, of course, does not imply technical efficiency alone but is defined in terms of human satisfaction in a world characterized by scarcity. Thus, if Nokia or any other actor on the market attempt to maximize profits, he can only do so by serving his fellow specimen by better and cheaper products. This is the heart of Adam Smith's invisible hand: the pursuit for individual happiness and self-interest increases the welfare of society at large.
But what is to say about those who will lose their jobs in Bochum? Well, their labour force is set free to add value somewhere else. Our needs, the imagination of better states of existence which can be substituted for the present state, always and by necessity outpaces the means at hand. This in turn implies the universal fact of scarcity, as a subjective and thus relative concept. Labour, of course, is no exception to this. If the labour market would be free and if wages could be adjusted for relative scarcities there is now doubt that consumers would not let their services go wasted. All those who lose their jobs have to organize a demand schedule for their individual factor supply, that is, they have to organize bids and choose the highest they can get. Again, this is the way the single labourer makes the best out of his situation and at the same time he or she increases general welfare.
Of course, subsidies are always a no-go in a free market economy. We do not need to wait until something like the “Nokia-case” happens to understand that subsidies decreases general welfare since it constrains competition, that is, the rivalry between producers in supplying the consumers best and cheapest. Subsidies cause inefficiency and rent-seeking behaviour. They always support the poor entrepreneur or manager and harm those who are anticipating our needs and future supply-and-demand conditions best.
Thus, stop subsidizing investments and let the labour market do its job. This is the best way to ensure general betterment and material wealth for the width of society.
