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Suppose there is some industry whose profit is based on unethical business practices. Eg: A pest control company X, who themselves send pests into people's houses, so as to later earn money from offering services. The business runs great due to weak laws. (I think a realistic analogy would be tech companies and the right to repair problem.)

I am arguing with another person about such a company X, and saying that X is bad for the economy since it will simply deplete the money of the average person. The person I am arguing with says that, if they were to go out of business, there'd be more unemployement and people in economic troubles in total, since there is no way to directly earn money in this country without a job.

While I still think it's bad after hearing their argument, I still feel I can't give a good enough rebuttal to this argument.

Could a counter argument be framed based on pre-exisiting economic principles? Otherwise, if my position is the "more wrong" one, can someone explain why I am wrong?

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    $\begingroup$ Company X is perpetrating fraud by scamming people. If Society tolerates that, where do they draw the line? Imagine a thug who kneecaps people to force them to give him money. He is also creating employment for doctors, nurses, and other hospital staff, so are we going to lock him up and jeopardize the jobs for the hospital folk? Or are we going to let him go, and save money by not employing police, lawyers, judges, and prison guards? But what if the police, etc, then become unemployed? Easy. They can rob people instead... $\endgroup$ Commented Apr 24, 2023 at 3:36
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    $\begingroup$ Sounds like the broken window fallacy. Paying people to solve problems that shouldn't exist in the first place might look like useful economic activity on paper. But it is not, because the resources that company uses could be used in more useful ways if the problem is solved properly. $\endgroup$
    – Philipp
    Commented Apr 24, 2023 at 9:12
  • $\begingroup$ You could equate it to a form of stealing. $\endgroup$
    – DKNguyen
    Commented Apr 24, 2023 at 21:27
  • $\begingroup$ A similar argument that was heard in Germany very often was that electric cars are bad for the economy because the engines are so much simpler and a lot of industry in Germany is geared towards providing components for the very complex Diesel engines and other related technologies. $\endgroup$
    – Mookuh
    Commented Apr 25, 2023 at 7:27
  • $\begingroup$ @DKNguyen stealing can be beneficial (see tax) $\endgroup$ Commented Apr 25, 2023 at 14:32

8 Answers 8

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if they were to go out of business, there'd be more unemployment and people in economic troubles in total

Not necessarily. Customers are paying money for the ill-gotten services of company X. This reduces the amount they have available to spend on other goods. If company X were banned (or perhaps more realistically its unethical practices were stopped and as a consequence it went out of business), its former customers would have more money to spend on other goods. If they chose to spend that money, they would provide additional business for other companies which would therefore need to employ more people.

Whether the net effect on employment and aggregate wage income would be neutral would depend on various imponderables including customers' marginal propensity to consume and the output-to-labour ratios in the relevant industries. However, the notion that the direct reduction in employment and income from banning company X would not be offset by secondary effects as described above can be seen to be fallacious.

Given the comments below, I will add that it isn't relevant to the above argument whether any staff taken on by other companies include former employees of company X. In a (typical) situation where there is some unemployment in an economy, the effect on overall economic welfare (as assessed by a suitable social welfare function) of some employees losing their jobs can be (partly or wholly) offset by others gaining employment.

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  • $\begingroup$ Plus, these other companies are currently desperate to hire anyone they can find, so they should jump at the opportunity to put the former company X employees on their payroll. $\endgroup$
    – gerrit
    Commented Apr 24, 2023 at 7:02
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    $\begingroup$ @gerrit Or not, depending on how radioactive they consider these former company X employees to be. They have, after all, perpetuated quite questionable practices. Potential new employers might choose to look past that and consider it only the fault of the bosses of X, or they might not. This also depends on the exact details of the X scandal, and especially whether regular pest control employees knew about the more shady side of company X's practices. $\endgroup$
    – Arthur
    Commented Apr 24, 2023 at 11:41
  • $\begingroup$ @Arthur True, it depends on the risk of hiring someone who has followed illegal orders vs. the cost of keeping the vacancy unfilled. $\endgroup$
    – gerrit
    Commented Apr 24, 2023 at 12:20
  • $\begingroup$ @gerrit they say they are, but IIRC the data says differently - those job postings don't correlate to actual hires $\endgroup$ Commented Apr 24, 2023 at 13:17
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    $\begingroup$ @user253751 Might depend on the country. I read that many employers in the US won't touch ex-convicts with a yardstick even twenty years after they were released from serving a few years for dealing marijuana as a teenager, but that effect would seem less prevalent in western Europe. $\endgroup$
    – gerrit
    Commented Apr 25, 2023 at 6:45
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As stated, a pest control company that sends pests into people's homes to then offer to get rid of them, is essentially a rephrased version of the parable of the broken window: https://en.wikipedia.org/wiki/Parable_of_the_broken_window

The parable of the broken window suggests an idea of professional window-breakers who would stimulate the economy by breaking windows and thus increasing demand for the services of people who would replace the windows, thus increasing economic activity.

The usual refutation of this idea is that in absence of this artificially induced demand for replacing windows, people would spend their money elsewhere (for example, buying themselves things they actually want to have) and increase economic activity in other ways, in which they won't if they already spent all their money replacing windows. In essence, the refutation comes down to the idea that the window-breakers incur opportunity costs equal to their supposed economic stimulus, thus just moving your spending from one place to another instead of increasing your spending. And that other place could hire the workers that were displaced by the ban on window-breakers.

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  • $\begingroup$ does this only work if the savings rate is low? $\endgroup$ Commented Apr 25, 2023 at 18:13
  • $\begingroup$ To an extent, yeah. But also a lot of people will try to make up for money they took out of savings by saving more later after a sudden expenditure and cutting their expenses for a while. At the extreme end, though, this refutation can break down. Take the example of Japan, where the savings rate is extremely high - many people there already save as much as they possibly can, so professional window-breakers could actually increase their total long-term spending and stimulate the economy. $\endgroup$
    – Mash
    Commented Apr 27, 2023 at 8:54
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You're correct that there is wastage in this setup. Let's consider the pest control company X. If the company generates revenue of $M from its services, that revenue is distributed among its workers and owners as salary and profit. However, the workers also incur labor costs in the form of disutility from their work.

One possible solution to achieve a Pareto superior outcome is to ban the company and raise taxes of $M from the people who were previously paying for pest control services. This revenue can then be distributed for free among the workers and owners. This outcome is Pareto superior because the workers are strictly better off - they receive the same amount of money without incurring any labor costs.

Alternatively, if it's necessary to provide employment for these workers, any job opportunity can be offered to them in return for the money that is being paid to them.

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  • $\begingroup$ How would you define "wastage"? $\endgroup$
    – Babu
    Commented Apr 23, 2023 at 19:38
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    $\begingroup$ I mean wastage of resources. Resources such as labor can be diverted to some other activity or activities that are useful. $\endgroup$
    – Amit
    Commented Apr 24, 2023 at 1:52
  • $\begingroup$ If you ban the company and raise taxes, how will the people paying for pest control services control pests now? You've removed a service and haven't provided a way to pay for it. Presumably pests still exist and people will need some level of pest control. $\endgroup$ Commented Apr 24, 2023 at 14:05
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    $\begingroup$ Please read the information given in the question: "A pest control company X, who themselves send pests into people's houses, so as to later earn money from offering services." If X is banned, then pests don't exist. So these services are not needed. $\endgroup$
    – Amit
    Commented Apr 24, 2023 at 14:38
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I am arguing with another person about such a company X, and say that X is bad for the economy since it will deplete the money of average person simply. The person I am arguing with say that, if they were to go out of buisness, there'd be more unemployement and people in economic troubles in total, since there is no way to directly earn money in this country without a job.

This is fallacy in long-run but can happen in short-run. Virtually all macroeconomists agree that long-run aggregate supply is vertical (e.g. see any macro textbook Blanchard et al Macroeconomics or Mankiw Macroeconomics etc). Result of this is that in long run Say's law applies and supply determines its own demand. Hence in long-run it does not matter whether you decide to shop at particular company $x$, if company $x$ goes out of business all that happens is that labor and capital (and other factors of production) that were 'locked in' company $x$ becomes available for other companies to produce goods and services that people enjoy and aggregate demand in long-run is irrelevant.

However, your friend also has a grain of truth in his argument. Long-run in macroeconomy is time period over which prices are fully flexible and in real life such time period is often thought to be decade or even multiple decades (see Blanchard Macroeconomics pp 569). So it is important to think also what happens in short-run.

In short-run, basically what Adam Bailey said in his answer applies. That is what will actually happen to the employment is ambiguous as it will depend on not just your demand but myriad of other factors such as marginal propensity to consume etc. In short-run this could have negative effects on economy not just through higher unemployment but also additional negative general equilibrium effects stemming from the fact that these unemployed people will consume less which leads to less income for other people and employment and so on until economy stabilizes at some temporary level of production. Although whether this would occur would depend on number of factors and if the company is small then the negative effect will also be small even despite the general equilibrium feedback loops.

This being said, if the company is actually scamming people, e.g. putting pests into peoples houses, the company does not actually produce useful output, so we would be better off if the company would be shut down. The reason for that is that, assuming the company is only running scams and not doing any legitimate business, they are just wasting not just labor but also capital of society both of which are scarce resources. In such case, it might be even sensible to just pay those employees for some transitional period full wages through some government scheme and just shut the company down so at least capital is released to be used by other companies.

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  • $\begingroup$ "Prices are fully flexible" Could you explain that? $\endgroup$
    – Babu
    Commented Apr 24, 2023 at 1:08
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    $\begingroup$ @TrystwithFreedom sure, in short run prices and wages are not flexible since they cannot be changed without any cost. For example, employees will have contract that stipulates some wage and employer can't just decide to pay less than what is in the contract. Rigidities like this result in upward sloping aggregate supply and in that case Say's law wont hold $\endgroup$
    – 1muflon1
    Commented Apr 24, 2023 at 2:27
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This resembles Keynes' suggestion to use public funds to let people dig holes to counteract a depression if nothing better can be found. Of course it would be much preferred to let people do something useful, in particular improve the infrastructure — but even something as useless as digging holes would be better than doing nothing and let the depression run its course.

Governments regularly use public administrative employment which only marginally contributes anything useful to the economy as a means to reduce unemployment. Letting all the useless public employees go would have a negative economic impact, at least for a while. Even reducing something as utterly unproductive as military personnel created problems after the cold war.

It is essential to note that this fiscal intervention in bad times had its counterpart in good times: Then, governments should reduce fiscal spending and not additionally boost the economy. Essentially, the government would dampen economic oscillations in both directions to reduce friction losses.

Your exterminator is not publicly funded but has a similar economic function as useless public employees or military personnel, at least if the customers create additional economic activity instead of just diverting funds, for example because they are forced to take on an emergency credit because of the perceived infestation. Like public work programs it is only useful in times of underemployment and economic contraction.

In times of prosperity, by contrast, it diverts consumption and precious resources, in particular labor, from places where they would generate profits, encourage investments and hence increase, as one hopes, the overall wealth of the society.

As a counter-argument to your conversation partner: Even in an economic downturn it would not only morally but also economically be better to contribute to the society's wealth or well-being instead of scamming people and producing nothing.

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Lately I've heard this argument quite a bit--that coal and oil jobs will be destroyed if we limit emissions so we shouldn't. They will, but as I understand it more jobs are being created in the renuable sectors than are being lost.

The newer jobs are different and require more training though, so the people who are actually mining coal might not be able to find a replacement job without training (and although it's hard to tell, they don't always want to retrain).

There was a similar argument with loggers.

In essence, I think a lot of these "Arguments" originate from the industry as excuses to keep the industry itself going. If instead of being a different industry (like Solar) a new coal-extraction process were to develop that removed the need for all the miners, the industry wouldn't hesitate to lay them off. This has happened repeatedly in many industries--and when it does I've rarely heard the "But what about the economy!" argument, instead they talk about how much more productive the new process will be and how good it will be for the economy.

As to your question of what is the counter-reasoning for this argument: I always try to consider cases in the past where we've had a revolution in some industry and it caused this kind of upheavel, would we have stopped it? If horse and buggy drivers didn't want to get licenses, should we have banned cars so they could keep their jobs? Should we not allow computer auomation of accounting work so that we don't put accountants out of business?

Another point... In the micro-case you mentioned, your friend is missing a huge section of the analysis: the extra money that the families save will still get spent, they will just go towards industries that are actually providing a wanted service. People will still be employed by the money, just not theives. Even if the money is just banked, it will then be used by the bank to grant loans for others (Perhaps to build a house, which will employ quite a few people).

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  • $\begingroup$ It is certainly true that these arguments originate from the industry as excuses to keep itself going. You might consider citing a source for this fact. $\endgroup$ Commented Apr 25, 2023 at 14:34
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the employees that lose their jobs, will do what most people do when the lose a job - go and get a new job. Hopefully this time they will get a job that actually benefits society.

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Suppose there is some industry whose profit is based on unethical business practices. Eg: A pest control company X, who themselves send pests into people's houses, so as to later earn money from offering services

Maybe the problem is they don't agree with your premise: that that sort of thing is truly unethical.

Maybe they think those sort of practices are completely fair, or maybe they think every business is mildly unethical anyway, so "what's the difference"? (Note: I don't believe that, but they might.)

If you take that stance, then protecting those jobs makes more sense.

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  • $\begingroup$ Lateral thinking $\endgroup$
    – Babu
    Commented Apr 24, 2023 at 17:14
  • $\begingroup$ My best advice is this: don't ask stackexchange, go and talk to those people. It's possible to have a productive conversation if you try to find your common ground to begin with, and just ask questions with an open mind. Resist the urge to disagree or argue: this is just an exercise to understand. $\endgroup$
    – Slothario
    Commented Apr 24, 2023 at 18:13

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