Small Business Survey Illustrates Trade-Offs

A new survey of how U.S. small businesses are behaving provides a good example of how unintended consequences, externalities and trade-offs work in the real world. The ScaleFactor survey looked at small business thinking about hiring and technology, including artificial intelligence.

Most of us might generally consider rising pay rates to be a good thing. But higher pay rates and benefits also mean it is more costly for a small business to hire a new employee, and that seems to be constraining hiring by small businesses.

Health care costs were a big reason new employees were not hired, the survey found. But the wider use of technology-based accounting and back office software also has caused more smaller firms to avoid hiring chief financial officers as well.

That illustrates a key trade-off: higher wages and more jobs might both be desired public policy outcomes. But the two tend to be inversely related. Choices.

Economics has been at times called the dismal science. The phrase has had a number of meanings, originally expressing a fear that human population growth was destined to outstrip food production. But the term also has been used by some to decry social implications of markets.

The more useful framework might be the sense of discipline and informed making of choices every resource allocation and policy entails. The issue is not so much “dismal” outcomes; more the notion that choices must always be made.

Means are scarce; ends unlimited. Another way of putting it is that appetites are unlimited; resources limited.

Some might liken the idea to the phrase “no free lunch,” meaning principally that resources are scarce and that choices have to be made.

That is illustrated best by the term opportunity cost, the foregone benefits a person, firm or other entity misses out on because resources were committed to another use. The notion of “trade-offs” is helpful, in that regard.

The other popular phrase related to economic thinking (allocation of scarce resources, trade-offs, opportunity costs)  is “no gain without pain.” Choices between multiple competing claimants for resources must always be made.

To some extent, the discipline is supposed to help people and entities make better choices (more efficient use of resources; avoiding waste).

Externalities are one example of applied economics thinking. An externality is a cost or benefit received by a third party because of a transaction between two others. Pollution is the now-classic example.

Some might liken that concept to the notion of unintended consequences. Public or private policies are intended to solve one particular problem, but also have other unintended consequences.

This does not mean dismal outcomes are to be expected. It does mean benefits always must be weighed against costs, and with at least some view to possible direct externalities.