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<title>C.9 Would laissez-faire capitalism reduce unemployment?</title>

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<h1>C.9 Would laissez-faire capitalism reduce unemployment?</h1>

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In order to answer this question, we must first have to point out that

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"actually existing capitalism" tries to manage unemployment to ensure

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a compliant and servile working class. This is done under the name of

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fighting "inflation" but, in reality, it about controlling wages and

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maintaining high profit rates for the capitalist class. Market discipline

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for the working class, state protection for the ruling class, in other

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words. As Edward Herman points out:

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"Conservative economists have even developed a concept of a 'natural rate

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of unemployment,' a metaphysical notion and throwback to an eighteenth

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century vision of a 'natural order,' but with a modern apologetic twist.

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The natural rate is defined as the minimum unemployment level consistent

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with price level stability, but, as it is based on a highly abstract model

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that is not directly testable, the natural rate can only be inferred from

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the price level itself. That is, if prices are going up, unemployment is

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below the 'natural rate' and too low, whether the actual rate is 4, 8,

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or 10 percent. In this world of conservative economics, anybody is

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'voluntarily' unemployed. Unemployment is a matter of rational choice:

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some people prefer 'leisure' over the real wage available at going (or

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still lower) wage rates . . .

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"Apart from the grossness of this kind of metaphysical legerdemain, the

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very concept of a natural rate of unemployment has a huge built-in

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bias. It takes as granted all the other institutional factors that

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influence the price level-unemployment trade-off (market structures

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and independent pricing power, business investment policies at home

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and abroad, the distribution of income, the fiscal and monetary mix,

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etc.) and focuses solely on the tightness of the labour market

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as the controllable variable. Inflation is the main threat, the

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labour market (i.e. wage rates and unemployment levels) is the

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locus of the solution to the problem." [Beyond Hypocrisy, p. 94]

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</blockquote>

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Unsurprisingly, Herman defines this "natural" rate as "the rate of

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unemployment preferred by the propertied classes." [Op. Cit., p. 156]

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The theory behind this is usually called the "Non-Accelerating Inflation

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Rate of Unemployment" (or NAIRU). Like many of the worse aspects of

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modern economics, the concept was raised Milton Friedman in the late

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1960s. At around the same time, Edmund Phelps independently developed

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the theory (and gained the so-called "Nobel Prize" in economics for so doing

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in 2006). Both are similar and both simply repeat, in neo-classical jargon,

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the insight which critics of capitalism had argued for over a century:

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unemployment is a necessary aspect of capitalism for it is essential

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to maintaining the power of the boss over the worker. Ironically,

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therefore, modern neo-classical economics is based on a notion which

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it denied for over a century (this change may be, in part, because

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the ruling elite thinks it has won the class war and has, currently,

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no major political and social movements it has to refute by presenting

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a rosy picture of the system).

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Friedman raised his notion of a "Natural Rate of Unemployment" in 1968.

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He rooted it in the neo-classical perspective of individual expectations

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rather than, say, the more realistic notion of class conflict. His

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argument was simple. There exists in the economy some "natural" rate

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associated with the real wage an ideal economy would produce (this is

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"the level that would be ground out by the Walrasian system of general

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equilibrium equations," to quote him). Attempts by the government to

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reduce actual unemployment below this level would result in rising

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inflation. This is because there would be divergence between the actual

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rate of inflation and its expected rate. By lowering unemployment, bosses

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have to raise wages and this draws unemployed people into work (note the

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assumption that unemployment is voluntary). However, rising wages were

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passed on by bosses in rising prices and so the real wage remains the

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same. This eventually leads to people leaving the workforce as the real wage

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has fallen back to the previous, undesired, levels. However, while the

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unemployment level rises back to its "natural" level, inflation does

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not. This is because workers are interested in real wages and, so if inflation

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is at, say, 2% then they will demand wage increases that take this into account.

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If they expect inflation to increase again then workers will demand more

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wages to make up for it, which in turn will cause prices to rise (although

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Friedman downplayed that this was because bosses were increasing their

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prices to maintain profit levels). This will lead to rising inflation

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and rising unemployment. Thus the expectations of individuals are the key.

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For many economists, this process predicted the rise of stagflation in

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the 1970s and gave Friedman's Monetarist dogmas credence. However, this

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was because the "Bastard Keynesianism" of the post-war period was rooted

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in the same neo-classical assumptions used by Friedman. Moreover, they

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had forgotten the warnings of left-wing Keynesians in the 1940s that

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full unemployment would cause inflation as bosses would pass on wage

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rises onto consumers. This class based analysis, obviously, did not fit

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in well with the panglossian assumptions of neo-classical economics. Yet

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basing an analysis on individual expectations does not answer the question

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whether these expectations are meet. With strong organisation and a willingness

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to act, workers can increase their wages

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to counteract inflation. This means that there are two main options within

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capitalism. The first option is to use price controls to stop capitalists

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increasing their prices. However, this contradicts the scared laws of

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supply and demand and violates private property. Which brings us to the

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second option, namely to break unions and raise unemployment to such levels

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that workers think twice about standing up for themselves. In this case,

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workers cannot increase their money wages and so their real wages drop.

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Guess which option the capitalist state went for? As Friedman made clear

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when he introduced the concept there was really nothing "natural"

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about the natural rate theory as it was determined by state policy:

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"I do not mean to suggest that it is immutable and unchangeable. On the

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contrary, many of the market characteristics that determine its level

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are man-made and policy-made. In the United States, for example, legal

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minimum wage rates . . . and the strength of labour unions all make the

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natural rate of unemployment higher than it would otherwise be."

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["The Role of Monetary Policy," pp. 1-17, American Economic Review,

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Vol. 68, No. 1, p. 9]

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</blockquote>

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Thus the "natural" rate is really a social and political phenomenon which,

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in effect, measures the bargaining strength of working people. This suggests

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that inflation will fall when working class people are in no position to

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recoup rising prices in the form of rising wages. The "Natural Rate" is,

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in other words, about class conflict.

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This can be seen when the other (independent) inventor of the "natural"

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rate theory won the so-called Nobel prize in 2006. Unsurprisingly, the

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Economist magazine was cock-a-hoop. ["A natural choice: Edmund Phelps

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earns the economics profession's highest accolade", Oct 12th 2006] The

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reasons why became clear. According to the magazine, "Phelps won his

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laurels in part for kicking the feet from under his intellectual

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forerunners" by presenting a (neo-classical) explanation for the breakdown

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of the so-called "Phillips curve." This presented a statistical trade-off

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between inflation and unemployment ("unemployment was low in Britain when

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wage inflation was high, and high when inflation was low"). The problem

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was that economists "were quick -- too quick -- to conclude that

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policymakers therefore faced a grand, macroeconomic trade-off" in which,

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due to "such a tight labour market, companies appease workers by offering

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higher wages. They then pass on the cost in the form of dearer prices,

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cheating workers of a higher real wage. Thus policy makers can engineer

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lower unemployment only through deception." Phelps innovation was to

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argue that "[e]ventually workers will cotton on,

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demanding still higher wages to offset the rising cost of living. They can

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be duped for as long as inflation stays one step ahead of their rising

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expectations of what it will be." The similarities with Friedman's idea

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are obvious. This meant that the "stable trade-off depicted by the Phillips

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curve is thus a dangerous mirage" which broke down in the 1970s with the rise

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of stagflation.

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Phelps argued that there was a "natural" rate of unemployment,

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where "workers' expectations are fulfilled, prices turn out as anticipated,

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and they no longer sell their labour under false pretences." This

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"equilibrium does not, sadly, imply full employment" and so capitalism

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required "leaving some workers mouldering on the shelf. Given economists'

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almost theological commitment to the notion that markets clear, the presence

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of unemployment in the world requires a theodicy to explain it." The

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religious metaphor does seem appropriate as most economists (and The

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Economist) do treat the market like a god (a theodicy is a specific branch

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of theology and philosophy that attempts to reconcile the existence of evil

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in the world with the assumption of a benevolent God). And, as with all

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gods, sacrifices are required and Phelps� theory is the means by which this

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is achieved. As the magazine noted: "in much of his work he contends that

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unemployment is necessary to cow workers, ensuring their loyalty to the

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company and their diligence on the job, at a wage the company can afford

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to pay" (i.e., one which would ensure a profit).

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It is this theory which has governed state policy since the 1980s. In other

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words, government's around the world have been trying to "cow workers" in

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order to ensure their obedience ("loyalty to the company"). Unsurprisingly,

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attempts to lower the "natural rate" have all involved using the state to

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break the economic power of working class people (attacking unions,

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increasing interest rates to increase unemployment in order to temporarily

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"cow" workers and so on). All so that profits can be keep high in the face

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of the rising wages caused by the natural actions of the market!

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Yet it must be stressed that Friedman's and Phelps' conclusions are hardly

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new. Anarchists and other socialists had been arguing since the 1840s that

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capitalism had no tendency to full employment either in theory or in

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practice. They have also noted how periods of full employment bolstered

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working class power and harmed profits. It is, as we stressed in

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<a href="secC1.html#secc15">section C.1.5</a>, the fundamental disciplinary mechanism of the system. Somewhat

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ironically, then, Phelps got bourgeois economics highest prize for

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restating, in neo-classical jargon, the model of the labour market

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expounded by, say, Marx:

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"If [capital�s] accumulation on the one hand increases the demand for

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labour, it increases on the other the supply of workers by 'setting

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them free', while at the same time the pressure of the unemployed

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compels those that are employed to furnish more labour, and therefore

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makes the supply of labour to a certain extent independent of the

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supply of labourers. The movement of the law of supply and demand of

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labour on this basis completes the despotism of capital. Thus as soon

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as the workers learn the secret of why it happens that the more they

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work, the more alien wealth they produce . . . as soon as, by setting

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up trade unions, etc., they try to organise a planned co-operation

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between employed and unemployed in order to obviate or to weaken the

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ruinous effects of this natural law of capitalistic production on

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their class, so soon capital and its sycophant, political economy,

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cry out at the infringement of the 'eternal' and so to speak 'sacred'

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law of supply and demand. Every combination of employed and unemployed

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disturbs the 'pure' action of this law. But on the other hand, as

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soon as . . . adverse circumstances prevent the creation of an

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industrial reserve army and, with it, the absolute dependence of the

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working-class upon the capitalist class, capital, along with its

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platitudinous Sancho Panza, rebels against the 'sacred' law of supply

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and demand, and tries to check its inadequacies by forcible means."

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[Capital, Vol. 1, pp. 793-4]

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</blockquote>

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That the Economist and Phelps are simply echoing, and confirming, Marx

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is obvious. Modern economics, while disparaging Marx, has integrated

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this idea into its macro-economic policy recommendations by urging the

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state to manipulate the economy to ensure that "inflation" (i.e. wage

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rises) are under control. Economics has played its role of platitudinous

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sycophant well while Phelps' theory has informed state interference

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("forcible means") in the economy since the 1980s, with the expected

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result that wages have failed to keep up with rising productivity and

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so capital as enriched itself at the expense of labour (see

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<a href="secC3.html">section C.3</a>

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for details). The use of Phelps' theory by capital in the class war is

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equally obvious -- as was so blatantly stated by The Economist and

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the head of the American Federal Reserve during this period:

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"there's supporting testimony from Alan Greenspan. Several times

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during the late 1990s, Greenspan worried publicly that, as

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unemployment drifted steadily lower the 'pool of available

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workers' was running dry. The dryer it ran, the greater risk of

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'wage inflation,' meaning anything more than minimal increases.

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Productivity gains took some of the edge of this potentially

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dire threat, said Greenspan, and so did 'residual fear of job

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skill obsolescence, which has induced a preference for job

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security over wage gains' . . . Workers were nervous and acting

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as if the unemployment rate were higher than the 4% it reached in

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the boom. Still, Greenspan was a bit worried, because . . . if

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the pool stayed dry, 'Significant increases in wages, in excess

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of productivity growth, [would] inevitably emerge, absent the

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unlikely repeal of the law of supply and demand.' Which is why

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Greenspan & Co. raised short-term interest rates by about two

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points during 1999 and the first half of 2000. There was no

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threat of inflation . . . nor were there any signs of rising

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worker militancy. But wages were creeping higher, and the

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threat of the sack was losing some of its bite." [Doug Henwood,

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After the New Economy, pp. 206-7]

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</blockquote>

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Which is quite ironic, given that Greenspan's role in the economy

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was, precisely, to "repeal" the "law of supply and demand." As

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one left-wing economist puts it (in a chapter correctly entitled "The

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Workers Are Getting Uppity: Call In the Fed!"), the Federal Reverse

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(like all Central Banks since the 1980s) "worries that if too many

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people have jobs, or if it is too easy for workers to find jobs,

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there will be upward pressure on wages. More rapid wage growth can get

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translated into more rapidly rising prices -- in other words, inflation.

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So the Fed often decides to raise interest rates to slow the economy

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and keep people out of work in order to keep inflation from increasing

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and eventually getting out of control." However, "[m]ost people probably

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do not realise that the Federal Reserve Board, an agency of the

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government, intervenes in the economy to prevent it from creating too

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many jobs. But there is even more to the story. When the Fed hits the

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brakes to slow job growth, it is not doctors, lawyers, and CEOs who end

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up without jobs. The people who lose are those in the middle and the

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bottom -- sales clerks, factory workers, custodians, and dishwashers.

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These are the workers who don�t get hired or get laid off when the

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economy slows or goes into a recession." [The Conservative Nanny State,

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p. 31] Thus the state pushes up unemployment rates to slow wage growth,

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and thereby relieve inflationary pressure. The reason should be obvious:

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"In periods of low unemployment, workers don't only gain from higher

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wages. Employers must make efforts to accommodate workers' various needs,

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such as child care or flexible work schedules, because they know that

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workers have other employment options. The Fed is well aware of the

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difficulties that employers face in periods of low unemployment. It

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compiles a regular survey, called the 'Beige Book,' of attitudes

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from around the country about the state of the economy. Most of

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the people interviewed for the Beige Book are employers.

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"From 1997 to 2000, when the unemployment rate was at its lowest

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levels in 30 years, the Beige Book was filled with complaints that

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some companies were pulling workers from other companies with offers

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of higher wages and better benefits. Some Beige Books reported that

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firms had to offer such non-wage benefits as flexible work hours,

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child care, or training in order to retain workers. The Beige Books

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give accounts of firms having to send buses into inner cities to

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bring workers out to the suburbs to work in hotels and restaurants.

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It even reported that some employers were forced to hire workers

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with handicaps in order to meet their needs for labour.

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"From the standpoint of employers, life is much easier when the workers

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are lined up at the door clamouring for jobs than when workers have the

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option to shop around for better opportunities. Employers can count on

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a sympathetic ear from the Fed. When the Fed perceives too much upward

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wage pressure, it slams on the brakes and brings the party to an end.

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The Fed justifies limiting job growth and raising the unemployment

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rate because of its concern that inflation may get out of control,

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but this does not change the fact that it is preventing workers, and

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specifically less-skilled workers, from getting jobs, and clamping

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down on their wage growth." [Op. Cit., pp. 32-3]

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</blockquote>

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This has not happened by accident. Lobbying by business, as another left-wing

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economist stresses, "is directed toward increasing their economic power"

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and business "has been a supporter of macroeconomic policies that have

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operated the economy with higher rates of unemployment. The stated justification

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is that this lowers inflation, but it also weakens workers' bargaining power."

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Unsurprisingly, "the economic consequence of the shift in the balance of power

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in favour of business . . . has served to redistribute income towards profits at

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the expense of wages, thereby lowering demand and raising unemployment."

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In effect, the Federal Reserve "has been using monetary policy as a form of

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surrogate incomes policy, and this surrogate policy has been tilted against

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wages in favour of profits" and so is regulating the economy "in

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a manner favourable to business." [Thomas I. Palley, Plenty

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of Nothing, p. 77, p. 111 and pp. 112-3] That this is done under the name

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of fighting inflation should not fool us:

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"Mild inflation is often an indication that workers have some bargaining

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strength and may even have the upper hand. Yet, it is at exactly this

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stage that the Fed now intervenes owning to its anti-inflation commitment,

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and this intervention raises interest rates and unemployment. Thus, far

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from being neutral, the Fed's anti-inflation policy implies siding with

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business in the ever-present conflict between labour and capital over

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distribution of the fruits of economic activity . . . natural-rate theory

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serves as the perfect cloak for a pro-business policy stance."

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[Op. Cit., p. 110]

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</blockquote>

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In a sense, it is understandable that the ruling class within capitalism

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desires to manipulate unemployment in this way and deflect questions

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about their profit, property and power onto the state of the labour market.

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High prices can, therefore, be blamed on high wages rather than high

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profits, rents and interest while, at the same time, workers will put

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up with lower hours and work harder and be too busy surviving to find

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the time or the energy to question the boss's authority either in theory

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or in practice. So managing the economy by manipulating interest rates to

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increase unemployment levels when required allows greater profits to be

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extracted from workers as management hierarchy is more secure. People

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will put up with a lot in the face of job insecurity. As left-wing

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economist Thomas Balogh put it, full employment "generally removes the

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need for servility, and thus alters the way of life, the relationship

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between classes . . . weakening the dominance of men over men, dissolving

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the master-servant relation. It is the greatest engine for the attainment

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by all of human dignity and greater equality." [The Irrelevance of

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Conventional Economics, p. 47]

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Which explains, in part, why the 1960s and 1970s were marked by mass

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social protest against authority rather than von Hayek's "Road to

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Serfdom." It also explains why the NAIRU was so enthusiastically

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embraced and applied by the ruling class. When times are hard, workers

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with jobs think twice before standing up to their bosses and so work

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harder, for longer and in worse conditions. This ensures that surplus

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value is increased relative to wages (indeed, in the USA, real wages

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have stagnated since 1973 while profits have grown massively). In

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addition, such a policy ensures that political discussion about

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investment, profits, power and so on ("the other institutional

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factors") are reduced and diverted because working class people are

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too busy trying to make ends meet. Thus the state intervenes in the

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economy to stop full employment developing to combat inflation and

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instability on behalf of the capitalist class.

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That this state manipulation is considered consistent with the "free market"

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says a lot about the bankruptcy of the capitalist system and its defenders.

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But, then, for most defenders of the system state intervention on behalf of

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capital is part of the natural order, unlike state intervention (at least

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in rhetoric) on behalf of the working class (and shows that Kropotkin

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was right to stress that the state never practices "laissez-faire" with

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regard to the working class -- see <a href="secD1.html">section D.1</a>). Thus neo-liberal capitalism

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is based on monetary policy that explicitly tries to weaken working class

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resistance by means of unemployment. If "inflation" (i.e. labour income)

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starts to increase, interest rates are raised so causing unemployment and,

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it is hoped, putting the plebes back in their place. In other words, the

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road to private serfdom has been cleared of any barriers imposed on it by

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the rise of the working class movement and the policies of social democracy

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implemented after the Second World War to stop social revolution. This is

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the agenda pursued so strongly in America and Britain, imposed on the

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developing nations and urged upon Continental Europe.

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Although the aims and results of the NAIRU should be enough to condemn it

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out of hand, it can be dismissed for other reasons. First and foremost,

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this "natural" rate is both invisible and can move. This means trying to

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find it is impossible (although it does not stop economists trying, and then

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trying again when rate inflation and unemployment rates refute the first

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attempt, and then trying again and again). In addition, it is a fundamentally

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a meaningless concept -- you can prove anything with an invisible, mobile

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value -- it is an non-refutable concept and so, fundamentally, non-scientific.

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Close inspection reveals natural rate theory to be akin to a religious

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doctrine. This is because it is not possible to conceive of a

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test that could possibly falsify the theory. When predictions of the

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natural rate turn out wrong (as they repeatedly have), proponents can

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simply assert that the natural rate has changed. That has led to the most

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recent incarnation of the theory in which the natural rate is basically

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the trend rate of unemployment. Whatever trend is observed is natural --

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case closed.

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Since natural rate theory cannot be tested, a sensible thing would

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be to examine its assumptions for plausibility and reasonableness.

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However, Milton Friedman�s early work on economic methodology blocks

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this route as he asserted that realism and plausibility of assumptions

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have no place in economics. With most economists blindly accepting

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this position, the result is a church in which entry is conditional

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on accepting particular assumptions about the working of markets. The

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net effect is to produce an ideology, an ideology which survives due

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to its utility to certain sections of society.

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If this is the case, and it is, then any attempts to maintain the "natural"

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rate are also meaningless as the only way to discover it is to watch actual

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inflation levels and raising interest rates appropriately. Which means

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that people are being made unemployed on the off-chance that the unemployment

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level will drop below the (invisible and mobile) "natural" rate and harm the

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interests of the ruling class (high inflation rates harms interest incomes

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and full employment squeezes profits by increasing workers' power). This

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does not seem to bother most economists, for whom empirical evidence at the

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best of times is of little consequence. This is doubly true with the NAIRU,

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for with an invisible, mobile value, the theory is always true after the fact

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-- if inflation rises as unemployment rises, then the natural rate has

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increased; if inflation falls as unemployment rises, it has fallen!

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As post-Keynesian economist James K. Galbraith noted in his useful critique

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of the NAIRU, "as the real unemployment rate moves, the apparent NAIRU moves

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in its shadow" and its "estimates and re-estimates seem largely a response

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to predictive failure. We still have no theory, and no external evidence,

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governing the fall of the estimated NAIRU. The literature simply

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observes that inflation hasn't occurred and so the previous estimate

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must have been too high." He stresses, economists have held "to a concept

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in the face of twenty years of unexplained variation, predictive failure,

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and failure of the profession to coalesce on procedural issues." [Created

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Unequal, p. 180] Given that most mainstream economists subscribe to this

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fallacy, it just shows how the "science" accommodates itself to the needs

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of the powerful and how the powerful will turn to any old nonsense if

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it suits their purpose. A better example of supply and demand for ideology

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could not be found.

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So, supporters of "free market" capitalism do have a point, "actually

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existing capitalism" has created high levels of unemployment. What is

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significant is that most supporters of capitalism consider that this

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is a laissez-faire policy! Sadly, the ideological supporters of pure

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capitalism rarely mention this state intervention on behalf of the

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capitalist class, preferring to attack trade unions, minimum wages,

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welfare and numerous other "imperfections" of the labour market which,

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strangely, are designed (at least in rhetoric) to benefit working class

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people. Ignoring that issue, however, the question now arises, would a

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"purer" capitalism create full employment?

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First, we should point out that some supporters of "free market" capitalism

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(most notably, the "Austrian" school) claim that real markets are not in

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equilibrium at all, i.e. that the nature state of the economy is one of

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disequilibrium. As we noted in <a href="secC1.html#secc16">section C.1.6</a>, this means full employment

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is impossible as this is an equilibrium position but few explicitly state

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this obvious conclusion of their own theories and claim against logic that

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full employment can occur (full employment, it should be stressed, has

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never meant 100% employment as they will always be some people looking

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for a job and so by that term we mean close to 100% employment). Anarchists

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agree: full employment can occur in "free market" capitalism but not for

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ever nor even for long periods. As the Polish socialist economist Michal

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Kalecki pointed out in regards to pre-Keynesian capitalism, "[n]ot only

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is there mass unemployment in the slump, but average employment throughout

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the cycle is considerably below the peak reached in the boom. The reserve

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of capital equipment and the reserve army of unemployed are typical features

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of capitalist economy at least throughout a considerable part of the

449

[business] cycle." [quoted by Malcolm C. Sawyer, The Economics of Michal

450

Kalecki, pp. 115-6]

451

452

It is doubtful that "pure" capitalism will be any different. This is due to

453

the nature of the system. What is missing from the orthodox analysis is

454

an explicit discussion of class and class struggle (implicitly, they are

455

there and almost always favour the bosses). Once this is included, the

456

functional reason for unemployment becomes clear. It serves to discipline

457

the workforce, who will tolerate being bossed about much more with the fear

458

that unemployment brings. This holds down wages as the threat of unemployment

459

decreases the bargaining power of workers. This means that unemployment is

460

not only a natural product of capitalism, it is an essential part of it.

461

462

So cycles of short periods approaching full employment and followed by longer

463

periods of high unemployment are actually a more likely outcome of pure

464

capitalism than continued full employment. As we argued in sections

465

466

and <a href="secC7.html#secc71">C.7.1</a> capitalism needs unemployment to function successfully and so

467

"free market" capitalism will experience periods of boom and slump, with

468

unemployment increasing and decreasing over time (as can be seen from

469

19th century capitalism). So as Juliet Schor, a labour economist, put it,

470

usually "employers have a structural advantage in the labour market, because

471

there are typically more candidates ready and willing to endure this

472

work marathon [of long hours] than jobs for them to fill." Under

473

conditions of full-employment "employers are in danger of losing the

474

upper hand" and hiring new workers "suddenly becomes much more difficult.

475

They are harder to find, cost more, and are less experienced." These

476

considerations "help explain why full employment has been rare."

477

Thus competition in the labour market is "typically skewed in favour of

478

employers: it is a buyers market. And in a buyer's market, it is the

479

sellers who compromise." In the end, workers adapt to this inequality of

480

power and instead of getting what they want, they want what they get

481

(to use Schor's expression). Under full employment this changes. In

482

such a situation it is the bosses who have to start compromising. And

483

they do not like it. As Schor notes, America "has never experienced

484

a sustained period of full employment. The closest we have gotten is

485

the late 1960s, when the overall unemployment rate was under 4 percent

486

for four years. But that experience does more to prove the point than

487

any other example. The trauma caused to business by those years of a

488

tight labour market was considerable. Since then, there has been a

489

powerful consensus that the nation cannot withstand such a low rate

490

of unemployment." Hence the support for the NAIRU to ensure that

491

"forced idleness of some helps perpetuate the forced overwork of

492

others." [The Overworked American, p. 71, p. 75, p. 129, pp. 75-76

493

and p. 76]

494

495

So, full employment under capitalism is unlikely to last long (nor would

496

full employment booms fill a major part of the business cycle). In

497

addition, it should be stressed that the notion that capitalism naturally

498

stays at equilibrium or that unemployment is temporary adjustments is false,

499

even given the logic of capitalist economics. As Proudhon argued:

500

501

"The economists admit it [that machinery causes unemployment]: but

502

here they repeat their eternal refrain that, after a lapse of time, the

503

demand for the product having increased in proportion to the reduction

504

in price [caused by the investment], labour in turn will come finally to

505

be in greater demand than ever. Undoubtedly, with time, the equilibrium

506

will be restored; but I must add again, the equilibrium will be no sooner

507

restored at this point than it will be disturbed at another, because the

508

spirit of invention never stops." [System of Economical Contradictions,

509

pp. 200-1]

510

</blockquote>

511

That capitalism creates permanent unemployment and, indeed, needs it

512

to function is a conclusion that few, if any, pro-"free market" capitalists

513

subscribe to. Faced with the empirical evidence that full employment is

514

rare in capitalism, they argue that reality is not close enough to their

515

theories and must be changed (usually by weakening the power of labour by

516

welfare "reform" and reducing "union power"). Thus reality is at fault, not

517

the theory (to re-quote Proudhon, "Political economy -- that is, proprietary

518

despotism -- can never be in the wrong: it must be the proletariat."

519

[Op. Cit. p. 187]) So if unemployment exists, then its because real wages

520

are too high, not because capitalists need unemployment to discipline

521

labour (see <a href="secC9.html#secc92">section C.9.2</a> for evidence that this argument is false). Or

522

if real wages are falling as unemployment is rising, it can only mean that

523

the real wage is not falling fast enough -- empirical evidence is never

524

enough to falsify logical deductions from assumptions!

525

526

(As an aside, it is one of amazing aspects of the "science" of economics

527

that empirical evidence is never enough to refute its claims. As the

528

Post-Keynesian economist Nicholas Kaldor once pointed out, "[b]ut unlike

529

any scientific theory, where the basic assumptions are chosen on the

530

basis of direct observation of the phenomena the behaviour of which

531

forms the subject-matter of the theory, the basic assumptions of

532

economic theory are either of a kind that are unverifiable. . . or

533

of a kind which are directly contradicted by observation." [Further

534

Essays on Applied Economics, pp. 177-8])

535

536

Of course, reality often has the last laugh on any ideology. For example,

537

since the late 1970s and early 1980s right-wing capitalist parties have

538

taken power in many countries across the world. These regimes made many

539

pro-free market reforms, arguing that a dose of market forces would lower

540

unemployment, increase growth and so on. The reality proved somewhat

541

different. For example, in the UK, by the time the Labour Party under

542

Tony Blair come back to office in 1997, unemployment (while falling) was

543

still higher than it had been when the last Labour government left office

544

in 1979 (this in spite of repeated redefinitions of unemployment by the

545

Tories in the 1980s to artifically reduce the figures). 18 years of labour

546

market reform had not reduced unemployment even under the new

547

definitions. This outcome was identical to New Zealand's neo-liberal

548

experiment, were its overall effect was unimpressive, to say the least:

549

lower growth, lower productivity and feeble real wage increases combined

550

with rising inequality and unemployment. Like the UK, unemployment was

551

still higher in 1997 than it had been in 1979. Over a decade of "flexible"

552

labour markets had increased unemployment (more than doubling it,

553

in fact, at one point as in the UK under Thatcher). It is no

554

understatement to argue, in the words of two critics of neo-liberalism,

555

that the "performance of the world economy since capital was

556

liberalised has been worse than when it was tightly controlled"

557

and that "[t]hus far, [the] actual performance [of liberalised

558

capitalism] has not lived up to the propaganda." [Larry Elliot

559

and Dan Atkinson, The Age of Insecurity, p. 274 and p. 223]

560

In fact, as Palley notes, "wage and income growth that would have

561

been deemed totally unsatisfactory a decade ago are now embraced as

562

outstanding economic performance." [Op. Cit., p. 202]

563

564

Lastly, it is apparent merely from a glance at the history of capitalism

565

during its laissez-faire heyday in the 19th century that "free"

566

competition among workers for jobs does not lead to full employment.

567

Between 1870 and 1913, unemployment was at an average of 5.7% in the

568

16 more advanced capitalist countries. This compares to an average of

569

7.3% in 1913-50 and 3.1% in 1950-70. [Takis Fotopoulos, "The Nation-State

570

and the Market", pp. 37-80, Society and Nature, Vol. 2, No. 2, p. 61]

571

If laissez-faire did lead to full employment, these figures would, surely,

572

be reversed.

573

574

As discussed above, full employment cannot be a fixed

575

feature of capitalism due to its authoritarian nature and the requirements

576

of production for profit. To summarise, unemployment has more to do with

577

private property than the wages of our fellow workers or any social safety

578

nets working class movements have managed to pressure the ruling class to

579

accept. However, it is worthwhile to discuss why the "free market" capitalist

580

is wrong to claim that unemployment within their system will not exist for

581

long periods of time. In addition, to do so will also indicate the poverty

582

of their theory of, and "solution" to, unemployment and the human

583

misery they would cause. We do this in the <a href="secC9.html#secc91">next section</a>.

584

585

586

<h2><a name="secc91">C.9.1 Would cutting wages reduce unemployment?</a></h2>

587

588

589

The "free market" capitalist (i.e., neo-classical, neo-liberal or "Austrian")

590

argument is that unemployment is caused by the real wage of labour being

591

higher than the market clearing level. The basic argument is that the market

592

for labour is like any other market and as the price of a commodity increases,

593

the demand for it falls. In terms of labour, high prices (wages) causes lower

594

demand (unemployment). Workers, it is claimed, are more interested in money

595

wages than real wages (which is the amount of goods they can buy with their

596

money wages). This leads them to resist wage cuts even when prices are falling,

597

leading to a rise in their real wages and so they price themselves out of work

598

without realising it. From this analysis comes the argument that if workers

599

were allowed to compete 'freely' among themselves for jobs, real wages would

600

decrease and so unemployment would fall. State intervention (e.g. unemployment

601

benefit, social welfare programmes, legal rights to organise, minimum wage

602

laws, etc.) and labour union activity are, according to this theory, the

603

cause of unemployment, as such intervention and activity forces wages above

604

their market level and so force employers to "let people go." The key to

605

ending unemployment is simple: cut wages.

606

607

This position was brazenly put by "Austrian" economist Murray Rothbard. He

608

opposed any suggestion that wages should not be cut as the notion that

609

"the first shock of the depression must fall on profits and not on wages."

610

This was "precisely the reverse of sound policy since profits provide the

611

motive power for business activity." [America's Great Depression, p. 188]

612

Rothbard's analysis of the Great Depression is so extreme it almost reads

613

like a satirical attack on the laissez-faire position as his hysterical

614

anti-unionism makes him blame unions for the depression for, apparently,

615

merely existing (even in an extremely weakened state) for their influence

616

was such as to lead economists and the President to recommend to numerous

617

leading corporate business men not to cut wages to end the depression

618

(wages were cut, but not sufficiently as prices also dropped as we will

619

discuss in the <a href="secC2.html#secc92">next section</a>). It should be noted that Rothbard takes his

620

position on wage cutting despite of an account of the business cycle rooted

621

in bankers lowering interest rates and bosses over-investing as a result

622

(see <a href="secC8.html">section C.8</a>). So despite not setting interest rates

623

nor making investment decisions, he expected working class people to pay for

624

the actions of bankers and capitalists by accepting lower wages! Thus

625

working class people must pay the price of the profit seeking activities

626

of their economic masters who not only profited in good times, but can

627

expect others to pay the price in bad ones. Clearly, Rothbard took the

628

first rule of economics to heart: the boss is always right.

629

630

The chain of logic in this explanation for unemployment is rooted in many of the

631

key assumptions of neo-classical and other marginalist economics. A firm's demand

632

for labour (in this schema) is the marginal physical product of labour multiplied

633

by the price of the output and so it is dependent on marginal productivity theory.

634

It is assumed that there are diminishing returns and marginal productivity as

635

only this produces a downward-sloping labour demand curve. For labour, it is

636

assumed that its supply curve is upwards slopping. So it must be stressed that

637

marginal productivity theory lies at the core of "free market" capitalist theories

638

of output and distribution and so unemployment as the marginal product of labour

639

is interpreted as the labour demand curve. This enforces the viewpoint that

640

unemployment is caused by wages being too high as firms adjust production to

641

bring the marginal cost of their products (the cost of producing one more item)

642

into equality with the product's market-determined price. So a drop in labour

643

costs theoretically leads to an expansion in production, producing jobs for the

644

"temporarily" unemployed and moving the economy toward full-employment. So, in

645

this theory, unemployment can only be reduced by lowering the real wages of

646

workers currently employed. Thus the unfettered free market would ensure that

647

all those who want to work at the equilibrium real wage will do so. By definition,

648

any people who were idle in such a pure capitalism would be voluntarily enjoying

649

leisure and not unemployed. At worse, mass unemployment would be a transitory

650

disturbance which will quickly disappear if the market is flexible enough and

651

there are no imperfections in it (such as trade unions, workers' rights, minimum

652

wages, and so on).

653

654

Sadly for these arguments, the assumptions required to reach it are absurd as

655

the conclusions (namely, that there is no involuntary unemployment as markets

656

are fully efficient). More perniciously, when confronted with the reality of

657

unemployment, most supporters of this view argue that it arises only because

658

of government-imposed rigidities and trade unions. In their "ideal" world

659

without either, there would, they claim, be no unemployment. Of course, it is

660

much easier to demand that nothing should be done to alleviate unemployment

661

and that workers' real wages be reduced when you are sitting in a tenured

662

post in academia save from the labour market forces you wish others to be

663

subjected to (in their own interests).

664

665

This perspective suffered during the Great Depression and the threat of

666

revolution produced by persistent mass unemployment meant that dissident

667

economists had space to question the orthodoxy. At the head of this

668

re-evaluation was Keynes who presented an alternative analysis and

669

solution to the problem of unemployment in his 1936 book The General

670

Theory of Employment, Interest and Money (it should be noted that the

671

Polish socialist economist Michal Kalecki independently developed a

672

similar theory a few years before Keynes but without the neo-classical

673

baggage Keynes brought into his work).

674

675

Somewhat ironically, given the abuse he has suffered at the hands of the right

676

(and some of his self-proclaimed followers), Keynes took the assumptions of

677

neo-classical economics on the labour market as the starting point of his

678

analysis. As such, critics of Keynes's analysis generally misrepresent it. For

679

example, right-liberal von Hayek asserted that Keynes "started from the correct

680

insight that the regular cause of extensive unemployment is real wages that are

681

too high. The next step consisted in the proposition that a direct lowering of

682

money wages could be brought about only by a struggle so painful and prolonged

683

that it could not be contemplated. Hence he concluded that real wages must be

684

lowered by the process of lowering the value of money," i.e. by inflation. Thus

685

"the supply of money must be so increased as to raise prices to a level where

686

the real value of the prevailing money wage is no longer greater than the

687

productivity of the workers seeking employment." [The Constitution of Liberty,

688

p. 280] This is echoed by libertarian Marxist Paul Mattick who presented an

689

identical argument, stressing that for Keynes "wages were less flexible than

690

had been generally assumed" and lowering real wages by inflation "allowed for

691

more subtle ways of wage-cutting than those traditionally employed." [Marx

692

and Keynes, p. 7]

693

694

Both are wrong. These arguments are a serious distortion of Keynes's argument.

695

While he did start by assuming the neo-classical position that unemployment was

696

caused by wages being too high, he was at pains to stress that even with ideally

697

flexible labour markets cutting real wages would not reduce unemployment.

698

As such, Keynes argued that unemployment was not caused by labour resisting

699

wage cuts or by "sticky" wages. Indeed, any "Keynesian" economist who does argue

700

that "sticky" wages are responsible for unemployment shows that he or she has not

701

read Keynes -- Chapter two of the General Theory critiques precisely this

702

argument. Taking neo-classical economists at its word, Keynes analyses what would

703

happen if the labour market were perfect and so he assumes the same model

704

as his neo-classical opponents, namely that unemployment is caused by wages being

705

too high and there is flexibility in both commodity and labour markets. As he

706

stressed, his "criticism of the accepted [neo-]classical theory of economics

707

has consisted not so much in finding logical flaws in its analysis as in pointing

708

out that its tacit assumptions are seldom or never satisfied, with the result that

709

it cannot solve the economic problems of the actual world." [The General

710

Theory, p. 378]

711

712

What Keynes did was to consider the overall effect of cutting wages on

713

the economy as a whole. Given that wages make up a significant part of the

714

costs of a commodity, "if money-wages change, one would have expected the

715

[neo-]classical school to argue that prices would change in almost the

716

same proportion, leaving the real wage and the level of unemployment

717

practically the same as before." However, this was not the case, causing

718

Keynes to point out that they "do not seem to have realised that . . .

719

their supply curve for labour will shift bodily with every movement of

720

prices." This was because labour cannot determine its own real wage as

721

prices are controlled by bosses. Once this is recognised, it becomes

722

obvious that workers do not control the cost of living (i.e., the real

723

wage). Therefore trade unions "do not raise the obstacle to any increase

724

in aggregate employment which is attributed to them by the [neo-]classical

725

school." So while workers could, in theory, control their wages by asking

726

for less pay (or, more realistically, accepting any wage cuts imposed by

727

their bosses as the alternative is unemployment) they do not have any

728

control over the prices of the goods they produce. This means that they

729

have no control over their real wages and so cannot reduce unemployment

730

by pricing themselves into work by accepting lower wages. Given these

731

obvious facts, Keynes concluded that there was "no ground for the belief

732

that a flexible wage policy is capable of continuous full employment . . .

733

The economic system cannot be made self-adjusting along these lines."

734

[Op. Cit., p. 12, pp. 8-9, p. 15 and p. 267] As he summarised:

735

736

"the contention that the unemployment which characterises a depression

737

is due to a refusal by labour to accept a reduction of money-wages

738

is not clearly supported by the facts. It is not very plausible to

739

assert that unemployment in the United States in 1932 was due either to

740

labour obstinately refusing to accept a reduction of money-wages or to

741

its demanding a real wage beyond what the productivity of the economic

742

machine was capable of furnishing . . . Labour is not more truculent

743

in the depression than in the boom -- far from it. Nor is its physical

744

productivity less. These facts from experience are a prima facie

745

ground for questioning the adequacy of the [neo-]classical analysis."

746

[Op. Cit., p. 9]

747

</blockquote>

748

This means that the standard neo-classical argument was flawed. While cutting

749

wages may make sense for one firm, it would not have this effect throughout

750

the economy as is required to reduce unemployment as a whole. This is another

751

example of the fallacy of composition. What may work with an individual worker

752

or firm will not have the same effect on the economy as a whole for cutting

753

wages for all workers would have a massive effect on the aggregate demand for

754

their firms products.

755

756

For Keynes and Kalecki, there were two possibilities if wages were cut. One

757

possibility, which Keynes considered the most likely, would be that a cut in

758

money wages across the whole economy would see a similar cut in prices. The

759

net effect of this would be to leave real wages unchanged. The other assumes

760

that as wages are cut, prices remain prices remained unchanged or only fell

761

by a small amount (i.e. if wealth was redistributed from workers to their

762

employers). This is the underlying assumption of "free market" argument that

763

cutting wages would end the slump. In this theory, cutting real wages would

764

increase profits and investment and this would make up for any decline in

765

working class consumption and so its supporters reject the claim that cutting

766

real wages would merely decrease the demand for consumer goods without

767

automatically increasing investment sufficiently to compensate for this.

768

769

However, in order make this claim, the theory depends on three critical

770

assumptions, namely that firms can expand production, that they will

771

expand production, and that, if they do, they can sell their expanded

772

production. This theory and its assumptions can be questioned. To do so

773

we will draw upon David Schweickart's excellent summary. [Against

774

Capitalism, pp. 105-7]

775

776

The first assumption states that it is always possible for a company to

777

take on new workers. Yet increasing production requires more than just

778

labour. Tools, raw materials and work space are all required in addition

779

to new workers. If production goods and facilities are not available,

780

employment will not be increased. Therefore the assumption that labour

781

can always be added to the existing stock to increase output is plainly

782

unrealistic, particularly if we assume with neo-classical economics that

783

all resources are fully utilised (for an economy operating at less than

784

full capacity, the assumption is somewhat less inappropriate).

785

786

Next, will firms expand production when labour costs decline? Hardly.

787

Increasing production will increase supply and eat into the excess profits

788

resulting from the fall in wages (assuming, of course, that demand holds

789

up in the face of falling wages). If unemployment did result in a lowering

790

of the general market wage, companies might use the opportunity to replace

791

their current workers or force them to take a pay cut. If this happened,

792

neither production nor employment would increase. However, it could be

793

argued that the excess profits would increase capital investment in the

794

economy (a key assumption of neo-liberalism). The reply is obvious: perhaps,

795

perhaps not. A slumping economy might well induce financial caution and

796

so capitalists could stall investment until they are convinced of the

797

sustained higher profitability will last.

798

799

This feeds directly into the last assumption, namely that the produced

800

goods will be sold. Assuming that money wages are cut, but prices remain

801

the same then this would be a cut in real wages. But when wages decline,

802

so does worker purchasing power, and if this is not offset by an increase

803

in spending elsewhere, then total demand will decline. However, it can be

804

argued that not everyone's real income would fall: incomes from profits

805

would increase. But redistributing income from workers to capitalists, a

806

group who tend to spend a smaller portion of their income on consumption

807

than do workers, could reduce effective demand and increase unemployment.

808

Moreover, business does not (cannot) instantaneously make use of the

809

enlarged funds resulting from the shift of wages to profit for investment

810

(either because of financial caution or lack of existing facilities). In

811

addition, which sane company would increase investment in the face of

812

falling demand for its products? So when wages decline, so does workers'

813

purchasing power and this is unlikely to be offset by an increase in

814

spending elsewhere. This will lead to a reduction in aggregate demand as

815

profits are accumulated but unused, so leading to stocks of unsold goods

816

and renewed price reductions. This means that the cut in real wages will

817

be cancelled out by price cuts to sell unsold stock and unemployment remains.

818

In other words, contrary to neo-classical economics, a fall in wages may

819

result in the same or even more unemployment as aggregate demand drops

820

and companies cannot find a market for their goods. And so, "[i]f prices

821

do not fall, it is still worse, for then real wages are reduced and

822

unemployment is increased directly by the fall in the purchase of

823

consumption goods." [Joan Robinson, Further Contributions to Economics,

824

p. 34]

825

826

The "Pigou" (or "real balance") effect is another neo-classical argument

827

that aims to prove that (in the end) capitalism will pass from slump to

828

boom quickly. This theory argues that when unemployment is sufficiently

829

high, it will lead to the price level falling which would lead to a rise

830

in the real value of the money supply and so increase the real value

831

of savings. People with such assets will have become richer and this

832

increase in wealth will enable people to buy more goods and so investment

833

will begin again. In this way, slump passes to boom naturally.

834

835

However, this argument is flawed in many ways. In reply, Michal Kalecki

836

argued that, firstly, Pigou had "assumed that the banking system would

837

maintain the stock of money constant in the face of declining incomes,

838

although there was no particular reason why they should." If the money

839

stock changes, the value of money will also change. Secondly, that "the

840

gain in money holders when prices fall is exactly offset by the loss to

841

money providers. Thus, whilst the real value of a deposit in bank

842

account rises for the depositor when prices fell, the liability

843

represented by that deposit for the bank also rises in size." And,

844

thirdly, "that falling prices and wages would mean that the real value

845

of outstanding debts would be increased, which borrowers would find it

846

increasingly difficult to repay as their real income fails to keep pace

847

with the rising real value of debt. Indeed, when the falling prices and

848

wages are generated by low levels of demand, the aggregate real income

849

will be low. Bankruptcies follow, debts cannot be repaid, and a

850

confidence crisis was likely to follow." In other words, debtors may

851

cut back on spending more than creditors would increase it and so the

852

depression would continue as demand did not rise. [Malcolm C. Sawyer,

853

The Economics of Michal Kalecki, p. 90]

854

855

So, the traditional neo-classical reply that investment spending will increase

856

because lower costs will mean greater profits, leading to greater savings,

857

and ultimately, to greater investment is weak. Lower costs will mean greater

858

profits only if the products are sold, which they might not be if demand

859

is adversely affected. In other words, a higher profit margins do not result

860

in higher profits due to fall in consumption caused by the reduction of

861

workers purchasing power. And, as Michal Kalecki argued, wage cuts in

862

combating a slump may be ineffective because gains in profits are not

863

applied immediately to increase investment and the reduced purchasing power

864

caused by the wage cuts causes a fall in sales, meaning that higher profit

865

margins do not result in higher profits. Moreover, as Keynes pointed out long

866

ago, the forces and motivations governing saving are quite distinct from

867

those governing investment. Hence there is no necessity for the two quantities

868

always to coincide. So firms that have reduced wages may not be able to sell

869

as much as before, let alone more. In that case they will cut production,

870

add to unemployment and further reduce demand. This can set off a

871

vicious downward spiral of falling demand and plummeting production leading

872

to depression, a process described by Kropotkin (nearly 40 years before

873

Keynes made the same point in The General Theory):

874

875

"Profits being the basis of capitalist industry, low profits explain all

876

ulterior consequences.

877

878

"Low profits induce the employers to reduce the wages, or the number of

879

workers, or the number of days of employment during the week. . . As

880

Adam Smith said, low profits ultimately mean a reduction of wages, and

881

low wages mean a reduced consumption by the worker. Low profits mean also

882

a somewhat reduced consumption by the employer; and both together mean

883

lower profits and reduced consumption with that immense class of middlemen

884

which has grown up in manufacturing countries, and that, again, means

885

a further reduction of profits for the employers." [Fields, Factories

886

and Workshops Tomorrow, p. 33]

887

</blockquote>

888

So, as is often the case, Keynes was simply including into mainstream economics

889

perspectives which had long been held by critics of capitalism and dismissed

890

by the orthodoxy. Keynes' critique of Say's Law essentially repeated Marx's

891

while Proudhon pointed out in 1846 that "if the producer earns less, he will

892

buy less" and this will "engender . . . over-production and destitution."

893

This was because "though the workmen cost [the capitalist] something, they

894

are [his] customers: what will you do with your products, when driven away

895

by [him], they shall consume no longer?" This means that cutting wages and

896

employment would not work for they are "not slow in dealing employers a

897

counter-blow; for if production excludes consumption, it is soon obliged

898

to stop itself." [System of Economical Contradictions, p. 204 and p. 190]

899

Significantly, Keynes praised Proudhon's follower Silvio Gesell for getting

900

part of the answer and for producing "an anti-Marxian socialism" which

901

the "future will learn more from" than Marx. [Op. Cit., p. 355]

902

903

So far our critique of the "free market" position has, like Keynes's,

904

been within the assumptions of that theory itself. More has to be said,

905

though, as its assumptions are deeply flawed and unrealistic. It should

906

be stressed that while Keynes's acceptance of much of the orthodoxy ensured

907

that at least some of his ideas become part of the mainstream,

908

Post-Keynesians like Joan Robinson would latter bemoan the fact that

909

he sought a compromise rather than clean break with the orthodoxy. This

910

lead to the rise of the post-war neo-classical synthesis, the so-called

911

"Keynesian" argument that unemployment was caused by wages being "sticky"

912

and the means by which the right could undermine social Keynesianism and

913

ensure a return to neo-classical orthodoxy.

914

915

Given the absurd assumptions underlying the "free market" argument, a wider

916

critique is possible as it reflects reality no more than any other part of

917

the pro-capitalist ideology which passes for mainstream economics.

918

919

As noted above, the argument that unemployment is caused by wages being

920

too high is part of the wider marginalist perspective. Flaws in that will

921

mean that its explanation of unemployment is equally flawed. So it must

922

be stressed that the marginalist theory of distribution lies at the core

923

of its theories of both output and unemployment. In that theory, the marginal

924

product of labour is interpreted as the labour demand curve as the firm's

925

demand for labour is the marginal physical product of labour multiplied by

926

the price of the output and this produces the viewpoint that unemployment is

927

caused by wages being too high. So given the central role which marginal

928

productivity theory plays in the mainstream argument, it is useful to start

929

our deeper critique by re-iterating that, as indicated in <a href="secC2.html">section C.2</a>,

930

Joan Robinson and Piero Sraffa had successfully debunked this theory in the

931

1950s. "Yet for psychological and political reasons," notes James K.

932

Galbraith, "rather than for logical and mathematical ones, the capital

933

critique has not penetrated mainstream economics. It likely never will.

934

Today only a handful of economists seem aware of it." ["The

935

distribution of income", pp. 32-41, Richard P. F. Holt and Steven Pressman

936

(eds.), A New Guide to Post Keynesian Economics, p. 34] Given that this

937

underlies the argument that high wages cause high unemployment, it means

938

that the mainstream argument for cutting wages has no firm theoretical basis.

939

940

It should also be noted that the assumption that adding more labour to capital

941

is always possible flows from the assumption of marginal productivity theory

942

which treats "capital" like an ectoplasm and can be moulded into whatever

943

form is required by the labour available (see <a href="secC2.html#secc25">section C.2.5</a> for more

944

discussion). Hence Joan Robinson's dismissal of this assumption, for

945

"the difference between the future and the past is eliminated by making

946

capital 'malleable' so that mistakes can always be undone and equilibrium

947

is always guaranteed. . . with 'malleable' capital the demand for labour

948

depends on the level of wages." [Contributions to Modern Economics, p. 6]

949

Moreover, "labour and capital are not often as smoothly substitutable for

950

each other as the [neo-classical] model requires . . . You can't use one

951

without the other. You can't measure the marginal productivity of one

952

without the other." Demand for capital and labour is, sometimes, a joint

953

demand and so it is often to adjust wages to a worker's marginal

954

productivity independent of the cost of capital. [Hugh Stretton,

955

Economics: A New Introduction, p. 401]

956

957

Then there is the role of diminishing returns. The assumption that the demand

958

curve for labour is always downward sloping with respect to aggregate employment

959

is rooted in the notion that industry operates, at least in the short run, under

960

conditions of diminishing returns. However, diminishing returns are not a

961

feature of industries in the real world. Thus the assumption that the downward

962

slopping marginal product of labour curve is identical to the aggregate demand

963

curve for labour is not true as it is inconsistent with empirical evidence.

964

"In a system at increasing returns," noted one economist, "the direct relation

965

between real wages and employment tends to render the ordinary mechanism of wage

966

adjustment ineffective and unstable." [Ferdinando Targetti, Nicholas Kaldor,

967

p. 344] In fact, as discussed in <a href="secC1.html#secc12">section C.1.2</a>, without this assumption

968

mainstream economics cannot show that unemployment is, in fact, caused by

969

real wages being too high (along with many other things).

970

971

Thus, if we accept reality, we must end up "denying the inevitability of a

972

negative relationship between real wages and employment." Post-Keynesian

973

economists have not found any empirical links between the growth of unemployment

974

since the early in 1970s and changes in the relationship between productivity

975

and wages and so there is "no theoretical reason to expect a negative

976

relationship between employment and the real wage, even at the level of the

977

individual firm." Even the beloved marginal analysis cannot be used in the

978

labour market, as "[m]ost jobs are offered on a take-it-or-leave-it basis.

979

Workers have little or no scope to vary hours of work, thereby making marginal

980

trade-offs between income and leisure. There is thus no worker sovereignty

981

corresponding to the (very controversial) notion of consumer sovereignty."

982

Over all, "if a relationship exists between aggregate employment and the

983

real wage, it is employment that determines wages. Employment and unemployment

984

are product market variables, not labour market variables. Thus attempts to

985

restore full employment by cutting wages are fundamentally misguided."

986

[John E. King, "Labor and Unemployment," pp. 65-78, Holt and Pressman (eds.),

987

Op. Cit., p. 68, pp. 67-8, p. 72, p. 68 and p. 72] In addition:

988

989

"Neo-classical theorists themselves have conceded that a negative relationship

990

between the real wage and the level of employment can be established only in

991

a one-commodity model; in a multi-commodity framework no such generalisation

992

is possible. This confines neo-classical theory to an economy without money

993

and makes it inapplicable to a capitalist or entrepreneurial economy."

994

[Op. Cit., p. 71]

995

</blockquote>

996

And, of course, the whole analysis is rooted in the notion of perfect

997

competition. As Nicholas Kaldor mildly put it:

998

999

"If economics had been a 'science' in the strict sense of the word, the

1000

empirical observation that most firms operate in imperfect markets would

1001

have forced economists to scrap their existing theories and to start thinking

1002

on entirely new lines . . . unfortunately economists do not feel under the

1003

same compulsion to maintain a close correspondence between theoretical

1004

hypotheses and the facts of experience." [Further Essays on Economic

1005

Theory ad Policy, p. 19]

1006

</blockquote>

1007

Any real economy is significantly different from the impossible notion of

1008

perfect competition and "if there exists even one monopoly anywhere in the

1009

system . . . it follows that others must be averaging less than the marginal

1010

value of their output. So to concede the existence of monopoly requires that

1011

one either drop the competitive model entirely or construct an elaborate new

1012

theory . . . that divides the world into monopolistic, competitive, and

1013

subcompetitive ('exploited') sectors." [James K. Galbraith, Created Unequal,

1014

p. 52] As noted in <a href="secC4.html#secc43">section C.4.3</a>, mainstream economists have admitted that

1015

monopolistic competition (i.e., oligopoly) is the dominant market form but

1016

they cannot model it due to the limitations of the individualistic assumptions

1017

of bourgeois economics. Meanwhile, while thundering against unions the

1018

mainstream economics profession remains strangely silent on the impact of

1019

big business and pro-capitalist monopolies like patents and copyrights on

1020

distribution and so the impact of real wages on unemployment.

1021

1022

All this means that "neither the demand for labour nor the supply of labour

1023

depends on the real wage. It follows from this that the labour market is not

1024

a true market, for the price associated with it, the wage rate, is incapable

1025

of performing any market-clearing function, and thus variations in the wage

1026

rate cannot eliminate unemployment." [King, Op. Cit., p. 65] As such, the

1027

"conventional economic analysis of markets . . . is unlikely to apply"

1028

to the labour market and as a result "wages are highly unlikely to reflect

1029

workers' contributions to production." This is because economists treat

1030

labour as no different from other commodities yet "economic theory

1031

supports no such conclusion." At its most basic, labour is not produced

1032

for profit and the "supply curve for labour can 'slope backward' -- so

1033

that a fall in wages can cause an increase in the supply of workers." In

1034

fact, the idea of a backward sloping supply curve for labour is just as

1035

easy to derive from the assumptions used by economists to derive their

1036

standard one. This is because workers may prefer to work less as the wage

1037

rate rises as they will be better off even if they do not work more.

1038

Conversely, very low wage rates are likely to produce a very high supply

1039

of labour as workers need to work more to meet their basic needs. In

1040

addition, as noted at the end of <a href="secC1.html#secc14">section C.1.4</a>, economic theory itself

1041

shows that workers will not get a fair wage when they face very powerful

1042

employers unless they organise unions. [Steve Keen, Debunking Economics,

1043

pp. 111-2 and pp. 119-23]

1044

1045

Strong evidence that this model of the labour market can be found from

1046

the history of capitalism. Continually we see capitalists turn to the

1047

state to ensure low wages in order to ensure a steady supply of labour

1048

(this was a key aim of state intervention during the rise of capitalism,

1049

incidentally). For example, in central and southern Africa mining companies

1050

tried to get locals to labour. They had little need for money, so they

1051

worked a day or two then disappeared for the rest of the week. To avoid

1052

simply introducing slavery, some colonial administrators introduced and

1053

enforced a poll-tax. To earn enough to pay it, workers had to work a

1054

full week. [Hugh Stretton, Op. Cit., p. 403] Much the same was imposed

1055

on British workers at the dawn of capitalism. As Stephen Marglin points

1056

out, the "indiscipline of the labouring classes, or more bluntly, their

1057

laziness, was widely noted by eighteenth century observers." By laziness

1058

or indiscipline, these members of the ruling class meant the situation

1059

where "as wages rose, workers chose to work less." In economic terms, "a

1060

backward bending labour supply curve is a most natural phenomenon as long

1061

as the individual worker controls the supply of labour." However, "the

1062

fact that higher wages led workers to choose more leisure . . . was disastrous"

1063

for the capitalists. Unsurprisingly, the bosses did not meekly accept the

1064

workings of the invisible hand. Their "first recourse was to the law"

1065

and they "utilised the legislative, police and judicial powers of the

1066

state" to ensure that working class people had to supply as many hours

1067

as the bosses demanded. ["What do Bosses do?", pp. 60-112, Review of

1068

Radical Political Economy, Vol. 6, No. 2, pp. 91-4]

1069

1070

This means that the market supply curve "could have any shape at all"

1071

and so economic theory "fails to prove that employment is determined

1072

by supply and demand, and reinforces the real world observation that

1073

involuntary unemployment can exist" as reducing the wage need not

1074

bring the demand and supply of labour into alignment. While the

1075

possibility of backward-bending labour supply curves is sometimes

1076

pointed out in textbooks, the assumption of an upward sloping supply

1077

curve is taken as the normal situation but "there is no theoretical

1078

-- or empirical -- justification for this." Sadly for the world, this

1079

assumption is used to draw very strong conclusions by economists. The

1080

standard arguments against minimum wage legislation, trade unions and

1081

demand management by government are all based on it. Yet, as Keen notes,

1082

such important policy positions "should be based upon robust intellectual

1083

or empirical foundations, rather than the flimsy substrate of mere fancy.

1084

Economists are quite prone to dismiss alternative perspectives on labour

1085

market policy on this very basis -- that they lack any theoretical or

1086

empirical foundations. Yet their own policy positions are based as much

1087

on wishful thinking as on wisdom." [Op. Cit., pp. 121-2 and p. 123]

1088

1089

Within a capitalist economy the opposite assumption to that taken by

1090

economics is far more likely, namely that there is a backward sloping

1091

labour supply curve. This is because the decision to work is not one

1092

based on the choice between wages and leisure made by the individual

1093

worker. Most workers do not choose whether they work or not, and the

1094

hours spent working, by comparing their (given) preferences and the

1095

level of real wages. They do not practice voluntary leisure waiting

1096

for the real wage to exceed their so-called "reservation" wage (i.e.

1097

the wage which will tempt them to forsake a life of leisure for the

1098

disutility of work). Rather, most workers have to take a job because

1099

they do not have a choice as the alternative is poverty (at best) or

1100

starvation and homelessness (at worse). The real wage influences the

1101

decision on how much labour to supply rather than the decision to

1102

work or not. This is because as workers and their families have a

1103

certain basic living standard to maintain and essential bills which need

1104

to be paid. As earnings increase, basic costs are covered and so people

1105

are more able to work less and so the supply of labour tends to fall.

1106

Conversely, if real earnings fall because the real wage is less then

1107

the supply of labour may increase as people work more hours and/or

1108

more family members start working to make enough to cover the bills

1109

(this is because, once in work, most people are obliged to accept

1110

the hours set by their bosses). This is the opposite of what happens

1111

in "normal" markets, where lower prices are meant to produce a

1112

decrease in the amount of the commodity supplied. In other words,

1113

the labour market is not a market, i.e. it reacts in different ways

1114

than other markets (Stretton provides a good summary of this argument

1115

[Op. Cit., pp. 403-4 and p. 491]).

1116

1117

So, as radical economists have correctly observe, such considerations

1118

undercut the "free market" capitalist contention that labour

1119

unions and state intervention are responsible for unemployment (or

1120

that depressions will easily or naturally end by the workings of the

1121

market). To the contrary, insofar as labour unions and various welfare

1122

provisions prevent demand from falling as low as it might otherwise

1123

go during a slump, they apply a brake to the downward spiral. Far

1124

from being responsible for unemployment, they actually mitigate it.

1125

For example, unions, by putting purchasing power in the hands of

1126

workers, stimulates demand and keeps employment higher than the level

1127

it would have been. Moreover, wages are generally spent immediately and

1128

completely whilst profits are not. A shift from profits to wages may

1129

stimulate the economy since more money is spent but there will be a

1130

delayed cut in consumption out of profits. [Malcolm Sawyer, The

1131

Economics of Michal Kalecki, p. 118] All this should be obvious, as

1132

wages (and benefits) may be costs for some firms but they are revenue

1133

for even more and labour is not like other commodities and reacts in

1134

changes in price in different ways.

1135

1136

Given the dynamics of the labour "market" (if such a term makes much

1137

sense given its atypical nature), any policies based on applying

1138

"economics 101" to it will be doomed to failure. As such, any book

1139

entitled Economics in One Lesson must be viewed with suspicion

1140

unless it admits that what it expounds has little or no bearing to

1141

reality and urges the reader to take at least the second lesson. Of

1142

course, a few people actually do accept the simplistic arguments that

1143

reside in such basic economics texts and think that they explain the

1144

world (these people usually become right-"libertarians" and spend the

1145

rest of their lives ignoring their own experience and reality in favour

1146

of a few simple axioms). The wage-cutting argument (like most of economics)

1147

asserts that any problems are due to people not listening to economists

1148

and that there is no economic power, there are no "special interests" -- it

1149

is just that people are stupid. Of course, it is irrelevant that it is much

1150

easier to demand that workers' real wages be reduced when you are sitting

1151

in a tenured post in academia. True to their ideals and "science", it is

1152

refreshing to see how many of these "free market" economists renounce

1153

tenure so that their wages can adjust automatically as the market demand

1154

for their ideologically charged comments changes.

1155

1156

So when economic theories extol suffering for future benefits, it is

1157

always worth asking who suffers, and who benefits. Needless to say,

1158

the labour market flexibility agenda is anti-union, anti-minimum wage,

1159

and anti-worker protection. This agenda emerges from theoretical claims

1160

that price flexibility can restore full employment, and it rests dubious

1161

logic, absurd assumptions and on a false analogy comparing the labour market

1162

with the market for peanuts. Which, ironically, is appropriate as the

1163

logic of the model is that workers will end up working for peanuts! As

1164

such, the "labour market" model has a certain utility as it removes the

1165

problem of institutions and, above all, power from the perspective of

1166

the economist. In fact, institutions such as unions can only be considered

1167

as a problem in this model rather than a natural response to the unique

1168

nature of the labour "market" which, despite the obvious differences,

1169

most economists treat like any other.

1170

1171

To conclude, a cut in wages may deepen any slump, making it deeper and longer

1172

than it otherwise would be. Rather than being the solution to unemployment,

1173

cutting wages will make it worse (we will address the question of whether

1174

wages being too high actually causes unemployment in the first place, in

1175

the <a href="secC9.html#secc92">next section</a>). Given that,

1176

as we argued in <a href="secC8.html#secc82">section C.8.2</a>, inflation

1177

is caused by insufficient profits

1178

for capitalists (they try to maintain their profit margins by price

1179

increases) this spiralling effect of cutting wages helps to explain what

1180

economists term "stagflation" -- rising unemployment combined with rising

1181

inflation (as seen in the 1970s). As workers are made unemployed,

1182

aggregate demand falls, cutting profit margins even more and in response

1183

capitalists raise prices in an attempt to recoup their losses. Only a

1184

very deep recession can break this cycle (along with labour militancy

1185

and more than a few workers and their families).

1186

1187

Thus the capitalist solution to crisis is based on working class people paying

1188

for capitalism's contradictions. For, according to the mainstream theory, when

1189

the production capacity of a good exceeds any reasonable demand for it, the

1190

workers must be laid off and/or have their wages cut to make the company

1191

profitable again. Meanwhile the company executives -- the people responsible

1192

for the bad decisions to build lots of factories -- continue to collect their

1193

fat salaries, bonuses and pensions, and get to stay on to help manage the

1194

company through its problems. For, after all, who better, to return a company

1195

to profitability than those who in their wisdom ran it into bankruptcy?

1196

Strange, though, no matter how high their salaries and bonuses get,

1197

managers and executives never price themselves out of work.

1198

1199

All this means that working class people have two options in a slump --

1200

accept a deeper depression in order to start the boom-bust cycle again or

1201

get rid of capitalism and with it the contradictory nature of capitalist

1202

production which produces the business cycle in the first place (not to

1203

mention other blights such as hierarchy and inequality). In the end,

1204

the only solution to unemployment is to get rid of the system which

1205

created it by workers seizing their means of production and abolishing

1206

the state. When this happens, then production for the profit of the few

1207

will be ended and so, too, the contradictions this generates.

1208

1209

1210

<h2><a name="secc92">C.9.2 Is unemployment caused by wages being too high?</a></h2>

1211

1212

1213

As we noted in the <a href="secC9.html#secc91">last section</a>, most capitalist economic theories argue

1214

that unemployment is caused by wages being too high. Any economics

1215

student will tell you that labour is like any other commodity and so

1216

if its price is too high then there will be less demand for it, so

1217

producing an excess supply of it on the market. Thus high wages will

1218

reduce the quantity of labour demanded and so create unemployment -- a

1219

simple case of "supply and demand."

1220

1221

From this theory we would expect that areas and periods with high wages

1222

will also have high levels of unemployment. Unfortunately for the theory,

1223

this does not seem to be the case. Even worse for it, high wages are

1224

generally associated with booms rather than slumps and this has been known

1225

to mainstream economics since at least 1939 when in March of that year

1226

The Economic Journal printed an article by Keynes about the movement of

1227

real wages during a boom in which he evaluated the empirical analysis of

1228

two labour economists (entitled "Relative Movements of Real Wages and

1229

Output" this is contained as an Appendix of most modern editions of The

1230

General Theory).

1231

1232

These studies showed that "when money wages are rising, real wages have

1233

usually risen too; whilst, when money wages are falling, real wages are

1234

no more likely to rise than to fall." Keynes admitted that in The General

1235

Theory he was "accepting, without taking care to check the facts", a

1236

"widely held" belief. He discussed where this belief came from, namely

1237

leading 19th century British economist Alfred Marshall who had produced a

1238

"generalisation" from a six year period between 1880-86 which was not

1239

true for the subsequent business cycles of 1886 to 1914. He also quotes

1240

another leading economist, Arthur Pigou, from 1927 on how "the upper halves of

1241

trade cycles have, on the whole, been associated with higher rates of real

1242

wages than the lower halves" and indicates that he provided evidence on

1243

this from 1850 to 1910 (although this did not stop Pigou reverting to the

1244

"Marshallian tradition" during the Great Depression and blaming high

1245

unemployment on high wages). [The General Theory, p. 394, p. 398 and

1246

p. 399] Keynes conceded the point, arguing that he had tried to minimise

1247

differences between his analysis and the standard perspective. He stressed

1248

that while he assumed countercyclical real wages his argument did not depend

1249

on it and given the empirical evidence provided by labour economists he

1250

accepted that real wages were pro-cyclical in nature.

1251

1252

The reason why this is the case is obvious given the analysis in the

1253

<a href="secC9.html#secc91">last section</a>. Labour does not control prices and so cannot control its own real

1254

wage. Looking at the Great Depression, it seems difficult to blame it on

1255

workers refusing to take pay cuts when by 1933 "wages and salaries in U.S.

1256

manufacturing were less than half their 1929 levels and, in automobiles and

1257

steel, were under 40 percent of the 1929 levels." In Detroit, there had

1258

been 475,000 auto-workers. By 1931 "almost half has been laid off." [William

1259

Lazonick, Competitive Advantage on the Shop Floor, p. 271] The notion of

1260

all powerful unions or workers' resistance to wage cuts causing high

1261

unemployment hardly fits these facts. Peter Temin provides information on

1262

real wages in manufacturing during the depression years. Using 1929 as

1263

the base year, weekly average real wages (i.e., earnings divided by the

1264

consumer price index) fell each year to reach a low of 85.5% by 1932.

1265

Hourly real wages remained approximately constant (rising to 100.1%

1266

in 1930 and then 102.6% in 1931 before falling to 99% in 1932). The

1267

larger fall in weekly wages was due to workers having a shorter working

1268

week. The "effect of shorter hours and lower wages was to decrease the

1269

income of employed workers." Thus the notion that lowering wages will

1270

increase employment seems as hard to support as the notion that wages being

1271

too high caused the depression in the first place. Temin argues, "no part of

1272

the [neo-]classical story is accurate." [Did Monetary Forces Cause the Great

1273

Depression?, pp. 139-40] It should be noted that the consensus of economists

1274

is that during this period the evidence seems to suggest that real wages did

1275

rise overall. This was because the prices of commodities fell faster than did

1276

the wages paid to workers. Which confirms Keynes, as he had argued that workers

1277

cannot price themselves into work as they have no control over prices. However,

1278

there is no reason to think that high real wages caused the high unemployment

1279

as the slump itself forced producers to cut prices (not to mention wages).

1280

Rather, the slump caused the increase in real wages.

1281

1282

Since then, economists have generally confirmed that real wage are procyclical.

1283

In fact, "a great deal of empirical research has been conducted in this area

1284

-- research which mostly contradicts the neo-classical assumption of an inverse

1285

relation between real wages and employment." [Ferdinando Targetti, Nicholas

1286

Kaldor, p. 50] Nicholas Kaldor, one of the first Keynesians, also stressed

1287

that the notion that there is an inverse relationship between real wages and

1288

employment is "contradicted by numerous empirical studies which show that, in

1289

the short period, changes in real wages are positively correlated with changes

1290

in employment and not negatively." [Further Essays on Economic Theory and

1291

Policy, p. 114fn] As Hugh Stretton summarises in his excellent introductory

1292

text on economics:

1293

1294

"In defiance of market theory, the demand for labour tends strongly to vary

1295

with its price, not inversely to it. Wages are high when there is full

1296

employment. Wages -- especially for the least-skilled and lowest paid -- are

1297

lowest when there is least employment. The causes chiefly run from the

1298

employment to the wages, rather than the other way. Unemployment weakens

1299

the bargaining power, worsens the job security and working conditions, and

1300

lowers the pay of those still in jobs.

1301

1302

"The lower wages do not induce employers to create more jobs . . . most

1303

business firms have no reason to take on more hands if wages decline. Only

1304

empty warehouses, or the prospect of more sales can get them to do that,

1305

and these conditions rarely coincide with falling employment and wages. The

1306

causes tend to work the other way: unemployment lowers wages, and the lower

1307

wages do not restore the lost employment." [Economics: A New Introduction,

1308

pp. 401-2]

1309

</blockquote>

1310

Will Hutton, the British neo-Keynesian economist, summarises research

1311

by two other economists that suggests high wages do not cause unemployment:

1312

1313

"the British economists David Blanchflower and Andrew Oswald [examined] . . .

1314

the data in twelve countries about the actual relation between wages and

1315

unemployment -- and what they have discovered is another major challenge

1316

to the free market account of the labour market. Free market theory would

1317

predict that low wages would be correlated with low local unemployment;

1318

and high wages with high local unemployment.

1319

1320

"Blanchflower and Oswald have found precisely the opposite relationship.

1321

The higher the wages, the lower the local unemployment -- and the lower

1322

the wages, the higher the local unemployment. As they say, this is not a

1323

conclusion that can be squared with free market text-book theories of

1324

how a competitive labour market should work." [The State We're In,

1325

p. 102]

1326

</blockquote>

1327

Unemployment was highest where real wages were lowest and nowhere had

1328

falling wages being followed by rising employment or falling unemployment.

1329

Blanchflower and Oswald stated that their conclusion is that employees

1330

"who work in areas of high unemployment earn less, other things constant,

1331

than those who are surrounded by low unemployment." [The Wage Curve,

1332

p. 360] This relationship, the exact opposite of that predicted by

1333

"free market" capitalist economics, was found in many different

1334

countries and time periods, with the curve being similar for different

1335

countries. Thus, the evidence suggests that high unemployment is

1336

associated with low earnings, not high, and vice versa.

1337

1338

Looking at less extensive evidence, if minimum wages and unions cause

1339

unemployment, why did the South-eastern states of the USA (with a lower

1340

minimum wage and weaker unions) have a higher unemployment rate than

1341

North-western states during the 1960s and 1970s? Or why, when the (relative)

1342

minimum wage declined under Reagan and Bush in the 1980s, did chronic

1343

unemployment accompany it? [Allan Engler, The Apostles of Greed,

1344

p. 107] Or the Low Pay Network report "Priced Into Poverty"

1345

which discovered that in the 18

1346

months before they were abolished, the British Wages Councils (which

1347

set minimum wages for various industries) saw a rise of 18,200 in

1348

full-time equivalent jobs compared to a net loss of 39,300 full-time

1349

equivalent jobs in the 18 months afterwards. Given that nearly half

1350

the vacancies in former Wages Council sectors paid less than the rate

1351

which it is estimated Wages Councils would now pay, and nearly 15%

1352

paid less than the rate at abolition, there should (by the "free market"

1353

argument) have been rises in employment in these sectors as pay fell.

1354

The opposite happened. This research shows that the falls in pay

1355

associated with Wages Council abolition had not created more employment.

1356

Indeed, employment growth was more buoyant prior to abolition than

1357

subsequently. So whilst Wages Council abolition did not result in more

1358

employment, the erosion of pay rates caused by their abolition resulted

1359

in more families having to endure poverty pay. Significantly, the

1360

introduction of a national minimum wage by the first New Labour

1361

government did not have the dire impact "free market" capitalist

1362

economists and politicians predicted.

1363

1364

It should also be noted that an extensive analysis of the impact of minimum

1365

wage increases at the state level in America by economists David Card and

1366

Alan Kreuger found the facts contradicted the standard theory, with rises

1367

in the minimum wage having a small positive impact on both employment and

1368

wages for all workers. [Myth and Measurement: The New Economics of the

1369

Minimum Wage] While their work was attacked by business leaders and

1370

economists from think-tanks funded by them, Card and Kreuger's findings

1371

that raising the lowest wages had no effect on unemployment or decreased

1372

it proved to be robust. In particular, when replying to criticism of their

1373

work by other economists who based their work, in part, on data supplied

1374

by a business funded think-tank Card and Krueger discovered that not only

1375

was that work consistent with their original findings but that the "only

1376

data set that indicates a significant decline in employment" was by some

1377

amazing coincidence "the small set of restaurants collected by" the think

1378

tank. ["Minimum Wages and Employment: A Case Study of the Fast-Food

1379

Industry in New Jersey and Pennsylvania: Reply", pp. 1397-1420, The

1380

American Economic Review, Vol. 90, No. 5, p. 1419] For a good overview

1381

of "how the fast food industry and its conservative allies sought to

1382

discredit two distinguished economists, and how the attack backfired"

1383

when "the two experts used by the fast food industry to impeach Card

1384

and Krueger, effectively ratified them" see John Schmitt's "Behind the

1385

Numbers: Cooked to Order." [The American Prospect, May-June 1996,

1386

pp. 82-85]

1387

1388

(This does not mean that anarchists support the imposition of a legal

1389

minimum wage. Most anarchists do not because it takes the responsibility

1390

for wages from unions and other working class organisations, where it

1391

belongs, and places it in the hands of the state. We mention these

1392

examples in order to highlight that the "free market" capitalist

1393

argument has serious flaws with it.)

1394

1395

Empirical evidence does not support the argument the "free market" capitalist

1396

argument that unemployment is caused by real wages being too high. The

1397

phenomenon that real wages tend to increase during the upward swing of the

1398

business cycle (as unemployment falls) and fall during recessions (when

1399

unemployment increases) renders the standard interpretation that real wages

1400

govern employment difficult to maintain (real wages are "pro-cyclical," to

1401

use economic terminology). This evidence makes it harder for economists to

1402

justify policies based on a direct attack on real wages as the means to

1403

cure unemployment.

1404

1405

While this evidence may come as a shock to those who subscribe to the

1406

arguments put forward by those who think capitalist economics reflect the

1407

reality of that system, it fits well with the anarchist and other socialist

1408

analysis. For anarchists, unemployment is a means of disciplining labour

1409

and maintaining a suitable rate of profit (i.e. unemployment is a key means

1410

of ensuring that workers are exploited). As full employment is approached,

1411

labour's power increases, so reducing the rate of exploitation and so

1412

increasing labour's share of the value it produces (and so higher wages).

1413

Thus, from an anarchist point of view, the fact that wages are higher in

1414

areas of low unemployment is not a surprise, nor is the phenomenon of

1415

pro-cyclical real wages. After all, as we noted in <a href="secC3.html">section C.3</a>,

1416

the ratio

1417

between wages and profits are, to a large degree, a product of bargaining

1418

power and so we would expect real wages to grow in the upswing of the

1419

business cycle, fall in the slump and be high in areas of low unemployment.

1420

1421

The evidence therefore suggests that the "free market" capitalist claim

1422

that unemployment is caused by unions, "too high" wages, and so on, is

1423

false. Indeed, by stopping capitalists appropriating more of the income

1424

created by workers, high wages maintain aggregate demand and contribute

1425

to higher employment (although, of course, high employment cannot be

1426

maintained indefinitely under wage slavery due to the rise in workers'

1427

power this implies). Rather, unemployment is a key aspect of the capitalist

1428

system and cannot be got rid off within it. The "free market" capitalist

1429

"blame the workers" approach fails to understand the nature and dynamic

1430

of the system (given its ideological role, this is unsurprising). So

1431

high real wages for workers increases aggregate demand and reduces

1432

unemployment from the level it would be if the wage rate was cut. This

1433

is supported by most of the research into wage dynamics during the

1434

business cycle and by the "wage curve" of numerous countries. This

1435

suggests that the demand for labour is independent of the real wages

1436

and so the price of labour (wages) is incapable of performing any

1437

market clearing function. The supply and demand for labour are

1438

determined by two different sets of factors. The relationship between

1439

wages and unemployment flows from the latter to the former rather

1440

than the reverse: the wage is influenced by the level of unemployment.

1441

Thus wages are not the product of a labour market which does not really

1442

exist but rather is the product of "institutions, customs, privilege,

1443

social relations, history, law, and above all power, with an admixture

1444

of ingenuity and luck. But of course power, and particularly market

1445

or monopoly power, changes with the general of demand, the rate of

1446

growth, and the rate of unemployment. In periods of high employment,

1447

the weak gain on the strong; in periods of high unemployment, the

1448

strong gain on the weak." [Galbraith, Created Unequal, p. 266]

1449

1450

This should be obvious enough. It is difficult for workers to resist

1451

wage cuts and speeds-up when faced with the fear of mass unemployment.

1452

As such, higher rates of unemployment "reduce labour's bargaining power

1453

vis-a-vis business, and this helps explain why wages have declined and

1454

workers have not received their share of productivity growth" (between

1455

1970 and 1993, only the top 20% of the US population increased its share

1456

of national income). [Thomas I. Palley, Plenty of Nothing, p. 55

1457

and p. 58] Strangely, though, this obvious fact seems lost on most economists.

1458

In fact, if you took their arguments seriously then you would have

1459

to conclude that depressions and recessions are the periods during

1460

which working class people do the best! This is on two levels. First,

1461

in neo-classical economics work is considered a disutility and

1462

workers decide not to work at the market-clearing real wage because

1463

they prefer leisure to working. Leisure is assumed to be intrinsically

1464

good and the wage the means by which workers are encouraged to

1465

sacrifice it. Thus high unemployment must be a good thing as it gives

1466

many more people leisure time. Second, for those in work their real

1467

wages are higher than before, so their income has risen. Alfred Marshall,

1468

for example, argued that in depressions money wages fell but not as fast

1469

as prices. A

1470

"powerful friction" stopped this, which "establish[ed] a higher

1471

standard of living among the working classes" and a "diminish[ing of]

1472

the inequalities of wealth." When asked whether during a period of

1473

depression the employed working classes got more than they did before,

1474

he replied "[m]ore than they did before, on the average." [quoted by

1475

Keynes, Op. Cit., p. 396]

1476

1477

Thus, apparently, working class people do worse in booms than in slumps

1478

and, moreover, they can resist wage cuts more in the face of mass

1479

unemployment than in periods approaching full employment. That the

1480

theory which produced these conclusions could be taken remotely

1481

seriously shows the dangers of deducing an economic ideology from

1482

a few simple axioms rather than trusting in empirical evidence and

1483

common sense derived from experience. Nor should it come as too great a

1484

surprise, as "free market" capitalist economics tends to ignore

1485

(or dismiss) the importance of economic power and the social context

1486

within which individuals make their choices. As Bob Black acidly put

1487

it with regards to the 1980s, it "wasn't the workers who took these

1488

gains [of increased productivity], not in higher wages, not in safer

1489

working conditions, and not in shorter hours -- hours of work have

1490

increased . . . It must be, then, that in the 80s and after workers

1491

have 'chosen' lower wages, longer hours and greater danger on the

1492

job. Yeah, sure." ["Smokestack Lightning," pp. 43-62, Friendly Fire,

1493

p. 61]

1494

1495

In the real world, workers have little choice but to accept a job as

1496

they have no independent means to exist in a pure capitalist system

1497

and so no wages means no money for buying such trivialities as food

1498

and shelter. The decision to take a job is, for most workers, a

1499

non-decision -- paid work is undertaken out of economic necessity and

1500

so we are not in a position to refuse work because real wages are too

1501

low to be worth the effort (the welfare state reduces this pressure,

1502

which is why the right and bosses are trying to destroy it). With

1503

high unemployment, pay and conditions will worsen while hours and

1504

intensity of labour will increase as the fear of the sack will result

1505

in increased job insecurity and so workers will be more willing to

1506

placate their bosses by obeying and not complaining. Needless to

1507

say, empirical evidence shows that "when unemployment is

1508

high, inequality rises. And when unemployment is low, inequality tends

1509

to fall." [James K. Galbraith, Op. Cit., p. 148] This is

1510

unsurprising as the "wage curve" suggests that it is unemployment

1511

which drives wage levels, not the other way round. This is important

1512

as higher unemployment would therefore create higher inequality as

1513

workers are in no position to claim back productivity increases and so

1514

wealth would flood upwards.

1515

1516

Then there is the issue of the backward-bending supply curve of labour

1517

we discussed at the end of the <a href="secC9.html#secc91">last section</a>. As the "labour market" is

1518

not really a market, cutting real wages will have the opposite effect

1519

on the supply of labour than its supporters claim. It is commonly found

1520

that as real wages fall, hours at work become longer and the number of

1521

workers in a family increases. This is because the labour supply curve

1522

is negatively slopped as families need to work more (i.e., provide more

1523

labour) to make ends meet. This means that a fall in real wages may increase the

1524

supply of labour as workers are forced to work longer hours or take

1525

second jobs simply to survive. The net effect of increasing supply

1526

would be to decrease real wages even more and so, potentially, start

1527

a vicious circle and make the recession deeper. Looking at the US, we

1528

find evidence that supports this analysis. As the wages for the bottom 80%

1529

of the population fell in real terms under Reagan and Bush in the 1980s, the

1530

number of people with multiple jobs increased as did the number of mothers who

1531

entered the labour market. In fact, "the only reason that family income

1532

was maintained is the massive increase in labour force participation of

1533

married women . . . Put simply, jobs paying family wages have been disappearing,

1534

and sustaining a family now requires that both adults work . . . The result has

1535

been a squeeze on the amount of time that people have for themselves . . .

1536

there is a loss of life quality associated with the decline in time for family

1537

. . . they have also been forced to work longer . . . Americans are working

1538

longer just to maintain their current position, and the quality of family life

1539

is likely declining. A time squeeze has therefore accompanied the wage

1540

squeeze." [Palley, Op. Cit., pp. 63-4] That is, the supply of

1541

labour increased as its price fell (Reagan's turn to military Keynesianism

1542

and incomplete nature of the "reforms" ensured that a deep spiral was avoided).

1543

1544

To understand why this is the case, it is necessary to think about how the

1545

impact of eliminating the minimum wage and trade unions would actually have.

1546

First, of course, there would be a drop in the wages of the poorest workers

1547

as the assertion is that the minimum wage increases unemployment by forcing

1548

wages up. The assertion is that the bosses would then employ more workers

1549

as a result. However, this assumes that extra workers could easily be added

1550

to the existing capital stock which may not be the case. Assuming this is

1551

the case (and it is a big assumption), what happens to the workers who

1552

have had their pay cut? Obviously, they still need to pay their bills which

1553

means they either cut back on consumption and/or seek more work (assuming

1554

that prices have not fallen, as this would leave the real wage unchanged).

1555

If the former happens, then firms may find that they face reduced demand

1556

for their products and, consequently, have no need for the extra employees

1557

predicted by the theory. If the latter happens, then the ranks of those

1558

seeking work will increase as people look for extra jobs or people outside

1559

the labour market (like mothers and children) are forced into the job market. As

1560

the supply of workers increase, wages must drop according to the logic of

1561

the "free market" position. This does not mean that a recovery is impossible,

1562

just that in the short and medium terms cutting wages will make a recession worse and be

1563

unlikely to reduce unemployment for some time.

1564

1565

This suggests that a "free market" capitalism, marked by a fully competitive

1566

labour market, no welfare programmes nor unemployment benefits, and extensive

1567

business power to break unions and strikes would see aggregate demand

1568

constantly rise and fall, in line with the business cycle, and unemployment

1569

and inequality would follow suit. Moreover, unemployment would be higher

1570

over most of the business cycle (and particularly at the bottom of the

1571

slump) than under a capitalism with social programmes, militant unions

1572

and legal rights to organise because the real wage would not be able to

1573

stay at levels that could support aggregate demand nor could the

1574

unemployed use their benefits to stimulate the production of consumer

1575

goods. This suggests that a fully competitive labour market, as in the

1576

19th century, would increase the instability of the system -- an

1577

analysis which was confirmed in during the 1980s ("the relationship

1578

between measured inequality and economic stability . . . was weak but

1579

if anything it suggests that the more egalitarian countries showed a

1580

more stable pattern of growth after 1979." [Dan Corry and Andrew

1581

Glyn, "The Macroeconomics of equality, stability and growth", Paying

1582

for Inequality, Andrew Glyn and David Miliband (eds.) pp. 212-213]).

1583

1584

So, in summary, the available evidence suggests that high wages are

1585

associated with low levels of unemployment. While this should be the

1586

expected result from any realistic analysis of the economic power which

1587

marks capitalist economies, it does not provide much support for claims

1588

that only by cutting real wages can unemployment be reduced. The "free

1589

market" capitalist position and one based on reality have radically

1590

different conclusions as well as political implications. Ultimately,

1591

most laissez-faire economic analysis is unpersuasive both in terms of

1592

the facts and their logic. While economics may be marked by axiomatic

1593

reasoning which renders everything the markets does as optimal, the

1594

problem is precisely that it is pure axiomatic reasoning with little or no

1595

regard for the real world. Moreover, by some strange coincidence, they usually

1596

involve policy implications which generally make the rich richer by

1597

weakening the working class. Unsurprisingly, decades of empirical

1598

evidence have not shifted the faith of those who think that the simple

1599

axioms of economics take precedence over the real world nor has this

1600

faith lost its utility to the economically powerful.

1601

1602

1603

<h2><a name="secc93">C.9.3 Are "flexible" labour markets the answer to unemployment?</a></h2>

1604

1605

1606

The usual "free market" capitalist (or neo-liberal) argument is that labour

1607

markets must become more "flexible" to solve the problem of unemployment.

1608

This is done by weakening unions, reducing (or abolishing) the welfare

1609

state, and so on. In defence of these policies, their proponents point

1610

to the low unemployment rates of the USA and UK and contrast them to the

1611

claimed economic woes of Europe (particularly France and Germany). As

1612

we will indicate in this section, this stance has more to do a touching

1613

faith that deregulating the labour market brings the economy as a whole

1614

closer to the ideal of "perfect competition" than a balanced analysis

1615

and assessment of the available evidence. Moreover, it is always important

1616

to remember, as tenured economists (talking of protective labour market

1617

institutions!) seem to forget, that deregulation can and does have high

1618

economic (and not to mention individual and social) costs too.

1619

1620

The underlying argument for flexible labour markets is the notion that

1621

unemployment is cased by wages being too high and due to market imperfections

1622

wages are sticky downwards. While both claims, as we have seen above, are

1623

dubious both factually and logically this has not stopped this position

1624

becoming the reigning orthodoxy in elite circles. By market imperfections

1625

it is meant trade unions, laws which protect labour, unemployment benefit

1626

and other forms of social welfare provision (and definitely not

1627

big business, patent and copyright laws, or any other pro-business state

1628

interventions). All these ensure that wages for those employed are inflexible

1629

downwards and the living standards of those unemployed are too high

1630

to induce them to seek work. This means that orthodox economics is based

1631

on (to use John Kenneth Galbraith's justly famous quip) the assumption that

1632

the rich do not work because they are paid too little, while the poor do

1633

not work because they are paid too much.

1634

1635

We should first point out that attacks on social welfare have a long pedigree

1636

and have been conducted with much the same rationale -- it made people lazy

1637

and gave them flexibility when seeking work. For example, the British Poor

1638

Law Report of the 1830s "built its case against relief on the damage done

1639

by poor relief to personal morality and labour discipline (much the same

1640

thing in the eyes of the commissioners)." [David McNally, Against the

1641

Market, p. 101] The report itself stated that "the greatest evil" of the

1642

system was "the spirit of laziness and insubordination that it creates."

1643

[quoted by McNally, Op. Cit., p. 101]

1644

1645

While the rhetoric used to justify attacks on welfare has changed somewhat

1646

since then, the logic and rationale have not. They have as their root the

1647

need to eliminate anything which provided working class people any means for

1648

independence from the labour market. It has always aimed to ensure that

1649

the fear of the sack remains a powerful tool in the bosses arsenal and to

1650

ensure that their authority is not undermined. Ironically, therefore, its

1651

underlying aims are to decrease the options available to working class

1652

people, i.e. to reduce our flexibility within the labour market by

1653

limiting our options to finding a job fast or face dire poverty (or worse).

1654

1655

Secondly, there is a unspoken paradox to this whole process. If we look at

1656

the stated, public, rationale behind "flexibility" we find a strange

1657

fact. While the labour market is to be made more "flexible" and in line

1658

with ideal of "perfect competition", on the capitalist side no attempt

1659

is being made to bring it into line with that model. Let us not forget

1660

that perfect competition (the theoretical condition in which all resources,

1661

including labour, will be efficiently utilised) states that there must be a

1662

large number of buyers and sellers. This is the case on the sellers side of

1663

the "flexible" labour market, but this is not the case on the buyers

1664

(where, as indicated in <a href="secC4.html">section C.4</a>, oligopoly reigns). Most who favour

1665

labour market "flexibility" are also those most against the breaking up of

1666

big business and oligopolistic markets or are against attempts to stop

1667

mergers between dominant companies in and across markets. Yet the model

1668

requires both sides to be made up of numerous small firms without market

1669

influence or power. So why expect making one side more "flexible" will

1670

have a positive effect on the whole?

1671

1672

There is no logical reason for this to be the case and as we noted in

1673

<a href="secC1.html#secc14">section C.1.4</a>, neo-classical economics agrees -- in an economy with both

1674

unions and big business, removing the former while retaining the latter

1675

will not bring it closer to the ideal of perfect competition. With

1676

the resulting shift in power on the labour market things will get worse

1677

as income is distributed from labour to capital. Which is, we must stress,

1678

precisely what has happened since the 1980s and the much lauded "reforms"

1679

of the labour market. It is a bit like expecting peace to occur between

1680

two warring factions by disarming one side and arguing that because the

1681

number of guns have been halved peacefulness has doubled! Of course, the

1682

only "peace" that would result would be the peace of the graveyard or a

1683

conquered people -- subservience can pass for peace, if you do not look

1684

too close. In the end, calls for the "flexibility" of labour indicate the

1685

truism that, under capitalism, labour exists to meet the requirements of

1686

capital (or living labour exists to meet the needs of dead labour, a

1687

truly insane way to organise a society).

1688

1689

Then there is the key question of comparing reality with the rhetoric.

1690

As economist Andrew Glyn points out, the neo-liberal orthodoxy on this

1691

issue "has been strenuously promoted despite weak evidence for the

1692

magnitude of its benefits and in almost total neglect of its costs."

1693

In fact, "there is no evidence that the countries which carried out

1694

more reforms secured significant falls in unemployment." This is perhaps

1695

unsurprising as "there is plenty of support for such deregulation from

1696

business even without strong evidence that unemployment would be reduced."

1697

As far as welfare goes, the relationship between unemployment and benefits

1698

is, if anything, in the 'wrong' direction (higher benefits do along with

1699

lower unemployment). Of course there are a host of other influences on

1700

unemployment but "if benefits were very important we might expect some

1701

degree of correlation in the 'right' (positive) direction . . . such a

1702

lack of simple relation with unemployment applies to other likely suspects

1703

such as employment protection and union membership." [Capitalism Unleashed,

1704

p. 48, p. 121, p. 48 and p. 47]

1705

1706

Nor is it mentioned that the history of labour market flexibility is somewhat

1707

at odds with the theory. It is useful to remember that American unemployment

1708

was far worse than Europe's during the 1950s, 60s and 70s. In fact, it did not

1709

get better than the European average until the second half of the 1980s. [David

1710

R. Howell, "Introduction", pp. 3-34, Fighting Unemployment, David R. Howell

1711

(ed.), pp. 10-11] To summarise:

1712

1713

"it appears to be only relatively recently that the maintained greater

1714

flexibility of US labour markets has apparently led to a superior performance

1715

in terms of lower unemployment, despite the fact this flexibility is no new

1716

phenomenon. Comparing, for example, the United States with the United

1717

Kingdom, in the 1960s the United States averaged 4.8 per cent, with the

1718

United Kingdom at 1.9 per cent; in the 1970s the United States rate rose

1719

to 6.1 per cent, with the United Kingdom rising to 4.3 per cent, and it was

1720

only in the 1980s that the ranking was reversed with the United States at

1721

7.2 per cent and the United Kingdom at 10 per cent. . . Notice that this

1722

reversal of rankings in the 1980s took place despite all the best efforts

1723

of Mrs Thatcher to create labour market flexibility. . . [I]f labour market

1724

flexibility is important in explaining the level of unemployment. . . why

1725

does the level of unemployment remain so persistently high in a country,

1726

Britain, where active measures have been taken to create flexibility?"

1727

[Keith Cowling and Roger Sugden, Beyond Capitalism, p. 9]

1728

</blockquote>

1729

If we look at the fraction of the labour force without a job in America, we

1730

find that in 1969 it was 3.4% (7.3% including the underemployed) and rose

1731

to 6.1% in 1987 (16.8% including the underemployed). Using more recent data,

1732

we find that, on average, the unemployment rate was 6.2% in 1990-97 compared

1733

to 5.0% in the period 1950-65. In other words, labour market "flexibility" has

1734

not reduced unemployment levels, in fact "flexible" labour markets have been

1735

associated with higher levels of unemployment. Of course, we are comparing

1736

different time periods. A lot changed between

1737

the 1960s and the 1990s and so comparing these periods cannot be the whole

1738

answer. However, it does seem strange that the period with stronger unions,

1739

higher minimum wages and more generous welfare state should be associated

1740

with lower unemployment than the subsequent "flexible" period. It is

1741

possible that the rise in flexibility and the increase in unemployment

1742

may be unrelated. If we look at different countries over the same time

1743

period we can see if "flexibility" actually reduces unemployment. As one

1744

British economist notes, this may not be the case:

1745

1746

"Open unemployment is, of course, lower in the US. But once we allow

1747

for all forms of non-employment [such as underemployment, jobless

1748

workers who are not officially registered as such and so on], there is

1749

little difference between Europe and the US: between 1988 and 1994,

1750

11 per cent of men aged 25-55 were not in work in France, compared

1751

with 13 per cent in the UK, 14 per cent in the US and 15 per cent in

1752

Germany." [Richard Layard, quoted by John Gray, False Dawn, p. 113]

1753

</blockquote>

1754

Also when evaluating the unemployment records of a country, other factors

1755

than the "official" rate given by the government must taken into account.

1756

Firstly, different governments have different definitions of what counts

1757

as unemployment. As an example, the USA has a more restrictive definition

1758

of who is unemployed than Germany. For example, in 2005 Germany's unemployment

1759

rate was officially 11.2%. However, using the US definition it was only around

1760

9% (7% in what was formerly West Germany). The offical figure was higher as

1761

it included people, such as those involuntarily working part-time, as being

1762

unemployed who are counted as being employed in the USA. America, in the

1763

same year, had an unemployment rate of around 5%. So comparing unadjusted

1764

unemployment figures will give a radically different picture of the problem

1765

than using standardised ones. Sadly far too often business reporting in

1766

newspapers fail to do this.

1767

1768

In addition, all estimates of America's unemployment record must take

1769

into account its incarceration rates. The prison population is

1770

not counted as part of the labour force and so is excluded when

1771

calculating unemployment figures. This is particularly significant as

1772

those in prison are disproportionately from demographic groups with

1773

very high unemployment rates and so it is likely that a substantial

1774

portion of these people would be unemployed if they were not in jail.

1775

If America and the UK did not have the huge surge in prison population

1776

since the 1980s neo-liberal reforms, the unemployment rate in both

1777

countries would be significantly higher. In the late 1990s, for example,

1778

more than a million extra people would be seeking work if the US penal

1779

policies resembled those of any other Western nation. [John Gray,

1780

Op. Cit., p. 113] England and Wales, unsurprisingly, tops the prison

1781

league table for Western Europe. In 2005, 145 per 100,000 of their

1782

population was incarcerated. In comparison, France had a rate of 88

1783

while Germany had one of 97. This would, obviously, reduce the numbers

1784

of those seeking work on the labour market and, consequently, reduce the

1785

unemployment statistics.

1786

1787

While the UK is praised for its "flexible" labour market in the 2000s,

1788

many forget the price which was paid to achieve it and even more fail

1789

to realise that the figures hide a somewhat different reality. It is

1790

therefore essential to remember Britain's actual economic performance

1791

during Thatcher's rule rather than the "economically correct" narrative

1792

we have inherited from the media and economic "experts." When Thatcher

1793

came to office in 1979 she did so promising to end the mass unemployment

1794

experienced under Labour (which had doubled between 1974 and 1979).

1795

Unemployment then tripled in her first term, rising to over 3 million

1796

in 1982 (for the first time since the 1930s, representing 1 in 8 people).

1797

This was due in large part to the application of Monetarist dogma making

1798

the recession far worse than it had to be. Unemployment remained at

1799

record levels throughout the 1980s, only dropping to below its 1979

1800

level in 1997 when New Labour took office. It gets worse. Faced with

1801

unemployment rising to well over 10%, Thatcher's regime did what any

1802

respectable government would -- it cooked the books. It changed how

1803

unemployment was recorded in order to artificially lower the official

1804

unemployment records. It also should be stressed that the UK unemployment

1805

figures do not take into account the Thatcherite policy of shunting as

1806

many people as possible off the unemployment roles and onto sickness and incapacity

1807

benefits during the 1980s and 1990s ("In some countries, like the UK and

1808

the Netherlands, many [of the unemployed] found their way onto sickness

1809

benefit . . . Across the UK, for example, there was a strong positive

1810

correlation between numbers on sickness benefits and the local unemployment

1811

rate." [Glyn, Op. Cit., p. 107]). Once these "hidden" people

1812

are included the unemployment figures of Britain are similar to those

1813

countries, such as France and Germany, who are more honest in recording

1814

who is and is not unemployed.

1815

1816

Eighteen years of high unemployment and a massive explosion in those on

1817

incapacity benefits is hardly an advert for the benefits of "flexible" labour

1818

market. However, a very deep recession, double-figure unemployment for

1819

most of the decade, defeats for key strikes and unions plus continued

1820

high unemployment for nearly two decades had an impact on the labour

1821

movement. It made people willing to put up with anything in order to

1822

remain in work. Hence Thatcher's "economic miracle" -- the working class

1823

finally knew its place in the social hierarchy.

1824

1825

Thus, if a politician is elected who is hailed by the right as a "new

1826

Thatcher", i.e., seeking to "reform" the economy (which is "economically

1827

correct" speak for using the state to break working class militancy)

1828

then there are some preconditions required before they force their

1829

populations down the road to (private) serfdom. They will have to

1830

triple unemployment in under three years and have such record levels

1831

last over a decade, provoke the deepest recession since the 1930s,

1832

oversee the destruction of the manufacturing sector and use the powers

1833

of the state to break the mass protests and strikes their policies will

1834

provoke. Whether they are successful depends on the willingness of

1835

working class people to stand up for their liberties and rights and so

1836

impose, from the streets, the changes that really needed -- changes

1837

that politicians will not, indeed cannot, achieve.

1838

1839

Nor should it be forgotten that here are many European countries with around

1840

the same, or lower, official unemployment rates as the UK with much less

1841

"flexible" labour markets. Taking the period 1983 to 1995, we find that

1842

around 30 per cent of the population of OECD Europe lived in countries with

1843

average unemployment rates lower than the USA and around 70 per cent in

1844

countries with lower unemployment than Canada (whose wages are only

1845

slightly less flexible than the USA). Furthermore, the European countries

1846

with the lowest unemployment rates were not noted for their labour market flexibility

1847

(Austria 3.7%, Norway 4.1%, Portugal 6.4%, Sweden 3.9% and Switzerland 1.7%).

1848

Britain, which probably had the most flexible labour market had an average

1849

unemployment rate higher than half of Europe. And the unemployment rate of

1850

Germany is heavily influenced by areas which were formally in East Germany.

1851

Looking at the former West German regions only, unemployment between 1983

1852

and 1995 was 6.3%, compared to 6.6% in the USA (and 9.8% in the UK). This

1853

did not change subsequently. There are many regulated European countries

1854

with lower unemployment than the USA (in 2002, 10 of 18 European countries

1855

had lower unemployment rates). Thus:

1856

1857

"Often overlooked in the 1990s in the rush to embrace market fundamentalism

1858

and to applaud the American model was the fact that several European countries

1859

with strong welfare states consistently reported unemployment rates well below

1860

that of the United States . . . At the same time, other European welfare sates,

1861

characterised by some of the lowest levels of wage inequality and the highest

1862

levels of social protection in the developed world, experienced substantial

1863

declines in unemployment over the 1990s, reaching levels that are now below

1864

that of the United States." [David R. Howell, "Conclusion", pp. 310-43,

1865

Op. Cit., p. 310]

1866

</blockquote>

1867

As such, it is important to remember that "the empirical basis" of the

1868

neo-liberal OECD-IMF orthodoxy is "limited." [Howell, Op. Cit., p. 337]

1869

In fact, the whole "Europe is in a state of decline" narrative which is

1870

used to justify the imposition of neo-liberal reforms there is better

1871

understood as the corporate media's clever ploy to push Europe into the

1872

hands of the self-destructing neo-liberalism that is slowly taking its

1873

toll on Britain and America rather than a serious analysis of the real

1874

situation there.

1875

1876

Take, for example, the issue of high youth unemployment in many European

1877

countries which reached international awareness during the French anti-CPE

1878

protests in 2006. In fact, the percentage of prime-age workers (25-54) in

1879

employment is pretty similar in "regulated" France, Germany and Sweden as

1880

in "flexible" America and Britain (it is much higher for women in Sweden).

1881

However, there are significant differences in youth employment rates and

1882

this suggests where the apparent unemployment problem lies in Europe. This

1883

problem is due to the statistical method used to determine

1884

the unemployment figures. The standard measure of unemployment divides the

1885

number unemployed by the numbers unemployed plus employed. The flaw in

1886

this should be obvious. For example, assume that 90% of French youths

1887

are in education and of the remaining 10%, 5% are in work and 5% are

1888

unemployed. This last 10% are the "labour force" and so we would get a

1889

massive 50% unemployment rate but this is due to the low (5%) employment

1890

rate. Looking at the youth population as a whole, only 5% are actually

1891

unemployed. [David R. Howell, "Introduction", pp. 3-34, Op. Cit.,

1892

pp. 13-14] By the standard measure, French males age 15-24 had an unemployment

1893

rate of 20.8% in 2007, as compared to 11.8% in America. Yet this

1894

difference is mainly because, in France (as in the rest of Europe),

1895

there are many more young males not in the labour force (more are in

1896

school and fewer work part time while studying). As those who are not

1897

in the labour market are not counted in the standard measure, this

1898

gives an inflated value for youth unemployment. A far better comparison

1899

would be to compare the number of unemployed divided by the population

1900

of those in the same age group. This results in the USA having a rate

1901

of 8.3% and France 8.6%.

1902

1903

Another source of the "decline" of Europe is usually linked to lower

1904

GDP growth over the past few years compared to countries like Britain

1905

and the USA. Yet this perspective fails to take into account internal

1906

income distribution. Both the USA and UK are marked by large (and

1907

increasing) inequality and that GDP growth is just as unequally

1908

distributed. In America, for example, most of GDP growth since the 1980s

1909

has been captured by the top 5% of the population while median wages

1910

have been (at best) flat. Ignoring the enrichment of the elite in the

1911

USA and UK would mean that GDP growth would be, at least for the bulk

1912

of the population, better in Europe. This means that while Europe may

1913

have grown more slowly, it benefits more than just the ruling class.

1914

Then there are such factors as poverty and social mobility. Rates

1915

of poverty are much worse in the neo-liberal countries, while social

1916

mobility has fallen in the US and UK since the 1980s. There are less

1917

poor people in Europe and they stay in poverty for shorter periods of

1918

time compared to America and Britain.

1919

1920

Moreover, comparing Europe's income or GDP per person to the U.S. fails

1921

to take into account the fact that Europeans work far less than Americans

1922

or British people. So while France may have lagged America in per capita

1923

income in 2007 ($30,693 to $43,144), it cannot be said that working class

1924

people are automatically worse off as French workers have a significantly

1925

shorter working week and substantially more holidays. Less hours at work

1926

and longer holidays may impact negatively on GDP but only an idiot would

1927

say that this means the economy is worse, never mind the quality of life.

1928

Economists, it should be remembered, cannot say that one person is worse

1929

off than another if she has less income due to working fewer hours. So

1930

GDP per capita may be

1931

higher in the US, but only because American workers work more hours and

1932

not because they are more productive. Like other Europeans, the French

1933

have decided to work less and enjoy it more. So it is important to remember

1934

that GDP is not synonymous with well-being and that inequality can produce

1935

misleading per capita income comparisons.

1936

1937

A far better indicator of economic welfare is productivity. It is understandable

1938

that this is not used as a measure when comparing America to Europe as it is as

1939

high, or higher, in France and other Western European countries as it is in the

1940

US (and much higher than in the UK where low wages and long hours boost the

1941

figure). And it should be remembered that rising productivity in the US

1942

has not been reflecting in rising wages since 1980. The gains of

1943

productivity, in other words, have been accumulated by the boss class

1944

and not by the hard working American people (whose working week has

1945

steadily increased during that period). Moreover, France created more

1946

private sector jobs (+10% between 1996 and 2002, according to the OECD)

1947

than the UK (+6%) or the US (+5%). Ironically, given the praise it

1948

receives for being a neo-liberal model, the UK economy barely created

1949

any net employment in the private sector between 2002 and 2007 (unemployment

1950

had dropped, but that was due to increased state spending which led

1951

to a large rise in public sector jobs).

1952

1953

Then there is the fact that some European countries have listened to

1954

the neo-liberal orthodoxy and reformed their markets but to little

1955

success. So it should be noted that "there has in fact already been a

1956

very considerable liberalisation and reform in Europe," both in product

1957

and labour markets. In fact, during the 1990s Germany and Italy reformed

1958

their labour markets "roughly ten times" as much as the USA. The "point

1959

is that reforms should have boosted productivity growth in Europe," but

1960

they did not. If regulation "was the fundamental problem, some positive

1961

impact on labour productivity growth should have come already from the

1962

very substantial deregulation already undertaken. Deregulation should

1963

have contributed to an acceleration in productivity growth in Europe

1964

whereas actually productivity growth declines. It is hard to see how

1965

regulation, which was declining, could be the source of Europe's slowdown."

1966

[Glyn, Op. Cit., p. 144]

1967

1968

So, perhaps, "flexibility" is not the solution to unemployment some

1969

claim it is (after all, the lack of a welfare state in the 19th century

1970

did not stop mass unemployment nor long depressions occurring). Indeed, a

1971

strong case can be made (and has been by left-wing economists) that the

1972

higher open unemployment in Europe has a lot less to do with "rigid"

1973

structures and "pampered" citizens than it does with the fiscal and

1974

monetary austerity produced by the excessively tight monetary policies

1975

of the European Central Bank plus the requirements of the Maastricht

1976

Treaty and the "Growth and Stability pact" which aims to reduce demand

1977

expansion (i.e. wage rises) under the name of price stability (i.e.,

1978

the usual mantra of fighting inflation by lowering wage increases). So,

1979

"[i]n the face of tight monetary policy imposed first by the [German]

1980

Bundesbank and then by the European Central Bank . . . it has been

1981

essential to keep wages moderate and budget deficits limited. With

1982

domestic demand severely constrained, many European countries

1983

experiences particularly poor employment growth in the mid-1990s."

1984

[David R. Howell, "Conclusion", Op. Cit., p. 337] This has been

1985

essentially imposed by the EU bureaucrats onto the European population

1986

and as these policies, like the EU itself, has the support of most of

1987

Europe's ruling class such an explanation is off the political agenda.

1988

1989

So if "flexibility" does not result in lower unemployment, just what

1990

is it good for? The net results of American labour market "flexibility"

1991

were summarised by head the US Federal Reserve Alan Greenspan in 1997.

1992

He was discussing the late 1990s boom (which was, in fact, the product

1993

of the dot.com bubble rather than the dawn of a new era so many claimed

1994

at the time). He explained why unemployment managed to fall below the

1995

standard NAIRU rate without inflation increasing. In his words:

1996

1997

"Increases in hourly compensation . . . have continued to fall far

1998

short of what they would have been had historical relationships

1999

between compensation gains and the degree of labour market tightness

2000

held . . . As I see it, heightened job insecurity explains a

2001

significant part of the restraint on compensation and the consequent

2002

muted price inflation . . . The continued reluctance of workers to

2003

leave their jobs to seek other employment as the labour market has

2004

tightened provides further evidence of such concern, as does the

2005

tendency toward longer labour union contracts . . . The low level

2006

of work stoppages of recent years also attests to concern about job

2007

security . . . The continued decline in the share of the private

2008

workforce in labour unions has likely made wages more responsive to

2009

market forces . . . Owing in part to the subdued behaviour of wages,

2010

profits and rates of return on capital have risen to high levels."

2011

[quoted by Jim Stanford, "Testing the Flexibility Paradigm: Canadian

2012

Labor Market Performance in International Context," pp. 119-155,

2013

Fighting Unemployment, David R. Howell (ed.), pp. 139-40]

2014

</blockquote>

2015

Under such circumstances, it is obvious why unemployment could drop

2016

and inflation remain steady. Yet there is a massive contradiction in

2017

Greenspan's account. As well as showing how keen the Federal Reserve

2018

investigates the state of the class struggle, ready to intervene when

2019

the workers may be winning, it also suggests that flexibility works

2020

just one way:

2021

2022

"Some of the features highlighted by Greenspan reflect precisely

2023

a lack of flexibility in the labour market: a lack of response

2024

of compensation to tight labour markets, a reluctance of workers

2025

to leave their jobs, and the prevalence of long-term contracts

2026

that lock employment arrangements for six or more years at a time.

2027

And so Greenspan's portrayal of the unique features of the US model

2028

suggests that something more than flexibility is the key ingredient

2029

at work -- or at least that 'flexibility' is being interpreted

2030

once again from an unbalanced and one-sided perspective. It is,

2031

rather, a high degree of labour market discipline that seems to

2032

be the operative force. US workers remain insecure despite a

2033

relatively low unemployment rate, and hence compensation gains

2034

. . . were muted. This implies a consequent redistribution

2035

of income from labour to capital . . . Greenspan's story is more

2036

about fear than it is about flexibility -- and hence this famous

2037

testimony has come to be known as Greenspan's 'fear factor'

2038

hypothesis, in which he concisely described the importance of

2039

labour market discipline for his conduct of monetary policy."

2040

[Jim Stanford, Op. Cit., p. 140]

2041

</blockquote>

2042

So while this attack on the wages, working conditions and social welfare is

2043

conducted under the pre-Keynesian notion of wages being "sticky" downwards,

2044

the underlying desire is to impose a "flexibility" which ensures that wages

2045

are "sticky" upwards. This suggests a certain one-sidedness to the

2046

"flexibility" of modern labour markets: employers enjoy the ability to

2047

practice flexpoilation but the flexibility of workers to resist is reduced.

2048

2049

Rather than lack of "flexibility," the key factor in explaining high unemployment

2050

in Europe is the anti-inflationary policies of its central banks, which pursue

2051

high interest rates in order to "control" inflation (i.e. wages). In contrast,

2052

America has more flexibility simply due to the state of the working class

2053

there. With labour so effectively crushed in America, with so many workers

2054

feeling they cannot change things or buying into the individualistic premises

2055

of capitalism thanks to constant propaganda by business funded think-tanks,

2056

the US central bank can rely on job insecurity and ideology to keep workers

2057

in their place in spite of relatively lower official unemployment. Meanwhile,

2058

as the rich get richer many working class people spend their time making

2059

ends meet and blaming everyone and everything but their ruling class for

2060

their situation ("US families must work even more hours to achieve the

2061

standard of living their predecessors achieved 30 years ago." [David R.

2062

Howell, "Conclusion", Op. Cit., p. 338]).

2063

2064

All this is unsurprising for anarchists as we recognise that "flexibility"

2065

just means weakening the bargaining power of labour in order to increase

2066

the power and profits of the rich (hence the expression "flexploitation"!).

2067

Increased "flexibility" has been associated with higher, not lower

2068

unemployment. This, again, is unsurprising, as a "flexible" labour market

2069

basically means one in which workers are glad to have any job and face

2070

increased insecurity at work (actually, "insecurity" would be a more honest

2071

word to use to describe the ideal of a competitive labour market rather than

2072

"flexibility" but such honesty would let the cat out of the bag). In such an

2073

environment, workers' power is reduced meaning that capital gets a larger

2074

share of the national income than labour and workers are less inclined to

2075

stand up for their rights. This contributes to a fall in aggregate demand, so

2076

increasing unemployment. In addition, we should note that "flexibility" may

2077

have little effect on unemployment (although not on profits) as a reduction of

2078

labour's bargaining power may result in more rather than less unemployment.

2079

This is because firms can fire "excess" workers at will, increase the hours

2080

of those who remain and stagnating or falling wages reduces

2081

aggregate demand. Thus the paradox of increased "flexibility" resulting in

2082

higher unemployment is only a paradox in the neo-classical framework. From

2083

an anarchist perspective, it is just the way the system works as is the

2084

paradox of overwork and unemployment occurring at the same time.

2085

2086

So while "free market" economics protrays unions as a form of market failure,

2087

an interference with the natural workings of the market system and recommend

2088

that the state should eliminate them or ensure that they are basically

2089

powerless to act, this simply does not reflect the real world. Any real

2090

economy is marked by the economic power of big business (in itself,

2091

according to neo-classical economics, a distortion of the market).

2092

Unless workers organise then they are in a weak position and will be

2093

even more exploited by their economic masters. Left-wing economist

2094

Thomas I. Palley presents the correct analysis of working class

2095

organisation when he wrote:

2096

2097

"The reality is that unions are a correction of market failure,

2098

namely the massive imbalance of power that exists between individual

2099

workers and corporate capital. The importance of labour market

2100

bargaining power for the distribution of income, means that unions

2101

are a fundamental prop for widespread prosperity. Weakening unions

2102

does not create a 'natural' market: it just creates a market in

2103

which business has the power to dominate labour.

2104

2105

"The notion of perfect natural markets is built on the assumption

2106

that market participants have no power. In reality, the process

2107

of labour exchange is characterised not only by the presence of

2108

power, but also by gross inequality of power. An individual worker

2109

is at a great disadvantage in dealing with large corporations that

2110

have access to massive pools of capital and can organise in a

2111

fashion that renders every individual dispensible . . . Unions

2112

help rectify the imbalance of power in labour markets, and they

2113

therefore correct market failure rather than causing it."

2114

{Op. Cit., pp. 36-7]

2115

</blockquote>

2116

The welfare state also increases the bargaining power of workers against

2117

their firms and limits the ability of firms to replace striking workers

2118

with scabs. Given this, it is understandable why bosses hate unions and

2119

any state aid which undermines their economic power. Thus the "hallmark"

2120

of the neo-liberal age "is an economic environment that pits citizen

2121

against citizen for the benefit of those who own and manage" a country.

2122

[Op. Cit, p. 203]

2123

2124

And we must add that whenever governments have attempted to make the

2125

labour market "fully competitive" it has either been the product of

2126

dictatorship (e.g. Chile under Pinochet) or occurred at the same time

2127

as increased centralisation of state power and increased powers for the

2128

police and employers (e.g. Britain under Thatcher, Reagan in the USA).

2129

This is the agenda which is proscribed for Western Europe. In 2006,

2130

when successful street protests stopped a proposed labour market

2131

reform in France (the CPE), one American journalist, Elaine Sciolino,

2132

complained that "the government seems to fear its people; the people

2133

seem to fear change." [New York Times, March 17 2006] Such are

2134

the contradictions of neo-liberalism. While proclaiming the need

2135

to reduce state intervention, it requires increased state power to

2136

impose its agenda. It needs to make people fear their government and

2137

fear for their jobs. Once that has been achieved, then people who

2138

accept "change" (i.e. the decisions of their economic, social and

2139

political bosses) without question. That the French people do not want

2140

a British or American style labour market, full of low-wage toilers

2141

who serve at the boss's pleasure should not come as a surprise. Nor

2142

should the notion that elected officials in a supposed democracy are

2143

meant to reflect the feelings of the sovereign people be considered

2144

as unusual or irrational.

2145

2146

The anti-democratic nature of capitalist "flexiblity" applies across the world.

2147

Latin American Presidents trying to introduce neo-liberalism into their

2148

countries have had to follow suit and "ride roughshod over democratic

2149

institutions, using the tradition Latin American technique of

2150

governing by decree in order to bypass congressional opposition. . .

2151

Civil rights have also taken a battering. In Bolivia, the government

2152

attempted to defuse union opposition . . . by declaring a state of

2153

siege and imprisoning 143 strike leaders. . . In Colombia, the

2154

government used anti-terrorist legislation in 1993 to try 15 trade

2155

union leaders opposing the privatisation of the state telecommunications

2156

company. In the most extreme example, Peru's Alberto Fujimori dealt

2157

with a troublesome Congress by simply dissolving it . . . and seizing

2158

emergency powers." [Duncan Green, The Silent Revolution, p. 157]

2159

2160

This is unsurprising. People, when left alone, will create communities,

2161

organise together to collectively pursue their own happiness, protect

2162

their communities and environment. In other words, they will form groups,

2163

associations and unions to control and influence the decisions that affect

2164

them. In order to create a "fully competitive" labour market, individuals

2165

must be atomised and unions, communities and associations weakened, if not

2166

destroyed, in order to fully privatise life. State power must be used

2167

to disempower the mass of the population, restrict their liberty, control

2168

popular organisations and social protest and so ensure that the free market

2169

can function without opposition to the human suffering, misery and pain

2170

it would cause. People, to use Rousseau's evil term, "must be forced

2171

to be free." And, unfortunately for neo-liberalism, the countries that tried

2172

to reform their labour market still suffered from high unemployment, plus

2173

increased social inequality and poverty and where still subject to the

2174

booms and slumps of the business cycle.

2175

2176

Of course, bosses and the elite are hardly going to present their

2177

desire for higher profits and more power in those terms. Hence the

2178

need to appear concerned about the fate of the unemployed. As such,

2179

it is significant, of course, that right-wing economists only seem to

2180

become concerned over unemployment when trade unions are organising or

2181

politicians are thinking of introducing or raising the minimum wage.

2182

Then they will talk about how these will raise unemployment and harm

2183

workers, particularly those from ethnic minorities. Given that bosses

2184

always oppose such policies, we must conclude that they are, in fact,

2185

seeking a situation where there is full employment and finding willing

2186

workers is hard to do. This seems, to say the least, an unlikely

2187

situation. If bosses were convinced that, for example, raising the

2188

minimum wage would increase unemployment rather than their wages bill

2189

they would be supporting it wholeheartedly as it would allow them to

2190

pressurise their workers into labouring longer and harder to remain in

2191

employment. Suffice to say, bosses are in no hurry to see their pool

2192

of wage slaves drained and so their opposition to trade unions and

2193

minimum wages are the product of need for profits rather than some

2194

concern for the unemployed.

2195

2196

This applies to family issues as well. In its support for "free markets"

2197

you can get a taste of the schizophrenic

2198

nature of the conservative right's approach to family values. On the one

2199

hand, they complain that families do not spend enough time together as

2200

they are under financial pressure and this results both parents going out

2201

to work and working longer hours.

2202

Families will also suffer because businesses do not have to offer paid

2203

maternity leave, paid time off, flexitime, paid holidays, or other things

2204

that benefit them. However, the right cannot bring themselves to advocate

2205

unions and strike action by workers (or state intervention) to achieve

2206

this. Ironically, their support for "free market" capitalism and

2207

"individualism" undermines their support for "family values." Ultimately,

2208

that is because profits will always come before parents.

2209

2210

All this is unsurprising as, ultimately, the only real solution to unemployment

2211

and overwork is to end wage labour and the liberation of humanity from the needs

2212

of capital. Anarchists argue that an economy should exist to serve people rather

2213

than people existing to serve the economy as under capitalism. This explains why

2214

capitalism has always been marked by a focus on "what the economy wants" or

2215

"what is best for the economy" as having a capitalist economy always results in

2216

profit being placed over people. Thus we have the paradoxical situation, as

2217

under neo-liberalism, where an economy is doing well while the bulk of the

2218

population are not.

2219

2220

Finally, we must clarify the anarchist position on state welfare (we support

2221

working class organisations, although we are critical of unions with bureaucratic

2222

and top-down structures). As far as state welfare goes, anarchists do not place

2223

it high on the list of things we are struggling against (once the welfare

2224

state for the rich has been abolished, then, perhaps, we will reconsider that).

2225

As we will discuss in <a href="secD1.html#secd15">section D.1.5</a>, anarchists

2226

are well aware that the current neo-liberal rhetoric of "minimising" the state

2227

is self-serving and hides an attack on the living standards of working class

2228

people. As such, we do not join in such attacks regardless of how critical we

2229

may be of aspects of the welfare state for we seek genuine reform

2230

from below by those who use it rather than "reform" from above by politicians

2231

and bureaucrats in the interests of state and capital. We also seek to promote

2232

alternative social institutions which, unlike the welfare state, are under

2233

working class control and so cannot be cut by decree from above. For further

2234

discussion, see sections <a href="secJ5.html#secj515">J.5.15</a> and

2235

2236

2237

<h2><a name="secc94">C.9.4 Is unemployment voluntary?</a></h2>

2238

2239

2240

Here we point out another aspect of the free market capitalist "blame the workers"

2241

argument, of which the diatribes against unions and workers' rights highlighted

2242

above is only a part. This is the assumption that unemployment is not involuntary

2243

but is freely chosen by workers. As Nicholas Kaldor put it, for "free market"

2244

economists involuntary employment "cannot exist because it is excluded by the

2245

assumptions." [Further Essays on Applied Economics, p. x] Many

2246

neo-classical economists claim that unemployed workers calculate that their

2247

time is better spent searching for more highly paid employment (or living on

2248

welfare than working) and so desire to be jobless. That this argument is taken

2249

seriously says a lot about the state of modern capitalist economic theory, but

2250

as it is popular in many right-wing circles, we should discuss it.

2251

2252

David Schweickart notes, these kinds of arguments ignore "two well-established

2253

facts: First, when unemployment rises, it is layoffs, not [voluntary] quits,

2254

that are rising. Second, unemployed workers normally accept their first job

2255

offer. Neither of these facts fits well with the hypothesis that most

2256

unemployment is a free choice of leisure." [Against Capitalism, p. 108]

2257

When a company fires a number of its workers, it can hardly be said that the

2258

sacked workers have calculated that their time is better spent looking for a

2259

new job. They have no option. Of course, there are numerous jobs advertised

2260

in the media. Does this not prove that capitalism always provides jobs for

2261

those who want them? Hardly, as the number of jobs advertised must have some

2262

correspondence to the number of unemployed and the required skills and those

2263

available. If 100 jobs are advertised in an areas reporting 1,000 unemployed,

2264

it can scarcely be claimed that capitalism tends to full employment. This

2265

hardly gives much support to the right-wing claim that unemployment is

2266

"voluntary" and gives an obvious answer to right-wing economist Robert

2267

Lucas's quest "to explain why people allocate time to . . . unemployment,

2268

we need to know why they prefer it to all other activities." [quoted by

2269

Schweickart, Op. Cit., p. 108] A puzzle indeed! Perhaps this unworldly

2270

perspective explains why there has been no real effort to verify the

2271

assertion that unemployment is "voluntary leisure."

2272

2273

Somewhat ironically, given the desire for many on the right to deny the

2274

possibility of involuntary unemployment this perspective became increasingly

2275

influential at precisely the same time as the various theories of the

2276

so-called "natural rate" of unemployment did (see <a href="secC9.html">section C.9</a>). Thus, at

2277

the same time as unemployment was proclaimed as being a "voluntary" choice

2278

economics was also implicitly arguing that this was nonsense, that unemployment

2279

is an essential disciplinary tool within capitalism to keep workers in their

2280

place (sorry, to fight inflation).

2281

2282

In addition, it is worthwhile to note that the right-wing assumption

2283

that higher unemployment benefits and a healthy welfare state promote

2284

unemployment is not supported by the evidence. As a moderate member

2285

of the British Conservative Party notes, the "OECD studied seventeen

2286

industrial countries and found no connect between a country's unemployment

2287

rate and the level of its social-security payments." [Dancing with Dogma,

2288

p. 118] Moreover, the economists David Blanchflower and Andrew Oswald

2289

"Wage Curve" for many different countries is approximately the same for

2290

each of the fifteen countries they looked at. This also suggests that labour

2291

market unemployment is independent of social-security conditions as

2292

their "wage curve" can be considered as a measure of wage flexibility.

2293

Both of these facts suggest that unemployment is involuntary in nature

2294

and cutting social-security will not affect unemployment.

2295

2296

Another factor in considering the nature of unemployment is the effect of

2297

decades of "reform" of the welfare state conducted in both the USA and UK

2298

since 1980. During the 1960s the welfare state was far more generous than

2299

it was in the 1990s and unemployment was lower. If unemployment was

2300

"voluntary" and due to social-security being high, we would expect a

2301

decrease in unemployment as welfare was cut (this was, after all, the

2302

rationale for cutting it in the first place). In fact, the reverse occurred,

2303

with unemployment rising as the welfare state was cut. Lower social-security

2304

payments did not lead to lower unemployment, quite the reverse in fact.

2305

2306

Faced with these facts, some may conclude that as unemployment is independent

2307

of social security payments then the welfare state can be cut. However, this

2308

is not the case as the size of the welfare state does affect the poverty rates

2309

and how long people remain in poverty. In the USA, the poverty rate was 11.7%

2310

in 1979 and rose to 13% in 1988, and continued to rise to 15.1% in 1993. The

2311

net effect of cutting the welfare state was to help increase poverty.

2312

Similarly, in the UK during the same period, to quote the ex-Thatcherite

2313

John Gray, there "was the growth of an underclass. The percentage of British

2314

(non-pensioner) households that are wholly workless -- that is, none of whose

2315

members is active in the productive economy -- increased from 6.5 per cent in

2316

1975 to 16.4 per cent in 1985 and 19.1 per cent in 1994. . . Between 1992

2317

and 1997 there was a 15 per cent increase in unemployed lone parents. . .

2318

This dramatic growth of an underclass occurred as a direct consequence of

2319

neo-liberal welfare reforms, particularly as they affected housing."

2320

[False Dawn, p. 30] This is the opposite of the predictions of right-wing

2321

theories and rhetoric.

2322

2323

As Gray correctly argues, the "message of the American [and other] New

2324

Right has always been that poverty and the under class are products of the

2325

disincentive effects of welfare, not the free market." He goes on to note

2326

that it "has never squared with the experience of the countries of

2327

continental Europe where levels of welfare provision are far more

2328

comprehensive than those of the United States have long co-existed with

2329

the absence of anything resembling an American-style underclass. It does

2330

not touch at virtually any point the experience of other Anglo-Saxon

2331

countries." He points to the example of New Zealand where "the theories

2332

of the American New Right achieved a rare and curious feat -- self-refutation

2333

by their practical application. Contrary to the New Right's claims, the

2334

abolition of nearly all universal social services and the stratification

2335

of income groups for the purpose of targeting welfare benefits selectively

2336

created a neo-liberal poverty trap." [Op. Cit., p. 42]

2337

2338

So while the level of unemployment benefits and the welfare state may

2339

have little impact on the level of unemployment (which is to be expected

2340

if the nature of unemployment is essentially involuntary), it does have

2341

an effect on the nature, length and persistency of poverty. Cutting

2342

the welfare state increases poverty and the time spent in poverty

2343

(and by cutting redistribution, it also increases inequality).

2344

2345

If we look at the relative size of a nation's social security transfers

2346

as a percentage of Gross Domestic Product and its relative poverty rate

2347

we find a correlation. Those nations with a high level of spending have

2348

lower rates of poverty. In addition, there is a correlation between the

2349

spending level and the number of persistent poor. Those nations with

2350

high spending levels have more of their citizens escape poverty. For

2351

example, Sweden has a single-year poverty rate of 3% and a poverty

2352

escape rate of 45% and Germany has figures of 8% and 24% (and

2353

a persistent poverty rate of 2%). In contrast, the USA has figures

2354

of 20% and 15% (and a persistent poverty rate of 42%).

2355

2356

Given that a strong welfare state acts as a kind of floor under the

2357

wage and working conditions of labour, it is easy to see why

2358

capitalists and the supporters of "free market" capitalism seek

2359

to undermine it. By undermining the welfare state, by making

2360

labour "flexible," profits and power can be protected from working

2361

people standing up for their rights and interests. Little wonder the

2362

claimed benefits of "flexibility" have proved to be so elusive for the

2363

vast majority while inequality has exploded. The welfare state, in

2364

other words, reduces the attempts of the capitalist system to commodify

2365

labour and increases the options available to working class people. While

2366

it did not reduce the need to get a job, the welfare state did undermine

2367

dependence on any particular employee and so increased workers'

2368

independence and power. It is no coincidence that the attacks on unions

2369

and the welfare state was and is framed in the rhetoric of protecting the

2370

"right of management to manage" and of driving people back into wage

2371

slavery. In other words, an attempt to increase the commodification of

2372

labour by making work so insecure that workers will not stand up for

2373

their rights.

2374

2375

Unemployment has tremendous social costs, with the unemployed facing financial

2376

insecurity and the possibility of indebtedness and poverty. Many studies have

2377

found that unemployment results in family distribution, ill health (both

2378

physical and mental), suicide, drug addition, homelessness, malnutrition,

2379

racial tensions and a host of other, negative, impacts. Given all this,

2380

given the dire impact of joblessness, it strains belief that people would

2381

choose to put themselves through it. The human costs of unemployment

2382

are well documented. There is a stable

2383

correlation between rates of unemployment and the rates of mental-hospital

2384

admissions. There is a connection between unemployment and juvenile and

2385

young-adult crime. The effects on an individual's self-respect and the

2386

wider implications for their community and society are massive. As David

2387

Schweickart concludes the "costs of unemployment, whether measured in

2388

terms of the cold cash of lost production and lost taxes or in the hotter

2389

units of alienation, violence, and despair, are likely to be large under

2390

Laissez Faire." [Op. Cit., p. 109]

2391

2392

Of course, it could be argued that the unemployed should look for work and

2393

leave their families, home towns, and communities in order to find it.

2394

However, this argument merely states that people should change their whole

2395

lives as required by "market forces" (and the wishes -- "animal spirits,"

2396

to use Keynes' term -- of those who own capital). In other words, it just

2397

acknowledges that capitalism results in people losing their ability to

2398

plan ahead and organise their lives (and that, in addition, it can deprive

2399

them of their sense of identity, dignity and self-respect as well),

2400

portraying this as somehow a requirement of life (or even, in some cases,

2401

noble).

2402

2403

It seems that capitalism is logically committed to viciously contravening

2404

the very values upon which it claims it be built, namely the respect for

2405

the innate worth and separateness of individuals. This is hardly surprising,

2406

as capitalism is based on reducing individuals to the level of another

2407

commodity (called "labour"). To requote Karl Polanyi:

2408

2409

"In human terms such a postulate [of a labour market] implied for the

2410

worker extreme instability of earnings, utter absence of professional

2411

standards, abject readiness to be shoved and pushed about indiscriminately,

2412

complete dependence on the whims of the market. [Ludwig Von] Mises justly

2413

argued that if workers 'did not act as trade unionists, but reduced their

2414

demands and changed their locations and occupations according to the labour

2415

market, they would eventually find work.' This sums up the position under

2416

a system based on the postulate of the commodity character of labour. It

2417

is not for the commodity to decide where it should be offered for sale, to

2418

what purpose it should be used, at what price it should be allowed to

2419

change hands, and in what manner it should be consumed or destroyed."

2420

[The Great Transformation, p. 176]

2421

</blockquote>

2422

However, people are not commodities but living, thinking, feeling

2423

individuals. The "labour market" is more a social institution than an

2424

economic one and people and work more than mere commodities. If we reject

2425

the neo-liberals' assumptions for the nonsense they are, their case fails.

2426

Capitalism, ultimately, cannot provide full employment simply because

2427

labour is not a commodity (and as we discussed in <a href="secC7.html">section C.7</a>, this

2428

revolt against commodification is a key part of understanding the business

2429

cycle and so unemployment).

2430

2431

2432

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2433

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