4
<title>C.9 Would laissez-faire capitalism reduce unemployment, as
5
supporters of "free market" capitalism claim?</title>
9
<h1>C.9 Would laissez-faire capitalism reduce unemployment, as
10
supporters of "free market" capitalism claim?</h1>
12
Firstly, we have to state that "actually existing capitalism" in the West
13
actually manages unemployment to ensure high profit rates for the capitalist
14
class (see <a href="secC8.html#secc83">section C.8.3</a>) - market discipline
15
for the working class, state
16
protection for the ruling class, in other words. As Edward Herman points
19
"Conservative economists have even developed a concept of a 'natural rate
20
of unemployment' [which Herman defines as "the rate of unemployment
21
preferred by the propertied classes"] . . . [which] is defined as the
22
minimum level consistent with price level stability, but, as it is based
23
on a highly abstract model that is not directly testable, the natural
24
rate can only be inferred from the price level itself. That is, if prices
25
are going up, unemployment is below the 'natural rate' and too low. . .
26
Apart from the grossness of this kind of metaphysical legerdemain, the
27
very concept of a natural rate of unemployment has a huge built-in
28
bias. It takes as granted all the other institutional factors that
29
influence the price level-unemployment trade-off (market structures
30
and independent pricing power, business investment policies at home
31
and abroad, the distribution of income, the fiscal and monetary mix,
32
etc.) and focuses solely on the tightness of the labour market
33
as the controllable variable. Inflation is the main threat, the
34
labour market (i.e. wage rates and unemployment levels) is the
35
locus of the solution to the problem."</i> [<b>Beyond Hypocrisy</b>, p. 94]
37
In a sense, it is understandable that the ruling class within capitalism
38
desires to manipulate unemployment in this way and deflect questions
39
about their profit, property and power onto the labour market. Managing
40
depression (as indicated by high unemployment levels) allows greater profits
41
to be extracted from workers as management hierarchy is more secure. When
42
times are hard, workers with jobs think twice before standing up to their
43
bosses and so work harder, for longer and in worse conditions. This ensures
44
that surplus value is increased relative to real wages (indeed, in the
45
USA, real wages have stagnated since 1973 while profits have grown
46
massively). In addition, such a policy ensures that political discussion
47
about investment, profits, power and so on (<i>"the other institutional
48
factors"</i>) are reduced and diverted because working class people are
49
too busy trying to make ends meet.
51
Of course, it can be argued that as this "natural" rate is both invisible
52
and can move, historical evidence is meaningless -- you can prove anything
53
with an invisible, mobile value. But if this is the case then any attempts to
54
maintain a "natural" rate is also meaningless as the only way to discover it
55
is to watch inflation levels (and with an invisible, mobile value, the theory
56
is always true after the fact -- if inflation rises as unemployment rises, then
57
the natural rate has increased; if inflation falls as unemployment rises, it has
58
fallen!). Which means that people are being made unemployed on the off-chance
59
that the unemployment level will drop below the (invisible and mobile) "natural"
60
rate and harm the interests of the ruling class (high inflation rates harms interest
61
incomes and full employment squeezes profits by increasing workers' power).
62
Given that most mainstream economists subscribe to this fallacy, it just
63
shows how the "science" accommodates itself to the needs of the powerful.
65
So, supporters of "free market" capitalism do have a point, "actually
66
existing capitalism" has created high levels of unemployment. The
67
question now arises, will a "purer" capitalism create full employment?
69
First, we should point out that some supporters of "free market" capitalism
70
claim that the market has no tendency to equilibrium at all, which means full
71
employment is impossible, but few explicitly state this obvious conclusion
72
of their own theories. However, most claim that full employment can occur.
73
Anarchists agree, full employment can occur in "free market" capitalism,
74
but not for ever (nor for long periods). As the Polish economist Michal
75
Kalecki pointed out in regards to pre-Keynesian capitalism, the <i>"reserve
76
of capital equipment and the reserve army of unemployed are typical features
77
of capitalist economy at least throughout a considerable part of the
78
[business] cycle."</i> [quoted by George R. Feiwel, <b>The Intellectual Capital
79
of Michal Kalecki</b>, p. 130]
81
Cycles of short periods of full employment and longer periods of rising and
82
falling unemployment are actually a more likely outcome of "free market"
83
capitalism than continued full employment. As we argued in sections
84
<a href="secB4.html#secb44">B.4.4</a>
85
and <a href="secC7.html#secc71">C.7.1</a> capitalism needs unemployment to function successfully and so
86
"free market" capitalism will experience periods of boom and slump, with
87
unemployment increasing and decreasing over time (as can be seen from 19th
88
century capitalism). So, full employment under capitalism is unlikely to last
89
long (nor would full employment booms fill a major part of the full
90
business cycle). Moreover, the notion that capitalism naturally stays at
91
equilibrium or that unemployment is temporary adjustments is false,
92
even given the logic of neo-classical economics. As Proudhon argued:
94
"The economists admit it [that machinery causes unemployment]: but
95
here they repeat their eternal refrain that, after a lapse of time, the demand
96
for the product having increased in proportion to the reduction
97
in price [caused by the investment], labour in turn will come finally to be
98
in greater demand than ever. Undoubtedly, <b>with time,</b> the equilibrium
99
will be restored; but I must add again, the equilibrium will be no sooner
100
restored at this point than it will be disturbed at another, because the
101
spirit of invention never stops. . ."</i> [<b>System of Economical
102
Contradictions</b>, pp. 200-1]
104
That capitalism creates permanent unemployment and, indeed, needs it
105
to function is a conclusion that few, if any, pro-"free market" capitalists
106
subscribe to. Faced with the empirical evidence that full employment is
107
rare in capitalism, they argue that reality is not close enough to their
108
theories and must be changed (usually by weakening the power of
109
labour by welfare "reform" and reducing "union power"). Thus
110
reality is at fault, not the theory (to re-quote Proudhon, <i>"Political
111
economy -- that is, proprietary despotism -- can never be in the
112
wrong: it must be the proletariat."</i> [<b>Op. Cit.</b>, p. 187]) So if
113
unemployment exists, then its because real wages are too high, not
114
because capitalists need unemployment to discipline labour (see
115
<a href="secC9.html#secc92">section C.9.2</a>
116
for evidence that the neo-classical theory is false). Or
117
if real wages are falling as unemployment is rising, it can only
118
mean that the real wage is not falling fast enough -- empirical
119
evidence is never enough to falsify logical deductions from
122
(As an aside, it is one of amazing aspects of the "science" of economics
123
that empirical evidence is never enough to refute its claims. As the
124
left-wing economist Nicholas Kaldor once pointed out, <i>"[b]ut unlike
125
any scientific theory, where the basic assumptions are chosen on the
126
basis of direct observation of the phenomena the behaviour of which
127
forms the subject-matter of the theory, the basic assumptions of
128
economic theory are either of a kind that are unverifiable. . . or
129
of a kind which are directly contradicted by observation."</i> [<b>Further
130
Essays on Applied Economics</b>, pp. 177-8] Or, if we take the standard
131
economics expression "in the long run," we may point out that unless
132
a time is actually given it will always remain unclear as to how much
133
evidence must be gathered before one can accept or reject the theory.)
135
Of course, reality often has the last laugh on any ideology. For example,
136
since the late 1970s and early 1980s right-wing capitalist parties
137
have taken power in many countries across the world. These regimes
138
made many pro-free market reforms, arguing that a dose of market
139
forces would lower unemployment, increase growth and so on. The
140
reality proved somewhat different. For example, in the UK, by the
141
time the Labour Party under Tony Blair come back to office in 1997,
142
unemployment (while falling) was still higher than it had been
143
when the last Labour government left office in May, 1979. 18 years
144
of labour market reform had not reduced unemployment. It is no
145
understatement to argue, in the words of two critics of neo-liberalism,
146
that the <i>"performance of the world economy since capital was
147
liberalised has been worse than when it was tightly controlled"</i>
148
and that <i>"[t]hus far, [the] actual performance [of liberalised
149
capitalism] has not lived up to the propaganda."</i> [Larry Elliot
150
and Dan Atkinson, <b>The Age of Insecurity</b>, p. 274, p. 223]
152
Lastly, it is apparent merely from a glance at the history of capitalism
153
during its laissez-faire heyday in the 19th century that "free"
154
competition among workers for jobs does not lead to full employment.
155
Between 1870 and 1913, unemployment was at an average of 5.7% in
156
the 16 more advanced capitalist countries. This compares to an average
157
of 7.3% in 1913-50 and 3.1% in 1950-70. If laissez-faire did lead to
158
full employment, these figures would be reversed. As discussed above
159
(in <a href="secC7.html#secC71">section C.7.1</a>), ]
160
full employment <b>cannot</b> be a fixed feature of
161
capitalism due to its authoritarian nature and the requirements of
162
production for profit. To summarise, unemployment has more to
163
do with private property than the wages of our fellow workers.
165
However, it is worthwhile to discuss why the "free market" capitalist is
166
wrong to claim that unemployment within their system will not exist for
167
long periods of time. In addition, to do so will also indicate the poverty
168
of their theory of, and "solution" to, unemployment and the human
169
misery they would cause. We do this in the
170
<a href="secC9.html#secc91">next section</a>.
172
<a name="secc91"><h2>C.9.1 Would cutting wages reduce unemployment?</h2>
174
The "free market" capitalist (or neo-classical or neo-liberal or "Austrian") argument
175
is that unemployment is caused by workers real wage being higher than the market
176
clearing level. Workers, it is claimed, are more interested in money wages than
177
real wages (which is the amount of goods they can by with their money wages).
178
This leads them to resist wage cuts even when prices are falling, leading to a
179
rise in their real wages. In other words, they are pricing themselves out of
180
work without realising it (the validity of the claim that unemployment is
181
caused by high wages is discussed in the
182
<a href="secC9.html#secc92">next section</a>).
184
From this analysis comes the argument that if workers were allowed to compete
185
'freely' among themselves for jobs, real wages would decrease. This would reduce
186
production costs and this drop would produce an expansion in production which
187
provides jobs for the unemployed. Hence unemployment would fall. State intervention
188
(e.g. unemployment benefit, social welfare programmes, legal rights to organise,
189
minimum wage laws, etc.) and labour union activity according to this theory is
190
the cause of unemployment, as such intervention and activity forces wages above
191
their market level, thus increasing production costs and "forcing" employers to
194
Therefore, according to neo-classical economic theory, firms adjust production
195
to bring the marginal cost of their products (the cost of producing one
196
more item) into equality with the product's market-determined price. So a
197
drop in costs theoretically leads to an expansion in production, producing
198
jobs for the "temporarily" unemployed and moving the economy toward
199
a full-employment equilibrium.
201
So, in neo-classical theory, unemployment can be reduced by reducing the
202
real wages of workers currently employed. However, this argument is flawed.
203
While cutting wages may make sense for one firm, it would not have this
204
effect throughout the economy as a whole (as is required to reduce
205
unemployment in a country as a whole). This is because, in all versions of
206
neo-classical theory, it is assumed that prices depend (at least in part)
207
on wages. If all workers accepted a cut in wages, all prices would fall
208
and there would be little reduction in the buying power of wages. In other
209
words, the fall in money wages would reduce prices and leave real wages
210
nearly unchanged and unemployment would continue.
212
Moreover, if prices remained unchanged or only fell by a small amount (i.e.
213
if wealth was redistributed from workers to their employers), then the effect
214
of this cut in real wages would not increase employment, it would reduce it.
215
For people's consumption depends on their income, and if their incomes
216
have fallen, in real terms, so will their consumption. As Proudhon pointed
217
out in 1846, <i>"if the producer earns less, he will buy less. . . [which will]
218
engender. . . over-production and destitution"</i> because <i>"though the
219
workmen cost you [the capitalist] something, they are your customers:
220
what will you do with your products, when driven away by you, they
221
shall consume no longer? Thus, machinery, after crushing, is not show
222
in dealing employers a counter-blow; for if production excludes
223
consumption, it is soon obliged to stop itself."</i> [<b>System of Economical
224
Contradictions</b>, p. 204, p. 190]
226
However, it can be argued, not everyone's real income would fall: incomes from
227
profits would increase. But redistributing income from workers to capitalists, a
228
group who tend to spend a smaller portion of their income on consumption than do
229
workers, could reduce effective demand and increase unemployment. As David
230
Schweickart points out, when wages decline, so does workers' purchasing power;
231
and if this is not offset by an increase in spending elsewhere, total demand will
232
decline [<b>Against Capitalism</b>, pp. 106-107]. In other words, contrary to
233
neo-classical economics, market equilibrium might be established at any level
236
But in "free market" capitalist theory, such a possibility of market
237
equilibrium with unemployment is impossible. Neo-liberals reject the
238
claim that cutting real wages would merely decrease the demand for
239
consumer goods without automatically increasing investment sufficiently to
240
compensate for this. Neo-classicists argue that investment will increase
241
to make up for the decline in working class consumption.
243
However, in order make this claim, the theory depends on three critical
244
assumptions, namely that firms can expand production, that they will expand
245
production, and that, if they do, they can sell their expanded production.
246
However, this theory and its assumptions can be questioned.
248
The first assumption states that it is always possible for a company to
249
take on new workers. But increasing production requires more than just
250
labour. If production goods and facilities are not available, employment
251
will not be increased. Therefore the assumption that labour can always be
252
added to the existing stock to increase output is plainly unrealistic.
254
Next, will firms expand production when labour costs decline? Hardly.
255
Increasing production will increase supply and eat into the excess profits
256
resulting from the fall in wages. If unemployment did result in a lowering
257
of the general market wage, companies might use the opportunity to replace
258
their current workers or force them to take a pay cut. If this happened,
259
neither production nor employment would increase. However, it could be
260
argued that the excess profits would increase capital investment in the
261
economy (a key assumption of neo-liberalism). The reply is obvious: perhaps,
262
perhaps not. A slumping economy might well induce financial caution and
263
so capitalists could stall investment until they are convinced of the
264
sustained higher profitability while last.
266
This feeds directly into the last assumption, namely that the produced
267
goods will be sold. But when wages decline, so does worker purchasing
268
power, and if this is not offset by an increase in spending elsewhere,
269
then total demand will decline. Hence the fall in wages may result in the
270
same or even more unemployment as aggregate demand drops and companies
271
cannot find a market for their goods. However, business does not (cannot)
272
instantaneously make use of the enlarged funds resulting from the shift
273
of wages to profit for investment (either because of financial caution
274
or lack of existing facilities). This will lead to a reduction in aggregate
275
demand as profits are accumulated but unused, so leading to stocks
276
of unsold goods and renewed price reductions. This means that the
277
cut in real wages will be cancelled out by price cuts to sell unsold
278
stock and unemployment remains.
280
So, the traditional neo-classical reply that investment spending will increase
281
because lower costs will mean greater profits, leading to greater savings,
282
and ultimately, to greater investment is weak. Lower costs will mean greater
283
profits only if the products are sold, which they might not be if demand
284
is adversely affected. In other words, a higher profit margins do not result in
285
higher profits due to fall in consumption caused by the reduction of workers
286
purchasing power. And, as Michal Kalecki argued, wage cuts in combating
287
a slump may be ineffective because gains in profits are not applied
288
immediately to increase investment and the reduced purchasing power
289
caused by the wage cuts causes a fall in sales, meaning that higher profit
290
margins do not result in higher profits. Moreover, as Keynes pointed out long
291
ago, the forces and motivations governing saving are quite distinct from
292
those governing investment. Hence there is no necessity for the two quantities
293
always to coincide. So firms that have reduced wages may not be able to sell
294
as much as before, let alone more. In that case they will cut production,
295
adding to unemployment and further lowering demand. This can set off a
296
vicious downward spiral of falling demand and plummeting production leading
297
to depression (the political results of such a process would be dangerous
298
to the continued survival of capitalism). This downward spiral is described
299
by Kropotkin (nearly 40 years before Keynes made the same point in his
300
<b>General Theory of Employment, Interest and Money</b>):
302
"Profits being the basis of capitalist industry, low profits explain all
303
ulterior consequences.
305
"Low profits induce the employers to reduce the wages, or the number of
306
workers, or the number of days of employment during the week. . . [L]ow
307
profits ultimately mean a reduction of wages, and low wages mean a
308
reduced consumption by the worker. Low profits mean also a somewhat
309
reduced consumption by the employer; and both together mean lower
310
profits and reduced consumption with that immense class of middlemen
311
which has grown up in manufacturing countries, and that, again, means
312
a further reduction of profits for the employers."</i> [<b>Fields, Factories and
313
Workshops Tomorrow</b>, p. 33]
315
Thus, a cut in wages will deepen any slump, making it deeper and longer
316
than it otherwise would be. Rather than being the solution to unemployment,
317
cutting wages will make it worse (we will address the question of whether
318
wages being too high actually causes unemployment in the first place, as
319
maintained by neo-classical economics, below). Given that, as we argued
320
in <a href="secC7.html#secc71">section C.7.1</a>, inflation is caused by
321
insufficient profits for capitalists
322
(they try to maintain their profit margins by price increases) this spiralling
323
effect of cutting wages helps to explain what economists term "stagflation"
324
As workers are made unemployed, aggregate demand falls, cutting profit
325
margins even more and in response capitalists raise prices in an attempt to
326
recoup their losses. Only a very deep recession can break this cycle (along
327
with labour militancy and more than a few workers and their families).
328
Working people paying for capitalism's contradictions, in other words.
330
All this means that working class people have two options in a slump --
331
accept a deeper depression in order to start the boom-bust cycle again or
332
get rid of capitalism and with it the contradictory nature of capitalist
333
production which produces the business cycle in the first place (not to
334
mention other blights such as hierarchy and inequality).
336
The "Pigou" (or "real balance") effect is another neo-classical argument
337
that aims to prove that (in the end) capitalism will pass from slump to
338
boom. This theory argues that when unemployment is sufficiently high, it
339
will lead to the price level falling which would lead to a rise in the real
340
value of the money supply and so increase the real value of savings. People
341
with such assets will have become richer and this increase in wealth will
342
enable people to buy more goods and so investment will begin again. In
343
this way, slump passes to boom naturally.
345
However, this argument is flawed in many ways. In reply, Michal Kalecki
346
argued that, firstly, Pigou had <i>"assumed that the banking system would
347
maintain the stock of money constant in the face of declining incomes,
348
although there was no particular reason why they should."</i> If the money
349
stock changes, the value of money will also change. Secondly, that <i>"the
350
gain in money holders when prices fall is exactly offset by the loss to
351
money providers. Thus, whilst the real value of a deposit in bank
352
account rises for the depositor when prices fell, the liability
353
represented by that deposit for the bank also rises in size."</i> And,
354
thirdly, <i>"that falling prices and wages would mean that the real value
355
of outstanding debts would be increased, which borrowers would find it
356
increasingly difficult to repay as their real income fails to keep pace
357
with the rising real value of debt. Indeed, when the falling prices and
358
wages are generated by low levels of demand, the aggregate real income
359
will be low. Bankruptcies follow, debts cannot be repaid, and a
360
confidence crisis was likely to follow."</i> In other words, debtors may
361
cut back on spending more than creditors would increase it and so the
362
depression would continue as demand did not rise. [Malcolm C. Sawyer,
363
<b>The Economics of Michal Kalecki</b>, p. 90]
365
However, even if we ignore this the capitalist argument is still likely
366
to be wrong as it the <i>"conventional economic analysis of markets . . .
367
is unlikely to apply"</i> to the labour market and as a result <i>"wages are
368
highly unlikely to reflect workers' contributions to production."</i> This
369
is because economists treat labour as no different from other commodities
370
yet <i>"economic theory supports no such conclusion."</i> At its most basic,
371
labour is <b>not</b> produced for profit and the <i>"supply curve for labour
372
can 'slope backward' -- so that a fall in wages can cause an increase
373
in the supply of workers."</i> In addition, as noted at the end of
374
<a href="secC1.html#secc14">section C.1.4</a>, economic theory itself shows that workers will not
375
get a fair wage when they face organised or very powerful employers
376
unless they organise unions. [Keen, <b>Debunking Economics</b>, pp. 111-2
379
The idea of a backward sloping supply curve for labour is just as easy
380
to derive from the assumptions used by economists to derive their
381
standard one. This is because workers may prefer to work less as
382
the wage rate rises as they will be better off even if they do not
383
work more. Conversely, very low wage rates are likely to produce a
384
very high supply of labour as workers need to work more to meet
385
their basic needs (this was a key aim of state intervention during
386
the rise of capitalism, incidentally). This means that the market
387
suply curve <i>"could have any shape at all"</i> and so economic theory
388
<i>"fails to prove that employment is determined by supply and demand,
389
and reinforces the real world observation that involuntary
390
unemployment can exist"</i> as reducing the wage need not bring the
391
demand and supply of labour into aligment. While the possibility
392
of backward-bending labour supply curves is sometimes pointed out
393
in textbooks, the assumption of an upward sloping supply curve
394
is taken as the normal situation but <i>"there is no theoretical
396
Sadly for the world, this assumption is used to draw very strong
397
conclusions by economists. The standard arguments against minimum
398
wage legislation, trade unions and demand management by government
399
are all based on it. Yet, as Keen notes, such important policy
400
positions <i>"should be based upon robust intellectual or empirical
401
foundations, rather than the flimsy substrate of mere fancy.
402
Economists are quite prone to dimiss alternative perspectives on
403
labour market policy on this very basis -- that they lack any
404
theoretical or empirical foundations. Yet their own policy
405
positions are based as much on wishful thinking as on wisdom."</i>
406
[<b>Op. Cit.</b>, p. 123] Within a capitalist economy the opposite
407
assumption to that taken by economics is far more likely, namely
408
that there <b>is</b> a backward sloping labour supply curve. This means
409
that a fall in real wages may <b>increase</b> the supply of labour as
410
workers are forced to work longer hours or take second jobs simply
411
to meet their basic needs. In other words, the labour market is not
412
a market, i.e. it reacts in different ways than other markets.
414
So, as Schweickart, Kalecki, Keen and others correctly observe, such
415
considerations undercut the neo-classical contention that labour
416
unions and state intervention are responsible for unemployment (or
417
that depressions will easily or naturally end by the workings of the
418
market). To the contrary, insofar as labour unions and various welfare
419
provisions prevent demand from falling as low as it might otherwise
420
go during a slump, they apply a brake to the downward spiral. Far
421
from being responsible for unemployment, they actually mitigate it.
422
This should be obvious, as wages (and benefits) may be costs for
423
some firms but they are revenue for even more.
425
<a name="secc92"><h2>C.9.2 Is unemployment caused by wages being too high?</h2>
427
As we noted in the <a href="secC9.html#secc92">last section</a>,
428
most capitalist economic theories argue
429
that unemployment is caused by wages being too high. Any economics
430
student will tell you that high wages will reduce the quantity of labour
431
demanded, in other words unemployment is caused by wages being
432
too high -- a simple case of "supply and demand." From this theory
433
we would expect that areas with high wages will also be areas with
434
high levels of unemployment. Unfortunately for the theory, this does
435
not seem to be the case.
437
Empirical evidence does not support the argument the neo-classical
438
argument that unemployment is caused by real wages being too high.
439
The phenomenon that real wages increase during the upward swing
440
of the business cycle (as unemployment falls) and fall during
441
recessions (when unemployment increases) renders the neo-classical
442
interpretation that real wages govern employment difficult to maintain
443
(real wages are <i><b>"pro-cyclical,"</i></b> to use economic terminology).
445
is not the only evidence against the neo-classical theory of unemployment.
446
Will Hutton, the UK based neo-Keynesian economist, summaries research
447
that suggests high wages do not cause unemployment (as claimed
448
by neo-classical economists):
450
"the British economists David Blanchflower and Andrew Oswald [examined] . . .
451
the data in twelve countries about the actual relation between wages and
452
unemployment - and what they have discovered is another major challenge
453
to the free market account of the labour market. . . [They found] precisely
454
the opposite relationship [than that predicted in neo-classical theory]. The
455
higher the wages, the lower the local unemployment - and the lower the
456
wages, the higher the local unemployment. As they say, this is not a
457
conclusion that can be squared with free market text-book theories of
458
how a competitive labour market should work."</i> [<b>The State We're In</b>,
461
Blanchflower and Oswald state their conclusions from their research that
462
employees <i>"who work in areas of high unemployment earn less, other
463
things constant, than those who are surrounded by low unemployment."</i>
464
[<b>The Wage Curve</b>, p. 360] This relationship, the exact opposite of
465
that predicted by neo-classical economics, was found in many different
466
countries and time periods, with the curve being similar for different
467
countries. Thus, the evidence suggests that high unemployment is
468
associated with low earnings, not high, and vice versa.
470
Looking at less extensive evidence we find that, taking the example of the
471
USA, if minimum wages and unions cause unemployment, why did the
472
South-eastern states (with a <b>lower</b> minimum wage and weaker unions)
473
have a <b>higher</b> unemployment rate than North-western states during the
474
1960's and 1970's? Or why, when the (relative) minimum wage declined
475
under Reagan and Bush, did chronic unemployment accompany it?
476
[Allan Engler, <b>The Apostles of Greed</b>, p. 107]
478
Or the Low Pay Network report <i>"Priced Into Poverty"</i> which discovered
479
that in the 18 months before they were abolished, the British Wages
480
Councils (which set minimum wages for various industries) saw a rise
481
of 18,200 in full-time equivalent jobs compared to a net loss of 39,300
482
full-time equivalent jobs in the 18 months afterwards. Given that nearly
483
half the vacancies in former Wages Council sectors paid less than the
484
rate which it is estimated Wages Councils would now pay, and nearly 15%
485
paid less than the rate at abolition, there should (by the neo-classical
486
argument) have been rises in employment in these sectors as pay falls.
487
The opposite happened. This research shows clearly that the falls in pay
488
associated with Wages Council abolition have not created more employment.
489
Indeed, employment growth was more buoyant prior to abolition than
490
subsequently. So whilst Wages Council abolition has not resulted in more
491
employment, the erosion of pay rates caused by abolition has resulted in
492
more families having to endure poverty pay.
494
(This does not mean that anarchists support the imposition of a legal
495
minimum wage. Most anarchists do not because it takes the responsibility
496
for wages from unions and other working class organisations, where it
497
belongs, and places it in the hands of the state. We mention these
498
examples in order to highlight that the neo-classical argument has
501
While this evidence may come as a shock to neo-classical economics,
502
it fits well with anarchist and other socialist analysis. For anarchists,
503
unemployment is a means of disciplining labour and maintaining
504
a suitable rate of profit (i.e. unemployment is a key means of ensuring
505
that workers are exploited). As full employment is approached, labour's
506
power increases, so reducing the rate of exploitation and so increasing
507
labour's share of the value it produces (and so higher wages). Thus, from
508
an anarchist point of view, the fact that wages are higher in areas of low
509
unemployment is not a surprise, nor is the phenomenon of pro-cyclical
510
real wages. After all, as we noted in <a href="secC3.html">section C.3</a>,
511
the ratio between wages
512
and profits are, to a large degree, a product of bargaining power and so
513
we would expect real wages to grow in the upswing of the business cycle,
514
fall in the slump and be high in areas of low unemployment. And, far more
515
importantly, this evidence suggests that the neo-classical claim that
516
unemployment is caused by unions, "too high" wage rates, and so on,
517
is false. Indeed, by stopping capitalists appropriating more of the income
518
created by workers, high wages maintain aggregate demand and contribute
519
to higher employment (although, of course, high employment cannot be
520
maintained indefinitely under wage slavery due to the rise in workers'
521
power this implies). Rather, unemployment is a key aspect of the capitalist
522
system and cannot be got rid off within it and the neo-classical "blame the
523
workers" approach fails to understand the nature and dynamic of the system.
525
So, perhaps, high real wages for workers increases aggregate demand and
526
reduces unemployment from the level it would be if the wage rate was cut.
527
Indeed, this seems to supported by research into the "wage curve" of
528
numerous countries. This means that a "free market" capitalism, marked
529
by a fully competitive labour market, no welfare programmes, unemployment
530
benefits, higher inequality and extensive business power to break unions
531
and strikes would see aggregate demand constantly rise and fall, in line
532
with the business cycle, and unemployment would follow suit. Moreover,
533
unemployment would be higher over most of the business cycle (and
534
particularly at the bottom of the slump) than under a capitalism with
535
social programmes, militant unions and legal rights to organise because
536
the real wage would not be able to stay at levels that could support
537
aggregate demand nor could the unemployed use their benefits to
538
stimulate the production of consumer goods.
540
In other words, a fully competitive labour market would increase the instability
541
of the market, as welfare programmes and union activity maintain aggregate
542
income for working people, who spend most of their income, so stabilising
543
aggregate demand -- an analysis which was confirmed in during the 1980s
544
(<i>"the relationship between measured inequality and economic stability. . .
545
was weak but if anything it suggests that the more egalitarian countries
546
showed a more stable pattern of growth after 1979"</i> [Dan Corry and Andrew
547
Glyn, <i>"The Macroeconomics of equality, stability and growth"</i>, in <b>Paying
548
for Inequality</b>, Andrew Glyn and David Miliband (Eds.) pp. 212-213]).
550
<a name="secc93"><h2>C.9.3 Are "flexible" labour markets the answer to unemployment?</h2>
552
The usual neo-liberal argument is that labour markets must become
553
more "flexible" to solve the problem of unemployment. This is done
554
by weakening unions, reducing (or abolishing) the welfare state, and so
555
on. However, we should note that the current arguments for greater
556
"flexibility" within the labour market as the means of reducing
557
unemployment seem somewhat phoney. The argument is that by
558
increasing flexibility, making the labour market more "perfect", the
559
so-called "natural" rate of unemployment will drop (this is the rate at
560
which inflation is said to start accelerating upwards) and so unemployment
561
can fall without triggering an accelerating inflation rate. Of course, that
562
the real source of inflation is capitalists trying to maintain their profit
563
levels is not mentioned (after all, profits, unlike wages, are to be
564
maximised for the greater good). Nor is it mentioned that the history
565
of labour market flexibility is somewhat at odds with the theory:
567
"it appears to be only relatively recently that the maintained greater
568
flexibility of US labour markets has apparently led to a superior performance
569
in terms of lower unemployment, despite the fact this flexibility is no new
570
phenomenon. Comparing, for example, the United States with the United
571
Kingdom, in the 1960s the United States averaged 4.8 per cent, with the United
572
Kingdom at 1.9 per cent; in the 1970s the United States rate rose to 6.1 per cent,
573
with the United Kingdom rising to 4.3 per cent, and it was only in the 1980s
574
that the ranking was reversed with the United States at 7.2 per cent and the
575
United Kingdom at 10 per cent. . . Notice that this reversal of rankings
576
in the 1980s took place despite all the best efforts of Mrs Thatcher to
577
create labour market flexibility. . . [I]f labour market flexibility is
578
important in explaining the level of unemployment. . . why does the level
579
of unemployment remain so persistently high in a country, Britain, where
580
active measures have been taken to create flexibility?"</i> [Keith Cowling and
581
Roger Sugden, <b>Beyond Capitalism</b>, p. 9]
583
If we look at the fraction of the labour force without a job in America, we find
584
that in 1969 it was 3.4% (7.3% including the underemployed) and <b>rose</b> to
585
6.1% in 1987 (16.8% including the underemployed). Using more recent data,
586
we find that, on average, the unemployment rate was 6.2% in 1990-97 compared
587
to 5.0% in the period 1950-65. In other words, labour market "flexibility" has
588
not reduced unemployment levels, in fact "flexible" labour markets have been
589
associated with higher levels of unemployment.
591
Of course we are comparing different time periods. A lot has changed between
592
the 1960s and the 1990s and so comparing these periods cannot be the whole
593
answer. After all, the rise in flexibility and the increase in unemployment may
594
be unrelated. However, if we look at different countries over the same time
595
period we can see if "flexibility" actually reduces unemployment. As one
596
British economist notes, this may not be the case:
598
"Open unemployment is, of course, lower in the US. But once we allow
599
for all forms of non-employment [such as underemployment, jobless
600
workers who are not officially registered as such and so on], there is
601
little difference between Europe and the US: between 1988 and 1994,
602
11 per cent of men aged 25-55 were not in work in France, compared
603
with 13 per cent in the UK, 14 per cent in the US and 15 per cent in
604
Germany."</i> [Richard Layard quoted by John Gray in <b>False Dawn</b>,
607
In addition, all estimates of America's unemployment record must take
608
into account America's incarceration rates. Over a million people more
609
would be seeking work if the US penal policies resembled those of
610
any other Western nation. [John Gray, <b>Op. Cit.</b>, p. 113]
612
Taking the period 1983 to 1995, we find that around 30 per cent of the
613
population of OECD Europe lived in countries with average unemployment
614
rates lower than the USA and around 70 per cent in countries with lower
615
unemployment than Canada (whose relative wages are only slightly
616
less flexible than the USA). Furthermore, the European countries
617
with the lowest unemployment rates were not noted for their wage
618
flexibility (Austria 3.7%, Norway 4.1%, Portugal 6.4%, Sweden 3.9%
619
and Switzerland 1.7%). Britain, which probably had the most flexible
620
labour market had an average unemployment rate higher than half of
621
Europe. And the unemployment rate of Germany is heavily influenced
622
by areas which were formally in East Germany. Looking at the former
623
West German regions only, unemployment between 1983 and 1995
624
was 6.3%, compared to 6.6% in the USA (and 9.8% in the UK).
626
So, perhaps, "flexibility" is not the solution to unemployment some
627
claim it is (after all, the lack of a welfare state in the 19th century
628
did not stop unemployment nor long depressions occurring). Indeed,
629
a case could be made that the higher open unemployment in Europe
630
has a lot less to do with "rigid" structures and "pampered" citizens
631
than it does with the fiscal and monetary austerity required by
632
European unification as expressed in the Maastricht Treaty. As
633
this Treaty has the support of most of Europe's ruling class such
634
an explanation is off the political agenda.
636
Moreover, if we look at the rationale behind "flexibility" we find a strange
637
fact. While the labour market is to be made more "flexible" and in line
638
with ideal of "perfect competition", on the capitalist side no attempt
639
is being made to bring <b>it</b> into line with that model. Let us not forget
640
that perfect competition (the theoretical condition in which all resources,
641
including labour, will be efficiently utilised) states that there must be a
642
large number of buyers and sellers. This is the case on the sellers side of the
643
"flexible" labour market, but this is <b>not</b> the case on the buyers (where, as
644
indicated in <a href="secC4.html">section C.4</a>, oligopoly reigns).
645
Most who favour labour market
646
"flexibility" are also those most against breaking up of big business and
647
oligopolistic markets or the stopping of mergers between dominant
648
companies in and across markets. The model requires <b>both</b> sides to
649
be "flexible," so why expect making one side more "flexible" will have a
650
positive effect on the whole? There is no logical reason for this to be the
651
case. Indeed, with the resulting shift in power on the labour market things
652
may get worse as income is distributed from labour to capital. It is a bit
653
like expecting peace to occur between two warring factions by disarming
654
one side and arguing that because the number of guns have been halved
655
peacefulness has doubled! Of course, the only "peace" that would result
656
would be the peace of the graveyard or a conquered people -- subservience
657
can pass for peace, if you do not look too close. In the end, calls for the
658
"flexibility" of labour indicate the truism that, under capitalism, labour
659
exists to meet the requirements of capital (or living labour exists to meet
660
the needs of dead labour, a truly insane way to organise a society).
662
All this is unsurprising for anarchists as we recognise that "flexibility"
663
just means weakening the bargaining power of labour in order to increase
664
the power and profits of the rich (hence the expression <i><b>"flexploitation"</i></b>!).
665
Increased "flexibility" has been associated with <b>higher,</b> not lower
666
unemployment. This, again, is unsurprising, as a "flexible" labour market
667
basically means one in which workers are glad to have any job and face increased
668
insecurity at work (actually, "insecurity" would be a more honest word to
669
use to describe the ideal of a competitive labour market rather than "flexibility"
670
but such honesty would let the cat out of the bag). In such an environment,
671
workers' power is reduced, meaning that capital gets a larger share of the
672
national income than labour and workers are less inclined to stand up for
673
their rights. This contributes to a fall in aggregate demand, so increasing
674
unemployment. In addition, we should note that "flexibility" may have little
675
effect on unemployment (although not on profits) as a reduction of labour's
676
bargaining power may result in <b>more</b> rather than less unemployment. This
677
is because firms can fire "excess" workers at will, increase the hours of those
678
who remain (the paradox of overwork and unemployment is just an expression
679
of how capitalism works) and stagnating or falling wages reduces aggregate
680
demand. Thus the paradox of increased "flexibility" resulting in higher
681
unemployment is only a paradox in the neo-classical framework. From an
682
anarchist perspective, it is just the way the system works.
684
And we must add that whenever governments have attempted to make
685
the labour market "fully competitive" it has either been the product of
686
dictatorship (e.g. Chile under Pinochet) or occurred at the same time
687
increased centralisation of state power and increased powers for the police
688
and employers (e.g. Britain under Thatcher, Reagan in the USA). Latin
689
American Presidents trying to introduce neo-liberalism into their
690
countries have had to follow suit and <i>"ride roughshod over democratic
691
institutions, using the tradition Latin American technique of
692
governing by decree in order to bypass congressional opposition. . .
693
Civil rights have also taken a battering. In Bolivia, the government
694
attempted to defuse union opposition . . . by declaring a state of
695
siege and imprisoning 143 strike leaders. . . In Colombia, the
696
government used anti-terrorist legislation in 1993 to try 15 trade
697
union leaders opposing the privatisation of the state telecommunications
698
company. In the most extreme example, Peru's Alberto Fujimori dealt
699
with a troublesome Congress by simply dissolving it . . . and seizing
700
emergency powers."</i> [Duncan Green, <b>The Silent Revolution</b>, p. 157]
702
This is unsurprising. People, when left alone, will create communities,
703
organise together to collectively pursue their own happiness, protect
704
their communities and environment. In other words, they will form
705
associations and unions to influence the decisions that affect them.
706
In order to create a "fully competitive" labour market, individuals must
707
be atomised and unions, communities and associations weakened, if not
708
destroyed, in order to fully privatise life. State power must be used
709
to disempower the mass of the population, restrict their liberty, control
710
popular organisations and social protest and so ensure that the free market
711
can function without opposition to the human suffering, misery and pain
712
it would cause. People, to use Rousseau's evil term, "must be forced
713
to be free." And, unfortunately for neo-liberalism, the countries that tried
714
to reform their labour market still suffered from high unemployment, plus
715
increased social inequality and poverty and where still subject to the
716
booms and slumps of the business cycle.
718
Ultimately, the only real solution to unemployment is to end wage labour
719
and liberate humanity from the needs of capital.
721
<a name="secc94"><h2>C.9.4 Is unemployment voluntary?</h2>
723
Here we point out another aspect of the neo-classical "blame the workers"
724
argument, of which the diatribes against unions and workers' rights
725
highlighted above is only a part. This is the argument that unemployment is
726
not involuntary but is freely chosen by workers. As the left-wing economist
727
Nicholas Kaldor put it, for "free market" economists involuntary employment
728
<i>"cannot exist because it is excluded by the assumptions."</i> [<b>Further Essays
729
on Applied Economics</b>, p. x] The neo-classical economists claim that
730
unemployed workers calculate that their time is better spent searching
731
for more highly paid employment (or living on welfare than working) and
732
so desire to be jobless. That this argument is taken seriously says a lot
733
about the state of modern capitalist economic theory, but as it is popular
734
in many right-wing circles, we should discuss it.
736
Firstly, when unemployment rises it is because of layoffs, not voluntary
737
quittings, are increasing. When a company fires a number of its workers,
738
it can hardly be said that the sacked workers have calculated that their
739
time is better spent looking for a new job. They have no option. Secondly,
740
unemployed workers normally accept their first job offer. Neither of these
741
facts fits well with the hypothesis that most unemployment is "voluntary."
743
Of course, there are numerous jobs advertised in the media. Does this not
744
prove that capitalism always provides jobs for those who want them?
745
Hardly, as the number of jobs advertised must have some correspondence to
746
the number of unemployed. If 100 jobs are advertised in an areas reporting
747
1,000 unemployed, it can scarcely be claimed that capitalism tends to
750
In addition, it is worthwhile to note that the right-wing assumption that
751
higher unemployment benefits and a healthy welfare state promote
752
unemployment is not supported by the evidence. As a moderate member
753
of the British Conservative Party notes, the <i>"OECD studied seventeen
754
industrial countries and found no connect between a country's unemployment
755
rate and the level of its social-security payments."</i> [<b>Dancing with Dogma</b>,
756
p. 118] Moreover, the economists David Blanchflower and Andrew Oswald
757
"Wage Curve" for many different countries is approximately the same for
758
each of the fifteen countries they looked at. This also suggests that labour
759
market unemployment is independent of social-security conditions as
760
their "wage curve" can be considered as a measure of wage flexibility.
761
Both of these facts suggest that unemployment is involuntary in nature
762
and cutting social-security will <b>not</b> affect unemployment.
764
Another factor in considering the nature of unemployment is the effect of
765
nearly 20 years of "reform" of the welfare state conducted in both the USA
766
and UK. During the 1960s the welfare state was far more generous than it
767
was in the 1990s and unemployment was lower. If unemployment was
768
"voluntary" and due to social-security being high, we would expect a
769
decrease in unemployment as welfare was cut (this was, after all, the
770
rationale for cutting it in the first place). In fact, the reverse occurred,
771
with unemployment rising as the welfare state was cut. Lower
772
social-security payments did not lead to lower unemployment,
773
quite the reverse in fact.
775
Faced with these facts, some may conclude that as unemployment is independent
776
of social security payments then the welfare state can be cut. However, this is
777
not the case as the size of the welfare state does affect the poverty rates and how
778
long people remain in poverty. In the USA, the poverty rate was 11.7% in 1979
779
and rose to 13% in 1988, and continued to rise to 15.1% in 1993. The net effect
780
of cutting the welfare state was to help <b>increase</b> poverty. Similarly, in the UK
781
during the same period, to quote the ex-Thatcherite John Gray, there <i>"was the
782
growth of an underclass. The percentage of British (non-pensioner) households
783
that are wholly workless - that is, none of whose members is active in the productive
784
economy - increased from 6.5 per cent in 1975 to 16.4 per cent in 1985 and
785
19.1 per cent in 1994. . . Between 1992 and 1997 there was a 15 per cent
786
increase in unemployed lone parents. . . This dramatic growth of an underclass
787
occurred as a direct consequence of neo-liberal welfare reforms, particularly as
788
they affected housing."</i> [<b>False Dawn</b>, p. 30] This is the opposite of the
789
predictions of right-wing theories and rhetoric. As John Gray correctly
790
argues, the <i>"message of the American [and other] New Right has always
791
been that poverty and the under class are products of the disincentive effects
792
of welfare, not the free market."</i> He goes on to note that it <i>"has never
793
squared with the experience of the countries of continental Europe
794
where levels of welfare provision are far more comprehensive than
795
those of the United States have long co-existed with the absence of
796
anything resembling an American-style underclass. It does not touch
797
at virtually any point the experience of other Anglo-Saxon countries."</i>
798
[<b>Op. Cit.</b>, p. 42] He goes on to notes that:
800
"In New Zealand, the theories of the American New Right achieved a
801
rare and curious feat - self-refutation by their practical application.
802
Contrary to the New Right's claims, the abolition of nearly all universal
803
social services and the stratification of income groups for the purpose
804
of targeting welfare benefits selectively created a neo-liberal poverty
805
trap."</i> [<b>Ibid.</b>]
807
So while the level of unemployment benefits and the welfare state may
808
have little impact on the level of unemployment (which is to be expected
809
if the nature of unemployment is essentially involuntary), it <b>does</b> have
810
an effect on the nature, length and persistency of poverty. Cutting
811
the welfare state increases poverty and the time spent in poverty
812
(and by cutting redistribution, it would also increase inequality).
814
If we look at the relative size of a nation's social security transfers as a
815
percentage of Gross Domestic Product and its relative poverty rate we
816
find a correlation. Those nations with a high level of spending have
817
lower rates of poverty. In addition, there is a correlation between the
818
spending level and the number of persistent poor. Those nations with
819
high spending levels have more of their citizens escape poverty. For
820
example, Sweden has a single-year poverty rate of 3% and a poverty
821
escape rate of 45% and Germany has figures of 8% and 24% (and
822
a persistent poverty rate of 2%). In contrast, the USA has figures
823
of 20% and 15% (and a persistent poverty rate of 42%) [Greg J.
824
Duncan of the University of Michigan Institute for Social Research,
827
Given that a strong welfare state acts as a kind of floor under the
828
wage and working conditions of labour, it is easy to see why
829
capitalists and the supporters of "free market" capitalism seek
830
to undermine it. By undermining the welfare state, by making
831
labour "flexible," profits and power can be protected from working
832
people standing up for their rights and interests. Little wonder the
833
claimed benefits of "flexibility" have proved to be so elusive for the
834
vast majority while inequality has exploded. The welfare state, in
835
other words, reduces the attempts of the capitalist system to commodify
836
labour and increases the options available to working class people. While
837
it did not reduce the need to get a job, the welfare state did undermine
838
dependence on any particular employee and so increased workers'
839
independence and power. It is no coincidence that the attacks
840
on unions and the welfare state was and is framed in the rhetoric
841
of protecting the "right of management to manage" and of driving
842
people back into wage slavery. In other words, an attempt to increase
843
the commodification of labour by making work so insecure that
844
workers will not stand up for their rights.
846
The human costs of unemployment are well documented. There is a stable
847
correlation between rates of unemployment and the rates of mental-hospital
848
admissions. There is a connection between unemployment and juvenile and
849
young-adult crime. The effects on an individual's self-respect and the
850
wider implications for their community and society are massive. As David
851
Schweickart concludes:
853
"The costs of unemployment, whether measured in terms of the cold cash
854
of lost production and lost taxes or in the hotter unions of alienation,
855
violence, and despair, are likely to be large under Laissez Faire."</i>
856
[<b>Against Capitalism</b>, p. 109]
858
Of course, it could be argued that the unemployed should look for work and
859
leave their families, home towns, and communities in order to find it.
860
However, this argument merely states that people should change their whole
861
lives as required by "market forces" (and the wishes -- <i>"animal spirits,"</i>
862
to use Keynes' term -- of those who own capital). In other words, it just
863
acknowledges that capitalism results in people losing their ability to
864
plan ahead and organise their lives (and that, in addition, it can deprive
865
them of their sense of identity, dignity and self-respect as well),
866
portraying this as somehow a requirement of life (or even, in some cases,
869
It seems that capitalism is logically committed to viciously contravening
870
the very values upon which it claims it be built, namely the respect for
871
the innate worth and separateness of individuals. This is hardly
872
surprising, as capitalism is based on reducing individuals to the level of
873
another commodity (called "labour"). To requote Karl Polanyi:
875
"In human terms such a postulate [of a labour market] implied for the
876
worker extreme instability of earnings, utter absence of professional
877
standards, abject readiness to be shoved and pushed about indiscriminately,
878
complete dependence on the whims of the market. [Ludwig Von] Mises justly
879
argued that if workers 'did not act as trade unionists, but reduced their
880
demands and changed their locations and occupations according to the labour
881
market, they would eventually find work.' This sums up the position under
882
a system based on the postulate of the commodity character of labour. It
883
is not for the commodity to decide where it should be offered for sale, to
884
what purpose it should be used, at what price it should be allowed to
885
change hands, and in what manner it should be consumed or destroyed."</i>
886
[<b>The Great Transformation</b>, p. 176]
888
However, people are <b>not</b> commodities but living, thinking, feeling
889
individuals. The "labour market" is more a social institution than an
890
economic one and people and work more than mere commodities. If we reject
891
the neo-liberals' assumptions for the nonsense they are, their case fails.
892
Capitalism, ultimately, cannot provide full employment simply because
893
labour is <b>not</b> a commodity (and as we discussed in <a href="secC7.html">section C.7</a>, this
894
revolt against commodification is a key part of understanding the business
895
cycle and so unemployment).
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