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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>

<p>
In order to answer this question, we must first have to point out that 
"actually existing capitalism" tries to manage unemployment to ensure 
a compliant and servile working class. This is done under the name of
fighting "inflation" but, in reality, it about controlling wages and
maintaining high profit rates for the capitalist class. Market discipline 
for the working class, state protection for the ruling class, in other 
words. As Edward Herman points out:
</p><p><blockquote>
<i>"Conservative economists have even developed a concept of a 'natural rate
of unemployment,' a metaphysical notion and throwback to an eighteenth
century vision of a 'natural order,' but with a modern apologetic twist.
The natural rate is defined as the minimum unemployment level consistent 
with price level stability, but, as it is based on a highly abstract model 
that is not directly testable, the natural rate can only be inferred from 
the price level itself. That is, if prices are going up, unemployment is 
below the 'natural rate' and too low, whether the actual rate is 4, 8, 
or 10 percent. In this world of conservative economics, anybody is 
'voluntarily' unemployed. Unemployment is a matter of rational choice:
some people prefer 'leisure' over the real wage available at going (or
still lower) wage rates . . .
</p><p>
"Apart from the grossness of this kind of metaphysical legerdemain, the
very concept of a natural rate of unemployment has a huge built-in 
bias. It takes as granted all the other institutional factors that
influence the price level-unemployment trade-off (market structures
and independent pricing power, business investment policies at home
and abroad, the distribution of income, the fiscal and monetary mix, 
etc.) and focuses solely on the tightness of the labour market 
as the controllable variable. Inflation is the main threat, the 
labour market (i.e. wage rates and unemployment levels) is the 
locus of the solution to the problem."</i> [<b>Beyond Hypocrisy</b>, p. 94]
</blockquote></p><p>
Unsurprisingly, Herman defines this "natural" rate as <i>"the rate of 
unemployment preferred by the propertied classes."</i> [<b>Op. Cit.</b>, p. 156]
The theory behind this is usually called the <i><b>"Non-Accelerating Inflation
Rate of Unemployment"</b></i> (or NAIRU). Like many of the worse aspects of 
modern economics, the concept was raised Milton Friedman in the late 
1960s. At around the same time, Edmund Phelps independently developed
the theory (and gained the so-called "Nobel Prize" in economics for so doing 
in 2006). Both are similar and both simply repeat, in neo-classical jargon, 
the insight which critics of capitalism had argued for over a century: 
unemployment is a necessary aspect of capitalism for it is essential 
to maintaining the power of the boss over the worker. Ironically, 
therefore, modern neo-classical economics is based on a notion which 
it denied for over a century (this change may be, in part, because 
the ruling elite thinks it has won the class war and has, currently, 
no major political and social movements it has to refute by presenting 
a rosy picture of the system).
</p><p>
Friedman raised his notion of a <i>"Natural Rate of Unemployment"</i> in 1968.
He rooted it in the neo-classical perspective of individual expectations 
rather than, say, the more realistic notion of class conflict. His 
argument was simple. There exists in the economy some <i>"natural"</i> rate
associated with the real wage an ideal economy would produce (this is
<i>"the level that would be ground out by the Walrasian system of general
equilibrium equations,"</i> to quote him). Attempts by the government to 
reduce actual unemployment below this level would result in rising 
inflation. This is because there would be divergence between the actual
rate of inflation and its expected rate. By lowering unemployment, bosses
have to raise wages and this draws unemployed people into work (note the 
assumption that unemployment is voluntary). However, rising wages were 
passed on by bosses in rising prices and so the <b>real</b> wage remains the
same. This eventually leads to people leaving the workforce as the real wage 
has fallen back to the previous, undesired, levels. However, while the 
unemployment level rises back to its <i>"natural"</i> level, inflation does 
not. This is because workers are interested in real wages and, so if inflation
is at, say, 2% then they will demand wage increases that take this into account.
If they expect inflation to increase again then workers will demand <b>more</b> 
wages to make up for it, which in turn will cause prices to rise (although
Friedman downplayed that this was because <b>bosses</b> were increasing their
prices to maintain profit levels). This will lead to rising inflation 
<b>and</b> rising unemployment. Thus the expectations of individuals are the key. 
</p><p>
For many economists, this process predicted the rise of stagflation in
the 1970s and gave Friedman's Monetarist dogmas credence. However, this
was because the <i>"Bastard Keynesianism"</i> of the post-war period was rooted
in the same neo-classical assumptions used by Friedman. Moreover, they 
had forgotten the warnings of left-wing Keynesians in the 1940s that 
full unemployment would cause inflation as bosses would pass on wage 
rises onto consumers. This class based analysis, obviously, did not fit
in well with the panglossian assumptions of neo-classical economics. Yet 
basing an analysis on individual expectations does not answer the question 
whether these expectations are meet. With strong organisation and a willingness 
to act, workers can increase their wages 
to counteract inflation. This means that there are two main options within 
capitalism. The first option is to use price controls to stop capitalists 
increasing their prices. However, this contradicts the scared laws of 
supply and demand and violates private property. Which brings us to the 
second option, namely to break unions and raise unemployment to such levels
that workers think twice about standing up for themselves. In this case,
workers cannot increase their money wages and so their real wages drop.
</p><p>
Guess which option the capitalist state went for? As Friedman made clear
when he introduced the concept there was really nothing <i>"natural"</i> 
about the natural rate theory as it was determined by state policy:
</p><p><blockquote>
<i>"I do not mean to suggest that it is immutable and unchangeable. On the 
contrary, many of the market characteristics that determine its level 
are man-made and policy-made. In the United States, for example, legal 
minimum wage rates . . . and the strength of labour unions all make the 
natural rate of unemployment higher than it would otherwise be."</i> 
[<i>"The Role of Monetary Policy,"</i> pp. 1-17, <b>American Economic Review</b>, 
Vol. 68, No. 1, p. 9]
</blockquote></p><p>
Thus the "natural" rate is really a social and political phenomenon which, 
in effect, measures the bargaining strength of working people. This suggests
that inflation will fall when working class people are in no position to
recoup rising prices in the form of rising wages. The "Natural Rate" is,
in other words, about class conflict. 
</p><p>
This can be seen when the other (independent) inventor of the "natural" 
rate theory won the so-called Nobel prize in 2006. Unsurprisingly, the 
<b>Economist</b> magazine was cock-a-hoop. [<i>"A natural choice: Edmund Phelps 
earns the economics profession's highest accolade"</i>, Oct 12th 2006] The 
reasons why became clear. According to the magazine, <i>"Phelps won his 
laurels in part for kicking the feet from under his intellectual 
forerunners"</i> by presenting a (neo-classical) explanation for the breakdown 
of the so-called <i>"Phillips curve."</i> This presented a statistical trade-off 
between inflation and unemployment (<i>"unemployment was low in Britain when 
wage inflation was high, and high when inflation was low"</i>). The problem 
was that economists <i>"were quick -- too quick -- to conclude that 
policymakers therefore faced a grand, macroeconomic trade-off"</i> in which,
due to <i>"such a tight labour market, companies appease workers by offering 
higher wages. They then pass on the cost in the form of dearer prices, 
cheating workers of a higher real wage. Thus policy makers can engineer 
lower unemployment only through deception."</i> Phelps innovation was to 
argue that <i>"[e]ventually workers will cotton on, 
demanding still higher wages to offset the rising cost of living. They can 
be duped for as long as inflation stays one step ahead of their rising 
expectations of what it will be."</i> The similarities with Friedman's idea
are obvious. This meant that the <i>"stable trade-off depicted by the Phillips 
curve is thus a dangerous mirage"</i> which broke down in the 1970s with the rise 
of stagflation. 
</p><p>
Phelps argued that there was a <i>"natural"</i> rate of unemployment, 
where <i>"workers' expectations are fulfilled, prices turn out as anticipated, 
and they no longer sell their labour under false pretences."</i>  This 
<i>"equilibrium does not, sadly, imply full employment"</i> and so capitalism 
required <i>"leaving some workers mouldering on the shelf. Given economists' 
almost theological commitment to the notion that markets clear, the presence 
of unemployment in the world requires a theodicy to explain it."</i> The 
religious metaphor does seem appropriate as most economists (and <b>The 
Economist</b>) do treat the market like a god (a theodicy is a specific branch 
of theology and philosophy that attempts to reconcile the existence of evil 
in the world with the assumption of a benevolent God). And, as with all 
gods, sacrifices are required and Phelps theory is the means by which this 
is achieved. As the magazine noted: <i>"in much of his work he contends that 
unemployment is necessary to cow workers, ensuring their loyalty to the 
company and their diligence on the job, at a wage the company can afford 
to pay"</i> (i.e., one which would ensure a profit). 
</p><p>
It is this theory which has governed state policy since the 1980s. In other
words, government's around the world have been trying to <i>"cow workers"</i> in
order to ensure their obedience (<i>"loyalty to the company"</i>). Unsurprisingly, 
attempts to lower the <i>"natural rate"</i> have all involved using the state to 
break the economic power of working class people (attacking unions, 
increasing interest rates to increase unemployment in order to temporarily 
<i>"cow"</i> workers and so on). All so that profits can be keep high in the face 
of the rising wages caused by the natural actions of the market! 
</p><p>
Yet it must be stressed that Friedman's and Phelps' conclusions are hardly 
new. Anarchists and other socialists had been arguing since the 1840s that 
capitalism had no tendency to full employment either in theory or in 
practice. They have also noted how periods of full employment bolstered 
working class power and harmed profits. It is, as we stressed in 
<a href="secC1.html#secc15">section C.1.5</a>, the fundamental disciplinary mechanism of the system. Somewhat 
ironically, then, Phelps got bourgeois economics highest prize for 
restating, in neo-classical jargon, the model of the labour market 
expounded by, say, Marx:
</p><p><blockquote>
<i>"If [capitals] accumulation on the one hand increases the demand for 
labour, it increases on the other the supply of workers by 'setting 
them free', while at the same time the pressure of the unemployed 
compels those that are employed to furnish more labour, and therefore 
makes the supply of labour to a certain extent independent of the 
supply of labourers. The movement of the law of supply and demand of 
labour on this basis completes the despotism of capital. Thus as soon 
as the workers learn the secret of why it happens that the more they
work, the more alien wealth they produce . . . as soon as, by setting 
up trade unions, etc., they try to organise a planned co-operation 
between employed and unemployed in order to obviate or to weaken the 
ruinous effects of this natural law of capitalistic production on 
their class, so soon capital and its sycophant, political economy, 
cry out at the infringement of the 'eternal' and so to speak 'sacred' 
law of supply and demand. Every combination of employed and unemployed 
disturbs the 'pure' action of this law. But on the other hand, as 
soon as . . . adverse circumstances prevent the creation of an 
industrial reserve army and, with it, the absolute dependence of the 
working-class upon the capitalist class, capital, along with its
platitudinous Sancho Panza, rebels against the 'sacred' law of supply 
and demand, and tries to check its inadequacies by forcible means."</i> 
[<b>Capital</b>, Vol. 1, pp. 793-4]
</blockquote></p><p>
That the <b>Economist</b> and Phelps are simply echoing, and confirming, Marx 
is obvious. Modern economics, while disparaging Marx, has integrated 
this idea into its macro-economic policy recommendations by urging the 
state to manipulate the economy to ensure that "inflation" (i.e. wage 
rises) are under control. Economics has played its role of platitudinous 
sycophant well while Phelps' theory has informed state interference 
(<i>"forcible means"</i>) in the economy since the 1980s, with the expected 
result that wages have failed to keep up with rising productivity and 
so capital as enriched itself at the expense of labour (see 
<a href="secC3.html">section C.3</a>
for details). The use of Phelps' theory by capital in the class war is 
equally obvious -- as was so blatantly stated by <b>The Economist</b> and 
the head of the American Federal Reserve during this period:
</p><p><blockquote>
<i>"there's supporting testimony from Alan Greenspan. Several times
during the late 1990s, Greenspan worried publicly that, as 
unemployment drifted steadily lower the 'pool of available 
workers' was running dry. The dryer it ran, the greater risk of
'wage inflation,' meaning anything more than minimal increases.
Productivity gains took some of the edge of this potentially 
dire threat, said Greenspan, and so did 'residual fear of job 
skill obsolescence, which has induced a preference for job 
security over wage gains' . . . Workers were nervous and acting
as if the unemployment rate were higher than the 4% it reached in
the boom. Still, Greenspan was a bit worried, because . . . if
the pool stayed dry, 'Significant increases in wages, in excess
of productivity growth, [would] inevitably emerge, absent the 
unlikely repeal of the law of supply and demand.' Which is why
Greenspan & Co. raised short-term interest rates by about two
points during 1999 and the first half of 2000. There was no 
threat of inflation . . . nor were there any signs of rising 
worker militancy. But wages were creeping higher, and the 
threat of the sack was losing some of its bite."</i> [Doug Henwood,
<b>After the New Economy</b>, pp. 206-7]
</blockquote></p><p>
Which is quite ironic, given that Greenspan's role in the economy
was, precisely, to <i>"repeal"</i> the <i>"law of supply and demand."</i> As
one left-wing economist puts it (in a chapter correctly entitled <i>"The 
Workers Are Getting Uppity: Call In the Fed!"</i>), the Federal Reverse
(like all Central Banks since the 1980s) <i>"worries that if too  many 
people have jobs, or if it is too easy for workers to find jobs, 
there will be upward pressure on wages. More rapid wage growth can get 
translated into more rapidly rising prices -- in other words, inflation. 
So the Fed often decides to raise interest rates to slow the economy 
and keep people out of work in order to keep inflation from increasing 
and eventually getting out of control."</i> However, <i>"[m]ost people probably 
do not realise that the Federal Reserve Board, an agency of the 
government, intervenes in the economy to prevent it from creating too 
many jobs. But there is even more to the story. When the Fed hits the 
brakes to slow job growth, it is not doctors, lawyers, and CEOs who end 
up without jobs. The people who lose are those in the middle and the 
bottom -- sales clerks, factory workers, custodians, and dishwashers. 
These are the workers who dont get hired or get laid off when the 
economy slows or goes into a recession."</i> [<b>The Conservative Nanny State</b>,
p. 31] Thus the state pushes up unemployment rates to slow wage growth, 
and thereby relieve inflationary pressure. The reason should be obvious:
</p><p><blockquote>
<i>"In periods of low unemployment, workers don't only gain from higher 
wages. Employers must make efforts to accommodate workers' various needs, 
such as child care or flexible work schedules, because they know that 
workers have other employment options. The Fed is well aware of the 
difficulties that employers face in periods of low unemployment. It 
compiles a regular survey, called the 'Beige Book,' of attitudes 
from around the country about the state of the economy. Most of 
the people interviewed for the Beige Book are employers. 
</p><p>
"From 1997 to 2000, when the unemployment rate was at its lowest 
levels in 30 years, the Beige Book was filled with complaints that 
some companies were pulling workers from other companies with offers 
of higher wages and better benefits. Some Beige Books reported that 
firms had to offer such non-wage benefits as flexible work hours, 
child care, or training in order to retain workers. The Beige Books 
give accounts of firms having to send buses into inner cities to 
bring workers out to the suburbs to work in hotels and restaurants. 
It even reported that some employers were forced to hire workers 
with handicaps in order to meet their needs for labour.
</p><p>
"From the standpoint of employers, life is much easier when the workers 
are lined up at the door clamouring for jobs than when workers have the 
option to shop around for better opportunities. Employers can count on 
a sympathetic ear from the Fed. When the Fed perceives too much upward 
wage pressure, it slams on the brakes and brings the party to an end. 
The Fed justifies limiting job growth and raising the unemployment 
rate because of its concern that inflation may get out of control, 
but this does not change the fact that it is preventing workers, and 
specifically less-skilled workers, from getting jobs, and clamping 
down on their wage growth."</i> [<b>Op. Cit.</b>, pp. 32-3]
</blockquote></p><p>
This has not happened by accident. Lobbying by business, as another left-wing
economist stresses, <i>"is directed toward increasing their economic power"</i> 
and business <i>"has been a supporter of macroeconomic policies that have 
operated the economy with higher rates of unemployment. The stated justification 
is that this lowers inflation, but it also weakens workers' bargaining power."</i> 
Unsurprisingly, <i>"the economic consequence of the shift in the balance of power
in favour of business . . . has served to redistribute income towards profits at 
the expense of wages, thereby lowering demand and raising unemployment."</i>
In effect, the Federal Reserve <i>"has been using monetary policy as a form of 
surrogate incomes policy, and this surrogate policy has been tilted against 
wages in favour of profits"</i> and so is regulating the economy <i>"in 
a manner favourable to business."</i> [Thomas I. Palley, <b>Plenty 
of Nothing</b>, p. 77, p. 111 and pp. 112-3] That this is done under the name
of fighting inflation should not fool us:
</p><p><blockquote><i>
"Mild inflation is often an indication that workers have some bargaining 
strength and may even have the upper hand. Yet, it is at exactly this 
stage that the Fed now intervenes owning to its anti-inflation commitment, 
and this intervention raises interest rates and unemployment. Thus, far 
from being neutral, the Fed's anti-inflation policy implies siding with 
business in the ever-present conflict between labour and capital over
distribution of the fruits of economic activity . . . natural-rate theory 
serves as the perfect cloak for a pro-business policy stance."</i> 
[<b>Op. Cit.</b>, p. 110]
</blockquote></p><p>
In a sense, it is understandable that the ruling class within capitalism
desires to manipulate unemployment in this way and deflect questions 
about their profit, property and power onto the state of the labour market.
High prices can, therefore, be blamed on high wages rather than high
profits, rents and interest while, at the same time, workers will put 
up with lower hours and work harder and be too busy surviving to find
the time or the energy to question the boss's authority either in theory
or in practice. So managing the economy by manipulating interest rates to 
increase unemployment levels when required allows greater profits to be 
extracted from workers as management hierarchy is more secure. People 
will put up with a lot in the face of job insecurity. As left-wing
economist Thomas Balogh put it, full employment <i>"generally removes the 
need for servility, and thus alters the way of life, the relationship 
between classes . . . weakening the dominance of men over men, dissolving 
the master-servant relation. It is the greatest engine for the attainment 
by all of human dignity and greater equality."</i> [<b>The Irrelevance of 
Conventional Economics</b>, p. 47] 
</p><p>
Which explains, in part, why the 1960s and 1970s were marked by mass 
social protest against authority rather than von Hayek's <i>"Road to 
Serfdom."</i> It also explains why the NAIRU was so enthusiastically 
embraced and applied by the ruling class. When times are hard, workers 
with jobs think twice before standing up to their bosses and so work 
harder, for longer and in worse conditions. This ensures that surplus 
value is increased relative to wages (indeed, in the USA, real wages 
have stagnated since 1973 while profits have grown massively). In 
addition, such a policy ensures that political discussion about 
investment, profits, power and so on (<i>"the other institutional 
factors"</i>) are reduced and diverted because working class people are 
too busy trying to make ends meet. Thus the state intervenes in the 
economy to <b>stop</b> full employment developing to combat inflation and 
instability on behalf of the capitalist class. 
</p><p>
That this state manipulation is considered consistent with the "free market" 
says a lot about the bankruptcy of the capitalist system and its defenders. 
But, then, for most defenders of the system state intervention on behalf of 
capital is part of the natural order, unlike state intervention (at least 
in rhetoric) on behalf of the working class (and shows that Kropotkin 
was right to stress that the state <b>never</b> practices "laissez-faire" with 
regard to the working class -- see <a href="secD1.html">section D.1</a>). Thus neo-liberal capitalism 
is based on monetary policy that explicitly tries to weaken working class 
resistance by means of unemployment. If "inflation" (i.e. labour income) 
starts to increase, interest rates are raised so causing unemployment and, 
it is hoped, putting the plebes back in their place. In other words, the
road to private serfdom has been cleared of any barriers imposed on it by
the rise of the working class movement and the policies of social democracy 
implemented after the Second World War to stop social revolution. This is
the agenda pursued so strongly in America and Britain, imposed on the 
developing nations and urged upon Continental Europe.
</p><p>
Although the aims and results of the NAIRU should be enough to condemn it
out of hand, it can be dismissed for other reasons. First and foremost,
this "natural" rate is both invisible and can move. This means trying to
find it is impossible (although it does not stop economists trying, and then
trying again when rate inflation and unemployment rates refute the first
attempt, and then trying again and again). In addition, it is a fundamentally
a meaningless concept -- you can prove anything with an invisible, mobile 
value -- it is an non-refutable concept and so, fundamentally, non-scientific. 
Close inspection reveals natural rate theory to be akin to a religious 
doctrine. This is because it is not possible to conceive of a 
test that could possibly falsify the theory. When predictions of the 
natural rate turn out wrong (as they repeatedly have), proponents can
simply assert that the natural rate has changed. That has led to the most 
recent incarnation of the theory in which the natural rate is basically 
the trend rate of unemployment. Whatever trend is observed is natural -- 
case closed. 
</p><p>
Since natural rate theory cannot be tested, a sensible thing would 
be to examine its assumptions for plausibility and reasonableness. 
However, Milton Friedmans early work on economic methodology blocks 
this route as he asserted that realism and plausibility of assumptions 
have no place in economics. With most economists blindly accepting 
this position, the result is a church in which entry is conditional 
on accepting particular assumptions about the working of markets. The
net effect is to produce an ideology, an ideology which survives due 
to its utility to certain sections of society. 
</p><p>
If this is the case, and it is, then any attempts to maintain the "natural" 
rate are also meaningless as the only way to discover it is to watch <b>actual</b>
inflation levels and raising interest rates appropriately. Which means 
that people are being made unemployed on the off-chance that the unemployment 
level will drop below the (invisible and mobile) "natural" rate and harm the 
interests of the ruling class (high inflation rates harms interest incomes 
and full employment squeezes profits by increasing workers' power). This
does not seem to bother most economists, for whom empirical evidence at the
best of times is of little consequence. This is doubly true with the NAIRU, 
for with an invisible, mobile value, the theory is always true after the fact 
-- if inflation rises as unemployment rises, then the natural rate has 
increased; if inflation falls as unemployment rises, it has fallen! 
As post-Keynesian economist James K. Galbraith noted in his useful critique 
of the NAIRU, <i>"as the real unemployment rate moves, the apparent NAIRU moves
in its shadow"</i> and its <i>"estimates and re-estimates seem largely a response
to predictive failure. We still have no theory, and no external evidence,
governing the fall of the estimated NAIRU. The literature simply 
observes that inflation hasn't occurred and so the previous estimate
must have been too high."</i> He stresses, economists have held <i>"to a concept 
in the face of twenty years of unexplained variation, predictive failure,
and failure of the profession to coalesce on procedural issues."</i> [<b>Created 
Unequal</b>, p. 180] Given that most mainstream economists subscribe to this 
fallacy, it just shows how the "science" accommodates itself to the needs 
of the powerful and how the powerful will turn to any old nonsense if 
it suits their purpose. A better example of supply and demand for ideology 
could not be found.
</p><p>
So, supporters of "free market" capitalism do have a point, "actually
existing capitalism" has created high levels of unemployment. What <b>is</b>
significant is that most supporters of capitalism consider that this 
is a laissez-faire policy! Sadly, the ideological supporters of pure
capitalism rarely mention this state intervention on behalf of the 
capitalist class, preferring to attack trade unions, minimum wages, 
welfare and numerous other "imperfections" of the labour market which, 
strangely, are designed (at least in rhetoric) to benefit working class 
people. Ignoring that issue, however, the question now arises, would a 
"purer" capitalism create full employment?
</p><p>
First, we should point out that some supporters of "free market" capitalism 
(most notably, the "Austrian" school) claim that real markets are not in 
equilibrium at all, i.e. that the nature state of the economy is one of
disequilibrium. As we noted in <a href="secC1.html#secc16">section C.1.6</a>, this means full employment 
is impossible as this is an equilibrium position but few explicitly state 
this obvious conclusion of their own theories and claim against logic that 
full employment can occur (full employment, it should be stressed, has
never meant 100% employment as they will always be some people looking 
for a job and so by that term we mean close to 100% employment). Anarchists 
agree: full employment can occur in "free market" capitalism but not for 
ever nor even for long periods. As the Polish socialist economist Michal 
Kalecki pointed out in regards to pre-Keynesian capitalism, <i>"[n]ot only 
is there mass unemployment in the slump, but average employment throughout
the cycle is considerably below the peak reached in the boom. The reserve
of capital equipment and the reserve army of unemployed are typical features 
of capitalist economy at least throughout a considerable part of the 
[business] cycle."</i> [quoted by Malcolm C. Sawyer, <b>The Economics of Michal 
Kalecki</b>, pp. 115-6] 
</p><p>
It is doubtful that "pure" capitalism will be any different. This is due to 
the nature of the system. What is missing from the orthodox analysis is 
an explicit discussion of class and class struggle (implicitly, they are
there and almost always favour the bosses). Once this is included, the 
functional reason for unemployment becomes clear. It serves to discipline 
the workforce, who will tolerate being bossed about much more with the fear 
that unemployment brings. This holds down wages as the threat of unemployment 
decreases the bargaining power of workers. This means that unemployment is 
not only a natural product of capitalism, it is an essential part of it. 
</p><p>
So cycles of short periods approaching full employment and followed by longer 
periods of high unemployment are actually a more likely outcome of pure 
capitalism than continued full employment. As we argued in sections 
<a href="secC1.html#secc15">C.1.5</a> 
and <a href="secC7.html#secc71">C.7.1</a> capitalism needs unemployment to function successfully and so 
"free market" capitalism will experience periods of boom and slump, with 
unemployment increasing and decreasing over time (as can be seen from 
19th century capitalism). So as Juliet Schor, a labour economist, put it, 
usually <i>"employers have a structural advantage in the labour market, because 
there are typically more candidates ready and willing to endure this 
work marathon [of long hours] than jobs for them to fill."</i> Under 
conditions of full-employment <i>"employers are in danger of losing the 
upper hand"</i> and hiring new workers <i>"suddenly becomes much more difficult. 
They are harder to find, cost more, and are less experienced."</i> These 
considerations <i>"help explain why full employment has been rare."</i> 
Thus competition in the labour market is <i>"typically skewed in favour of
employers: it is a buyers market. And in a buyer's market, it is the 
sellers who compromise."</i> In the end, workers adapt to this inequality of 
power and instead of getting what they want, they want what they get 
(to use Schor's expression).  Under full employment this changes. In 
such a situation it is the bosses who have to start compromising. And 
they do not like it. As Schor notes, America <i>"has never experienced 
a sustained period of full employment. The closest we have gotten is 
the late 1960s, when the overall unemployment rate was under 4 percent 
for four years. But that experience does more to prove the point than 
any other example. The trauma caused to business by those years of a 
tight labour market was considerable. Since then, there has been a 
powerful consensus that the nation cannot withstand such a low rate 
of unemployment."</i> Hence the support for the NAIRU to ensure that
<i>"forced idleness of some helps perpetuate the forced overwork of
others."</i> [<b>The Overworked American</b>, p. 71, p. 75, p. 129, pp. 75-76 
and p. 76] 
</p><p>
So, full employment under capitalism is unlikely to last long (nor would 
full employment booms fill a major part of the business cycle). In
addition, it should be stressed that the notion that capitalism naturally 
stays at equilibrium or that unemployment is temporary adjustments is false,
even given the logic of capitalist economics. As Proudhon argued:
</p><p><blockquote>
<i>"The economists admit it [that machinery causes unemployment]: but
here they repeat their eternal refrain that, after a lapse of time, the 
demand for the product having increased in proportion to the reduction
in price [caused by the investment], labour in turn will come finally to 
be in greater demand than ever. Undoubtedly, <b>with time,</b> the equilibrium
will be restored; but I must add again, the equilibrium will be no sooner
restored at this point than it will be disturbed at another, because the 
spirit of invention never stops."</i> [<b>System of Economical Contradictions</b>, 
pp. 200-1]
</blockquote></p><p>
That capitalism creates permanent unemployment and, indeed, needs it 
to function is a conclusion that few, if any, pro-"free market" capitalists 
subscribe to. Faced with the empirical evidence that full employment is 
rare in capitalism, they argue that reality is not close enough to their 
theories and must be changed (usually by weakening the power of labour by 
welfare "reform" and reducing "union power"). Thus reality is at fault, not 
the theory (to re-quote Proudhon, <i>"Political economy -- that is, proprietary 
despotism -- can never be in the wrong: it must be the proletariat."</i> 
[<b>Op. Cit.</b> p. 187]) So if unemployment exists, then its because real wages 
are too high, not because capitalists need unemployment to discipline 
labour (see <a href="secC9.html#secc92">section C.9.2</a> for evidence that this argument is false). Or 
if real wages are falling as unemployment is rising, it can only mean that 
the real wage is not falling fast enough -- empirical evidence is never 
enough to falsify logical deductions from assumptions!
</p><p>
(As an aside, it is one of amazing aspects of the "science" of economics 
that empirical evidence is never enough to refute its claims. As the 
Post-Keynesian economist Nicholas Kaldor once pointed out, <i>"[b]ut unlike 
any scientific theory, where the basic assumptions are chosen on the
basis of direct observation of the phenomena the behaviour of which
forms the subject-matter of the theory, the basic assumptions of 
economic theory are either of a kind that are unverifiable. . . or
of a kind which are directly contradicted by observation."</i> [<b>Further 
Essays on Applied Economics</b>, pp. 177-8])
</p><p>
Of course, reality often has the last laugh on any ideology. For example,
since the late 1970s and early 1980s right-wing capitalist parties have 
taken power in many countries across the world. These regimes made many 
pro-free market reforms, arguing that a dose of market forces would lower 
unemployment, increase growth and so on. The reality proved somewhat 
different. For example, in the UK, by the time the Labour Party under 
Tony Blair come back to office in 1997, unemployment (while falling) was 
still higher than it had been when the last Labour government left office 
in 1979 (this in spite of repeated redefinitions of unemployment by the 
Tories in the 1980s to artifically reduce the figures). 18 years of labour 
market reform had <b>not</b> reduced unemployment even under the new 
definitions. This outcome was identical to New Zealand's neo-liberal 
experiment, were its overall effect was unimpressive, to say the least: 
lower growth, lower productivity and feeble real wage increases combined 
with rising inequality and unemployment. Like the UK, unemployment was 
still higher in 1997 than it had been in 1979. Over a decade of "flexible" 
labour markets had increased unemployment (more than doubling it, 
in fact, at one point as in the UK under Thatcher). It is no
understatement to argue, in the words of two critics of neo-liberalism,
that the <i>"performance of the world economy since capital was
liberalised has been worse than when it was tightly controlled"</i>
and that <i>"[t]hus far, [the] actual performance [of liberalised
capitalism] has not lived up to the propaganda."</i> [Larry Elliot 
and Dan Atkinson, <b>The Age of Insecurity</b>, p. 274 and p. 223] 
In fact, as Palley notes, <i>"wage and income growth that would have 
been deemed totally unsatisfactory a decade ago are now embraced as 
outstanding economic performance."</i> [<b>Op. Cit.</b>, p. 202]
</p><p>
Lastly, it is apparent merely from a glance at the history of capitalism
during its laissez-faire heyday in the 19th century that "free"
competition among workers for jobs does not lead to full employment.
Between 1870 and 1913, unemployment was at an average of 5.7% in the 
16 more advanced capitalist countries. This compares to an average of 
7.3% in 1913-50 and 3.1% in 1950-70. [Takis Fotopoulos, <i>"The Nation-State
and the Market"</i>, pp. 37-80, <b>Society and Nature</b>, Vol. 2, No. 2, p. 61]
If laissez-faire did lead to full employment, these figures would, surely, 
be reversed. 
</p><p>
As discussed above, full employment <b>cannot</b> be a fixed 
feature of capitalism due to its authoritarian nature and the requirements 
of production for profit. To summarise, unemployment has more to do with 
private property than the wages of our fellow workers or any social safety
nets working class movements have managed to pressure the ruling class to
accept. However, it is worthwhile to discuss why the "free market" capitalist 
is wrong to claim that unemployment within their system will not exist for 
long periods of time. In addition, to do so will also indicate the poverty
of their theory of, and "solution" to, unemployment and the human 
misery they would cause. We do this in the <a href="secC9.html#secc91">next section</a>.
</p>

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

<p>
The "free market" capitalist (i.e., neo-classical, neo-liberal or "Austrian") 
argument is that unemployment is caused by the real wage of labour being 
higher than the market clearing level. The basic argument is that the market
for labour is like any other market and as the price of a commodity increases,
the demand for it falls. In terms of labour, high prices (wages) causes lower
demand (unemployment). Workers, it is claimed, are more interested in money 
wages than real wages (which is the amount of goods they can buy with their 
money wages). This leads them to resist wage cuts even when prices are falling, 
leading to a rise in their real wages and so they price themselves out of work 
without realising it. From this analysis comes the argument that if workers 
were allowed to compete 'freely' among themselves for jobs, real wages would 
decrease and so unemployment would fall. State intervention (e.g. unemployment 
benefit, social welfare programmes, legal rights to organise, minimum wage 
laws, etc.) and labour union activity are, according to this theory,  the 
cause of unemployment, as such intervention and activity forces wages above 
their market level and  so force employers to "let people go." The key to 
ending unemployment is simple: cut wages.
</p><p>
This position was brazenly put by "Austrian" economist Murray Rothbard. He 
opposed any suggestion that wages should <b>not</b> be cut as the notion that 
<i>"the first shock of the depression must fall on profits and not on wages."</i> 
This was <i>"precisely the reverse of sound policy since profits provide the 
motive power for business activity."</i> [<b>America's Great Depression</b>, p. 188] 
Rothbard's analysis of the Great Depression is so extreme it almost reads 
like a satirical attack on the laissez-faire position as his hysterical 
anti-unionism makes him blame unions for the depression for, apparently, 
merely existing (even in an extremely weakened state) for their influence 
was such as to lead economists and the President to recommend to numerous 
leading corporate business men <b>not</b> to cut wages to end the depression 
(wages were cut, but not sufficiently as prices also dropped as we will 
discuss in the <a href="secC2.html#secc92">next section</a>). It should be noted that Rothbard takes his 
position on wage cutting despite of an account of the business cycle rooted 
in bankers lowering interest rates and bosses over-investing as a result 
(see <a href="secC8.html">section C.8</a>). So despite not setting interest rates 
nor making investment decisions, he expected working class people to pay for 
the actions of bankers and capitalists by accepting lower wages! Thus 
working class people must pay the price of the profit seeking activities 
of their economic masters who not only profited in good times, but can 
expect others to pay the price in bad ones. Clearly, Rothbard took the 
first rule of economics to heart: the boss is always right.
</p><p>
The chain of logic in this explanation for unemployment is rooted in many of the
key assumptions of neo-classical and other marginalist economics. A firm's demand 
for labour (in this schema) is the marginal physical product of labour multiplied 
by the price of the output and so it is dependent on marginal productivity theory. 
It is assumed that there are diminishing returns and marginal productivity as 
only this produces a downward-sloping labour demand curve. For labour, it is 
assumed that its supply curve is upwards slopping. So it must be stressed that 
marginal productivity theory lies at the core of "free market" capitalist theories 
of output and distribution and so unemployment as the marginal product of labour 
is interpreted as the labour demand curve. This enforces the viewpoint that 
unemployment is caused by wages being too high as firms adjust production to 
bring the marginal cost of their products (the cost of producing one more item) 
into equality with the product's market-determined price. So a drop in labour
costs theoretically leads to an expansion in production, producing jobs for the 
"temporarily" unemployed and moving the economy toward full-employment. So, in 
this theory, unemployment can only be reduced by lowering the real wages of 
workers currently employed. Thus the unfettered free market would ensure that 
all those who want to work at the equilibrium real wage will do so. By definition, 
any people who were idle in such a pure capitalism would be voluntarily enjoying 
leisure and <b>not</b> unemployed. At worse, mass unemployment would be a transitory 
disturbance which will quickly disappear if the market is flexible enough and
there are no imperfections in it (such as trade unions, workers' rights, minimum 
wages, and so on). 
</p><p>
Sadly for these arguments, the assumptions required to reach it are absurd as 
the conclusions (namely, that there is no involuntary unemployment as markets 
are fully efficient). More perniciously, when confronted with the reality of 
unemployment, most supporters of this view  argue that it arises only because 
of government-imposed rigidities and trade unions. In their "ideal" world 
without either, there would, they claim, be no unemployment. Of course, it is 
much easier to demand that nothing should be done to alleviate unemployment 
and that workers' real wages be reduced when you are sitting in a tenured 
post in academia save from the labour market forces you wish others to be 
subjected to (in their own interests). 
</p><p>
This perspective suffered during the Great Depression and the threat of 
revolution produced by persistent mass unemployment meant that dissident 
economists had space to question the orthodoxy. At the head of this 
re-evaluation was Keynes who presented an alternative analysis and 
solution to the problem of unemployment in his 1936 book <b>The General 
Theory of Employment, Interest and Money</b> (it should be noted that the 
Polish socialist economist Michal Kalecki independently developed a 
similar theory a few years before Keynes but without the neo-classical
baggage Keynes brought into his work).
</p><p>
Somewhat ironically, given the abuse he has suffered at the hands of the right 
(and some of his self-proclaimed followers), Keynes took the assumptions of
neo-classical economics on the labour market as the starting point of his 
analysis. As such, critics of Keynes's analysis generally misrepresent it. For 
example, right-liberal von Hayek asserted that Keynes <i>"started from the correct 
insight that the regular cause of extensive unemployment is real wages that are 
too high. The next step consisted in the proposition that a direct lowering of 
money wages could be brought about only by a struggle so painful and prolonged 
that it could not be contemplated. Hence he concluded that real wages must be 
lowered by the process of lowering the value of money,"</i> i.e. by inflation. Thus 
<i>"the supply of money must be so increased as to raise prices to a level where
the real value of the prevailing money wage is no longer greater than the 
productivity of the workers seeking employment."</i> [<b>The Constitution of Liberty</b>, 
p. 280] This is echoed by libertarian Marxist Paul Mattick who presented an 
identical argument, stressing that for Keynes <i>"wages were less flexible than 
had been generally assumed"</i> and lowering real wages by inflation <i>"allowed for 
more subtle ways of wage-cutting than those traditionally employed."</i> [<b>Marx 
and Keynes</b>, p. 7] 
</p><p>
Both are wrong. These arguments are a serious distortion of Keynes's argument. 
While he did start by assuming the neo-classical position that unemployment was 
caused by wages being too high, he was at pains to stress that even with ideally 
flexible labour markets cutting real wages would <b>not</b> reduce unemployment. 
As such, Keynes argued that unemployment was <b>not</b> caused by labour resisting 
wage cuts or by "sticky" wages. Indeed, any "Keynesian" economist who does argue 
that "sticky" wages are responsible for unemployment shows that he or she has not 
read Keynes -- Chapter two of the <b>General Theory</b> critiques precisely this 
argument. Taking neo-classical economists at its word, Keynes analyses what would 
happen <b>if</b> the labour market were perfect and so he assumes the same model 
as his neo-classical opponents, namely that unemployment is caused by wages being 
too high and there is flexibility in both commodity and labour markets. As he 
stressed, his <i>"criticism of the accepted [neo-]classical theory of economics 
has consisted not so much in finding logical flaws in its analysis as in pointing 
out that its tacit assumptions are seldom or never satisfied, with the result that 
it cannot solve the economic problems of the actual world."</i> [<b>The General 
Theory</b>, p. 378] 
</p><p>
What Keynes did was to consider the <b>overall</b> effect of cutting wages on
the economy as a whole. Given that wages make up a significant part of the 
costs of a commodity, <i>"if money-wages change, one would have expected the 
[neo-]classical school to argue that prices would change in almost the 
same proportion, leaving the real wage and the level of unemployment 
practically the same as before."</i> However, this was not the case, causing
Keynes to point out that they <i>"do not seem to have realised that . . . 
their supply curve for labour will shift bodily with every movement of 
prices."</i> This was because labour cannot determine its own real wage as 
prices are controlled by bosses. Once this is recognised, it becomes 
obvious that workers do not control the cost of living (i.e., the real 
wage). Therefore trade unions <i>"do not raise the obstacle to any increase 
in aggregate employment which is attributed to them by the [neo-]classical 
school."</i> So while workers could, in theory, control their wages by asking 
for less pay (or, more realistically, accepting any wage cuts imposed by
their bosses as the alternative is unemployment) they do not have any 
control over the prices of the goods they produce. This means that they 
have <b>no</b> control over their real wages and so <b>cannot</b> reduce unemployment 
by pricing themselves into work by accepting lower wages. Given these 
obvious facts, Keynes concluded that there was <i>"no ground for the belief 
that a flexible wage policy is capable of continuous full employment . . . 
The economic system cannot be made self-adjusting along these lines."</i> 
[<b>Op. Cit.</b>, p. 12, pp. 8-9, p. 15 and p. 267] As he summarised:
</p><p><blockquote>
<i>"the contention that the unemployment which characterises a depression
is due to a refusal by labour to accept a reduction of money-wages 
is not clearly supported by the facts. It is not very plausible to
assert that unemployment in the United States in 1932 was due either to 
labour obstinately refusing to accept a reduction of money-wages or to 
its demanding a real wage beyond what the productivity of the economic
machine was capable of furnishing . . . Labour is not more truculent
in the depression than in the boom -- far from it. Nor is its physical
productivity less. These facts from experience are a <b>prima facie</b>
ground for questioning the adequacy of the [neo-]classical analysis."</i> 
[<b>Op. Cit.</b>, p. 9]
</blockquote></p><p>
This means that the standard neo-classical argument was flawed. While cutting 
wages may make sense for one firm, it would not have this effect throughout 
the economy as is required to reduce unemployment as a whole. This is another 
example of the fallacy of composition. What may work with an individual worker 
or firm will not have the same effect on the economy as a whole for cutting 
wages for all workers would have a massive effect on the aggregate demand for 
their firms products.
</p><p>
For Keynes and Kalecki, there were two possibilities if wages were cut. One 
possibility, which Keynes considered the most likely, would be that a cut in 
money wages across the whole economy would see a similar cut in prices. The 
net effect of this would be to leave real wages unchanged. The other assumes 
that as wages are cut, prices remain prices remained unchanged or only fell 
by a small amount (i.e. if wealth was redistributed from workers to their 
employers). This is the underlying assumption of "free market" argument that
cutting wages would end the slump. In this theory, cutting real wages would 
increase profits and investment and this would make up for any decline in 
working class consumption and so its supporters reject the claim that cutting 
real wages would merely decrease the demand for consumer goods without 
automatically increasing investment sufficiently to compensate for this.
</p><p>
However, in order make this claim, the theory depends on three critical 
assumptions, namely that firms can expand production, that they will 
expand production, and that, if they do, they can sell their expanded 
production. This theory and its assumptions can be questioned. To do so 
we will draw upon David Schweickart's excellent summary. [<b>Against 
Capitalism</b>, pp. 105-7] 
</p><p>
The first assumption states that it is always possible for a company to
take on new workers. Yet increasing production requires more than just
labour. Tools, raw materials and work space are all required in addition
to new workers. If production goods and facilities are not available, 
employment will not be increased. Therefore the assumption that labour 
can always be added to the existing stock to increase output is plainly 
unrealistic, particularly if we assume with neo-classical economics that
all resources are fully utilised (for an economy operating at less than 
full capacity, the assumption is somewhat less inappropriate).
</p><p>
Next, will firms expand production when labour costs decline? Hardly. 
Increasing production will increase supply and eat into the excess profits
resulting from the fall in wages (assuming, of course, that demand holds
up in the face of falling wages). If unemployment did result in a lowering
of the general market wage, companies might use the opportunity to replace
their current workers or force them to take a pay cut. If this happened,
neither production nor employment would increase. However, it could be
argued that the excess profits would increase capital investment in the 
economy (a key assumption of neo-liberalism). The reply is obvious: perhaps, 
perhaps not. A slumping economy might well induce financial caution and 
so capitalists could stall investment until they are convinced of the 
sustained higher profitability will last. 
</p><p>
This feeds directly into the last assumption, namely that the produced
goods will be sold. Assuming that money wages are cut, but prices remain
the same then this would be a cut in real wages. But when wages decline, 
so does worker purchasing power, and if this is not offset by an increase 
in spending elsewhere, then total demand will decline. However, it can be 
argued that not everyone's real income would fall: incomes from profits 
would increase. But redistributing income from workers to capitalists, a 
group who tend to spend a smaller portion of their income on consumption 
than do workers, could reduce effective demand and increase unemployment. 
Moreover, business does not (cannot) instantaneously make use of the 
enlarged funds resulting from the shift of wages to profit for investment 
(either because of financial caution or lack of existing facilities). In
addition, which sane company would increase investment in the face of 
falling demand for its products? So when wages decline, so does workers' 
purchasing power and this is unlikely to be offset by an increase in 
spending elsewhere. This will lead to a reduction in aggregate demand as 
profits are accumulated but unused, so leading to stocks of unsold goods 
and renewed price reductions. This means that the cut in real wages will 
be cancelled out by price cuts to sell unsold stock and unemployment remains.  
In  other words, contrary to neo-classical economics, a fall in wages may 
result in the same or even more unemployment as aggregate demand drops 
and companies cannot find a market for their goods. And so, <i>"[i]f prices 
do not fall, it is still worse, for then real wages are reduced and 
unemployment is increased directly by the fall in the purchase of 
consumption goods."</i> [Joan Robinson, <b>Further Contributions to Economics</b>, 
p. 34]
</p><p>
The "Pigou" (or <i>"real balance"</i>) effect is another neo-classical argument 
that aims to prove that (in the end) capitalism will pass from slump to
boom quickly. This theory argues that when unemployment is sufficiently 
high, it will lead to the price level falling which would lead to a rise 
in the real value of the money supply and so increase the real value 
of savings. People with such assets will have become richer and this 
increase in wealth will enable people to buy more goods and so investment 
will begin again. In this way, slump passes to boom naturally.
</p><p>
However, this argument is flawed in many ways. In reply, Michal Kalecki 
argued that, firstly, Pigou had <i>"assumed that the banking system would 
maintain the stock of money constant in the face of declining incomes, 
although there was no particular reason why they should."</i> If the money
stock changes, the value of money will also change. Secondly, that <i>"the 
gain in money holders when prices fall is exactly offset by the loss to 
money providers. Thus, whilst the real value of a deposit in bank 
account rises for the depositor when prices fell, the liability 
represented by that deposit for the bank also rises in size."</i> And, 
thirdly, <i>"that falling prices and wages would mean that the real value 
of outstanding debts would be increased, which borrowers would find it 
increasingly difficult to repay as their real income fails to keep pace 
with the rising real value of debt. Indeed, when the falling prices and 
wages are generated by low levels of demand, the aggregate real income 
will be low. Bankruptcies follow, debts cannot be repaid, and a 
confidence crisis was likely to follow."</i> In other words, debtors may 
cut back on spending more than creditors would increase it and so the 
depression would continue as demand did not rise. [Malcolm C. Sawyer, 
<b>The Economics of Michal Kalecki</b>, p. 90] 
</p><p>
So, the traditional neo-classical reply that investment spending will increase
because lower costs will mean greater profits, leading to greater savings,
and ultimately, to greater investment is weak. Lower costs will mean greater 
profits only if the products are sold, which they might not be if demand 
is adversely affected. In other words, a higher profit margins do not result 
in higher profits due to fall in consumption caused by the reduction of 
workers purchasing power. And, as Michal Kalecki argued, wage cuts in 
combating a slump may be ineffective because gains in profits are not 
applied immediately to increase investment and the reduced purchasing power 
caused by the wage cuts causes a fall in sales, meaning that higher profit
margins do not result in higher profits. Moreover, as Keynes pointed out long 
ago, the forces and motivations governing saving are quite distinct from 
those governing investment. Hence there is no necessity for the two quantities 
always to coincide. So firms that have reduced wages may not be able to sell 
as much as before, let alone more. In that case they will cut production, 
add to unemployment and further reduce demand. This can set off a 
vicious downward spiral of falling demand and plummeting production leading 
to depression, a process described by Kropotkin (nearly 40 years before 
Keynes made the same point in <b>The General Theory</b>):
</p><p><blockquote>
<i>"Profits being the basis of capitalist industry, low profits explain all
ulterior consequences.
</p><p>
"Low profits induce the employers to reduce the wages, or the number of
workers, or the number of days of employment during the week. . . As
Adam Smith said, low profits ultimately mean a reduction of wages, and 
low wages mean a reduced consumption by the worker. Low profits mean also 
a somewhat reduced consumption by the employer; and both together mean 
lower profits and reduced consumption with that immense class of middlemen
which has grown up in manufacturing countries, and that, again, means
a further reduction of profits for the employers."</i> [<b>Fields, Factories 
and Workshops Tomorrow</b>, p. 33]
</blockquote></p><p>
So, as is often the case, Keynes was simply including into mainstream economics
perspectives which had long been held by critics of capitalism and dismissed
by the orthodoxy. Keynes' critique of Say's Law essentially repeated Marx's
while Proudhon pointed out in 1846 that <i>"if the producer earns less, he will 
buy less"</i> and this will <i>"engender . . . over-production and destitution."</i> 
This was because <i>"though the workmen cost [the capitalist] something, they 
are [his] customers: what will you do with your products, when driven away 
by [him], they shall consume no longer?"</i> This means that cutting wages and 
employment would not work for they are <i>"not slow in dealing employers a 
counter-blow; for if production excludes consumption, it is soon obliged 
to stop itself."</i> [<b>System of Economical Contradictions</b>, p. 204 and p. 190]
Significantly, Keynes praised Proudhon's follower Silvio Gesell for getting
part of the answer and for producing  <i>"an anti-Marxian socialism"</i> which
the <i>"future will learn more from"</i> than Marx. [<b>Op. Cit.</b>, p. 355]
</p><p>
So far our critique of the "free market" position has, like Keynes's, 
been within the assumptions of that theory itself. More has to be said, 
though, as its assumptions are deeply flawed and unrealistic. It should 
be stressed that while Keynes's acceptance of much of the orthodoxy ensured 
that at least some of his ideas become part of the mainstream, 
Post-Keynesians like Joan Robinson would latter bemoan the fact that 
he sought a compromise rather than clean break with the orthodoxy. This 
lead to the rise of the post-war neo-classical synthesis, the so-called 
"Keynesian" argument that unemployment was caused by wages being "sticky" 
and the means by which the right could undermine social Keynesianism and 
ensure a return to neo-classical orthodoxy. 
</p><p>
Given the absurd assumptions underlying the "free market" argument, a wider 
critique is possible as it reflects reality no more than any other part of 
the pro-capitalist ideology which passes for mainstream economics.
</p><p>
As noted above, the argument that unemployment is caused by wages being
too high is part of the wider marginalist perspective. Flaws in that will 
mean that its explanation of unemployment is equally flawed. So it must 
be stressed that the marginalist theory of distribution lies at the core 
of its theories of both output and unemployment. In that theory, the marginal 
product of labour is interpreted as the labour demand curve as the firm's 
demand for labour is the marginal physical product of labour multiplied by 
the price of the output and this produces the viewpoint that unemployment is 
caused by wages being too high. So given the central role which marginal 
productivity theory plays in the mainstream argument, it is useful to start 
our deeper critique by re-iterating that, as indicated in <a href="secC2.html">section C.2</a>, 
Joan Robinson and Piero Sraffa had successfully debunked this theory in the 
1950s. <i>"Yet for psychological and political reasons,"</i> notes James K. 
Galbraith, <i>"rather than for logical and mathematical ones, the capital 
critique has not penetrated mainstream economics. It likely never will. 
Today only a handful of economists seem aware of it."</i> [<i>"The 
distribution of income"</i>, pp. 32-41, Richard P. F. Holt and Steven Pressman 
(eds.), <b>A New Guide to Post Keynesian Economics</b>, p. 34] Given that this 
underlies the argument that high wages cause high unemployment, it means
that the mainstream argument for cutting wages has no firm theoretical basis.
</p><p>
It should also be noted that the assumption that adding more labour to capital
is always possible flows from the assumption of marginal productivity theory 
which treats "capital" like an ectoplasm and can be moulded into whatever
form is required by the labour available (see <a href="secC2.html#secc25">section C.2.5</a> for more 
discussion). Hence Joan Robinson's dismissal of this assumption, for
<i>"the difference between the future and the past is eliminated by making 
capital 'malleable' so that mistakes can always be undone and equilibrium 
is always guaranteed. . . with 'malleable' capital the demand for labour 
depends on the level of wages."</i> [<b>Contributions to Modern Economics</b>, p. 6]
Moreover, <i>"labour and capital are not often as smoothly substitutable for
each other as the [neo-classical] model requires . . . You can't use one
without the other. You can't measure the marginal productivity of one 
without the other."</i> Demand for capital and labour is, sometimes, a <b>joint</b>
demand and so it is often to adjust wages to a worker's marginal
productivity independent of the cost of capital. [Hugh Stretton, 
<b>Economics: A New Introduction</b>, p. 401]
</p><p>
Then there is the role of diminishing returns. The assumption that the demand 
curve for labour is always downward sloping with respect to aggregate employment 
is rooted in the notion that industry operates, at least in the short run, under 
conditions of diminishing returns. However, diminishing returns are <b>not</b> a 
feature of industries in the real world. Thus the assumption that the downward 
slopping marginal product of labour curve is identical to the aggregate demand 
curve for labour is not true as it is inconsistent with empirical evidence. 
<i>"In a system at increasing returns,"</i> noted one economist, <i>"the direct relation 
between real wages and employment tends to render the ordinary mechanism of wage 
adjustment ineffective and unstable."</i> [Ferdinando Targetti, <b>Nicholas Kaldor</b>, 
p. 344] In fact, as discussed in <a href="secC1.html#secc12">section C.1.2</a>, without this assumption
mainstream economics cannot show that unemployment is, in fact, caused by
real wages being too high (along with many other things).
</p><p>
Thus, if we accept reality, we must end up <i>"denying the inevitability of a 
negative relationship between real wages and employment."</i> Post-Keynesian 
economists have not found any empirical links between the growth of unemployment 
since the early in 1970s and changes in the relationship between productivity 
and wages and so there is <i>"no theoretical reason to expect a negative 
relationship between employment and the real wage, even at the level of the 
individual firm."</i> Even the beloved marginal analysis cannot be used in the
labour market, as <i>"[m]ost jobs are offered on a take-it-or-leave-it basis. 
Workers have little or no scope to vary hours of work, thereby making marginal 
trade-offs between income and leisure. There is thus no worker sovereignty 
corresponding to the (very controversial) notion of consumer sovereignty."</i> 
Over all, <i>"if a relationship exists between aggregate employment and the 
real wage, it is employment that determines wages. Employment and unemployment 
are product market variables, not labour market variables. Thus attempts to
restore full employment by cutting wages are fundamentally misguided."</i>
[John E. King, <i>"Labor and Unemployment,"</i> pp. 65-78, Holt and Pressman (eds.), 
<b>Op. Cit.</b>, p. 68, pp. 67-8, p. 72, p. 68 and p. 72] In addition:
</p><p><blockquote>
<i>"Neo-classical theorists themselves have conceded that a negative relationship
between the real wage and the level of employment can be established only in
a one-commodity model; in a multi-commodity framework no such generalisation
is possible. This confines neo-classical theory to an economy without money
and makes it inapplicable to a capitalist or entrepreneurial economy."</i> 
[<b>Op. Cit.</b>, p. 71]
</blockquote></p><p>
And, of course, the whole analysis is rooted in the notion of perfect 
competition. As Nicholas Kaldor mildly put it:
</p><p><blockquote>
<i>"If economics had been a 'science' in the strict sense of the word, the 
empirical observation that most firms operate in imperfect markets would 
have forced economists to scrap their existing theories and to start thinking 
on entirely new lines . . . unfortunately economists do not feel under the 
same compulsion to maintain a close correspondence between theoretical 
hypotheses and the facts of experience."</i> [<b>Further Essays on Economic 
Theory ad Policy</b>, p. 19]
</blockquote></p><p>
Any real economy is significantly different from the impossible notion of 
perfect competition and <i>"if there exists even one monopoly anywhere in the 
system . . . it follows that others must be averaging less than the marginal
value of their output. So to concede the existence of monopoly requires that
one either drop the competitive model entirely or construct an elaborate new
theory . . . that divides the world into monopolistic, competitive, and
subcompetitive ('exploited') sectors."</i> [James K. Galbraith, <b>Created Unequal</b>,
p. 52] As noted in <a href="secC4.html#secc43">section C.4.3</a>, mainstream economists have admitted that 
monopolistic competition (i.e., oligopoly) is the dominant market form but
they cannot model it due to the limitations of the individualistic assumptions
of bourgeois economics. Meanwhile, while thundering against unions the 
mainstream economics profession remains strangely silent on the impact of
big business and pro-capitalist monopolies like patents and copyrights on
distribution and so the impact of real wages on unemployment.
</p><p>
All this means that <i>"neither the demand for labour nor the supply of labour 
depends on the real wage. It follows from this that the labour market is not 
a true market, for the price associated with it, the wage rate, is incapable 
of performing any market-clearing function, and thus variations in the wage 
rate cannot eliminate unemployment."</i> [King, <b>Op. Cit.</b>, p. 65] As such, the 
<i>"conventional economic analysis of markets . . . is unlikely to apply"</i> 
to the labour market and as a result <i>"wages are highly unlikely to reflect 
workers' contributions to production."</i> This is because economists treat 
labour as no different from other commodities yet <i>"economic theory 
supports no such conclusion."</i> At its most basic, labour is <b>not</b> produced 
for profit and the <i>"supply curve for labour can 'slope backward' -- so 
that a fall in wages can cause an increase in the supply of workers."</i> In 
fact, the idea of a backward sloping supply curve for labour is just as 
easy to derive from the assumptions used by economists to derive their 
standard one. This is because workers may prefer to work less as the wage 
rate rises as they will be better off even if they do not work more. 
Conversely, very low wage rates are likely to produce a very high supply 
of labour as workers need to work more to meet their basic needs. In 
addition, as noted at the end of <a href="secC1.html#secc14">section C.1.4</a>, economic theory itself 
shows that workers will not get a fair wage when they face very powerful 
employers unless they organise unions. [Steve Keen, <b>Debunking Economics</b>, 
pp. 111-2 and pp. 119-23] 
</p><p>
Strong evidence that this model of the labour market can be found from 
the history of capitalism. Continually we see capitalists turn to the 
state to ensure low wages in order to ensure a steady supply of labour 
(this was a key aim of state intervention during the rise of capitalism, 
incidentally). For example, in central and southern Africa mining companies 
tried to get locals to labour. They had little need for money, so they 
worked a day or two then disappeared for the rest of the week. To avoid 
simply introducing slavery, some colonial administrators introduced and 
enforced a poll-tax. To earn enough to pay it, workers had to work a 
full week. [Hugh Stretton, <b>Op. Cit.</b>, p. 403] Much the same was imposed 
on British workers at the dawn of capitalism. As Stephen Marglin points 
out, the <i>"indiscipline of the labouring classes, or more bluntly, their 
laziness, was widely noted by eighteenth century observers."</i> By laziness 
or indiscipline, these members of the ruling class meant the situation 
where <i>"as wages rose, workers chose to work less."</i> In economic terms, <i>"a 
backward bending labour supply curve is a most natural phenomenon as long 
as the individual worker controls the supply of labour."</i> However, <i>"the 
fact that higher wages led workers to choose more leisure . . . was disastrous"</i> 
for the capitalists. Unsurprisingly, the bosses did not meekly accept the 
workings of the invisible hand. Their <i>"first recourse was to the law"</i> 
and they <i>"utilised the legislative, police and judicial powers of the 
state"</i> to ensure that working class people had to supply as many hours 
as the bosses demanded. [<i>"What do Bosses do?"</i>, pp. 60-112, <b>Review of 
Radical Political Economy</b>, Vol. 6, No. 2, pp. 91-4]
</p><p>
This means that the market supply curve <i>"could have any shape at all"</i> 
and so economic theory <i>"fails to prove that employment is determined 
by supply and demand, and reinforces the real world observation that 
involuntary unemployment can exist"</i> as reducing the wage need not 
bring the demand and supply of labour into alignment. While the 
possibility of backward-bending labour supply curves is sometimes 
pointed out in textbooks, the assumption of an upward sloping supply 
curve is taken as the normal situation but <i>"there is no theoretical
-- or empirical -- justification for this."</i> Sadly for the world, this 
assumption is used to draw very strong conclusions by economists. The 
standard arguments against minimum wage legislation, trade unions and 
demand management by government are all based on it. Yet, as Keen notes, 
such important policy positions <i>"should be based upon robust intellectual 
or empirical foundations, rather than the flimsy substrate of mere fancy. 
Economists are quite prone to dismiss alternative perspectives on labour 
market policy on this very basis -- that they lack any theoretical or 
empirical foundations. Yet their own policy positions are based as much 
on wishful thinking as on wisdom."</i> [<b>Op. Cit.</b>, pp. 121-2 and p. 123] 
</p><p>
Within a capitalist economy the opposite assumption to that taken by 
economics is far more likely, namely that there <b>is</b> a backward sloping 
labour supply curve. This is because the decision to work is <b>not</b> one
based on the choice between wages and leisure made by the individual
worker. Most workers do <b>not</b> choose whether they work or not, and the 
hours spent working, by comparing their (given) preferences and the 
level of real wages. They do <b>not</b> practice voluntary leisure waiting
for the real wage to exceed their so-called <i>"reservation"</i> wage (i.e. 
the wage which will tempt them to forsake a life of leisure for the
disutility of work). Rather, most workers have to take a job because 
they do not have a choice as the alternative is poverty (at best) or 
starvation and homelessness (at worse). The real wage influences the
decision on how much labour to supply rather than the decision to
work or not. This is because as workers and their families have a 
certain basic living standard to maintain and essential bills which need
to be paid. As earnings increase, basic costs are covered and so people
are more able to work less and so the supply of labour tends to fall.
Conversely, if real earnings fall because the real wage is less then 
the supply of labour may <b>increase</b> as people work more hours and/or 
more family members start working to make enough to cover the bills
(this is because, once in work, most people are obliged to accept
the hours set by their bosses). This is the opposite of what happens 
in "normal" markets, where lower prices are meant to produce a 
<b>decrease</b> in the amount of the commodity supplied. In other words, 
the labour market is not a market, i.e. it reacts in different ways 
than other markets (Stretton provides a good summary of this argument 
[<b>Op. Cit.</b>, pp. 403-4 and p. 491]).
</p><p>
So, as radical economists have correctly observe, such considerations 
undercut the "free market" capitalist contention that labour 
unions and state intervention are responsible for unemployment (or 
that depressions will easily or naturally end by the workings of the 
market). To the contrary, insofar as labour unions and various welfare 
provisions prevent demand from falling as low as it might otherwise 
go during a slump, they apply a brake to the downward spiral. Far 
from being responsible for unemployment, they actually mitigate it.
For example, unions, by putting purchasing power in the hands of 
workers, stimulates demand and keeps employment higher than the level 
it would have been. Moreover, wages are generally spent immediately and 
completely whilst profits are not. A shift from profits to wages may 
stimulate the economy since more money is spent but there will be a 
delayed cut in consumption out of profits. [Malcolm Sawyer, <b>The 
Economics of Michal Kalecki</b>, p. 118] All this should be obvious, as 
wages (and benefits) may be costs for some firms but they are revenue 
for even more and labour is not like other commodities and reacts in 
changes in price in different ways.
</p><p>
Given the dynamics of the labour "market" (if such a term makes much 
sense given its atypical nature), any policies based on applying 
"economics 101" to it will be doomed to failure. As such, any book 
entitled <b>Economics in One Lesson</b> must be viewed with suspicion 
unless it admits that what it expounds has little or no bearing to 
reality and urges the reader to take at least the second lesson. Of 
course, a few people actually do accept the simplistic arguments that 
reside in such basic economics texts and think that they explain the 
world (these people usually become right-"libertarians" and spend the 
rest of their lives ignoring their own experience and reality in favour 
of a few simple axioms). The wage-cutting argument (like most of economics) 
asserts that any problems are due to people not listening to economists
and that there is no economic power, there are no "special interests" -- it 
is just that people are stupid. Of course, it is irrelevant that it is much 
easier to demand that workers' real wages be reduced when you are sitting 
in a tenured post in academia. True to their ideals and "science", it is 
refreshing to see how many of these "free market" economists renounce 
tenure so that their wages can adjust automatically as the market demand 
for their ideologically charged comments changes. 
</p><p>
So when economic theories extol suffering for future benefits, it is 
always worth asking who suffers, and who benefits. Needless to say, 
the labour market flexibility agenda is anti-union, anti-minimum wage, 
and anti-worker protection. This agenda emerges from theoretical claims 
that price flexibility can restore full employment, and it rests dubious
logic, absurd assumptions and on a false analogy comparing the labour market 
with the market for peanuts. Which, ironically, is appropriate as the 
logic of the model is that workers will end up working for peanuts! As
such, the "labour market" model has a certain utility as it removes the 
problem of institutions and, above all, power from the perspective of 
the economist. In fact, institutions such as unions can only be considered 
as a problem in this model rather than a natural response to the unique 
nature of the labour "market" which, despite the obvious differences, 
most economists treat like any other.
</p><p>
To conclude, a cut in wages may deepen any slump, making it deeper and longer
than it otherwise would be. Rather than being the solution to unemployment,
cutting wages will make it worse (we will address the question of whether 
wages being too high actually causes unemployment in the first place, in 
the <a href="secC9.html#secc92">next section</a>). Given that, 
as we argued in <a href="secC8.html#secc82">section C.8.2</a>, inflation 
is caused by insufficient profits 
for capitalists (they try to maintain their profit margins by price 
increases) this spiralling effect of cutting wages helps to explain what 
economists term <i>"stagflation"</i> -- rising unemployment combined with rising 
inflation (as seen in the 1970s). As workers are made unemployed, 
aggregate demand falls, cutting profit margins even more and in response 
capitalists raise prices in an attempt to recoup their losses. Only a 
very deep recession can break this cycle (along with labour militancy 
and more than a few workers and their families). 
</p><p>
Thus the capitalist solution to crisis is based on working class people paying 
for capitalism's contradictions. For, according to the mainstream theory, when 
the production capacity of a good exceeds any reasonable demand for it, the 
workers must be laid off and/or have their wages cut to make the company 
profitable again. Meanwhile the company executives -- the people responsible 
for the bad decisions to build lots of factories -- continue to collect their 
fat salaries, bonuses and pensions, and get to stay on to help manage the 
company through its problems. For, after all, who better, to return a company 
to profitability than those who in their wisdom ran it into bankruptcy?
Strange, though, no matter how high their salaries and bonuses get, 
managers and executives <b>never</b> price <b>themselves</b> out of work. 
</p><p>
All this means that working class people have two options in a slump -- 
accept a deeper depression in order to start the boom-bust cycle again or 
get rid of capitalism and with it the contradictory nature of capitalist 
production which produces the business cycle in the first place (not to 
mention other blights such as hierarchy and inequality). In the end, 
the only solution to unemployment is to get rid of the system which 
created it by workers seizing their means of production and abolishing 
the state. When this happens, then production for the profit of the few 
will be ended and so, too, the contradictions this generates.
</p>

<h2><a name="secc92">C.9.2 Is unemployment caused by wages being too high?</a></h2>

<p>
As we noted in the <a href="secC9.html#secc91">last section</a>, most capitalist economic theories argue
that unemployment is caused by wages being too high. Any economics
student will tell you that labour is like any other commodity and so
if its price is too high then there will be less demand for it, so
producing an excess supply of it on the market. Thus high wages will 
reduce the quantity of labour demanded and so create unemployment -- a 
simple case of "supply and demand." 
</p><p>
From this theory we would expect that areas and periods with high wages 
will also have high levels of unemployment. Unfortunately for the theory, 
this does not seem to be the case. Even worse for it, high wages are 
generally associated with booms rather than slumps and this has been known 
to mainstream economics since at least 1939 when in March of that year
<b>The Economic Journal</b> printed an article by Keynes about the movement of 
real wages during a boom in which he evaluated the empirical analysis of 
two labour economists (entitled <i>"Relative Movements of Real Wages and 
Output"</i> this is contained as an Appendix of most modern editions of <b>The 
General Theory</b>). 
</p><p>
These studies showed that <i>"when money wages are rising, real wages have 
usually risen too; whilst, when money wages are falling, real wages are 
no more likely to rise than to fall."</i> Keynes admitted that in <b>The General 
Theory</b> he was <i>"accepting, without taking care to check the facts"</i>, a 
<i>"widely held"</i> belief. He discussed where this belief came from, namely 
leading 19th century British economist Alfred Marshall who had produced a 
<i>"generalisation"</i> from a six year period between 1880-86 which was not 
true for the subsequent business cycles of 1886 to 1914. He also quotes 
another leading economist, Arthur Pigou, from 1927 on how <i>"the upper halves of 
trade cycles have, on the whole, been associated with higher rates of real 
wages than the lower halves"</i> and indicates that he provided evidence on 
this from 1850 to 1910 (although this did not stop Pigou reverting to the 
<i>"Marshallian tradition"</i> during the Great Depression and blaming high
unemployment on high wages). [<b>The General Theory</b>, p. 394, p. 398 and 
p. 399] Keynes conceded the point, arguing that he had tried to minimise 
differences between his analysis and the standard perspective. He stressed 
that while he assumed countercyclical real wages his argument did not depend 
on it and given the empirical evidence provided by labour economists he 
accepted that real wages were pro-cyclical in nature. 
</p><p>
The reason why this is the case is obvious given the analysis in the 
<a href="secC9.html#secc91">last section</a>. Labour does not control prices and so cannot control its own real 
wage. Looking at the Great Depression, it seems difficult to blame it on 
workers refusing to take pay cuts when by 1933 <i>"wages and salaries in U.S. 
manufacturing were less than half their 1929 levels and, in automobiles and 
steel, were under 40 percent of the 1929 levels."</i> In Detroit, there had 
been 475,000 auto-workers. By 1931 <i>"almost half has been laid off."</i> [William 
Lazonick, <b>Competitive Advantage on the Shop Floor</b>, p. 271] The notion of 
all powerful unions or workers' resistance to wage cuts causing high 
unemployment hardly fits these facts. Peter Temin provides information on 
real wages in manufacturing during the depression years. Using 1929 as 
the base year, weekly average real wages (i.e., earnings divided by the 
consumer price index) fell each year to reach a low of 85.5% by 1932. 
Hourly real wages remained approximately constant (rising to 100.1% 
in 1930 and then 102.6% in 1931 before falling to 99% in 1932). The 
larger fall in weekly wages was due to workers having a shorter working 
week. The <i>"effect of shorter hours and lower wages was to decrease the 
income of employed workers."</i> Thus the notion that lowering wages will 
increase employment seems as hard to support as the notion that wages being 
too high caused the depression in the first place. Temin argues, <i>"no part of 
the [neo-]classical story is accurate."</i> [<b>Did Monetary Forces Cause the Great 
Depression?</b>, pp. 139-40] It should be noted that the consensus of economists 
is that during this period the evidence seems to suggest that real wages <b>did</b> 
rise overall. This was because the prices of commodities fell faster than did 
the wages paid to workers. Which confirms Keynes, as he had argued that workers 
cannot price themselves into work as they have no control over prices. However, 
there is no reason to think that high real wages caused the high unemployment 
as the slump itself forced producers to cut prices (not to mention wages). 
Rather, the slump caused the increase in real wages.
</p><p>
Since then, economists have generally confirmed that real wage are procyclical.
In fact, <i>"a great deal of empirical research has been conducted in this area 
-- research which mostly contradicts the neo-classical assumption of an inverse 
relation between real wages and employment."</i> [Ferdinando Targetti, <b>Nicholas 
Kaldor</b>, p. 50] Nicholas Kaldor, one of the first Keynesians, also stressed
that the notion that there is an inverse relationship between real wages and 
employment is <i>"contradicted by numerous empirical studies which show that, in 
the short period, changes in real wages are positively correlated with changes 
in employment and not negatively."</i> [<b>Further Essays on Economic Theory and 
Policy</b>, p. 114fn] As Hugh Stretton summarises in his excellent introductory
text on economics:
</p><p><blockquote>
<i>"In defiance of market theory, the demand for labour tends strongly to vary 
<b>with</b> its price, not inversely to it. Wages are high when there is full 
employment. Wages -- especially for the least-skilled and lowest paid -- are 
lowest when there is least employment. The causes chiefly run from the 
employment to the wages, rather than the other way. Unemployment weakens 
the bargaining power, worsens the job security and working conditions, and 
lowers the pay of those still in jobs.
</p><p>
"The lower wages do not induce employers to create more jobs . . . most 
business firms have no reason to take on more hands if wages decline. Only 
empty warehouses, or the prospect of more sales can get them to do that, 
and these conditions rarely coincide with falling employment and wages. The 
causes tend to work the other way: unemployment lowers wages, and the lower 
wages do not restore the lost employment."</i> [<b>Economics: A New Introduction</b>, 
pp. 401-2]
</blockquote></p><p>
Will Hutton, the British neo-Keynesian economist, summarises research 
by two other economists that suggests high wages do not cause unemployment:
</p><p><blockquote>
<i>"the British economists David Blanchflower and Andrew Oswald [examined] . . . 
the data in twelve countries about the actual relation between wages and 
unemployment -- and what they have discovered is another major challenge 
to the free market account of the labour market. Free market theory would
predict that low wages would be correlated with low local unemployment;
and high wages with high local unemployment.
</p><p>
"Blanchflower and Oswald have found precisely the opposite relationship. 
The higher the wages, the lower the local unemployment -- and the lower 
the wages, the higher the local unemployment. As they say, this is not a 
conclusion that can be squared with free market text-book theories of 
how a competitive labour market should work."</i> [<b>The State We're In</b>, 
p. 102]
</blockquote></p><p>
Unemployment was highest where real wages were lowest and nowhere had
falling wages being followed by rising employment or falling unemployment.
Blanchflower and Oswald stated that their conclusion is that employees 
<i>"who work in areas of high unemployment earn less, other things constant, 
than those who are surrounded by low unemployment."</i> [<b>The Wage Curve</b>, 
p. 360] This relationship, the exact opposite of that predicted by 
"free market" capitalist economics, was found in many different 
countries and time periods, with the curve being similar for different 
countries. Thus, the evidence suggests that high unemployment is 
associated with low earnings, not high, and vice versa.
</p><p>
Looking at less extensive evidence, if minimum wages and unions cause 
unemployment, why did the South-eastern states of the USA (with a <b>lower</b> 
minimum wage and weaker unions) have a <b>higher</b> unemployment rate than 
North-western states during the 1960s and 1970s? Or why, when the (relative) 
minimum wage declined under Reagan and Bush in the 1980s, did chronic 
unemployment accompany it? [Allan Engler, <b>The Apostles of Greed</b>, 
p. 107] Or the <b>Low Pay Network</b> report <i>"Priced Into Poverty"</i> 
which discovered that in the 18 
months before they were abolished, the British Wages Councils (which 
set minimum wages for various industries) saw a rise of 18,200 in 
full-time equivalent jobs compared to a net loss of 39,300 full-time 
equivalent jobs in the 18 months afterwards. Given that nearly half 
the vacancies in former Wages Council sectors paid less than the rate 
which it is estimated Wages Councils would now pay, and nearly 15% 
paid less than the rate at abolition, there should (by the "free market"
argument) have been rises in employment in these sectors as pay fell.
The opposite happened. This research shows that the falls in pay 
associated with Wages Council abolition had not created more employment. 
Indeed, employment growth was more buoyant prior to abolition than 
subsequently. So whilst Wages Council abolition did not result in more 
employment, the erosion of pay rates caused by their abolition resulted 
in more families having to endure poverty pay. Significantly, the 
introduction of a national minimum wage by the first New Labour 
government did not have the dire impact "free market" capitalist
economists and politicians predicted. 
</p><p>
It should also be noted that an extensive analysis of the impact of minimum 
wage increases at the state level in America by economists David Card and 
Alan Kreuger found the facts contradicted the standard theory, with rises 
in the minimum wage having a small positive impact on both employment and
wages for all workers. [<b>Myth and Measurement: The New Economics of the 
Minimum Wage</b>] While their work was attacked by business leaders and 
economists from think-tanks funded by them, Card and Kreuger's findings 
that raising the lowest wages had no effect on unemployment or decreased 
it proved to be robust. In particular, when replying to criticism of their 
work by other economists who based their work, in part, on data supplied 
by a business funded think-tank Card and Krueger discovered that not only 
was that work consistent with their original findings but that the <i>"only 
data set that indicates a significant decline in employment"</i> was by some 
amazing coincidence <i>"the small set of  restaurants collected by"</i> the think 
tank. [<i>"Minimum Wages and Employment: A Case Study of the Fast-Food 
Industry in New Jersey and Pennsylvania: Reply"</i>, pp. 1397-1420, <b>The 
American Economic Review</b>, Vol. 90, No. 5, p. 1419] For a good overview 
of <i>"how the fast food industry and its conservative allies sought to 
discredit two distinguished economists, and how the attack backfired"</i>
when <i>"the two experts used by the fast food industry to impeach Card 
and Krueger, effectively ratified them"</i> see John Schmitt's <i>"Behind the 
Numbers: Cooked to Order."</i> [<b>The American Prospect</b>, May-June 1996, 
pp. 82-85]
</p><p>
(This does not mean that anarchists support the imposition of a legal
minimum wage. Most anarchists do not because it takes the responsibility
for wages from unions and other working class organisations, where it
belongs, and places it in the hands of the state. We mention these 
examples in order to highlight that the "free market" capitalist 
argument has serious flaws with it.)
</p><p>
Empirical evidence does not support the argument the "free market" capitalist 
argument that unemployment is caused by real wages being too high. The 
phenomenon that real wages tend to increase during the upward swing of the 
business cycle (as unemployment falls) and fall during recessions (when 
unemployment increases) renders the standard interpretation that real wages 
govern employment difficult to maintain (real wages are <i>"pro-cyclical,"</i> to 
use economic terminology). This evidence makes it harder for economists to 
justify policies based on a direct attack on real wages as the means to 
cure unemployment.
</p><p>
While this evidence may come as a shock to those who subscribe to the 
arguments put forward by those who think capitalist economics reflect the
reality of that system, it fits well with the anarchist and other socialist 
analysis. For anarchists, unemployment is a means of disciplining labour 
and maintaining a suitable rate of profit (i.e. unemployment is a key means 
of ensuring that workers are exploited). As full employment is approached, 
labour's power increases, so reducing the rate of exploitation and so 
increasing labour's share of the value it produces (and so higher wages). 
Thus, from an anarchist point of view, the fact that wages are higher in 
areas of low unemployment is not a surprise, nor is the phenomenon of 
pro-cyclical real wages. After all, as we noted in <a href="secC3.html">section C.3</a>, 
the ratio 
between wages and profits are, to a large degree, a product of bargaining 
power and so we would expect real wages to grow in the upswing of the 
business cycle, fall in the slump and be high in areas of low unemployment. 
</p><p>
The evidence therefore suggests that the "free market" capitalist claim 
that unemployment is caused by unions, "too high" wages, and so on, is 
false. Indeed, by stopping capitalists appropriating more of the income 
created by workers, high wages maintain aggregate demand and contribute 
to higher employment (although, of course, high employment cannot be 
maintained indefinitely under wage slavery due to the rise in workers' 
power this implies). Rather, unemployment is a key aspect of the capitalist 
system and cannot be got rid off within it. The "free market" capitalist 
"blame the workers" approach fails to understand the nature and dynamic 
of the system (given its ideological role, this is unsurprising). So 
high real wages for workers increases aggregate demand and reduces 
unemployment from the level it would be if the wage rate was cut. This 
is supported by most of the research into wage dynamics during the
business cycle and by the <i>"wage curve"</i> of numerous countries. This 
suggests that the demand for labour is independent of the real wages
and so the price of labour (wages) is incapable of performing any 
market clearing function. The supply and demand for labour are 
determined by two different sets of factors. The relationship between
wages and unemployment flows from the latter to the former rather
than the reverse: the wage is influenced by the level of unemployment.
Thus wages are not the product of a labour market which does not really
exist but rather is the product of <i>"institutions, customs, privilege,
social relations, history, law, and above all power, with an admixture
of ingenuity and luck. But of course power, and particularly market
or monopoly power, changes with the general of demand, the rate of
growth, and the rate of unemployment. In periods of high employment,
the weak gain on the strong; in periods of high unemployment, the
strong gain on the weak."</i> [Galbraith, <b>Created Unequal</b>, p. 266]
</p><p>
This should be obvious enough. It is difficult for workers to resist 
wage cuts and speeds-up when faced with the fear of mass unemployment.
As such, higher rates of unemployment <i>"reduce labour's bargaining power 
vis-a-vis business, and this helps explain why wages have declined and 
workers have not received their share of productivity growth"</i> (between 
1970 and 1993, only the top 20% of the US population increased its share 
of national income). [Thomas I. Palley, <b>Plenty of Nothing</b>, p. 55 
and p. 58] Strangely, though, this obvious fact seems lost on most economists. 
In fact, if you took their arguments seriously then you would have
to conclude that depressions and recessions are the periods during 
which working class people do the best! This is on two levels. First,
in neo-classical economics work is considered a disutility and 
workers decide not to work at the market-clearing real wage because
they prefer leisure to working. Leisure is assumed to be intrinsically
good and the wage the means by which workers are encouraged to 
sacrifice it. Thus high unemployment must be a good thing as it gives
many more people leisure time. Second, for those in work their real
wages are higher than before, so their income has risen. Alfred Marshall, 
for example, argued that in depressions money wages fell but not as fast 
as prices. A 
<i>"powerful friction"</i> stopped this, which <i>"establish[ed] a higher 
standard of living among the working classes"</i> and a <i>"diminish[ing of] 
the inequalities of wealth."</i> When asked whether during a period of 
depression the employed working classes got more than they did before, 
he replied <i>"[m]ore than they did before, on the average."</i> [quoted by 
Keynes, <b>Op. Cit.</b>, p. 396]
</p><p>
Thus, apparently, working class people do worse in booms than in slumps 
and, moreover, they can resist wage cuts more in the face of mass 
unemployment than in periods approaching full employment. That the 
theory which produced these conclusions could be taken remotely 
seriously shows the dangers of deducing an economic ideology from 
a few simple axioms rather than trusting in empirical evidence and 
common sense derived from experience. Nor should it come as too great a
surprise, as "free market" capitalist economics tends to ignore 
(or dismiss) the importance of economic power and the social context 
within which individuals make their choices. As Bob Black acidly put 
it with regards to the 1980s, it <i>"wasn't the <b>workers</b> who took these 
gains [of increased productivity], not in higher wages, not in safer 
working conditions, and not in shorter hours -- hours of work have 
<b>increased</b> . . . It must be, then, that in the 80s and after workers 
have 'chosen' lower wages, longer hours <b>and</b> greater danger on the 
job. Yeah, sure."</i> [<i>"Smokestack Lightning,"</i> pp. 43-62, <b>Friendly Fire</b>, 
p. 61] 
</p><p>
In the real world, workers have little choice but to accept a job as 
they have no independent means to exist in a pure capitalist system 
and so no wages means no money for buying such trivialities as food 
and shelter. The decision to take a job is, for most workers, a 
non-decision -- paid work is undertaken out of economic necessity and 
so we are not in a position to refuse work because real wages are too 
low to be worth the effort (the welfare state reduces this pressure, 
which is why the right and bosses are trying to destroy it). With
high unemployment, pay and conditions will worsen while hours and 
intensity of labour will increase as the fear of the sack will result 
in increased job insecurity and so workers will be more willing to 
placate their bosses by obeying and not complaining. Needless to 
say, empirical evidence shows that <i>"when unemployment is 
high, inequality rises. And when unemployment is low, inequality tends 
to fall."</i> [James K. Galbraith, <b>Op. Cit.</b>, p. 148] This is
unsurprising as the <i>"wage curve"</i> suggests that it is unemployment 
which drives wage levels, not the other way round. This is important 
as higher unemployment would therefore create higher inequality as 
workers are in no position to claim back productivity increases and so
wealth would flood upwards.
</p><p>
Then there is the issue of the backward-bending supply curve of labour
we discussed at the end of the <a href="secC9.html#secc91">last section</a>. As the "labour market" is
not really a market, cutting real wages will have the opposite effect
on the supply of labour than its supporters claim. It is commonly found
that as real wages fall, hours at work become longer and the number of
workers in a family increases. This is because the labour supply curve
is negatively slopped as families need to work more (i.e., provide more
labour) to make ends meet. This means that a fall in real wages may <b>increase</b> the 
supply of labour as workers are forced to work longer hours or take 
second jobs simply to survive. The net effect of increasing supply 
would be to <b>decrease</b> real wages even more and so, potentially, start
a vicious circle and make the recession deeper. Looking at the US, we 
find evidence that supports this analysis. As the wages for the bottom 80%
of the population fell in real terms under Reagan and Bush in the 1980s, the 
number of people with multiple jobs increased as did the number of mothers who 
entered the labour market. In fact, <i>"the only reason that family income 
was maintained is the massive increase in labour force participation of 
married women . . . Put simply, jobs paying family wages have been disappearing, 
and sustaining a family now requires that both adults work . . . The result has 
been a squeeze on the amount of time that people have for themselves . . . 
there is a loss of life quality associated with the decline in time for family 
. . . they have also been forced to work longer . . . Americans are working 
longer just to maintain their current position, and the quality of family life
is likely declining. A time squeeze has therefore accompanied the wage 
squeeze."</i> [Palley, <b>Op. Cit.</b>, pp. 63-4] That is, the supply of 
labour <b>increased</b> as its price fell (Reagan's turn to military Keynesianism
and incomplete nature of the "reforms" ensured that a deep spiral was avoided).
</p><p>
To understand why this is the case, it is necessary to think about how the 
impact of eliminating the minimum wage and trade unions would actually have. 
First, of course, there would be a drop in the wages of the poorest workers
as the assertion is that the minimum wage increases unemployment by forcing
wages up. The assertion is that the bosses would then employ more workers 
as a result. However, this assumes that extra workers could easily be added 
to the existing capital stock which may not be the case. Assuming this is 
the case (and it <b>is</b> a big assumption), what happens to the workers who 
have had their pay cut? Obviously, they still need to pay their bills which 
means they either cut back on consumption and/or seek more work (assuming
that prices have not fallen, as this would leave the real wage unchanged). 
If the former happens, then firms may find that they face reduced demand 
for their products and, consequently, have no need for the extra employees 
predicted by the theory. If the latter happens, then the ranks of those 
seeking work will increase as people look for extra jobs or people outside
the labour market (like mothers and children) are forced into the job market. As 
the supply of workers increase, wages <b>must</b> drop according to the logic of 
the "free market" position. This does not mean that a recovery is impossible, 
just that in the short and medium terms cutting wages will make a recession worse and be 
unlikely to <b>reduce</b> unemployment for some time.
</p><p>
This suggests that a "free market" capitalism, marked by a fully competitive 
labour market, no welfare programmes nor unemployment benefits, and extensive 
business power to break unions and strikes would see aggregate demand 
constantly rise and fall, in line with the business cycle, and unemployment 
and inequality would follow suit. Moreover, unemployment would be higher 
over most of the business cycle (and particularly at the bottom of the 
slump) than under a capitalism with social programmes, militant unions 
and legal rights to organise because the real wage would not be able to 
stay at levels that could support aggregate demand nor could the 
unemployed use their benefits to stimulate the production of consumer 
goods. This suggests that a fully competitive labour market, as in the 
19th century, would increase the instability of the system -- an 
analysis which was confirmed in during the 1980s (<i>"the relationship 
between measured inequality and economic stability . . . was weak but 
if anything it suggests that the more egalitarian countries showed a 
more stable pattern of growth after 1979."</i> [Dan Corry and Andrew
Glyn, <i>"The Macroeconomics of equality, stability and growth"</i>, <b>Paying
for Inequality</b>, Andrew Glyn and David Miliband (eds.) pp. 212-213]).
</p><p>
So, in summary, the available evidence suggests that <b>high</b> wages are 
associated with <b>low</b> levels of unemployment. While this should be the
expected result from any realistic analysis of the economic power which 
marks capitalist economies, it does not provide much support for claims 
that only by cutting real wages can unemployment be reduced. The "free 
market" capitalist position and one based on reality have radically 
different conclusions as well as political implications. Ultimately, 
most laissez-faire economic analysis is unpersuasive both in terms of 
the facts and their logic. While economics may be marked by axiomatic 
reasoning which renders everything the markets does as optimal, the 
problem is precisely that it is pure axiomatic reasoning with little or no 
regard for the real world. Moreover, by some strange coincidence, they usually 
involve policy implications which generally make the rich richer by 
weakening the working class. Unsurprisingly, decades of empirical 
evidence have not shifted the faith of those who think that the simple 
axioms of economics take precedence over the real world nor has this
faith lost its utility to the economically powerful.
</p>

<h2><a name="secc93">C.9.3 Are "flexible" labour markets the answer to unemployment?</a></h2>

<p>
The usual "free market" capitalist (or neo-liberal) argument is that labour 
markets must become more "flexible" to solve the problem of unemployment. 
This is done by weakening unions, reducing (or abolishing) the welfare 
state, and so on. In defence of these policies, their proponents point
to the low unemployment rates of the USA and UK and contrast them to the
claimed economic woes of Europe (particularly France and Germany). As
we will indicate in this section, this stance has more to do a touching 
faith that deregulating the labour market brings the economy as a whole 
closer to the ideal of "perfect competition" than a balanced analysis 
and assessment of the available evidence. Moreover, it is always important
to remember, as tenured economists (talking of protective labour market 
institutions!) seem to forget, that deregulation can and does have high 
economic (and not to mention individual and social) costs too.
</p><p>
The underlying argument for flexible labour markets is the notion that
unemployment is cased by wages being too high and due to market imperfections
wages are sticky downwards. While both claims, as we have seen above, are 
dubious both factually and logically this has not stopped this position 
becoming the reigning orthodoxy in elite circles. By market imperfections
it is meant trade unions, laws which protect labour, unemployment benefit 
and other forms of social welfare provision (and definitely <b>not</b> 
big business, patent and copyright laws, or any other pro-business state
interventions). All these ensure that wages for those employed are inflexible 
downwards and the living standards of those unemployed are too high 
to induce them to seek work. This means that orthodox economics is based 
on (to use John Kenneth Galbraith's justly famous quip) the assumption that 
the rich do not work because they are paid too little, while the poor do 
not work because they are paid too much. 
</p><p>
We should first point out that attacks on social welfare have a long pedigree
and have been conducted with much the same rationale -- it made people lazy 
and gave them flexibility when seeking work. For example, the British <b>Poor 
Law Report</b> of the 1830s <i>"built its case against relief on the damage done 
by poor relief to personal morality and labour discipline (much the same
thing in the eyes of the commissioners)."</i> [David McNally, <b>Against the 
Market</b>, p. 101] The report itself stated that <i>"the greatest evil"</i> of the 
system was <i>"the spirit of laziness and insubordination that it creates."</i>
[quoted by McNally, <b>Op. Cit.</b>, p. 101] 
</p><p>
While the rhetoric used to justify attacks on welfare has changed somewhat 
since then, the logic and rationale have not. They have as their root the 
need to eliminate anything which provided working class people any means for
independence from the labour market. It has always aimed to ensure that 
the fear of the sack remains a powerful tool in the bosses arsenal and to
ensure that their authority is not undermined. Ironically, therefore, its
underlying aims are to <b>decrease</b> the options available to working class
people, i.e. to reduce <b>our</b> flexibility within the labour market by 
limiting our options to finding a job fast or face dire poverty (or worse). 
</p><p>
Secondly, there is a unspoken paradox to this whole process. If we look at 
the stated, public, rationale behind "flexibility" we find a strange 
fact. While the labour market is to be made more "flexible" and in line 
with ideal of "perfect competition", on the capitalist side no attempt
is being made to bring <b>it</b> into line with that model. Let us not forget
that perfect competition (the theoretical condition in which all resources,
including labour, will be efficiently utilised) states that there must be a 
large number of buyers and sellers. This is the case on the sellers side of 
the "flexible" labour market, but this is <b>not</b> the case on the buyers 
(where, as indicated in <a href="secC4.html">section C.4</a>, oligopoly reigns). Most who favour 
labour market "flexibility" are also those most against the breaking up of 
big business and oligopolistic markets or are against attempts to stop 
mergers between dominant companies in and across markets. Yet the model 
requires <b>both</b> sides to be made up of numerous small firms without market
influence or power. So why expect making one side more "flexible" will 
have a positive effect on the whole? 
</p><p>
There is no logical reason for this to be the case and as we noted in 
<a href="secC1.html#secc14">section C.1.4</a>, neo-classical economics agrees -- in an economy with both
unions and big business, removing the former while retaining the latter
will <b>not</b> bring it closer to the ideal of perfect competition. With 
the resulting shift in power on the labour market things will get worse 
as income is distributed from labour to capital. Which is, we must stress,
precisely what <b>has</b> happened since the 1980s and the much lauded "reforms"
of the labour market. It is a bit like expecting peace to occur between 
two warring factions by disarming one side and arguing that because the 
number of guns have been halved peacefulness has doubled! Of course, the 
only "peace" that would result would be the peace of the graveyard or a 
conquered people -- subservience can pass for peace, if you do not look 
too close. In the end, calls for the "flexibility" of labour indicate the 
truism that, under capitalism, labour exists to meet the requirements of 
capital (or living labour exists to meet the needs of dead labour, a 
truly insane way to organise a society).
</p><p>
Then there is the key question of comparing reality with the rhetoric.
As economist Andrew Glyn points out, the neo-liberal orthodoxy on this
issue <i>"has been strenuously promoted despite weak evidence for the
magnitude of its benefits and in almost total neglect of its costs."</i> 
In fact, <i>"there is no evidence that the countries which carried out 
more reforms secured significant falls in unemployment."</i> This is perhaps 
unsurprising as <i>"there is plenty of support for such deregulation from 
business even without strong evidence that unemployment would be reduced."</i> 
As far as welfare goes, the relationship between unemployment and benefits 
is, if anything, in the 'wrong' direction (higher benefits do along with 
lower unemployment). Of course there are a host of other influences on 
unemployment but <i>"if benefits were very important we might expect <b>some</b> 
degree of correlation in the 'right' (positive) direction . . . such a 
lack of simple relation with unemployment applies to other likely suspects 
such as employment protection and union membership."</i> [<b>Capitalism Unleashed</b>, 
p. 48, p. 121, p. 48 and p. 47]
</p><p>
Nor is it mentioned that the history of labour market flexibility is somewhat 
at odds with the theory. It is useful to remember that American unemployment 
was far worse than Europe's during the 1950s, 60s and 70s. In fact, it did not 
get better than the European average until the second half of the 1980s. [David 
R. Howell, <i>"Introduction"</i>, pp. 3-34, <b>Fighting Unemployment</b>, David R. Howell 
(ed.), pp. 10-11] To summarise:
</p><p><blockquote>
<i>"it appears to be only relatively recently that the maintained greater
flexibility of US labour markets has apparently led to a superior performance
in terms of lower unemployment, despite the fact this flexibility is no new
phenomenon. Comparing, for example, the United States with the United 
Kingdom, in the 1960s the United States averaged 4.8 per cent, with the 
United Kingdom at 1.9 per cent; in the 1970s the United States rate rose 
to 6.1 per cent, with the United Kingdom rising to 4.3 per cent, and it was 
only in the 1980s that the ranking was reversed with the United States at 
7.2 per cent and the United Kingdom at 10 per cent. . . Notice that this 
reversal of rankings in the 1980s took place despite all the best efforts 
of Mrs Thatcher to create labour market flexibility. . . [I]f labour market 
flexibility is important in explaining the level of unemployment. . . why 
does the level of unemployment remain so persistently high in a country, 
Britain, where active measures have been taken to create flexibility?"</i> 
[Keith Cowling and Roger Sugden, <b>Beyond Capitalism</b>, p. 9]
</blockquote></p><p>
If we look at the fraction of the labour force without a job in America, we 
find that in 1969 it was 3.4% (7.3% including the underemployed) and <b>rose</b> 
to 6.1% in 1987 (16.8% including the underemployed). Using more recent data,
we find that, on average, the unemployment rate was 6.2% in 1990-97 compared
to 5.0% in the period 1950-65. In other words, labour market "flexibility" has
not reduced unemployment levels, in fact "flexible" labour markets have been
associated with higher levels of unemployment. Of course, we are comparing 
different time periods. A lot changed between
the 1960s and the 1990s and so comparing these periods cannot be the whole
answer. However, it does seem strange that the period with stronger unions,
higher minimum wages and more generous welfare state should be associated 
with <b>lower</b> unemployment than the subsequent "flexible" period. It is 
possible that the rise in flexibility and the increase in unemployment 
may be unrelated. If we look at different countries over the same time 
period we can see if "flexibility" actually reduces unemployment. As one 
British economist notes, this may not be the case:
</p><p><blockquote>
<i>"Open unemployment is, of course, lower in the US. But once we allow
for all forms of non-employment [such as underemployment, jobless
workers who are not officially registered as such and so on], there is
little difference between Europe and the US: between 1988 and 1994,
11 per cent of men aged 25-55 were not in work in France, compared
with 13 per cent in the UK, 14 per cent in the US and 15 per cent in
Germany."</i> [Richard Layard, quoted by John Gray, <b>False Dawn</b>, p. 113]
</blockquote></p><p>
Also when evaluating the unemployment records of a country, other factors
than the "official" rate given by the government must taken into account.
Firstly, different governments have different definitions of what counts 
as unemployment. As an example, the USA has a more restrictive definition 
of who is unemployed than Germany. For example, in 2005 Germany's unemployment 
rate was officially 11.2%. However, using the US definition it was only around 
9% (7% in what was formerly West Germany). The offical figure was higher as 
it included people, such as those involuntarily working part-time, as being 
unemployed who are counted as being employed in the USA. America, in the 
same year, had an unemployment rate of around 5%. So comparing unadjusted
unemployment figures will give a radically different picture of the problem
than using standardised ones. Sadly far too often business reporting in 
newspapers fail to do this.
</p><p>
In addition, all estimates of America's unemployment record must take
into account its incarceration rates. The prison population is 
not counted as part of the labour force and so is excluded when 
calculating unemployment figures. This is particularly significant as
those in prison are disproportionately from demographic groups with 
very high unemployment rates and so it is likely that a substantial 
portion of these people would be unemployed if they were not in jail. 
If America and the UK did not have the huge surge in prison population 
since the 1980s neo-liberal reforms, the unemployment rate in both 
countries would be significantly higher. In the late 1990s, for example,
more than a million extra people would be seeking work if the US penal 
policies resembled those of any other Western nation. [John Gray, 
<b>Op. Cit.</b>, p. 113] England and Wales, unsurprisingly, tops the prison 
league table for Western Europe. In 2005, 145 per 100,000 of their 
population was incarcerated. In comparison, France had a rate of 88 
while Germany had one of 97. This would, obviously, reduce the numbers 
of those seeking work on the labour market and, consequently, reduce the
unemployment statistics.
</p><p>
While the UK is praised for its "flexible" labour market in the 2000s, 
many forget the price which was paid to achieve it and even more fail
to realise that the figures hide a somewhat different reality. It is
therefore essential to remember Britain's actual economic performance 
during Thatcher's rule rather than the "economically correct" narrative 
we have inherited from the media and economic "experts." When Thatcher 
came to office in 1979 she did so promising to end the mass unemployment 
experienced under Labour (which had doubled between 1974 and 1979). 
Unemployment then tripled in her first term, rising to over 3 million 
in 1982 (for the first time since the 1930s, representing 1 in 8 people).
This was due in large part to the application of Monetarist dogma making 
the recession far worse than it had to be. Unemployment remained at 
record levels throughout the 1980s, only dropping to below its 1979
level in 1997 when New Labour took office. It gets worse. Faced with 
unemployment rising to well over 10%, Thatcher's regime did what any 
respectable government would -- it cooked the books. It changed how 
unemployment was recorded in order to artificially lower the official 
unemployment records. It also should be stressed that the UK unemployment
figures do not take into account the Thatcherite policy of shunting as 
many people as possible off the unemployment roles and onto sickness and incapacity 
benefits during the 1980s and 1990s (<i>"In some countries, like the UK and 
the Netherlands, many [of the unemployed] found their way onto sickness 
benefit . . . Across the UK, for example, there was a strong positive 
correlation between numbers on sickness benefits and the local unemployment 
rate."</i> [Glyn, <b>Op. Cit.</b>, p. 107]). Once these "hidden" people
are included the unemployment figures of Britain are similar to those 
countries, such as France and Germany, who are more honest in recording
who is and is not unemployed.
</p><p>
Eighteen years of high unemployment and a massive explosion in those on 
incapacity benefits is hardly an advert for the benefits of "flexible" labour 
market. However, a very deep recession, double-figure unemployment for 
most of the decade, defeats for key strikes and unions plus continued 
high unemployment for nearly two decades had an impact on the labour 
movement. It made people willing to put up with anything in order to 
remain in work. Hence Thatcher's "economic miracle" -- the working class 
finally knew its place in the social hierarchy.
</p><p>
Thus, if a politician is elected who is hailed by the right as a "new
Thatcher", i.e., seeking to "reform" the economy (which is "economically 
correct" speak for using the state to break working class militancy)
then there are some preconditions required before they force their
populations down the road to (private) serfdom. They will have to
triple unemployment in under three years and have such record levels 
last over a decade, provoke the deepest recession since the 1930s, 
oversee the destruction of the manufacturing sector and use the powers 
of the state to break the mass protests and strikes their policies will 
provoke. Whether they are successful depends on the willingness of 
working class people to stand up for their liberties and rights and so 
impose, from the streets, the changes that really needed  -- changes 
that politicians will not, indeed cannot, achieve.
</p><p>
Nor should it be forgotten that here are many European countries with around 
the same, or lower, official unemployment rates as the UK with much less 
"flexible" labour markets. Taking the period 1983 to 1995, we find that 
around 30 per cent of the population of OECD Europe lived in countries with 
average unemployment rates lower than the USA and around 70 per cent in 
countries with lower unemployment than Canada (whose wages are only 
slightly less flexible than the USA). Furthermore, the European countries
with the lowest unemployment rates were not noted for their labour market flexibility 
(Austria 3.7%, Norway 4.1%, Portugal 6.4%, Sweden 3.9% and Switzerland 1.7%). 
Britain, which probably had the most flexible labour market had an average 
unemployment rate higher than half of Europe. And the unemployment rate of 
Germany is heavily influenced by areas which were formally in East Germany. 
Looking at the former West German regions only, unemployment between 1983 
and 1995 was 6.3%, compared to 6.6% in the USA (and 9.8% in the UK). This 
did not change subsequently. There are many regulated European countries 
with lower unemployment than the USA (in 2002, 10 of 18 European countries 
had lower unemployment rates). Thus:
</p><p><blockquote>
<i>"Often overlooked in the 1990s in the rush to embrace market fundamentalism 
and to applaud the American model was the fact that several European countries 
with strong welfare states consistently reported unemployment rates well below 
that of the United States . . . At the same time, other European welfare sates, 
characterised by some of the lowest levels of wage inequality and the highest 
levels of social protection in the developed world, experienced substantial 
declines in unemployment over the 1990s, reaching levels that are now below 
that of the United States."</i> [David R. Howell, <i>"Conclusion"</i>, pp. 310-43, 
<b>Op. Cit.</b>, p. 310]
</blockquote></p><p>
As such, it is important to remember that <i>"the empirical basis"</i> of the 
neo-liberal OECD-IMF orthodoxy is <i>"limited."</i> [Howell, <b>Op. Cit.</b>, p. 337] 
In fact, the whole "Europe is in a state of decline" narrative which is
used to justify the imposition of neo-liberal reforms there is better 
understood as the corporate media's clever ploy to push Europe into the 
hands of the self-destructing neo-liberalism that is slowly taking its 
toll on Britain and America rather than a serious analysis of the real 
situation there.
</p><p>
Take, for example, the issue of high youth unemployment in many European 
countries which reached international awareness during the French anti-CPE 
protests in 2006. In fact, the percentage of prime-age workers (25-54) in 
employment is pretty similar in "regulated" France, Germany and Sweden as 
in "flexible" America and Britain (it is much higher for women in Sweden). 
However, there are significant differences in youth employment rates and 
this suggests where the apparent unemployment problem lies in Europe. This 
problem is due to the statistical method used to determine 
the unemployment figures. The standard measure of unemployment divides the 
number unemployed by the numbers unemployed plus employed. The flaw in 
this should be obvious. For example, assume that 90% of French youths 
are in education and of the remaining 10%, 5% are in work and 5% are 
unemployed. This last 10% are the "labour force" and so we would get a 
massive 50% unemployment rate but this is due to the low (5%) employment 
rate. Looking at the youth population as a whole, only 5% are actually 
unemployed. [David R. Howell, <i>"Introduction"</i>, pp. 3-34, <b>Op. Cit.</b>, 
pp. 13-14] By the standard measure, French males age 15-24 had an unemployment 
rate of 20.8% in 2007, as compared to 11.8% in America. Yet this 
difference is mainly because, in France (as in the rest of Europe), 
there are many more young males not in the labour force (more are in 
school and fewer work part time while studying). As those who are not 
in the labour market are not counted in the standard measure, this 
gives an inflated value for youth unemployment. A far better comparison 
would be to compare the number of unemployed divided by the population 
of those in the same age group. This results in the USA having a rate 
of 8.3% and France 8.6%. 
</p><p>
Another source of the "decline" of Europe is usually linked to lower 
GDP growth over the past few years compared to countries like Britain 
and the USA. Yet this perspective fails to take into account internal 
income distribution. Both the USA and UK are marked by large (and 
increasing) inequality and that GDP growth is just as unequally 
distributed. In America, for example, most of GDP growth since the 1980s
has been captured by the top 5% of the population while median wages 
have been (at best) flat. Ignoring the enrichment of the elite in the 
USA and UK would mean that GDP growth would be, at least for the bulk 
of the population, better in Europe. This means that while Europe may 
have grown more slowly, it benefits more than just the ruling class. 
Then there are such factors as poverty and social mobility. Rates
of poverty are much worse in the neo-liberal countries, while social 
mobility has fallen in the US and UK since the 1980s. There are less
poor people in Europe and they stay in poverty for shorter periods of
time compared to America and Britain.
</p><p>
Moreover, comparing Europe's income or GDP per person to the U.S. fails 
to take into account the fact that Europeans work far less than Americans
or British people. So while France may have lagged America in per capita
income in 2007 ($30,693 to $43,144), it cannot be said that working class 
people are automatically worse off as French workers have a significantly
shorter working week and substantially more holidays. Less hours at work 
and longer holidays may impact negatively on GDP but only an idiot would 
say that this means the economy is worse, never mind the quality of life.  
Economists, it should be remembered, cannot say that one person is worse 
off than another if she has less income due to working fewer hours. So 
GDP per capita may be 
higher in the US, but only because American workers work more hours and 
<b>not</b> because they are more productive. Like other Europeans, the French 
have decided to work less and enjoy it more. So it is important to remember 
that GDP is not synonymous with well-being and that inequality can produce
misleading per capita income comparisons.
</p><p>
A far better indicator of economic welfare is productivity. It is understandable 
that this is not used as a measure when comparing America to Europe as it is as 
high, or higher, in France and other Western European countries as it is in the 
US (and much higher than in the UK where low wages and long hours boost the 
figure). And it should be remembered that rising productivity in the US 
has not been reflecting in rising wages since 1980. The gains of 
productivity, in other words, have been accumulated by the boss class 
and not by the hard working American people (whose working week has 
steadily increased during that period). Moreover, France created more 
private sector jobs (+10% between 1996 and 2002, according to the OECD) 
than the UK (+6%) or the US (+5%). Ironically, given the praise it 
receives for being a neo-liberal model, the UK economy barely created 
any net employment in the private sector between 2002 and 2007 (unemployment 
<b>had</b> dropped, but that was due to increased state spending which led 
to a large rise in public sector jobs).
</p><p>
Then there is the fact that some European countries <b>have</b> listened to
the neo-liberal orthodoxy and reformed their markets but to little
success. So it should be noted that <i>"there has in fact already been a
very considerable liberalisation and reform in Europe,"</i> both in product 
and labour markets. In fact, during the 1990s Germany and Italy reformed 
their labour markets <i>"roughly ten times"</i> as much as the USA. The <i>"point 
is that reforms should have boosted productivity growth in Europe,"</i> but 
they did not. If regulation <i>"was the fundamental problem, some positive
impact on labour productivity growth should have come already from the 
very substantial deregulation already undertaken. Deregulation should 
have contributed to an acceleration in productivity growth in Europe 
whereas actually productivity growth declines. It is hard to see how 
regulation, which was declining, could be the source of Europe's slowdown."</i>
[Glyn, <b>Op. Cit.</b>, p. 144]
</p><p>
So, perhaps, "flexibility" is not the solution to unemployment some 
claim it is (after all, the lack of a welfare state in the 19th century 
did not stop mass unemployment nor long depressions occurring). Indeed, a 
strong case can be made (and has been by left-wing economists) that the 
higher open unemployment in Europe has a lot less to do with "rigid" 
structures and "pampered" citizens than it does with the fiscal and 
monetary austerity produced by the excessively tight monetary policies 
of the European Central Bank plus the requirements of the Maastricht 
Treaty and the <i>"Growth and Stability pact"</i> which aims to reduce demand 
expansion (i.e. wage rises) under the name of price stability (i.e.,
the usual mantra of fighting inflation by lowering wage increases). So,
<i>"[i]n the face of tight monetary policy imposed first by the [German] 
Bundesbank and then by the European Central Bank . . . it has been 
essential to keep wages moderate and budget deficits limited. With 
domestic demand severely constrained, many European countries
experiences particularly poor employment growth in the mid-1990s."</i>
[David R. Howell, <i>"Conclusion"</i>, <b>Op. Cit.</b>, p. 337] This has been 
essentially imposed by the EU bureaucrats onto the European population
and as these policies, like the EU itself, has the support of most of 
Europe's ruling class such an explanation is off the political agenda.
</p><p>
So if "flexibility" does not result in lower unemployment, just what 
is it good for? The net results of American labour market "flexibility" 
were summarised by head the US Federal Reserve Alan Greenspan in 1997. 
He was discussing the late 1990s boom (which was, in fact, the product 
of the dot.com bubble rather than the dawn of a new era so many claimed
at the time). He explained why unemployment managed to fall below the 
standard NAIRU rate without inflation increasing. In his words:
</p><p><blockquote>
<i>"Increases in hourly compensation . . . have continued to fall far
short of what they would have been had historical relationships
between compensation gains and the degree of labour market tightness
held . . . As I see it, heightened job insecurity explains a 
significant part of the restraint on compensation and the consequent 
muted price inflation . . . The continued reluctance of workers to 
leave their jobs to seek other employment as the labour market has 
tightened provides further evidence of such concern, as does the 
tendency toward longer labour union contracts . . . The low level 
of work stoppages of recent years also attests to concern about job 
security . . . The continued decline in the share of the private 
workforce in labour unions has likely made wages more responsive to 
market forces . . . Owing in part to the subdued behaviour of wages, 
profits and rates of return on capital have risen to high levels."</i> 
[quoted by Jim Stanford, <i>"Testing the Flexibility Paradigm: Canadian 
Labor Market Performance in International Context,"</i> pp. 119-155, 
<b>Fighting Unemployment</b>, David R. Howell (ed.), pp. 139-40]
</blockquote></p><p>
Under such circumstances, it is obvious why unemployment could drop
and inflation remain steady. Yet there is a massive contradiction in
Greenspan's account. As well as showing how keen the Federal Reserve 
investigates the state of the class struggle, ready to intervene when 
the workers may be winning, it also suggests that flexibility works
just one way:
</p><p><blockquote>
<i>"Some of the features highlighted by Greenspan reflect precisely
a <b>lack</b> of flexibility in the labour market: a lack of response
of compensation to tight labour markets, a reluctance of workers
to leave their jobs, and the prevalence of long-term contracts
that lock employment arrangements for six or more years at a time.
And so Greenspan's portrayal of the unique features of the US model
suggests that something more than flexibility is the key ingredient 
at work -- or at least that 'flexibility' is being interpreted 
once again from an unbalanced and one-sided perspective. It is,
rather, a high degree of labour market <b>discipline</b> that seems to
be the operative force. US workers remain insecure despite a 
relatively low unemployment rate, and hence compensation gains 
. . . were muted. This implies a consequent redistribution 
of income from labour to capital . . . Greenspan's story is more
about <b>fear</b> than it is about flexibility -- and hence this famous
testimony has come to be known as Greenspan's 'fear factor' 
hypothesis, in which he concisely described the importance of
labour market discipline for his conduct of monetary policy."</i>
[Jim Stanford, <b>Op. Cit.</b>, p. 140]
</blockquote></p><p>
So while this attack on the wages, working conditions and social welfare is 
conducted under the pre-Keynesian notion of wages being <i>"sticky"</i> downwards, 
the underlying desire is to impose a "flexibility" which ensures that wages 
are <i>"sticky"</i> <b>upwards.</b> This suggests a certain one-sidedness to the 
"flexibility" of modern labour markets: employers enjoy the ability to 
practice flexpoilation but the flexibility of workers to resist is reduced.
</p><p>
Rather than lack of "flexibility," the key factor in explaining high unemployment 
in Europe is the anti-inflationary policies of its central banks, which pursue 
high interest rates in order to "control" inflation (i.e. wages). In contrast,
America has more flexibility simply due to the state of the working class
there. With labour so effectively crushed in America, with so many workers 
feeling they cannot change things or buying into the individualistic premises 
of capitalism thanks to constant propaganda by business funded think-tanks, 
the US central bank can rely on job insecurity and ideology to keep workers
in their place in spite of relatively lower official unemployment. Meanwhile, 
as the rich get richer many working class people spend their time making 
ends meet and blaming everyone and everything but their ruling class for 
their situation (<i>"US families must work even more hours to achieve the 
standard of living their predecessors achieved 30 years ago."</i> [David R. 
Howell, <i>"Conclusion"</i>, <b>Op. Cit.</b>, p. 338]).
</p><p>
All this is unsurprising for anarchists as we recognise that "flexibility" 
just means weakening the bargaining power of labour in order to increase 
the power and profits of the rich (hence the expression <i><b>"flexploitation"</b></i>!).
Increased "flexibility" has been associated with <b>higher,</b> not lower 
unemployment. This, again, is unsurprising, as a "flexible" labour market 
basically means one in which workers are glad to have any job and face 
increased insecurity at work (actually, <i><b>"insecurity"</b></i> would be a more honest 
word to use to describe the ideal of a competitive labour market rather than 
<i>"flexibility"</i> but such honesty would let the cat out of the bag). In such an 
environment, workers' power is reduced meaning that capital gets a larger 
share of the national income than labour and workers are less inclined to 
stand up for their rights. This contributes to a fall in aggregate demand, so 
increasing unemployment. In addition, we should note that "flexibility" may 
have little effect on unemployment (although not on profits) as a reduction of 
labour's bargaining power may result in <b>more</b> rather than less unemployment. 
This is because firms can fire "excess" workers at will, increase the hours 
of those who remain and stagnating or falling wages reduces 
aggregate demand. Thus the paradox of increased "flexibility" resulting in 
higher unemployment is only a paradox in the neo-classical framework. From 
an anarchist perspective, it is just the way the system works as is the 
paradox of overwork and unemployment occurring at the same time.
</p><p>
So while "free market" economics protrays unions as a form of market failure, 
an interference with the natural workings of the market system and recommend 
that the state should eliminate them or ensure that they are basically
powerless to act, this simply does not reflect the real world. Any real
economy is marked by the economic power of big business (in itself, 
according to neo-classical economics, a distortion of the market). 
Unless workers organise then they are in a weak position and will be
even more exploited by their economic masters. Left-wing economist
Thomas I. Palley presents the correct analysis of working class 
organisation when he wrote:
<blockquote><i>
"The reality is that unions are a correction of market failure,
namely the massive imbalance of power that exists between individual
workers and corporate capital. The importance of labour market
bargaining power for the distribution of income, means that unions
are a fundamental prop for widespread prosperity. Weakening unions
does not create a 'natural' market: it just creates a market in 
which business has the power to dominate labour.
</p><p>
"The notion of perfect natural markets is built on the assumption
that market participants have no power. In reality, the process
of labour exchange is characterised not only by the presence of
power, but also by gross inequality of power. An individual worker
is at a great disadvantage in dealing with large corporations that
have access to massive pools of capital and can organise in a
fashion that renders every individual dispensible . . . Unions
help rectify the imbalance of power in labour markets, and they
therefore correct market failure rather than causing it."</i> 
{<b>Op. Cit.</b>, pp. 36-7]
</blockquote></p><p>
The welfare state also increases the bargaining power of workers against
their firms and limits the ability of firms to replace striking workers 
with scabs. Given this, it is understandable why bosses hate unions and
any state aid which undermines their economic power. Thus the <i>"hallmark"</i> 
of the neo-liberal age <i>"is an economic environment that pits citizen 
against citizen for the benefit of those who own and manage"</i> a country.
[<b>Op. Cit</b>, p. 203]
</p><p>
And we must add that whenever governments have attempted to make the 
labour market <i>"fully competitive"</i> it has either been the product of
dictatorship (e.g. Chile under Pinochet) or occurred at the same time 
as increased centralisation of state power and increased powers for the 
police and employers (e.g. Britain under Thatcher, Reagan in the USA). 
This is the agenda which is proscribed for Western Europe. In 2006, 
when successful street protests stopped a proposed labour market 
reform in France (the CPE), one American journalist, Elaine Sciolino, 
complained that <i>"the government seems to fear its people; the people 
seem to fear change."</i> [<b>New York Times</b>, March 17 2006] Such are 
the contradictions of neo-liberalism. While proclaiming the need 
to reduce state intervention, it requires increased state power to 
impose its agenda. It needs to make people fear their government and 
fear for their jobs. Once that has been achieved, then people who 
accept "change" (i.e. the decisions of their economic, social and 
political bosses) without question. That the French people do not want 
a British or American style labour market, full of low-wage toilers 
who serve at the boss's pleasure should not come as a surprise. Nor 
should the notion that elected officials in a supposed democracy are 
meant to reflect the feelings of the sovereign people be considered 
as unusual or irrational. 
</p><p>
The anti-democratic nature of capitalist "flexiblity" applies across the world.
Latin American Presidents trying to introduce neo-liberalism into their
countries have had to follow suit and <i>"ride roughshod over democratic
institutions, using the tradition Latin American technique of
governing by decree in order to bypass congressional opposition. . .
Civil rights have also taken a battering. In Bolivia, the government
attempted to defuse union opposition . . . by declaring a state of
siege and imprisoning 143 strike leaders. . . In Colombia, the
government used anti-terrorist legislation in 1993 to try 15 trade
union leaders opposing the privatisation of the state telecommunications
company. In the most extreme example, Peru's Alberto Fujimori dealt
with a troublesome Congress by simply dissolving it . . . and seizing
emergency powers."</i> [Duncan Green, <b>The Silent Revolution</b>, p. 157]
</p><p>
This is unsurprising. People, when left alone, will create communities, 
organise together to collectively pursue their own happiness, protect 
their communities and environment. In other words, they will form groups,
associations and unions to control and influence the decisions that affect 
them. In order to create a "fully competitive" labour market, individuals 
must be atomised and unions, communities and associations weakened, if not 
destroyed, in order to fully privatise life. State power must be used 
to disempower the mass of the population, restrict their liberty, control
popular organisations and social protest and so ensure that the free market 
can function without opposition to the human suffering, misery and pain
it would cause. People, to use Rousseau's evil term, <i>"must be forced 
to be free."</i> And, unfortunately for neo-liberalism, the countries that tried
to reform their labour market still suffered from high unemployment, plus
increased social inequality and poverty and where still subject to the 
booms and slumps of the business cycle.
</p><p>
Of course, bosses and the elite are hardly going to present their
desire for higher profits and more power in those terms. Hence the
need to appear concerned about the fate of the unemployed. As such,
it is significant, of course, that right-wing economists only seem to
become concerned over unemployment when trade unions are organising or
politicians are thinking of introducing or raising the minimum wage.
Then they will talk about how these will raise unemployment and harm
workers, particularly those from ethnic minorities. Given that bosses 
always oppose such policies, we must conclude that they are, in fact, 
seeking a situation where there is full employment and finding willing 
workers is hard to do. This seems, to say the least, an unlikely 
situation. If bosses were convinced that, for example, raising the 
minimum wage would increase unemployment rather than their wages bill 
they would be supporting it wholeheartedly as it would allow them to 
pressurise their workers into labouring longer and harder to remain in 
employment. Suffice to say, bosses are in no hurry to see their pool
of wage slaves drained and so their opposition to trade unions and 
minimum wages are the product of need for profits rather than some
concern for the unemployed.
</p><p>
This applies to family issues as well. In its support for "free markets" 
you can get a taste of the schizophrenic 
nature of the conservative right's approach to family values. On the one 
hand, they complain that families do not spend enough time together as 
they are under financial pressure and this results both parents going out 
to work and working longer hours. 
Families will also suffer because businesses do not have to offer paid 
maternity leave, paid time off, flexitime, paid holidays, or other things 
that benefit them. However, the right cannot bring themselves to advocate 
unions and strike action by workers (or state intervention) to achieve 
this. Ironically, their support for "free market" capitalism and 
"individualism" undermines their support for "family values." Ultimately,
that is because profits will always come before parents.
</p><p>
All this is unsurprising as, ultimately, the only real solution to unemployment 
and overwork is to end wage labour and the liberation of humanity from the needs 
of capital. Anarchists argue that an economy should exist to serve people rather 
than people existing to serve the economy as under capitalism. This explains why 
capitalism has always been marked by a focus on "what the economy wants" or 
"what is best for the economy" as having a capitalist economy always results in 
profit being placed over people. Thus we have the paradoxical situation, as 
under neo-liberalism, where an economy is doing well while the bulk of the 
population are not. 
</p><p>
Finally, we must clarify the anarchist position on state welfare (we support 
working class organisations, although we are critical of unions with bureaucratic 
and top-down structures). As far as state welfare goes, anarchists do not place
it high on the list of things we are struggling against (once the welfare 
state for the rich has been abolished, then, perhaps, we will reconsider that).
As we will discuss in <a href="secD1.html#secd15">section D.1.5</a>, anarchists
are well aware that the current neo-liberal rhetoric of "minimising" the state
is self-serving and hides an attack on the living standards of working class
people. As such, we do not join in such attacks regardless of how critical we
may be of aspects of the welfare state for we seek genuine reform 
from below by those who use it rather than "reform" from above by politicians
and bureaucrats in the interests of state and capital. We also seek to promote
alternative social institutions which, unlike the welfare state, are under
working class control and so cannot be cut by decree from above. For further
discussion, see sections <a href="secJ5.html#secj515">J.5.15</a> and
<a href="secJ5.html#secj516"> J.5.16</a>.</a>

<h2><a name="secc94">C.9.4 Is unemployment voluntary?</a></h2>

<p>
Here we point out another aspect of the free market capitalist "blame the workers" 
argument, of which the diatribes against unions and workers' rights highlighted 
above is only a part. This is the assumption that unemployment is not involuntary 
but is freely chosen by workers. As Nicholas Kaldor put it, for "free market" 
economists involuntary employment <i>"cannot exist because it is excluded by the 
assumptions."</i> [<b>Further Essays on Applied Economics</b>, p. x] Many 
neo-classical economists claim that unemployed workers calculate that their 
time is better spent searching for more highly paid employment (or living on 
welfare than working) and so desire to be jobless. That this argument is taken 
seriously says a lot about the state of modern capitalist economic theory, but 
as it is popular in many right-wing circles, we should discuss it. 
</p><p>
David Schweickart notes, these kinds of arguments ignore <i>"two well-established
facts: First, when unemployment rises, it is layoffs, not [voluntary] quits, 
that are rising. Second, unemployed workers normally accept their first job 
offer. Neither of these facts fits well with the hypothesis that most 
unemployment is a free choice of leisure."</i> [<b>Against Capitalism</b>, p. 108]
When a company fires a number of its workers, it can hardly be said that the 
sacked workers have calculated that their time is better spent looking for a 
new job. They have no option. Of course, there are numerous jobs advertised 
in the media. Does this not prove that capitalism always provides jobs for 
those who want them? Hardly, as the number of jobs advertised must have some 
correspondence to the number of unemployed and the required skills and those
available. If 100 jobs are advertised in an areas reporting 1,000 unemployed, 
it can scarcely be claimed that capitalism tends to full employment. This 
hardly gives much support to the right-wing claim that unemployment is 
"voluntary" and gives an obvious answer to right-wing economist Robert 
Lucas's quest <i>"to explain why people allocate time to . . . unemployment, 
we need to know why they prefer it to all other activities."</i> [quoted by 
Schweickart, <b>Op. Cit.</b>, p. 108] A puzzle indeed! Perhaps this unworldly 
perspective explains why there has been no real effort to verify the 
assertion that unemployment is "voluntary leisure."
</p><p>
Somewhat ironically, given the desire for many on the right to deny the
possibility of involuntary unemployment this perspective became increasingly
influential at precisely the same time as the various theories of the 
so-called "natural rate" of unemployment did (see <a href="secC9.html">section C.9</a>). Thus, at
the same time as unemployment was proclaimed as being a "voluntary" choice
economics was also implicitly arguing that this was nonsense, that unemployment 
<b>is</b> an essential disciplinary tool within capitalism to keep workers in their 
place (sorry, to fight inflation). 
</p><p>
In addition, it is worthwhile to note that the right-wing assumption 
that higher unemployment benefits and a healthy welfare state promote 
unemployment is not supported by the evidence. As a moderate member 
of the British Conservative Party notes, the <i>"OECD studied seventeen
industrial countries and found no connect between a country's unemployment
rate and the level of its social-security payments."</i> [<b>Dancing with Dogma</b>,
p. 118] Moreover, the economists David Blanchflower and Andrew Oswald
<i>"Wage Curve"</i> for many different countries is approximately the same for
each of the fifteen countries they looked at. This also suggests that labour
market unemployment is independent of social-security conditions as
their "wage curve" can be considered as a measure of wage flexibility. 
Both of these facts suggest that unemployment is involuntary in nature 
and cutting social-security will <b>not</b> affect unemployment.
</p><p>
Another factor in considering the nature of unemployment is the effect of
decades of "reform" of the welfare state conducted in both the USA and UK 
since 1980. During the 1960s the welfare state was far more generous than 
it was in the 1990s and unemployment was lower. If unemployment was 
"voluntary" and due to social-security being high, we would expect a 
decrease in unemployment as welfare was cut (this was, after all, the 
rationale for cutting it in the first place). In fact, the reverse occurred, 
with unemployment rising as the welfare state was cut. Lower social-security 
payments did not lead to lower unemployment, quite the reverse in fact.
</p><p>
Faced with these facts, some may conclude that as unemployment is independent
of social security payments then the welfare state can be cut. However, this 
is not the case as the size of the welfare state does affect the poverty rates 
and how long people remain in poverty. In the USA, the poverty rate was 11.7% 
in 1979 and rose to 13% in 1988, and continued to rise to 15.1% in 1993. The 
net effect of cutting the welfare state was to help <b>increase</b> poverty. 
Similarly, in the UK during the same period, to quote the ex-Thatcherite 
John Gray, there <i>"was the growth of an underclass. The percentage of British 
(non-pensioner) households that are wholly workless -- that is, none of whose 
members is active in the productive economy -- increased from 6.5 per cent in 
1975 to 16.4 per cent in 1985 and 19.1 per cent in 1994. . . Between 1992 
and 1997 there was a 15 per cent increase in unemployed lone parents. . . 
This dramatic growth of an underclass occurred as a direct consequence of 
neo-liberal welfare reforms, particularly as they affected housing."</i> 
[<b>False Dawn</b>, p. 30] This is the opposite of the predictions of right-wing 
theories and rhetoric. 
</p><p>
As Gray correctly argues, the <i>"message of the American [and other] New 
Right has always been that poverty and the under class are products of the 
disincentive effects of welfare, not the free market."</i> He goes on to note 
that it <i>"has never squared with the experience of the countries of 
continental Europe where levels of welfare provision are far more 
comprehensive than those of the United States have long co-existed with 
the absence of anything resembling an American-style underclass. It does 
not touch at virtually any point the experience of other Anglo-Saxon 
countries."</i> He points to the example of New Zealand where <i>"the theories 
of the American New Right achieved a rare and curious feat -- self-refutation 
by their practical application. Contrary to the New Right's claims, the 
abolition of nearly all universal social services and the stratification 
of income groups for the purpose of targeting welfare benefits selectively 
created a neo-liberal poverty trap."</i> [<b>Op. Cit.</b>, p. 42] 
</p><p>
So while the level of unemployment benefits and the welfare state may 
have little impact on the level of unemployment (which is to be expected 
if the nature of unemployment is essentially involuntary), it <b>does</b> have 
an effect on the nature, length and persistency of poverty. Cutting
the welfare state increases poverty and the time spent in poverty 
(and by cutting redistribution, it also increases inequality).
</p><p>
If we look at the relative size of a nation's social security transfers 
as a percentage of Gross Domestic Product and its relative poverty rate 
we find a correlation. Those nations with a high level of spending have 
lower rates of poverty. In addition, there is a correlation between the
spending level and the number of persistent poor. Those nations with
high spending levels have more of their citizens escape poverty. For
example, Sweden has a single-year poverty rate of 3% and a poverty
escape rate of 45% and Germany has figures of 8% and 24% (and
a persistent poverty rate of 2%). In contrast, the USA has figures
of 20% and 15% (and a persistent poverty rate of 42%). 
</p><p>
Given that a strong welfare state acts as a kind of floor under the 
wage and working conditions of labour, it is easy to see why 
capitalists and the supporters of "free market" capitalism seek
to undermine it. By undermining the welfare state, by making
labour "flexible," profits and power can be protected from working
people standing up for their rights and interests. Little wonder the
claimed benefits of "flexibility" have proved to be so elusive for the
vast majority while inequality has exploded. The welfare state, in
other words, reduces the attempts of the capitalist system to commodify
labour and increases the options available to working class people. While
it did not reduce the need to get a job, the welfare state did undermine 
dependence on any particular employee and so increased workers' 
independence and power. It is no coincidence that the attacks on unions 
and the welfare state was and is framed in the rhetoric of protecting the 
<i>"right of management to manage"</i> and of driving people back into wage 
slavery. In other words, an attempt to increase the commodification of 
labour by making work so insecure that workers will not stand up for 
their rights.
</p><p>
Unemployment has tremendous social costs, with the unemployed facing financial 
insecurity and the possibility of indebtedness and poverty. Many studies have 
found that unemployment results in family distribution, ill health (both 
physical and mental), suicide, drug addition, homelessness, malnutrition, 
racial tensions and a host of other, negative, impacts. Given all this, 
given the dire impact of joblessness, it strains belief that people would 
<b>choose</b> to put themselves through it. The human costs of unemployment 
are well documented. There is a stable
correlation between rates of unemployment and the rates of mental-hospital
admissions. There is a connection between unemployment and juvenile and
young-adult crime. The effects on an individual's self-respect and the
wider implications for their community and society are massive. As David 
Schweickart concludes the <i>"costs of unemployment, whether measured in 
terms of the cold cash of lost production and lost taxes or in the hotter 
units of alienation, violence, and despair, are likely to be large under 
Laissez Faire."</i> [<b>Op. Cit.</b>, p. 109] 
</p><p>
Of course, it could be argued that the unemployed should look for work and
leave their families, home towns, and communities in order to find it.
However, this argument merely states that people should change their whole
lives as required by "market forces" (and the wishes -- <i>"animal spirits,"</i>
to use Keynes' term -- of those who own capital). In other words, it just
acknowledges that capitalism results in people losing their ability to
plan ahead and organise their lives (and that, in addition, it can deprive
them of their sense of identity, dignity and self-respect as well),
portraying this as somehow a requirement of life (or even, in some cases,
noble).
</p><p>
It seems that capitalism is logically committed to viciously contravening
the very values upon which it claims it be built, namely the respect for
the innate worth and separateness of individuals. This is hardly surprising, 
as capitalism is based on reducing individuals to the level of another 
commodity (called "labour"). To requote Karl Polanyi: 
</p><p><blockquote>
<i>"In human terms such a postulate [of a labour market] implied for the 
worker extreme instability of earnings, utter absence of professional 
standards, abject readiness to be shoved and pushed about indiscriminately, 
complete dependence on the whims of the market. [Ludwig Von] Mises justly 
argued that if workers 'did not act as trade unionists, but reduced their 
demands and changed their locations and occupations according to the labour
market, they would eventually find work.' This sums up the position under
a system based on the postulate of the commodity character of labour. It
is not for the commodity to decide where it should be offered for sale, to
what purpose it should be used, at what price it should be allowed to
change hands, and in what manner it should be consumed or destroyed."</i> 
[<b>The Great Transformation</b>, p. 176]
</blockquote></p><p>
However, people are <b>not</b> commodities but living, thinking, feeling
individuals. The "labour market" is more a social institution than an
economic one and people and work more than mere commodities. If we reject
the neo-liberals' assumptions for the nonsense they are, their case fails.
Capitalism, ultimately, cannot provide full employment simply because
labour is <b>not</b> a commodity (and as we discussed in <a href="secC7.html">section C.7</a>, this
revolt against commodification is a key part of understanding the business
cycle and so unemployment). 
</p>

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