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<html>
<HEAD>

<TITLE>C.9 Would laissez-faire capitalism reduce unemployment, as supporters of  "free market" capitalism claim?</TITLE>
</HEAD>
<BODY>
<H1>C.9 Would laissez-faire capitalism reduce unemployment, as supporters of  "free market" capitalism claim?</H1>
<p>
Firstly, we have to state that "actually existing capitalism" in the West 
actually manages unemployment to ensure high profit rates for the capitalist
class (see <a href="secC8.html#secc83">section C.8.3</a>) - market discipline for the working class, state
protection for the ruling class, in other words. As Edward Herman points 
out:
<p><blockquote><i>
"Conservative economists have even developed a concept of a 'natural rate
of unemployment' [which Herman defines as "the rate of unemployment
preferred by the propertied classes"] . . . [which] is defined as the
minimum 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. . .
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>
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 labour market. Managing
depression (as indicated by high unemployment levels) allows greater profits
to be extracted from workers as management hierarchy is more secure. 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 real 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. 
<p>
Of course, it can be argued that as this "natural" rate is both invisible 
and can move, historical evidence is meaningless -- you can prove anything
with an invisible, mobile value. But if this is the case then any attempts to 
maintain a "natural" rate is also meaningless as the only way to discover it 
is to watch inflation levels (and 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!). 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). 
Given that most mainstream economists subscribe to this fallacy, it just 
shows how the "science" accommodates itself to the needs of the powerful.
<p>
So, supporters of "free market" capitalism do have a point, "actually
existing capitalism" has created high levels of unemployment. The 
question now arises, will a "purer" capitalism create full employment?
<p>
First, we should point out that some supporters of "free market" capitalism 
claim that the market has no tendency to equilibrium at all, which means full 
employment is impossible, but few explicitly state this obvious conclusion
of their own theories. However, most claim that full employment can occur. 
Anarchists agree, full employment can occur in "free market" capitalism, 
but not for ever (nor for long periods). As the Polish economist Michal 
Kalecki pointed out in regards to pre-Keynesian capitalism, the <i>"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 George R. Feiwel, <b>The Intellectual Capital 
of Michal Kalecki</b>, p. 130]
<p>
Cycles of short periods of full employment and longer periods of rising and
falling unemployment are actually a more likely outcome of "free market" 
capitalism than continued full employment. As we argued in sections 
<a href="secB4.html#secb44">B.4.4</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, full employment under capitalism is unlikely to last 
long (nor would full employment booms fill a major part of the full
business cycle). Moreover, the notion that capitalism naturally stays at 
equilibrium or that unemployment is temporary adjustments is false,
even given the logic of neo-classical economics. As Proudhon argued:
<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>
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 the neo-classical theory 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>
(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 
left-wing 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] Or, if we take the standard
economics expression "in the long run," we may point out that unless
a time is actually given it will always remain unclear as to how much
evidence must be gathered before one can accept or reject the theory.)
<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 May, 1979. 18 years
of labour market reform had not reduced unemployment. 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, p. 223] 
<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. If laissez-faire did lead to 
full employment, these figures would be reversed. As discussed above 
(in <a href="secC7.html#secC71">section C.7.1</a>), ]
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.
<p>
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>
<a name="secc91"><h2>C.9.1 Would cutting wages reduce unemployment?</h2>
<p>
The "free market" capitalist (or neo-classical or neo-liberal or "Austrian") argument 
is that unemployment is caused by workers real wage being higher than the market 
clearing level. Workers, it is claimed, are more interested in money wages than 
real wages (which is the amount of goods they can by with their money wages). 
This leads them to resist wage cuts even when prices are falling, leading to a 
rise in their real wages. In other words, they are pricing themselves out of 
work without realising it (the validity of the claim that unemployment is 
caused by high wages is discussed in the 
<a href="secC9.html#secc92">next section</a>). 
<p>
From this analysis comes the argument that if workers were allowed to compete 
'freely' among themselves for jobs, real wages would decrease. This would reduce 
production costs and this drop would produce an expansion in production which 
provides jobs for the unemployed. Hence unemployment would fall. State intervention 
(e.g. unemployment benefit, social welfare programmes, legal rights to organise, 
minimum wage laws, etc.) and labour union activity according to this theory is 
the cause of unemployment, as such intervention and activity forces wages above 
their market level, thus increasing production costs and "forcing" employers to 
"let people go." 
<p>
Therefore, according to neo-classical economic theory, 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 costs theoretically leads to an expansion in production, producing 
jobs for the "temporarily" unemployed and moving the economy toward 
a full-employment equilibrium.
<p>
So, in neo-classical theory, unemployment can be reduced by reducing the
real wages of workers currently employed. However, this argument is flawed.
While cutting wages may make sense for one firm, it would not have this 
effect throughout the economy as a whole (as is required to reduce 
unemployment in a country as a whole). This is because, in all versions of
neo-classical theory, it is assumed that prices depend (at least in part)
on wages. If all workers accepted a cut in wages, all prices would fall
and there would be little reduction in the buying power of wages. In other
words, the fall in money wages would reduce prices and leave real wages 
nearly unchanged and unemployment would continue.
<p>
Moreover, if prices remained unchanged or only fell by a small amount (i.e. 
if wealth was redistributed from workers to their employers), then the effect 
of this cut in real wages would not increase employment, it would reduce it.
For people's consumption depends on their income, and if their incomes
have fallen, in real terms, so will their consumption. As Proudhon pointed
out in 1846, <i>"if the producer earns less, he will buy less. . . [which will]
engender. . . over-production and destitution"</i> because <i>"though the 
workmen cost you [the capitalist] something, they are your customers: 
what will you do with your products, when driven away by you, they 
shall consume no longer? Thus, machinery, after crushing, is not show 
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, p. 190]
<p>
However, it can be argued, 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. As David
Schweickart points out, when wages decline, so does workers' purchasing power; 
and if this is not offset by an increase in spending elsewhere, total demand will 
decline [<b>Against Capitalism</b>, pp. 106-107]. In other words, contrary to
neo-classical economics, market equilibrium might be established at any level
of unemployment. 
<p>
But in "free market" capitalist theory, such a possibility of market
equilibrium with unemployment is impossible. Neo-liberals reject the 
claim that cutting real wages would merely decrease the demand for 
consumer goods without automatically increasing investment sufficiently to
compensate for this. Neo-classicists argue that investment will increase
to make up for the decline in working class consumption.
<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.  
However, this theory and its assumptions can be questioned.
<p>
The first assumption states that it is always possible for a company to
take on new workers. But increasing production requires more than just
labour. 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. 
<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. 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 while last.
<p>
This feeds directly into the last assumption, namely that the produced
goods will be sold. 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. Hence the 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. However, 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). 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.
<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, 
adding to unemployment and further lowering demand. This can set off a 
vicious downward spiral of falling demand and plummeting production leading 
to depression (the political results of such a process would be dangerous
to the continued survival of capitalism). This downward spiral is described
by Kropotkin (nearly 40 years before Keynes made the same point in his
<b>General Theory of Employment, Interest and Money</b>):
<p><blockquote><i>
"Profits being the basis of capitalist industry, low profits explain all
ulterior consequences.
<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. . . [L]ow
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>
Thus, a cut in wages will 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, as 
maintained by neo-classical economics, below).  Given that, as we argued
in <a href="secC7.html#secc71">section C.7.1</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 "stagflation"
-- 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). 
Working people paying for capitalism's contradictions, in other words. 
<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).
<p>
The "Pigou" (or "real balance") effect is another neo-classical argument 
that aims to prove that (in the end) capitalism will pass from slump to
boom. 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>
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>
So, as Schweickart, Kalecki and others correctly observe, such 
considerations undercut the neo-classical 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. 
This should be obvious, as wages (and benefits) may be costs for 
some firms but they are revenue for even more. 
<p>
<a name="secc92"><h2>C.9.2 Is unemployment caused by wages being too high?</h2>
<p>
As we noted in the <a href="secC9.html#secc92">last section</a>, 
most capitalist economic theories argue
that unemployment is caused by wages being too high. Any economics
student will tell you that high wages will reduce the quantity of labour
demanded, in other words unemployment is caused by wages being 
too high -- a simple case of "supply and demand." From this theory
we would expect that areas with high wages will also be areas with 
high levels of unemployment. Unfortunately for the theory, this does
not seem to be the case.
<p>
Empirical evidence does not support the argument the neo-classical
argument that unemployment is caused by real wages being too high. 
The phenomenon that real wages increase during the upward swing 
of the business cycle (as unemployment falls) and fall during 
recessions (when unemployment increases) renders the neo-classical 
interpretation that real wages govern employment difficult to maintain
(real wages are <i><b>"pro-cyclical,"</i></b> to use economic terminology).  But this
is not the only evidence against the neo-classical theory of unemployment.
Will Hutton, the UK based neo-Keynesian economist, summaries research 
that suggests high wages do not cause unemployment (as claimed 
by neo-classical economists):
<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. . . [They found] precisely 
the opposite relationship [than that predicted in neo-classical theory]. 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>
Blanchflower and Oswald state their conclusions from their research 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 neo-classical 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>
Looking at less extensive evidence we find that, taking the example of the 
USA, if minimum wages and unions cause unemployment, why did the 
South-eastern states (with a <b>lower</b> minimum wage and weaker unions) 
have a <b>higher</b> unemployment rate than North-western states during the 
1960's and 1970's? Or why, when the (relative) minimum wage declined 
under Reagan and Bush, did chronic unemployment accompany it? 
[Allan Engler, <b>The Apostles of Greed</b>, p. 107]
<p>
Or the Low Pay Network 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 neo-classical 
argument) have been rises in employment in these sectors as pay falls.
The opposite happened. This research shows clearly that the falls in pay 
associated with Wages Council abolition have not created more employment. 
Indeed, employment growth was more buoyant prior to abolition than 
subsequently. So whilst Wages Council abolition has not resulted in more 
employment, the erosion of pay rates caused by abolition has resulted in 
more families having to endure poverty pay.
<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 neo-classical argument has 
flaws with it.)
<p>
While this evidence may come as a shock to neo-classical economics,
it fits well with 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. And, far more 
importantly, this evidence suggests that the neo-classical claim that 
unemployment is caused by unions, "too high" wage rates, 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 and the neo-classical "blame the 
workers" approach fails to understand the nature and dynamic of the system.
<p>
So, perhaps, high real wages for workers increases aggregate demand and
reduces unemployment from the level it would be if the wage rate was cut. 
Indeed, this seems to supported by research into the "wage curve" of
numerous countries. This means that a "free market" capitalism, marked 
by a fully competitive labour market, no welfare programmes, unemployment 
benefits, higher inequality 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 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.
<p>
In other words, a fully competitive labour market would increase the instability 
of the market, as welfare programmes and union activity maintain aggregate 
income for working people, who spend most of their income, so stabilising 
aggregate demand -- 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>, in <b>Paying
for Inequality</b>, Andrew Glyn and David Miliband (Eds.) pp. 212-213]).
<p>
<a name="secc93"><h2>C.9.3 Are "flexible" labour markets the answer to unemployment?</h2>
<p>
The usual 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. However, we should note that the current arguments for greater 
"flexibility" within the labour market as the means of reducing
unemployment seem somewhat phoney. The argument is that by 
increasing flexibility, making the labour market more "perfect", the 
so-called "natural" rate of unemployment will drop (this is the rate at
which inflation is said to start accelerating upwards) and so unemployment 
can fall without triggering an accelerating inflation rate. Of course, that 
the real source of inflation is capitalists trying to maintain their profit
levels is not mentioned (after all, profits, unlike wages, are to be
maximised for the greater good). Nor is it mentioned that the history 
of labour market flexibility is somewhat at odds with the theory:
<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>
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. 
<p>
Of course we are comparing different time periods. A lot has changed between
the 1960s and the 1990s and so comparing these periods cannot be the whole
answer. After all, the rise in flexibility and the increase in unemployment may
be unrelated. However, 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><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 in <b>False Dawn</b>,
p. 113]
</blockquote><p>
In addition, all estimates of America's unemployment record must take
into account America's incarceration rates. Over a million people more
would be seeking work if the US penal policies resembled those of
any other Western nation. [John Gray, <b>Op. Cit.</b>, p. 113] 
<p>
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 relative wages are only slightly
less flexible than the USA). Furthermore, the European countries
with the lowest unemployment rates were not noted for their wage 
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).
<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 unemployment nor long depressions occurring). Indeed, 
a case could be made 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 required by 
European unification as expressed in the Maastricht Treaty. As 
this Treaty has the support of most of  Europe's ruling class such 
an explanation is off the political agenda.
<p>
Moreover, if we look at the 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 breaking up of big business and 
oligopolistic markets or the stopping of mergers between dominant 
companies in and across markets. The model requires <b>both</b> sides to 
be "flexible," so why expect making one side more "flexible" will have a 
positive effect on the whole? There is no logical reason for this to be the 
case. Indeed, with the resulting shift in power on the labour market things 
may get worse as income is distributed from labour to capital. 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>
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"</i></b>!).
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, "insecurity" would be a more honest word to
use to describe the ideal of a competitive labour market rather than "flexibility"
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 (the paradox of overwork and unemployment is just an expression 
of  how capitalism works) 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.
<p>
And we must add that whenever governments have attempted to make 
the labour market "fully competitive" it has either been the product of
dictatorship (e.g. Chile under Pinochet) or occurred at the same time
increased centralisation of state power and increased powers for the police 
and employers (e.g. Britain under Thatcher, Reagan in the USA). 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>
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 
associations and unions to 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, "must be forced 
to be free." 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>
Ultimately, the only real solution to unemployment is to end wage labour
and liberate humanity from the needs of capital.
<p>
<a name="secc94"><h2>C.9.4 Is unemployment voluntary?</h2>
<p>
Here we point out another aspect of the neo-classical "blame the workers" 
argument, of which the diatribes against unions and workers' rights 
highlighted above is only a part. This is the argument that unemployment is 
not involuntary but is freely chosen by workers. As the left-wing economist
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] The 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>
Firstly, when unemployment rises it is because of layoffs, not voluntary
quittings, are increasing. 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. Secondly,
unemployed workers normally accept their first job offer. Neither of these
facts fits well with the hypothesis that most unemployment is "voluntary."
<p>
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. If 100 jobs are advertised in an areas reporting
1,000 unemployed, it can scarcely be claimed  that capitalism tends to
full employment.
<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
"Wage Curve" 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>
Another factor in considering the nature of unemployment is the effect of
nearly 20 years of "reform" of the welfare state conducted in both the USA 
and UK. 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>
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. As  John 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>
[<b>Op. Cit.</b>, p. 42] He goes on to notes that: 
<p><blockquote><i>
"In New Zealand, 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>Ibid.</b>]
</blockquote><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 would also increase inequality).
<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%) [Greg J.
Duncan of the University of Michigan Institute for Social Research,
1994]. 
<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 "right of management to manage" 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>
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:
<p><blockquote><i>
 "The costs of unemployment, whether measured in terms of the cold cash 
of lost production and lost taxes or in the hotter unions of alienation, 
violence, and despair, are likely to be large under Laissez Faire."</i> 
[<b>Against Capitalism</b>, p. 109] 
</blockquote><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>
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><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>
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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