What's the real cause of unemployment
Professors Vedder and Gallaway--in Out of Work--provide a comprehensive examination of unemployment in the last century of American economic history, using a persuasive mix of Austrian theory (on money and business cycle), empirical methods, and narrative history. What they show is that government can produce all the unemployment it desires by intervening in the ability of the market to adjust wage rates according to prevailing economic conditions.
Why is this important? Unemployment is used to justify every bigger government programs—-from national industrial policies to high military expenditures to a return to New Deal-type "make work" projects. Increases in unemployment is a predictable source of public disgruntlement with economic affairs, and a precipitating trigger of ever more government involvement.
Amassing a huge amount of data, and examining the full range of existing literature and research, the authors target Keynesian fiscal demand-management and show that such policies as minimum wages, labor controls, unemployment compensation, and welfare have played significant roles in generating joblessness. They further show that the policies of both President Hoover and President Roosevelt prolonged and exacerbated unemployment during the Great Depression.
"Not only has the state aggravated the problem of unemployment for Americans, it has done so differentially. The biggest losers from state intervention have been the very people that advocates of activism have claimed need the most help, namely nonwhites, women, and unskilled and inexperienced youths. The strong, skilled, and comparatively affluent have managed to adjust to state intervention, although not without cost. The burden of the welfare state has fallen inordinately on those it was supposed to benefit the most."
This 400-page book is a seminal contribution to Austrian literature that didn't received nearly enough attention when it was published in 1993--and deserves far more attention today, not only from Austrians and people interested in free-market thought but from anyone who is prepared to completely rethink the subjects of unemployment and business cycles.
The quality and rigor of the research makes it suitable for graduate study or individual research. But it is also well written enough to make a great read for anyone interested in the relationship between economics and human well being.
Table of Contents:
Chapter 1: The Unemployment Century
Chapter 2: Unemployment in Theory
Chapter 3: The Neoclasssical/Austrian Approach
Chapter 4: The Gilded Age
Chapter 5: From New Era to New Deal
Chapter 6: The Banking Crisis and the Labor Market
Chapter 7: The New Deal
Chapter 8: The Impossible Dream Come True
Chapter 9: The Gentle Time
Chapter 10: The Camelot Years
Chapter 11: "Pride Goeth Before A Fall"
Chapter 12: The Winds of Change
Chapter 13: The Natural Rate of Employment
Chapter 14: Who Bears the Burden of Unemployment?
Chapter 15: Unemployment and the State
Chapter 16: Afterword
This softcover book is 336 pages.
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Comments (1)
P.M.Lawrence
In my view, today's unemployment in developed countries arises from an externality, the interaction of social security and the taxes that fund it. If we had enough resources for people to work for themselves, simply abolishing social security would cure unemployment - after a painful transition. People would move into subsistence living and price themselves down into part time work as they preferred.
But since we don't have those accessible subsistence resources, and haven't for decades if not centuries, marginalised people created vagrancy costs - the costs of having a needy underclass around, a breeding ground for crime and so on. This was why social security was brought in by the likes of Bismark, not for the benefit of the poor but to buy of the burden they presented to an economy and society that had cornered all the resources. (The same thing would arise if we ever pressed against Malthusian limits, but that is not our present situation.)
Anyway, either vagrancy costs or social security costs create an externality, since there is no way that market clearing wages can provide sufficient to live on, not in a fully developed cash economy in which you need cash for basic subsistence.
But there are cures. The fastest acting one, for countries like Australia or Canada with a GST (VAT) is one worked out by Professor Kim Swales of the University of Strathclyde. It is a Pigovian policy that not only improves employment but also improves GDP - we are operating sub-optimally at present. It works by providing Pigovian tax breaks to GST according to the number of people directly employed by the tax paying entity.
I also did a fair bit of work on this, coming at it from the point of view of Game Theory. I cover this at my publications page, which also links to Professor Swales's work; a good place to start is http://member.netlink.com.au/~peterl/publicns.html#AFRLET2.
The only catch I can see at the moment is that the work so far does not cover at the edges, where one tax/social security regime interfaces with another. This is a material aspect, with globalisation. It appears likely that these present a real cost, more so for countries with better social security systems trading with ones that don't have them or replace them with surviving patches of subsistence living. But anyway, the Swales approach is no different in its immediate costs than what we have now.
Long term, this approach is equivalent to either a Guaranteed Inadequate Income or to Negative Income Tax - being inadequate forces people to remain in work to earn a top up wage while allowing it to fall far enough below a living wage that everyone can be priced into work. (Early NIT trials failed because they didn't recognise the spillover effects and were set too high; wage levels remained in equilibrium with the needs of people in the same areas who were not in the trials, while there was insufficient incentive on those in the trials to seek top up wages.)
A better long term approach would be to have those outside funds arriving from privately held non-government resources; those could even be foreign investments, offsetting the problem "at the edges" when outsourcing takes resources outside the local society and economy. This would be a modern analogue of distributism, the cure for "the problem with capitalism is that there are not enough capitalists", as G.K.Chesterton put it. However, as I discuss at my site, the Swales approach has far fewer transitional problems.
All in all, I would recommend starting with the Swales approach, then transitioning via the other methods to a final neo-distributist system with people owning top up investments. This could be achieved by implementing the GST tax breaks with anonymous transferrable certificates given to actual and potential employees; these would become monetised and could form the basis of a Guaranteed Inadequate Income. That could then be handed off from the state to non-state private funds, eventually being broken down to family level.
This, of course, presumes that economic activity as a whole is kept up; if not, that would emulate hitting Malthusian limits, since there would not be enough to go around anyway. With a tax base like this with no direct personal impact, though, it becomes possible to stimulate activity by a high tax/high spend combination, and the eventual neo-distributism would maintain an equilibrium through Real Balance Effects from people's individual investment bases.
Published: May 6, 2006 4:20 AM