Unemployment is a Government Policy Choice

A common misconception is that if everybody was prepared to take awful enough jobs, unemployment would be eradicated automatically, irrespective of the government’s fiscal stance. Embedded in this argument is a misconception that unemployment, overall, can be eliminated through lower wages or deteriorating working conditions. In a capitalist monetary economy, this is not true. To think otherwise is to succumb to a fallacy of composition.

Orthodox neoclassical economists clung to this fallacy – many uninformed ones still do – but it has been shown to be unfounded in the Capital Debates as well as by later work by neoclassical general equilibrium theorists themselves. No other economic school of thought (other than the Austrians) ever suggested such a nonsensical notion. It was a fiction dreamed up by neoclassical economists to serve an ideological purpose (it implies everything will be hunky dory as long as markets are left to their own devices).

The reason no other economists ever supposed such a ridiculous relationship between wages and aggregate employment is that, even intuitively, there is no reason to think it would hold. A reduction in the price of anything always means two things simultaneously. It means: (i) somebody has to pay less for something they want; and (ii) somebody else is receiving less for providing that thing. At the aggregate level, it means: (i) all of us, taken as a whole, are paying less for the stuff we want; and (ii) all of us, taken as a whole, are receiving less for providing the same stuff. Why would anyone think this has any systematic effect on how much stuff will be produced in the economy? It doesn’t, as has been demonstrated formally in the Capital Debates and later work.

Unemployment is a government policy choice. Redistributing existing income from workers to capitalists by lowering wages has no systematic effect on aggregate employment. Why would it, necessarily? The lower wages mean workers are cheaper for firms to hire, but demand for consumption goods may be reduced. So is there more or less impetus for firms to undertake production of consumption goods? Is there more or less impetus for firms to undertake production of investment goods that will increase the capacity to produce consumption goods in the future? The answer to these questions is indeterminate. A mere redistribution of income (from wages to profits or vice versa) has no systematic effect on output and employment.

The bottom line is there are not enough jobs. One person may be able to get an existing job ahead of somebody else by offering to work for less pay or under worse conditions, but this does not alter the aggregate level of employment and unemployment in a predictable way. It may cause employment to increase. Then again, it might cause it to decrease. For instance, redistributing income to capitalists may merely raise the intended level of net private saving and reduce the level of planned private expenditures. If so, there will be a multiplied contraction in output and income, defeating the private-sector attempt to increase its net saving unless – and to the extent that – the government allows its budget to move sufficiently into deficit to satisfy private-sector net saving desires.

Unemployment is the result of the non-government sector wishing to net save more than is consistent with full employment, given its current level of net financial assets. The government has the capacity to eliminate unemployment, because it can alter the net financial asset position of the non-government sector. The non-government sector cannot do this on its own. It can redistribute existing net financial assets among its members, hoping that in some way – by sheer fluke – this will reduce private-sector net saving desires and boost demand, production and employment, but it can’t of its own accord increase its net financial assets.

By injecting sufficient additional high-powered money into the system (through deficit expenditure), the government is in a position to increase private net financial assets and render the non-government sector’s net saving behavior consistent with full employment. That is the straightforward solution to unemployment, and we can have it the moment the general community puts its collective foot down and insists on it.

This is a modified version of Unemployment is a Macro Problem originally published at Heteconomist


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