Would Laissez-Faire Capitalism Reduce Unemployment

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Republished with permission.
Source: The Anarchist Library


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:

“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 ...

“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.” [Beyond Hypocrisy, p. 94]

Unsurprisingly, Herman defines this “natural” rate as “the rate of unemployment preferred by the propertied classes.” [Op. Cit., p. 156] The theory behind this is usually called the “Non-Accelerating Inflation Rate of Unemployment” (or NAIRU). Like many of the worse aspects of modern economics, the concept was raised by 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).

Friedman raised his notion of a “Natural Rate of Unemployment” 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 “natural” rate associated with the real wage an ideal economy would produce (this is “the level that would be ground out by the Walrasian system of general equilibrium equations,” 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 real 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 “natural” 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 more wages to make up for it, which in turn will cause prices to rise (although Friedman downplayed that this was because bosses were increasing their prices to maintain profit levels). This will lead to rising inflation and rising unemployment. Thus the expectations of individuals are the key.

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 “Bastard Keynesianism” 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.

Guess which option the capitalist state went for? As Friedman made clear when he introduced the concept there was really nothing “natural” about the natural rate theory as it was determined by state policy:

“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.” [“The Role of Monetary Policy,” pp. 1–17, American Economic Review, Vol. 68, No. 1, p. 9]

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.

This can be seen when the other (independent) inventor of the “natural” rate theory won the so-called Nobel prize in 2006. Unsurprisingly, the Economist magazine was cock-a-hoop. [“A natural choice: Edmund Phelps earns the economics profession’s highest accolade”, Oct 12th 2006] The reasons why became clear. According to the magazine, “Phelps won his laurels in part for kicking the feet from under his intellectual forerunners” by presenting a (neo-classical) explanation for the breakdown of the so-called “Phillips curve.” This presented a statistical trade-off between inflation and unemployment (“unemployment was low in Britain when wage inflation was high, and high when inflation was low”). The problem was that economists “were quick — too quick — to conclude that policymakers therefore faced a grand, macroeconomic trade-off” in which, due to “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.” Phelps innovation was to argue that “[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.” The similarities with Friedman’s idea are obvious. This meant that the “stable trade-off depicted by the Phillips curve is thus a dangerous mirage” which broke down in the 1970s with the rise of stagflation.

Phelps argued that there was a “natural” rate of unemployment, where “workers’ expectations are fulfilled, prices turn out as anticipated, and they no longer sell their labour under false pretences.” This “equilibrium does not, sadly, imply full employment” and so capitalism required “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.” The religious metaphor does seem appropriate as most economists (and The Economist) 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: “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.e., one which would ensure a profit).

It is this theory which has governed state policy since the 1980s. In other words, government’s around the world have been trying to “cow workers” in order to ensure their obedience (“loyalty to the company”). Unsurprisingly, attempts to lower the “natural rate” 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 “cow” 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!

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 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:

“If [capital’s] 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.” [Capital, Vol. 1, pp. 793–4]

That the Economist 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 (“forcible means”) 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. The use of Phelps’ theory by capital in the class war is equally obvious — as was so blatantly stated by The Economist and the head of the American Federal Reserve during this period:

“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.” [Doug Henwood, After the New Economy, pp. 206–7]

Which is quite ironic, given that Greenspan’s role in the economy was, precisely, to “repeal” the “law of supply and demand.” As one left-wing economist puts it (in a chapter correctly entitled “The Workers Are Getting Uppity: Call In the Fed!”), the Federal Reverse (like all Central Banks since the 1980s) “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.” However,“[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 don’t get hired or get laid off when the economy slows or goes into a recession.” [The Conservative Nanny State, p. 31] Thus the state pushes up unemployment rates to slow wage growth, and thereby relieve inflationary pressure. The reason should be obvious:

“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.

“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.

“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.” [Op. Cit., pp. 32–3]

This has not happened by accident. Lobbying by business, as another left-wing economist stresses, “is directed toward increasing their economic power” and business “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.” Unsurprisingly, “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.” In effect, the Federal Reserve “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” and so is regulating the economy “in a manner favourable to business.” [Thomas I. Palley, Plenty of Nothing, p. 77, p. 111 and pp. 112–3] That this is done under the name of fighting inflation should not fool us:

“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.” [Op. Cit., p. 110]

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 “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.” [The Irrelevance of Conventional Economics, p. 47]

Which explains, in part, why the 1960s and 1970s were marked by mass social protest against authority rather than von Hayek’s “Road to Serfdom.” 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 (“the other institutional factors”) are reduced and diverted because working class people are too busy trying to make ends meet. Thus the state intervenes in the economy to stop full employment developing to combat inflation and instability on behalf of the capitalist class.

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 never practices “laissez-faire” with regard to the working class). 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.

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.

Since natural rate theory cannot be tested, a sensible thing would be to examine its assumptions for plausibility and reasonableness. However, Milton Friedman’s 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.

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 actual 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, “as the real unemployment rate moves, the apparent NAIRU moves in its shadow” and its “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.” He stresses, economists have held “to a concept in the face of twenty years of unexplained variation, predictive failure, and failure of the profession to coalesce on procedural issues.” [Created Unequal, 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.

So, supporters of “free market” capitalism do have a point, “actually existing capitalism” has created high levels of unemployment. What is 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?

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. 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, “[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.” [quoted by Malcolm C. Sawyer, The Economics of Michal Kalecki, pp. 115–6]

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.

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. 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 “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.” Under conditions of full-employment “employers are in danger of losing the upper hand” and hiring new workers“suddenly becomes much more difficult. They are harder to find, cost more, and are less experienced.” These considerations “help explain why full employment has been rare.” Thus competition in the labour market is “typically skewed in favour of employers: it is a buyers market. And in a buyer’s market, it is the sellers who compromise.” 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 “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.” Hence the support for the NAIRU to ensure that “forced idleness of some helps perpetuate the forced overwork of others.” [The Overworked American, p. 71, p. 75, p. 129, pp. 75–76 and p. 76]

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:

“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, with time, 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.” [System of Economical Contradictions, pp. 200–1]

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, “Political economy — that is, proprietary despotism — can never be in the wrong: it must be the proletariat.” [Op. Cit. p. 187]) So if unemployment exists, then its because real wages are too high, not because capitalists need unemployment to discipline labour. 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!

(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, “[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.” [Further Essays on Applied Economics, pp. 177–8])

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 not 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 “performance of the world economy since capital was liberalised has been worse than when it was tightly controlled” and that “[t]hus far, [the] actual performance [of liberalised capitalism] has not lived up to the propaganda.” [Larry Elliot and Dan Atkinson, The Age of Insecurity, p. 274 and p. 223] In fact, as Palley notes, “wage and income growth that would have been deemed totally unsatisfactory a decade ago are now embraced as outstanding economic performance.” [Op. Cit., p. 202]

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, “The Nation-State and the Market”, pp. 37–80, Society and Nature, Vol. 2, No. 2, p. 61] If laissez-faire did lead to full employment, these figures would, surely, be reversed.

As discussed above, full employment cannot 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 next section.



Freedom – Equality – Solidarity


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