The role of unemployment in capitalism

Unemployment in Britain currently stands at roughly two and a half million. This is not far from the three million mark of the Thatcher era, which became a watermark for social discontent. With public sector job losses – and the private sector fallout – expected to claim another million people, it is unsurprising that people fear a return to those dark days.

As such, it seems a rather apt time to look at unemployment and the role it plays within a capitalist society.

Like most areas of economics, unemployment is a subject which has been entrenched in dogma by the advocates (including the less sincere ones) of the capitalist “free” market. Thus, in looking at its real function, we first need to sweep away the cobwebs of laissez-faire mythology.

Joblessness and the fables of the market

The most prevalent idea on the economic right, in this area, is one presented to be on Twitter during a conversation with @verybritishdude. Namely, that “trying to protect jobs results in fewer jobs (more unemployment).

Or, as Ludwig von Mises put it;

The height of wage rates at which all those eager to get jobs can be employed depends on the marginal productivity of labor. The more capital — other things being equal — is invested, the higher wages climb on the free labor market, i.e., on the labor market not manipulated by the government and the unions. At these market wage rates all those eager to employ workers can hire as many as they want. At these market wage rates all those who want to be employed can get a job. There prevails on a free labor market a tendency toward full employment. In fact, the policy of letting the free market determine the height of wage rates is the only reasonable and successful full-employment policy. If wage rates, either by union pressure and compulsion or by government decree, are raised above this height, lasting unemployment of a part of the potential labor force develops.

Firstly the notion – prevalent generally in capitalist theories – the combination of workers is a “manipulation” of markets whilst employers are but neutral arbiters who invest capital needs to be challenged. Going right back to Adam Smith, it is a truth that “whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.” Indeed, they “are disposed to combine … in order to lower the wages of labour.”

Thus, the idea that the problem is “union pressure and compulsion” is an absurdity. And, even if it wasn’t, how would we challenge the equivalent movements by the bosses without either the collective strength of the workers or “government decree?” We cannot – and indeed the free marketeers would not want to, as what they really advocate is private feudalism.

As to the ability of a capitalist labour market to reduce unemployment if freed from the constraints of job security and able to hire and fire at will? Well, it’s true, but only on the most superficial level.

Looking at employment statistics in Britain today, we get a glimpse of life under unrestrained capitalism. After a recession which took hundreds of thousands of jobs, the Office for National Statistics (ONS) tells us (PDF) that unemployment fell by 9,000. However, evidence suggests that full-time employment lost has been replaced with part-time jobs and self-employment. Average pay in the public sector rose by 2.1% on a year earlier, with the public sector equivalent being 1.9% – which against a Retail Price Index (RPI) up 4.5% from last year is a real terms cut of 2.4% and 2.6% respectively.

The point on wages, in particular, is backed up by Hugh Stretton in Economics: A New Introduction;

In defiance of market theory, the demand for labour tends strongly to vary with its price, not inversely to it. Wages are high when there is full employment. Wages – especially for the least-skilled and lowest paid – are lowest when there is least employment. The causes chiefly run from the employment to the wages, rather than the other way. Unemployment weakens the bargaining power, worsens the job security and working conditions, and lowers the pay of those still in jobs.

The lower wages do not induce employers to create more jobs … most business firms have no reason to take on more hands if wages decline. Only empty warehouses, or the prospect of more sales can get them to do that, and these conditions rarely coincide with falling employment and wages. The causes tend to work the other way: unemployment lowers wages, and the lower wages do not restore the lost employment.

To spell the point out, what we’re looking at under Mises’ vision is a steady casualisation of work, which may increase the profits of the bosses immeasurably but only makes life more miserable for everybody else.

And that, of course, is the endgame. If Mises, or any of his co-thinkers, were serious about a free market, they would not have failed to address the question of the economic power the employer holds by wielding capital, and acknowledging that worker organisation is simply the counter-point to that. Instead, he sticks with the tag line that anything which challenges the dominance of the employing class is “manipulation,” and even agression. Because, when the worker has the upper hand in the labour market, it’s terrifying.

As Dean Baker wrote in The Conservative Nanny State (PDF);

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[eral Reserve Board, a government agency] 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.

All of which might seem to be an argument in favour of the free market, except for one practical point – the “pressure and compulsion” by the bosses which Mises conveniently overlooked;

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.

Thus we come to the purpose that unemployment serves in a capitalist economy.

The reserve army of labour

It is revealing that controlling inflation is the justification for measures which maintain unemployment at a level favourable to employers over workers. Milton Friedman, a co-thinker of Mises, developed the theory of the “Non-Accelerating Inflation Rate of Employment” (NAIRU) to argue exactly such a point.

Or, as Edward Herman scathingly put it in Beyond Hypocrisy;

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.

The flaw in Friedman’s reasoning, however, is that his “natural” rate is not natural at all. In fact, it alters based on exactly the same “manuplating” factors that Mises decried. As he put it himself in an article for The American Economic Review (PDF), it is not “immutable and unchangeable” because “many of the market characteristics that determine its level are man-made and policy-made.” Thus, “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.”

In other words, the natural rate of unemployment will be driven up (by state policy, as Baker details and Friedman concedes) in response to the strength of the working class – to avoid precisely the problem of employers having to compete for workers by attending to their needs and treating them with dignity.

And so, in practice, the theory of the “free market” transforms into the mechanism to control class conflict for the benefit of the ruling class.

This is not a new concept. In his unpublished manuscript, Wages, Karl Marx made the same point;

Big industry constantly requires a reserve army of unemployed workers for times of overproduction. The main purpose of the bourgeois in relation to the worker is, of course, to have the commodity labour as cheaply as possible, which is only possible when the supply of this commodity is as large as possible in relation to the demand for it, i.e., when the overpopulation is the greatest.

Overpopulation is therefore in the interest of the bourgeoisie, and it gives the workers good advice which it knows to be impossible to carry out.

Since capital only increases when it employs workers, the increase of capital involves an increase of the proletariat, and, as we have seen, according to the nature of the relation of capital and labour, the increase of the proletariat must proceed relatively even faster.

The above theory, however, which is also expressed as a law of nature, that population grows faster than the means of subsistence, is the more welcome to the bourgeois as it silences his conscience, makes hard-heartedness into a moral duty and the consequences of society into the consequences of nature, and finally gives him the opportunity to watch the destruction of the proletariat by starvation as calmly as other natural event without bestirring himself, and, on the other hand, to regard the misery of the proletariat as its own fault and to punish it.

The logical conclusion of which point, is that the capitalist system under which we all dwell not only generates permanent unemployment by its nature but actively demands it.

That said, this is not a conclusion which will be accepted by capitalists, of any stripe. In Pierre-Joseph Proudhon’s words, “political economy – that is, proprietary despotism – can never be in the wrong: it must be the proletariat.”

8 Responses to “The role of unemployment in capitalism”
  1. Julia says:

    This is a great analysis of unemployment under capitalism. It’s always upsetting to hear ideologues for the system blame all the system’s problems on some alien infiltrating the system as opposed to the system itself. Kind of reminds me of economists’ favorite saying: “It’s not my model that’s incorrect; it’s reality.”

    Cheers from the USA.

  2. W. Edwin Hinds IV says:

    Considering an actual free-market would require an absences of government, these “capitlists” wouldn’t recognize actual freedom if it bit them on the ass. Without tax victim subsidized roads to compliment their “just in time” logistics, police to enforce their absentee ownership, and the military to ensure the existence of controllable markets, these fools would be adrift in a sea of anarchy. Oh dear!

    Mix the state with anything, and you got yourself some reprehensible bullshit.

    Good read.

  3. Reblogged this on PoliticalSift and commented:
    A MUST read!!

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