THE SCIENTIFIC ANSWER
TO THE NUMBER ONE ECONOMIC PROBLEM
North Pacific Publishers
P.O. Box 13255
Portland, Oregon 97213
Copyright © 1976 by Dewey B. Larson. All rights reserved.
Library of Congress Catalog Card No. 75-44558
Printed in the United States of America by
Metropolitan Printing Co., Portland, Oregon
Once again employment has become a matter of general concern, and once again the only answer to the problem that the “authorities” are able to come up with is to try to buy it. So again we embark on costly and inefficient programs of inflation and public employment, no different from those that have been so unsatisfactory in the past.
There is a rather general impression at the moment that the answers to all problems can be bought; that money is the universal remedy for social and economic ills. We are told repeatedly that a nation which can afford to spend billions on going to the moon and on foreign wars can certainly afford to spend the necessary billions to solve our domestic problems, and we are constantly exhorted to start the spending immediately and forthwith. But notwithstanding this very common opinion;. the power of money is limited. It cannot always win a war, as we are now painfully aware; it cannot change deep-seated patterns of human behavior, as we are slowly beginning to realize; and it cannot buy good performance of our productive system. After all, the purpose of that system is to produce income; it is not something on which we should be spending our income.
Economic problems seldom have completely satisfactory solutions: In the final analysis, such a problem usually boils down to a matter of making some hard decisions: determining which of our objectives must be scaled down or abandoned because our resources are limited. But employment should be the outstanding exception. It is not another claimant competing for a share of the national product; it is an essential feature of the activity from which we derive that product. The right kind of measures to increase employment should add to the national income rather than consume part of it. Thus the mere existence of the problem, the fact that there is such a thing as involuntary unemployment, is prima facie evidence that there is something wrong with current thinking on the subject. Obviously, the view of the situation that we get from present-day economic theory, the view that leads to the self contradictory conclusion that we must buy a productive activity, is seriously in error. A new approach to the problem is clearly needed.
This volume is a report of the results of an investigation based on recognizing that unemployment is a factual matter, not a matter of opinion or judgment, and can therefore appropriately be attacked by the methods and procedures of the physical sciences, the most powerful and effective means of dealing with factual issues that the human race has ever been able to devise. Following the standard scientific practice, the first step in this investigation was to determine the true cause of unemployment, which strangely enough, had not previously been identified. Once this cause is known, it becomes obvious; not only that there are many practical means by which the present high unemployment rate can be quickly and easily reduced, but, more significantly, that it is not necessary to tolerate any unemployment at all. The results of the investigation confirm what should be evident from any careful consideration of the nature of the problem; that is, expenditure of income is not the proper way to correct deficiencies in an income-producing activity. These results show that if the right kind of measures are not put into effect, an efficient economy with full productive employment is impossible, regardless of how much is spent to achieve it, while if actions of the proper nature are taken, that result can be attained, not only without cost to the taxpayers; but with a substantial decrease in the burden that the taxpayers are now carrying.
Modern society, as it exists in North America, in Europe, and in a few other scattered locations around the world, faces many serious problems—plenty to keep us occupied for a long time to come. The causes of these problems are numerous and varied, and they are still subject to much controversy and difference of opinion, but when we get down to the basic elements of each problem we almost invariably find that the issue of employment is one of the controlling factors; often it is the crucial factor around which all else revolves.
The upsurge of crime, particularly in our larger cities, which constitutes one of the major threats against our present-day civilization, might seem offhand to be a matter of personal behavior, not an economic problem, but all serious students of the situation agree that idleness and lack of regular income are the fundamental factors that are responsible for the expansion of big city crime to its present alarming proportions. The mounting cost of public welfare payments can likewise be traced back to the unemployment situation more than to any other cause. Of course, many of the welfare recipients are classified as unemployable, but a substantial proportion of these persons are not unemployable in fact, but merely unemployable by law: an absurd outcome of an inadequate understanding of economic fundamentals on the part of the lawmakers and those to whom they look for economic advice. Additionally, many of those that are now genuinely unemployable have dropped into this category only because of the deteriorating effect of enforced idleness earlier in their lives. Furthermore, much of the welfare assistance goes to the support of fragments of broken homes, and there is no question but that a large number of these homes would still be intact if employment were more readily obtainable, particularly by the sub-standard worker. Unfortunately, the type of individual who habitually finds it difficult to hold a job is also likely to find it hard to carry the responsibility of supporting a family, even under the best of conditions, and where one problem is super-imposed on the other, the common denouement so familiar to the welfare worker is not surprising.
The racial issue that now looms so ominously on our horizon similarly reduces in large measure to a question of employment. As matters now stand, the unemployment rate is substantially higher for the minority groups than for the population as a whole, but as long as the economic organization permits an appreciable amount of general unemployment to exist, the minorities cannot improve their relative position except at the expense of the majority. Obviously such a result will not be easily attained, but unless employment opportunities are broadened for the minorities, so that they can rise to an economic status that will give them the means to make themselves more employable,. they will continue to be less acceptable to employers, and hence more subject to unemployment even if there is no unjustified discrimination. This is a good example of the traditional “vicious circle” that so often makes its appearance in economic affairs. Unless the general employment situation is improved, more and better jobs will not be forthcoming for the minority groups until they are better educated, better disciplined, and better trained, but they cannot achieve this improvement in education, discipline, and training unless they have the benefit of the income from more employment.
Industrial strife is generally correlated with wages and working conditions, but those who have participated in labor negotiations know that the spectre of unemployment looms larger to the average workman than any other labor issue and, so far as the rank and file are concerned, job security is the paramount goal. This accounts for the tenacity with which the unions defend their “jurisdiction” and for the prevalence of so-called “rules” that prescribe how many men the employer must assign to certain tasks, and, in many instances,. limit his use of labor-saving devices. The bitterness of the union resistance to the elimination of “feather-bedding” practices is somewhat bewildering to the ordinary citizen, who finds it difficult to see any justification for requiring an employer to carry unnecessary men on the payroll to perform useless work, or to stand by without doing any work at all, but the worker who sees what is, or may be, a threat to his livelihood cannot be expected to view the situation objectively.
On the international scene we find a similar preoccupation with employment. The struggle for a “favorable balance of trade”—an excess of exports over imports—makes no sense at all if it is viewed in its true status as a trade issue. Unless the excess of exports is ultimately counterbalanced by an equivalent excess of imports, it is simply donated to the foreigners in the long run. The respective efforts to achieve a “favorable” balance of trade therefore amount to nothing more than a competition to see which nation can give away the greatest amount. But the whole picture is confused by the injection of the employment issue into a situation that ought to be wholly independent of employment. Under existing conditions an excess of imports, even though it is, in itself, definitely beneficial to the nation as a whole, has a deflationary effect on the economy and leads to business recession and unemployment. Thus what ought to be a harmonious and mutually profitable exchange of products between nations becomes a dangerous bone of contention, generating suspicion and ill-will, and not infrequently leading to armed conflict.
The general situation with respect to unemployment is summed up in this manner by Professor George L. Bach:
Involuntary unemployment means waste of productive capacity. It means less clothing, fewer refrigerators, highways, and factories than we could otherwise have. It means human misery, resentment, shame, decay of skills, degrading deprivation for the unemployed and their families. It means a lower average standard of living for the nation, and slower economic growth for our children and grandchildren.l
One of the most distressing features of the situation is that, by and large, the attempts that are made to solve social and economic problems of the kind that have been mentioned, without first taking care of the underlying deficiencies in employment have a distinct tendency to aggravate the troubles rather than correct them. The damaging effects of the minimum wage laws in creating a new class of “unemployables” by legal action are widely recognized, even though this recognition has had little effect when matched against political expediency. Additionally, these minimum wage laws join with legal restraints on employment of minors, and with extra-legal restrictions imposed by the labor unions, to force thousands of young people into that idleness which is responsible for much, if not most, of the juvenile crime and delinquency that is of such immediate concern at the moment.
The enormous expansion of public welfare and unemployment payments in recent years represents an almost heroic effort to reach objectives that are just as commendable as those visualized by the supporters of the minimum wage legislation, but here again the inability of the community to provide employment for those who should be working completely alters the actual result of these programs and produces something quite different from the original objectives. The welfare assistance is supposed to go to those who cannot work, while unemployment insurance is intended to take care of those who are temporarily unable to find work which they are seeking, but under present conditions it is practically impossible to distinguish individuals in these categories from those who do not want to work, and the result is that both the roster of unemployment insurance beneficiaries and the welfare rolls fill up with individuals of the latter class. A particularly unfortunate fact is that idleness easily becomes habitual, and we are rapidly developing a class of society to whom welfare is a way of life.
The strenuous efforts that are now being made to equalize employment between the white and the non-white workers are likely to produce some equally undesirable results unless some significant advance is made toward a solution of the general employment problem. As a matter of abstract justice, it is clear that the burden of unemployment should rest no heavier on one group than on another, but under the conditions that now exist an increase in employment of non-whites can be attained only at the expense of the white workers, and those individuals who are displaced from their jobs, or who are denied jobs that they would otherwise have obtained, are altogether unlikely to be sympathetic with abstract justice. The resistance to such action will be all the more emphatic in view of the awkward fact that the accomplishment of the objective of an equitable distribution of the available jobs between the different groups will require replacing workers who, on the average, are better qualified, by workers who, on the average, are less qualified.
From the standpoint of the public at large, the detrimental effects of “featherbedding”, opposition to the use of labor-saving machinery, and other similar measures that the production workers employ in an effort to avoid loss of jobs are quite easily visualized, but some of these measures have an equally harmful effect on the economic status of the workers themselves, due to characteristics of the job-creating process that are not generally recognized. These factors that defeat the workers’ efforts to preserve employment, and aggravate the problems they are intended to alleviate, will be discussed in the pages that follow, together with similar items in the area of international trade, where, again, the problem of unemployment stands squarely in the way of many worthwhile objectives.
The logical procedure in all of these fields is to take care of the employment situation first, and then to attack the specific issue without the complications introduced by employment considerations. When we have work readily available for everyone, both the conditions that foster crime and the incentive toward crime will be minimized. When we are able to say to those who can work that they must work instead of living on welfare money or drawing unemployment compensation, we will be well on our way to curing what is now a serious disease of the social order. When we can provide work for all of our citizens there will no longer be any question of employment discrimination between one group and another. When there are plenty of new jobs available there will no longer be any sound reason for resisting the abolition of unnecessary jobs. When we no longer have to fear that we are “importing unemployment” when we import goods, our international trade relations will become much more harmonious.
Today no one denies that unemployment presents us with a serious challenge; nor is there any disposition to gainsay the conclusion that we are justified in making strenuous efforts to solve this most pressing problem, but it is questionable whether there is a general recognition of how serious the problem actually is; how widely the deadening influence of unemployment permeates into nearly all phases of our social and economic life. Such a recognition could hardly fail to carry with it a conviction that the nation is not taking the problem seriously enough; that we need to give it a priority greatly exceeding anything that it now enjoys.
Of course, much of what appears to be indifference to the situation on the part of the general public is actually the result of a rather general realization that the correct answer to the problem has not yet appeared. There are those who are ready to rush into any kind of ill-advised measures just to be doing something, but the average citizen takes a dim view of this sort of thing. The record of the depression years, when all of the shopworn remedies thus far available were applied to the ailing economy in massive doses, with no visible result other than a big addition to the taxpayers’ burden, is enough to disillusion anyone but the visionary.
However, the fact that we do not now have an answer to the problem is no justification for inaction; it merely means that the priority which this issue clearly deserves, for the reasons that have been discussed in the preceding paragraphs, should be applied to the task of finding the answer. As society is now organized, this is a task that would normally be assumed by the economists, in whose field the subject lies, but the inability of the economic profession to arrive at satisfactory answers to this and a host of other important economic problems, or even to agree on any answers, satisfactory or not, has raised a serious question as to whether the methods currently in use by this profession are adequate. This question is all the more pertinent in view of the fact that another group of investigators, the physical scientists, operating concurrently, but utilizing much different methods, have achieved some very spectacular successes in their field during the same period of time. A great many observers have thus been led to ask whether the remedy for the inadequacies of present-day economics might not lie in utilizing the highly successful methods of the physical sciences in the economic field.
Thus far the results that have been obtained from efforts along this line have not been encouraging. With few exceptions, however, these attempts at application of scientific procedures to economic problems have been made by members of the economic profession, rather than by scientists, and there is good reason to suspect that the failure to achieve satisfactory results has not been due to whatever limitations there may be on the applicability of the scientific approach, but is chargeable to a lack of sufficient understanding of the essentials of scientific procedure on the part of those who have undertaken the work, coupled with an inability to break loose from the rigid pattern of thought established in the economic field by long years of non-scientific treatment of the subject matter. The existing situation would therefore seem to call for a direct attack on the economic problems by scientists, .working with the tools to which they are accustomed, rather than leaving the job to be done by members of another profession attempting to use tools borrowed from science. This is the fundamental concept on which the present work is based.
Of course, the economists contend that their subject is also a science—one of the so-called “social sciences”—and that their methods are consequently entitled to be called “scientific”. But this assertion is irrelevant. Whatever they may be called, these are not the methods of the physical sciences, the methods that the scientists use and that they call scientific. The difference between the two methods of approach is described by Ernest Nagel, in his book The Structure of Science, in this manner:
It is also generally acknowledged that in the social sciences there is nothing quite like the almost complete unanimity commonly found among competent workers in the natural sciences as to what are matters of established fact, what are the reasonably satisfactory explanations (if any) for the assumed facts, and what are some of the valid procedures in sound inquiry… In contrast, the social sciences often produce the impression that they are a battleground for interminably warring schools of thought, and that even subject matter which has been under intensive and prolonged study remains at the unsettled periphery of research.2
The general opinion among the economists is that such a difference is inevitable because in their field there are no “matters of established fact” in the sense in which this term is used in the physical sciences. Their subject matter, explains John M. Clark, “consists of desires and values”.3 Frank H. Knight expresses this position explicitly. “The data with which social sciences are concerned”, he says, “consist of meanings, opinions, attitudes and values, not of physical facts”,4 and on this basis he dismisses “the notion that social problems can be solved by applying the methods by which man has achieved increasing mastery over nature” as “false and illusory”.5
However, those who share this view—a category that probably includes most professional economists—are looking at only one portion of the total economic picture. Economics, as now constituted, is a mixture of factual and non-factual elements. Opinions, attitudes, etc. do play a major role in determining what economic actions are initiated, to be sure. But once those actions have been taken, the consequences thereof are determined by fixed and immutable natural laws that are no more responsive to human opinions and desires than the laws of the physical sciences. If we want to know what will happen when a particular economic action is taken, or alternatively, what actions are required in order to attain certain specified results, then we need to determine, just as we would in the case of a physical question, what natural laws and principles are involved, and how each of them enters into the situation that we are investigating.
This is what has been lacking, so far as the employment problem is concerned. No one has ascertained, definitely and conclusively, what causes unemployment. The economists have not even looked for a specific answer to this question because they are convinced that, as Gunnar Myrdal puts it, “What all social sciences are dealing with is, in the last instance, human behavior”, and human behavior cannot be reduced to specific facts and figures. “The regularities we find”, Myrdal insists, “do not have the firm general validity of ‘laws of nature.”6
The finding of this present work is that this prevailing opinion is totally wrong. There are natural economic laws that have the same force as the natural physical laws. There is a specific factor that determines whether or not unemployment will exist, and the amount thereof. Part One of this volume will be devoted to deriving and explaining this factor: the “law of nature” applicable to employment: In the discussion we will first consider what the employment goals should be; that is, what we mean by the term “full employment” that appears in the title of the book. Then, as a background for the examination of employment fundamentals, we will demonstrate the erroneous nature of almost all of the ideas and opinions with respect to employment that are currently in vogue. Finally, we will carry out a scientific analysis of the employment situation and identify the controlling factor.
In Part Two, the information developed in Part One will be applied first to an examination of the measures currently utilized or advocated for reducing the amount of unemployment, and then to an identification of measures that will reach the same objective without the excessive cost and undesirable side effects of the measures heretofore regarded as the only ones that are available. To conclude the presentation, an effective employment program will be itemized, to show how an appropriate selection from among the available measures will enable meeting the employment goals previously defined without cost to the taxpayers.
“It is the continuing policy and responsibility of the federal government to use all practicable means… to promote maximum employment”. So says the Employment Act of 1946. But just what is “maximum employment”? Yoder tells us that “In ‘maximum employment’, all those capable of working are employed, whether or not they wish to work”.7 Obviously this is not the kind of maximum employment at which the statute is aimed. Congress certainly had no intention of setting up a system of forced labor. In fact, the language in the act restricts the government’s responsibility for providing “employment opportunities” to those who are not only able and willing to work, but who are also “seeking to work”. The term “full employment” is now more commonly used than “maximum employment”, but it has also acquired a wide range of interpretations. At one extreme there are those who broaden the meaning of the term far enough to include all sorts of visionary goals. Again quoting Yoder:
“Full employment” also suggests, in a democratic society, that each individual employee must be occupied, not only at the task for which he is best fitted, but also in that which he wants to do and for the hours per day and days per year that he, as an individual, wants to work.8
It is rather difficult for most of us to believe that anyone could seriously advance such an idea, even as a goal of the far distant future, since it is clearly out of the question until after both human nature and economic necessity have undergone some profound changes, but Yoder goes on to say that “the freedom of individuals to participate how and when and to the extent they wish is itself a major social goal as important or more important than full employment”. Injection of such fantastic concepts into what should be a serious consideration of a basic economic problem does nothing more than confuse the issues and impede the sincere efforts that are being made to reach practical goals. Anyone who keeps his feet on the ground knows that the tasks that must be performed are dictated by the needs of society and of the individuals of whom society is composed, together with the way in which the existing state of technology meets those needs. Inevitably there will be many difficult and disagreeable jobs, and there will be many more monotonous and uninspiring jobs, but nevertheless the workers must accommodate themselves to the work to be done not vice versa. Working at what one wants to do, and only so long as he wants to do it, is not “full employment”; it is complete leisure.
At the other extreme are those who propose to attain full employment by redemption; that is, they select some particular percentage of unemployment as the lowest level that, in their opinion, can reasonably be attained, as matters now stand, and then arbitrarily define “full employment” as a condition in which the unemployment does not exceed this percentage. For instance, Beveridge, one of the pioneers in the effort to establish government responsibility for employment, even though he proposed to manufacture jobs by such expedients as digging and filling useless holes, was still unable to visualize cutting unemployment below three percent. Indeed he intimated that he considered himself greatly daring in mentioning such a low figure.9 At least three workers out of every hundred are to be walking the streets looking for jobs in Beveridge’s Utopia of “full employment”. Just why they could not be digging more useless holes is unexplained. Perhaps Beveridge was in the same predicament as one of our own WPA directors who is reported to have found it necessary to send an urgent telegram to Washington asking for more leaves to rake.
The acme of cynicism comes from the government bureaucracy. According to an official of the Department of Labor, the term full employment “has no meaning apart from its political implications”.10 As he explains it, so long as there is not enough unemployment in any one place to create a public uproar there is nothing to be concerned about, and we can consider that we have full employment. When public dissatisfaction with employment conditions reaches the point where it begins to embarrass governmental officials then it is time to do something about it. Somewhat the same philosophy can be seen in the statements of many economists; in the use of the word “tolerable”, for example. Samuelson gives us his idea of a “tolerable percentage” in these words:
I would hesitate to specify the figure today, but I will say this: It would be, in my mind, less than a 4 percent figure—that is for the period ahead. I would not, realistically, think we could hope for a 2 percent figure in the near future.11
Edwin G. Nourse is more specific. He sets up a range within which the unemployment is acceptable, with upper and lower “peril points”. The upper peril point, the maximum tolerable unemployment, he places at 4 or 5 percent. A level of 2 percent he regards as the lower peril point: a “warning of inflationary overemployment, overextension of credit, or overinvestment”.12 The report of the President’s Commission on National Goals (1960) gives us a consensus as follows: “In practice, we must seek to keep unemployment consistently below 4 percent of the labor force”.12
A particularly disturbing feature of the present situation is that no one is able to say just what a “4 percent unemployment” means in terms of the number of individuals who want to work and do not have jobs. One would naturally assume that a 4 percent unemployment rate means that four out of every hundred who want jobs cannot find employment, but this is not at all true. To those who compile the statistics, “unemployment”, like “full employment” is a matter of definition, and since unemployment is a sensitive matter for the government, the term is continually being redefined to reduce the reported figures. For example, a person who becomes convinced that he cannot find a job and quits looking for one is no longer defined as unemployed, and the tendency is to get him out of the unemployment statistics as quickly as possible. According to news reports, a change made by the Bureau of Labor Statistics in 1967 reduced the “live” period to four weeks. Anyone who is out of work and says that he wants a job, but has not actually looked for one in the preceding four weeks is no longer counted.14
In view of the lack of agreement as to the meaning that should be attached to the term “full employment”, our first step in the direction of identifying the road that will lead us toward the goal we have somewhat vaguely specified by using this expression in the title of the present volume must be to identify the goal itself more clearly. It becomes apparent immediately, however, that the formulation of a precise definition of this goal is a more complex undertaking than is generally realized, as there are two separate categories of employment which are subject to altogether different considerations, both from the economic standpoint and from the social standpoint. One of these is the kind of employment toward which the policy laid down in the Employment Act of 1946 is directed; that is, jobs for those who are “able, willing and seeking to work”. For purposes of the present discussion we will designate this as primary employment.
Any broad statement of policy such as that contained in the Employment Act requires some further qualification and interpretation in application to specific circumstances, and it should be recognized that in using the term “able and willing” to work, Congress intended this to mean able and willing to work at some kind of a job currently available, under the conditions normally applicable to such jobs, and for the rate of compensation currently being paid for such work. We cannot undertake, as a matter of national policy, to provide each individual with the specific kind of a job that he likes best. The need for ski instructors or tea tasters is definitely limited, and while there are many openings for movie actresses and for bank presidents, the supply of such jobs is infinitesimal in comparison with the number of individuals who would like to have them. Anyone who puts unreasonable or unrealistic restrictions on the kind of a job that he is willing to accept is not “willing to work” in the sense in which that term is used in the Employment Act. He is not looking for primary employment.
The same comments apply to those who attach similar restrictions to the hours of employment or other working conditions that they are willing to accept, or who demand compensation in excess of the current rates as one of the conditions under which they will accept employment. Efficient organization of the productive system requires that certain regular schedules of working hours be maintained, and unless an individual is willing to adapt himself to such a schedule, he is not seeking primary employment as herein defined, and he is outside the area in which the Employment Act assumes responsibility. The primary employment is not necessarily confined, however, to what is usually termed “full time” work. Many operations are regularly scheduled on the basis of working hours that are shorter than the current “full time” standard, and other operations are regularly scheduled on a seasonal basis. Here the classification of the work depends on the part that it plays in the economy of the individual. If he depends on such employment for all, or a substantial part, of his livelihood, it is primary employment. If the work accounts for only a minor or incidental portion of his income, it is secondary employment.
The principal reason why we are distinguishing, in this analysis, between primary employment and secondary employment, in which category we will put all jobs that do not qualify under the primary classification, is the same reason that prompted Congress to make a practically identical distinction and to limit the national responsibility for providing jobs to those persons who are seeking primary employment. Such persons are the only ones who suffer hardship because of unemployment.
It is true that other persons may suffer hardship because of lack of income. Anyone who is unable to work at any normal job under normal conditions of employment may very well face serious problems, but these are not due to the failure of the economy to provide a sufficient number of jobs; they are due to the disability, whatever it may be. Likewise, the individual who is not willing to work at all unless he is provided with a job that meets his exact specifications may encounter some hardships as a result, and his family may suffer to an even greater extent, but here again the problem is not a lack of enough jobs, and the remedy lies elsewhere.
A second reason for distinguishing between primary and secondary employment is that primary employment is essentially an individual problem; that is, the consequences of lack of such employment fall most heavily on the individuals who are unemployed, and only to a lesser degree on society as a whole. Secondary employment, on the other hand, is essentially a problem of the community. If the optimum provisions for creating employment of this nature are not made, the loss manifests itself primarily as a lower standard of living for the public in general. Some individuals lose the benefit of income that they might have had, but there is no catastrophic effect on the individual worker comparable to that resulting from inability to find primary employment.
Finally, the third reason for making the distinction between these two types of employment is to lay the groundwork for development of a valid and workable theory of employment. Whatever relevance supply and demand considerations may have to the employment situation applies only to the secondary employment. Contrary to present-day economic opinion, primary employment is, in total, completely independent of supply and demand.
On the foregoing basis, we may now define full primary employment in essentially the same way that the term “maximum employment” is used in the Employment Act; that is, it is a condition in which jobs are available for all those who are able to do the kind of work required by the existing state of technology, who are willing to accept such work on the basis of current standards of working conditions, hours, and compensation, and who actually request such employment.
Since primary employment is fundamentally a matter of individual rather than collective concern, we cannot legitimately introduce any percentage margin into our definition. From the standpoint of the community, any program that reduces unemployment to very low proportions, say to one percent, would be quite satisfactory, but this low percentage has no meaning to the individual still without a job. He is not one percent unemployed; he is one hundred percent unemployed, and from his standpoint such a program is a total failure. An essential feature of a full employment program must therefore be one hundred percent primary employment.
Furthermore, in order to accomplish the clean sweep that is necessary to eliminate individual hardship, we must devise a program that will enable us to guarantee this full primary employment. A declaration of good intentions, such as that contained in the 1946 Employment Act will not serve the purpose. Nor can we be content with a program that almost reaches the one hundred percent goal. So far as the individual is concerned, there is an immense difference between a situation in which he has a reasonably good assurance of having a job and one in which he is certain of employment. As long as there is any element of uncertainty, even though relatively small, the worker always has the threat of unemployment hanging over his head, and he can never be free from apprehension about the future. Many contingencies in life are impossible to eliminate, and we must deal with these as they arise, but it will be demonstrated in this work that we can guarantee employment, and if each citizen is thus assured that so long as he is willing and able to work there will be a job for him, one of the principal burdens that the family breadwinner now carries will be lifted.
There is a very common impression that expecting the community to insure the availability of employment is impractical and unreasonable; that it is the individual’s responsibility to find himself a job, and that the most that can legitimately be expected from the community at large is some assistance toward this end. The issue of practicability will be disposed of in the chapters that follow, where it will be shown that it is entirely feasible to provide full-time employment on a guaranteed basis to all persons who are willing and able to do normal work. So far as the responsibility is concerned, it should be recognized that unemployment is purely a product of the economic organization. In a society where each individual, family or tribe is economically independent, there is no unemployment. It is only when an economic organization is developed in order to gain the benefit of specialization of effort that such a thing as lack of work enters the picture. In the ensuing discussion it will be shown that unemployment is a result of deficiencies in the economic organization rather than of any inherent lack of productive work to be done, but irrespective of the precise nature of the originating causes, it is clear that the existing inability to provide employment for everyone is an unfortunate by-product of the economic progress that has taken place. The responsibility for taking action to reduce its impact on the individual therefore rests with those who are the beneficiaries of organized economic activity; that is, the general public.
There is also a school of thought that opposes a guarantee of employment on the ground that it would tend to cause employment instability and inefficiency, inasmuch as workers would not be as responsive to pressures for efficient production if they are assured of getting another job if they quit or are discharged. Undoubtedly there will be a tendency in this direction. but the employer will still retain a powerful control over the efficiency of his working force, since the better jobs will still go to those who are the most competent and most stable, and he should find this adequate for his purpose.
It should also be remembered that, in the final analysis, the whole economic mechanism exists for the benefit of the individual workers. (Throughout this work the term “worker” refers to all those who do productive work of any kind. Where the reference is to industrial workers only, the text will so state.) In view of this fact, the use of fear as a weapon to secure greater effort from the worker is totally out of order. If workers in general prefer to work under less pressure, or to work shorter hours, or to follow any other policy that curtails production, there is no one else who is legitimately entitled to object, as long as the workers are willing to accept the reduction in income resulting from the lower production. Certainly they are overwhelmingly in favor of a guarantee of employment, if such a guarantee can be had on any reasonable terms, and this must therefore be listed as an essential feature of the employment goal.
Another requirement of a satisfactory employment program is that it should provide self-sustaining employment: jobs in which the marketable values produced by the work performed are sufficient to cover the wage payments to the workers. This is highly desirable from the standpoint of the worker, as his morale is likely to suffer if the work provided for him has an aspect of charity, but it is more than desirable, it is essential, from the standpoint of the community as a whole, since only a self-sustaining program can provide the basis for a guarantee of employment. As long as all or part of the cost has to be borne by the general public, there is always a possibility that, under extreme conditions, the cost of the program will exceed the ability or the willingness of the regularly employed population to pay the bill, and the program will collapse. In order to make a guarantee mean what it says there must be no cost to the general public, so that the program has no inherent limitations, and can be extended sufficiently to meet any situation that may develop.
In addition to eliminating the heavy weight of uncertainty that now hangs over the workers’ heads, a program that guarantees one hundred percent primary employment will also have some important collateral advantages. One of these is that elimination of “make work” practices will become possible. Restriction of output, rules that require the assignment of unnecessary workers to certain jobs, opposition to mechanization, rigid jurisdictional lines that cause lost time and delays, and similar practices are hard to combat under present conditions, in spite of the heavy cost to the general public, because the workers feel that such measures constitute an added degree of protection against loss of their jobs. When we are able, by means of a program such as the one that will be presented in the pages that follow, to guarantee every worker full-time employment, and to assure skilled workers that they will not suffer any loss if they are displaced by technological improvements, we will cut the ground out from under these obstacles to maximum production.
There is probably a minority among the workers that favors such work-limiting practices as a means of earning a living with less effort, but few of those who are in close contact with commercial and industrial operations will challenge the assertion that the average American workman would much rather be busy doing something constructive than drawing pay for wasting time. Once the job protection argument is eliminated, these restrictive practices will not only lose all semblance of support by the general public, but will also cease to appeal to the great majority of the workers.
Another important collateral benefit will be that the shiftless and indolent will lose their excuse for not working. Under present conditions it is difficult to take issue with anyone who says he cannot find a job, even though there may be good reasons for believing that he does not want to work, and is avoiding employment rather than looking for it. When we are ready to provide jobs for all who are able to work, we will put ourselves in a position where we can refuse to continue supporting able-bodied individuals in idleness, and can at least require them to earn their own subsistence. This will not only relieve the taxpayers of a large burden that they are now carrying, but will also have some salutary effects on the individuals concerned, as there is no question but that living in idleness on welfare payments or other forms of charity is definitely demoralizing.
There are some problems in connection with the administration of a guaranteed employment plan that will require some special attention. For instance, there is the question of the kind of jobs which came up earlier in the discussion. Whenever society as a whole, acting through government agencies, undertakes to provide employment for individuals who are unable to find jobs for themselves, or to compensate them in the event that such employment cannot be provided, a question arises as to how far the government is justified in permitting the workers to reject jobs that are not entirely to their liking. At present the official policies range all the way from one extreme wherein workers are allowed to draw unemployment compensation if there is no work immediately available in their narrow field of specialization, even though there is ample work in related fields, to the other extreme, which generally prevails where “made work” is the order of the day, in which workers are assigned mainly to pick and shovel jobs or to work of the “leaf raking” type without regard to their normal occupations.
In order to arrive at a sound basis for a policy with respect to this issue, we need to bear in mind that the primary reason for insisting on full primary employment is to avoid individual hardship. We are therefore justified in going as far as is necessary in order to prevent hardship, but we cannot justify burdening the taxpayer merely for the convenience of the worker. There is no definite standard by which we can judge the suitability of any particular kind of work for any specific worker, but this distinction between hardship and convenience gives us a general criterion. The character of the work that is available depends on the current state of technology, and the workers must in the aggregate, accommodate themselves to the kind of work thus determined. In an economy such as that of India, for example, where the efforts of 70 percent of the population are required to produce the needed agricultural products, it is not possible, at this time, to provide industrial jobs for any substantial proportion of the working force, irrespective of how many persons may desire such jobs, or how many may be qualified to do this kind of work. As a rule, we cannot consider that there is any hardship involved in being assigned to work of the same general type as that to which the individual is accustomed. Requiring office personnel to do hard manual labor is, of course, unreasonable, but we cannot justify allowing steamfitters to remain idle at public expense if there is plenty of work for plumbers.
It should also be noted that the present tendency on the part of social activists and politicians to condemn so-called “menial” jobs as an affront to the dignity of the workers, especially if they happen to be members of a minority group, is a disservice to the nation and to its economy. As already pointed out, the nature of the work that must be done is determined by the needs of the population and by the state of the technology, not by the occupational preferences of the workers. For the present, and as far as we can see into the future, there will be a great many essential jobs that are monotonous, difficult, or disagreeable. Some very drastic changes will be required before we can dispense with sewers, for example, and this is only one of a multitude of areas in which the working environment is necessarily somewhat less than ideal. But someone must perform each of these tasks, and as long as he is appropriately compensated, and not denied the privilege of moving to some other job for which he is qualified, if and when an opening occurs, he is simply carrying his share of the common burden. He is not being mistreated by being assigned to a “menial” job, and the repeated assertions to this effect are simply aggravating the employment situation and creating dissatisfaction that is neither justified nor remediable.
The question of the location of the available jobs will also come up for consideration. This is a rather touchy subject, as it involves not only the personal preferences of the individual workers but also the community spirit in the areas where normal employment opportunities are diminishing. If we apply the hardship criterion, however, there does not appear to be any adequate justification for making the job location a controlling factor in determining the suitability of available employment. Some provision will have to be made for absorbing any additional costs to the worker, but neither the necessity of changing the place of residence nor the blow to community pride by reason of loss of population can be classified as a genuine hardship. Of course, this phase of the program will have to be administered intelligently, with due regard for special circumstances, but in general, the program should be set up on the basis of a reasonable degree of mobility of the labor force.
A program specifically directed toward providing jobs for everyone, rather than merely assisting the individual to find something for himself (which is about as far as we go now), will eliminate most of the so-called “frictional” unemployment. However, some time interval between jobs is, on the average, unavoidable, and in a full employment program this unavoidable idle time between jobs should be handled in the same manner as the unavoidable idle time that often occurs during a working day; that is, it should be regarded as a normal feature of the job, and the worker should be paid at his regular rate. It will probably be advisable to have this payment made by the employment authority, since the placement interval will vary, but it would not be out of order to levy a severance charge against the employer. This would not be an undue burden on him, as he will be relieved of the unemployment insurance contribution that he now makes, as well as any severance pay for which he is currently obligated, but it would exert a certain amount of pressure on him to maintain as stable a labor force as possible.
Some special provisions will have to be made to take care of workers whose performance is unsatisfactory. Obviously it would not be sound policy to continue full wage payments to an individual discharged for cause, but he should have a guarantee of another job opportunity within a reasonable time. Also the severance charge should be assessed against the employer in such a case, just as in an ordinary layoff, so that he would not have a chance to gain any advantage from the discharge. Some suitable program will also have to be worked out for handling those who are chronically unable to maintain a satisfactory standard of performance on the jobs to which they are assigned, but such items are matters of detail that do not have to be spelled out specifically in a discussion of general policy. All that we are attempting to do here is to clarify the “full employment” goal at which we are aiming: to outline in a general way the kind of an employment situation that will exist once we have formulated and put into effect a practical program for achieving that goal.
Although a program that will achieve full primary employment, as defined in Chapter II, will eliminate individual hardship, and will therefore accomplish the most urgent employment objective, such a program is still far from being completely satisfactory from the standpoint of the community at large, since the general standard of living depends on how effectively the economy makes use of all available labor. From this standpoint a fully satisfactory employment program must not only provide full primary employment but must also generate the maximum practical volume of secondary employment.
One of the most absurd and, we may say, tragic, features of present-day economic life in the United States is that the dead weight of a completely erroneous conception of the nature and cause of unemployment has resulted in the general acceptance of policies that restrict and discourage the full use of the available labor supply, thereby depriving millions of individuals of the potential fruits of their labor, and at the same time forcing the nation as a whole to accept a lower standard of living than that which could be attained. Adoption of these policies, based upon the delusion that there are not enough jobs to go around and that we can meet the unemployment problem only by compelling part of the potential working force to remain idle, is beyond doubt the most costly economic mistake that this nation has ever made.
Basically, this colossal blunder rests on a misconception of the potential capacity of the modern productive plant. Great strides actually have been made toward increased productivity, and the current output of the economy is far above that of only a few decades ago, but too many individuals have acquired a fantastically exaggerated notion as to the potentialities of present-day production methods and facilities. Business administrators, engineers, and others who are actually participating in the task of pushing productivity to higher levels, and who have first-hand knowledge of how difficult it is to achieve even a modest gain, seldom fall into this kind of an error, but many academic economists and writers in the economic field, who are personally engaged in supplying services, a large and growing segment of the economy in which little or no gain in productivity ever takes place, somehow manage to persuade themselves that the economic millennium has arrived.
In the realm of fancy which these individuals inhabit, such preposterous expressions as the “Age of Abundance” and the “Era of Plenty” are tossed about in all seriousness, and wild schemes for disposing of our economic “surplus” are hatched in profusion. “The era of abundance has arrived”, says Robert Theobald, “Today, the productive system can grow fast enough to meet any demand which is likely to be placed on it”.15 Galbraith is equally confident. “No one”, he declares, “would be called upon to write at such length on a problem so easily solved as that of increasing production”.16 Our problem now, they tell us, is how to get rid of the stuff. “Abundance is a world-wide problem”, asserts Theobald.
But we are not living in this fairyland; we live in a cold hard world of inescapable realities. In this world of fact and not of fancy man must toil for everything he wants. The great bulk of the human race still lives in the shadow of starvation, condemned to labor almost unceasingly merely to produce the bare essentials of life. Only in comparatively recent years and in the most favored lands have we been able to reach the point where some of the comforts and conveniences that make life pleasant and enjoyable are available to the people at large. And why? Because we are Limited by our ability to produce. By the exercise of the ingenuity and imagination of millions of our people we are slowly and painfully raising our production per worker at a practically uniform rate year in and year out regardless of war or peace, boom or depression. But the productive capacity we have thus far attained is puny in comparison with our unfilled wants, and in view of our inability to make more than a slow and gradual improvement, the controlling factor in economic life for hundreds of years to come, perhaps forever, will still be scarcity just as it has been throughout the long upward march of human progress.
If we want to get the utmost out of our existing organization and facilities in the interim while we are going through the slow and difficult process of developing more efficient methods and tools, we have two options: we can use more workers or we can work longer hours. Nothing has ever been devised that will enable us to evade this brutal fact, regardless of what the dreamers may tell us. A full scale demonstration of just what we can do, and what is necessary in order to achieve maximum production, was staged during World War II. In this emergency it was obviously necessary to exert ourselves to the utmost, and in response to this all-out effort our factories poured out war material in quantities far surpassing anything that the world had ever seen before. But when we take the reduction in production of civilian goods into account, and correct our production figures for the inflation of dollar values, we find that the actual increase in total production above the pre-war level was only about thirty percent, and it was accomplished by adding the equivalent of about thirty percent to the total working force. The National Industrial Conference Board appraised the results in this manner:
Contrary to popular belief, wars are not accompanied by a marked increase in physical output of manufactured goods per hour of labor. In World War I, for example, output per man hour in manufacturing was slightly lower in 1919 than in 1914. The trend for World War II is still in dispute, but preliminary figures suggest that the output per man hour rose only about 1% a year, or far less than the annual gain in peacetime. It is true that the output per man hour rises in war industries, particularly where the volume is greatly expanded, as in aircraft or shipbuilding. But these gains are largely offset by declining productivity in civilian industries, which suffer from a substandard labor force, an uncertain flow of materials, and other retarding factors.17
This gets us back again to the significant fact that the average production per worker is not subject to sudden and spectacular changes. Any gain is a slow and laborious process, a matter of inching our way forward along a front that extends through thousands of different industries and occupations. Any improvement in one industry, no matter how substantial, represents only a very minor change in the general average. The high level of production that we would like to have cannot be attained by any kind of magic; it can be reached only by the slow evolution of better production methods, or by utilizing the same expedients that had to be employed to meet the demands of the war machine: increasing the number of workers and extending the working hours. Under the spur of military necessity we increased the total man-hours about thirty percent, and the result was an increase in total production amounting to just about thirty percent. The relation between man-hours and volume of production is direct and unmistakable.
Furthermore, there is no support for the widespread belief that wartime discoveries and technological improvements have added enormously to our production potential and have uncovered latent capabilities that have vastly increased our ability to produce goods from now on. Even the slightest attempt at a critical examination will show that this belief has no foundation in fact. We did not increase our capacity to produce peacetime goods during the war. The war production record was accomplished mainly by converting small scale industries to the mass production methods that were already standard practice in the civilian industries operating on a large scale, not by the discovery of any new techniques that could be transferred over to civilian production. It was the efficiency of pre-war industry that made the war record possible; civilian industry was the teacher, not the pupil.
It should also be noted that the “automation” that we have been hearing so much about lately is not a magic formula that will solve all of our production problems. In the first place, it is not something new that has just appeared on the scene; only the name is new. Automation is simply a controlled application of power to the tasks of industry, and it has been around for a long time. It is true that there have been some important developments in this field in recent years, but it takes a continuous series of new developments of some kind just to maintain the modest rate of increase in productivity—about two percent per year—that we have been accomplishing heretofore. There has not been any significant increase in this rate of gain since automation became a household word, and there is no indication that such an increase will be forthcoming. “A sharp break in the continuity of technical progress has not occurred, nor is it likely to occur in the next decade”,18 reports the National Commission on Technology, Automation and Economic Progress (1966).
Even those who contend that we are now in a position to provide the consumers with an almost limitless supply of goods are forced to return to reality when they undertake to tell us how these remarkable results are to be achieved. For instance, Galbraith, who regards increasing production as a “problem easily solved”, can do no more than suggest utilization of
Inasmuch as we now have in the United States an economic organization that uses more capital, employs labor and capital more efficiently, and possesses a more efficient technology than any other organization that the human race has thus far been able to devise, and there is no indication that we can improve our position in any of these categories at any faster rate than we are now doing, Galbraith’s list reduces to the same conclusion that was reached in the preceding discussion; namely, that we can speed up the rate of increase of production only by employing more labor or by working longer hours.
The first of these expedients, that of employing more workers, is the simplest, because there are a great many individuals who would prefer to work, but are prevented from so doing by existing economic policies and conditions. The World War II experience gives us a good idea as to the possibilities in this connection. Statistics compiled by the Department of Labor indicate that the increase in the total number of workers from 1940 to the wartime peak, over and above the normal growth of the working population, was about 13½ million. More than half of these workers drawn into production activity by the war emergency, over 7½ million, came from the ranks of the able-bodied unemployed, 3 million were youths of school age, 1½ million were women not normally employed in industry, and 1½ million were persons normally classified as unemployable.
The attainment of one hundred percent primary employment by means of measures of the kind that will be recommended in the concluding chapters of this work will eliminate the reservoir of able-bodied unemployed. Sound public policy will require keeping the youth in school, and these young workers will only be available during vacation periods. It is also doubtful whether full-time employment of women in industrial production can be increased to anything like the wartime level. The current tendency is toward more full-time work by women in service and professional occupations, but this is a reflection of general social conditions, and is not likely to be responsive to government employment policy. The potential increase in the working force, beyond that which will be accomplished by providing full primary employment, therefore reduces mainly to a matter of making more effective use of part-time workers and those who are now considered unemployable.
An important point in connection with the latter group that was mentioned earlier is that a large proportion of these individuals are not unemployable as a matter of fact; they are in this class only because of legal provisions that deny them employment, or accomplish the same end by denying them compensation for the work that they might do. Some increase in production can be obtained, for instance, by restoring the option of continuing at work to those older persons who reach the age at which they become eligible for social security pensions. At present the payment of pensions is made contingent on almost complete abstention from active gainful employment. The only basis for this requirement is the theory that the removal of these workers from the active labor force will leave more job opportunities for the younger job seekers, and there never has been any factual foundation for this supposition.
The whole conception of a limit to the number of potential jobs is a gross error, and the amount of unemployment is not affected in any significant way by the size of the labor force. The great mass of facts and figures that establish this basic principle beyond question will be discussed at length in the next chapter. Mere force of argument and reasoning may not be enough, however, to convince everyone that the present beliefs are mistaken, as the idea that the retirement of one group of workers leaves jobs for others has such a ring of plausibility about it that it takes a close scrutiny of the facts to detect the fallacy. This is another point where a definite guarantee of employment is important. When we guarantee full-time jobs to all those who are willing and able to work there will no longer be any argument at all for forcing the pensioners to remain idle. On the contrary, any contribution that they can make toward the national production of goods should be welcomed. The decision as to whether to quit work on reaching pension age should be made optional, and the present practice of withholding pension benefits from those who earn any substantial amount from “gainful employment” should be discontinued.
This does not necessarily mean abandoning the policy of mandatory retirement at a specified age which is now in effect in a large segment of American industry. There are valid arguments both for and against mandatory retirement, and this question should be resolved on its own merits. The objectionable feature of the present policies is that they are deliberately designed to force the older worker into idleness, to bar him not only from his usual job but from any job, in the fatuous belief that this opens up an employment opportunity for a younger worker.
Another legal restriction on employment that should be removed is the one that is imposed—quite unintentionally, but nevertheless effectively—by the minimum wage laws. These laws do not assure a worker that he will receive the established minimum wage; they simply forbid employers to hire him at any lower rate. The employer cannot remain an employer unless he gets his money’s worth from the labor that he employs, and hence the net result is to deny employment to anyone whose production is worth less than the established minimum wage. The higher this minimum is pushed, the more men are forced into idleness. This is a classic example of the kind of results that we obtain when we base economic policy on sociological objectives without considering the factual aspects of economics. A program intended to force the employer to pay higher wages to the less productive workers actually results in denying employment to those individuals.
There is much to be said in favor of the objective of the minimum wage laws—a reasonable minimum income for the worker, consistent with the level of the national income as a whole—but here, as in so many other instances, the socio-economist and his following among the lay public refuse to recognize the existence of basic laws governing economic processes, and blithely assume that irreproachable motives are sufficient to assure the success of policies of this kind. The actual fact is that if the sub-standard worker is to be paid more than the value of his production someone else must make up the difference. The employer who might have use for this sub-standard labor cannot accept this kind of a burden and still stay in business—whether or not he might wish to do so is entirely irrelevant—hence that “someone” must be the general public. But the same public that gives hearty approval to the minimum wage policy in principle has no visible inclination to pay the price that would make it work, and the result is that the sort of minimum wage laws that are now on the statute books do a grave injustice to the very persons they are intended to benefit.
In order to extricate ourselves from this absurd situation in which we are forcing individuals into idleness and building up a class of “unemployables” who add to our serious national problems in a great many ways, we should so organize our activities that anyone who is able to work at all is afforded the opportunity to make a contribution to his own support and to the welfare of the community by so doing, irrespective of how small that contribution may be. The goal of one hundred percent primary employment set up in Chapter II contemplates that continuous employment at normal wages be furnished for those who are able to earn these normal amounts. The point of the present discussion is that some further provision needs to be made for those who are unable to meet the normal standards. For instance, a number of substandard classifications could be established, and the workers unable to handle normal assignments could be placed in work where both the job requirements and the wage rates conform to the lower standards of the particular classification.
The question as to whether these sub-standard workers who earn sub-standard wages should receive any supplemental payments to bring their income up to some minimum level meeting the approval of the community is a separate, and non-economic, issue that should be considered on its own merits. The essential point that must be recognized is that if the citizens of the community decide that they want such a policy followed, then they must be prepared to pay the cost. As of now, the citizens, through their elected representatives, have, by enacting the minimum wage laws, given approval to the principle of a minimum income for all workers, but only on condition that someone else pays the bill. Whether or not the idea will still be looked upon with the same favor when it becomes clear to the general public that they must stand the cost is something that we will have to find out. At any rate, the present policies which simply force the sub-standard worker to remain idle are clearly not the right answer to the problem.
Development of procedures for making the most effective use of part-time workers is an objective that will justify a great deal of attention on the part of the employment administration. This presents an opportunity not only to add to the total productive man-hours, but also to make some contribution toward more efficient use of the available manpower. There has always been a considerable amount of variability in the requirements for different kinds of labor, due to seasonal conditions and other factors, but the irregularity is much greater in present-day practice than ever before, because of the increasing amount of specialization both in labor and in products, and because the consumer is now in a better position to demand that goods be available to him when, where, and as he wants them. Of course, business enterprises try to level out the peaks as much as possible, but the uncontrollable variations are large enough to constitute a major problem.
In some cases, such as certain types of construction, the answer thus far has been to create a work force that is employed only intermittently. In order to make this practical from the standpoint of the worker, the pay scales have to be high enough to compensate for the idle periods, and, in effect, these workers are therefore being paid for the idle time as well as for the working time. However, the individual worker has no assurance that he will fare equitably under this system. He may work steadily throughout the year and have very substantial earnings, but it is also possible that he may work seldom and earn very little. From the standpoint of the economy as a whole, the existing program is even less satisfactory, as it wastes a large part of the potential labor of the workers.
The use of part-time workers, individuals who want only part-time work, to meet the peak demands for labor is a much more efficient method of handling the fluctuating requirements. Here there is no waste of potential labor, as the time during which an individual does not want to work cannot be considered potential working time in a free society (as long as he is in a position where he does not have to work). Furthermore, there is no necessity, under this kind of an arrangement, for any unrealistic pay scales such as those which are now in effect in many of the occupations where men depend on intermittent work for a livelihood. One of the essential requirements of a complete employment program, therefore, is to set up facilities for making the most effective use of part-time labor.
There are also a great many opportunities for converting jobs of the intermittent type into full-time jobs by appropriate coupling of seasonal occupations and training the workers for more than one job. Before the days of the mechanical refrigerator, the combination coal and ice businesses were a familiar example of a logical coupling of this kind. Many industrial organizations undertake to do as much as they can along this line, as a means of stabilizing their labor force, but, as matters now stand, they are hampered by restrictions imposed by the labor unions—seniority rules, jurisdictional lines, etc. These, in turn, have their origin in the workers’ fear of losing their jobs. When full-time primary employment is guaranteed it should be possible to remove such obstacles to the efficient use of the available labor. Employment of students during the summer vacation periods to replace regular workers who are taking their vacations is an example of an effective coupling of this nature that can be utilized much more extensively after the various obstacles are cleared away.
The second way in which production can be increased beyond the levels to which the modest annual improvement in productivity will bring us is to increase hours of work. Here we come into conflict with a desire on the part of some workers to reduce their working hours to gain more leisure. However, workers in general do not now realize that for the working force as a whole this is a matter of one or the other. They cannot have both the goods and the leisure. If they prefer the leisure they will have to forfeit the goods that could be produced by working; if they prefer the goods they will have to forfeit the leisure. Of course, some workers may be able to enforce demands for reduced hours without reduction in pay, but this merely means that some other workers will have their real income reduced. The average real wage, the wage in terms of buying power, is determined entirely by the national productivity, and any action, such as a reduction of working hours, that cuts production automatically reduces the average real wage of the working population.
A limitation of the work week is in reality nothing but another means of creating involuntary unemployment. In its effect on the man who would prefer the income from an additional eight hours of work per week rather than the extra day of leisure, the existing 40 hour limitation is no different from a business recession that causes the factory to close down for two months out of the year. In either case he loses the potential income from about 50 days work.
One of the important factors in this situation is that the preferences of the individual workers are by no means uniform. Some prefer more leisure; others prefer more goods. As time goes on and continued improvements in technology increase productivity still further so that still more leisure will be practical for the average worker this matter will become increasingly important, as the range of individual preferences will be that much greater. It would seem, therefore, that some consideration ought to be given to ways and means of permitting more individual latitude in working hours. This would actually be a significant step in the direction of greater economic freedom. The present limitations are intended to benefit the worker by giving him more leisure, but their supporters overlook the fact that the additional leisure is not given to him; he is compelled to buy it at the price of giving up comforts and luxuries that he could have earned by working the additional time. It would seem much more consistent with our American ideals of individual liberty to permit each worker to have at least some chance to exercise the privilege of free choice, rather than to be forced to conform strictly to a program that may be directly opposed to his best interests.
It is often contended by those who advocate continuing reduction of working hours that the workers prefer the leisure to the additional income, and that there is no substantial element of the working population that would wish to take advantage of an opportunity to work longer hours. The erroneous nature of this contention is clearly demonstrated by the large and growing practice of “moonlighting”. The Department of Labor made a survey of this situation a few years ago, and found, as reported in Business Week, that during the month of the study (May 1962) “one out of every 20 employed persons held more than one job …The median number of hours worked on both jobs was 52, of which 12 were on the second job”.20
These are very significant figures. When we take into account the initiative and effort that are required in order to find a suitable second job, as well as the difficulty of making a satisfactory adjustment of working hours, it is evident that the five percent of the working force that extended their working time by “moonlighting” during the month covered by these statistics would be increased very materially if extra working time could be arranged more easily. This indicates that a substantial proportion of the working population prefers additional income to additional leisure. The present policy of forcing them to take the leisure against their wishes is open to serious question.
When limitations were first placed on working hours the objective was to protect the health of the workers. But we have dropped below the fatigue limit long ago, and reduction of working hours is now aimed at an entirely different objective: to increase leisure. Retention of practices set up on the basis of the earlier objective now gives rise to many absurdities. According to the theory under which we are now operating, the workers are being imposed upon when they are asked to work overtime, and the overtime premium is supposed to act as a deterrent to prevent the employer from working his employees extra hours when there is no real necessity. But the majority of the workers are eager for the overtime work, even when the overtime premium is small, and this creates the absurd situation in which the workers are actively seeking—in many cases even demanding—that which the employers are penalized for forcing upon them.
One practical method of eliminating inconsistencies of this nature and achieving a reasonable amount of latitude for individual choice in the matter of working hours would be to establish a double standard that would give proper recognition to the two separate reasons for limiting working hours. Under this plan the upper standard would be based on the fatigue theory, and would represent the limit beyond which work would not be permitted without penalty regardless of the attitude of the individual worker; it being assumed that the state should be concerned to prevent the worker from taking actions injurious to his health. This limit has no relation to productivity and should therefore remain fixed regardless of technological advances, although it would probably be advisable to have some variability between occupations. The lower limit would be based on the current productive efficiency, and would represent that amount of working time necessary to provide an acceptable minimum standard of living. This limit would be progressively lowered as the average production per worker continues to increase. Employers would be prohibited from requiring anyone to work more than this lower minimum as a condition of employment, but would be authorized to make mutually satisfactory arrangements with employees for any hours of work, either permanently or temporarily and without overtime premium, up to the maximum established by the upper limit.
Such a plan would give the individual a chance to adjust his hours of work to his own special situation, and it would improve the general level of economic satisfaction to a substantial degree, as those who prefer the minimum hours with the corresponding minimum living standard could stay on that basis, whereas those who feel that they could put forth additional effort to advantage could go ahead with a heavier program to the extent that their employer’s situation would permit. The optimum work week for any individual is that number of hours beyond which he values the leisure more than the goods that could be purchased with the additional income. This is clearly a matter of individual appraisal, and any such mandatory limitation of working time as that imposed by current laws and overtime practices operates to the detriment of the person who values more goods above more leisure, whereas it confers no corresponding gain on the person who has the opposite preference. We recognize that it is definitely advantageous to the individual, in his capacity as a consumer, to be able to make his purchases in those quantities that are most convenient to him, and the sellers go to considerable lengths to satisfy his preferences. It would similarly be advantageous to the individual, in his capacity as a worker, to be able to sell his labor in those quantities that are most convenient to him, and if we are to secure the maximum values from our economic system some means of accomplishing this end is essential. Here, for once, our conclusions are in full accord with those of Galbraith, as expressed in the following statement:
The employed person should be accorded a much wider set of options than at present as between work and goods on the one hand and leisure on the other. The way should be open for the individual who wishes to satisfy his needs for food, clothing and simple houseroom with ten or twenty hours of labor a week to do so…men who speak much of liberty should allow and even encourage it.21
Most employers will probably object to optional arrangements of the kind proposed on the ground that they would complicate operations and increase costs. But the truth is that any additional costs that apply to all producers can be, and therefore are, added to the selling prices and are borne by the consuming public, not by the employers. Hence the preferences of the employers are not entitled to any consideration. The only pertinent question is whether the individual citizens, in their capacity as workers, get enough benefit from the increased flexibility of working hours to justify the relatively small amount that would be added to the prices which they, in their capacity as consumers, have to pay in the marketplace. There can hardly be much doubt on this score.
Summarizing the discussion in this chapter, the goal of the employment program with respect to secondary employment should be to eliminate those features of existing economic policies that result in compulsory idleness, and to set up the necessary machinery to enable maximum utilization of the available labor of the secondary type. The principal objection to measures of this kind, the fear that increased working time for some individuals will result in unemployment for others, will be removed by the adoption of an employment program of the type outlined in the chapters to follow: a program that will enable a guarantee of full primary employment for all. There is some question as to whether we are justified in going so far as to try to induce individuals to work, or to work more, in the absence of any need on their part or any national emergency that makes greater production imperative, but it is obviously desirable that every person should have the opportunity of exercising the “goods or leisure” option, and should not be forced into partial or total idleness against his will.
In the scientific field, the recognized test of the validity of a theory is to apply it to some practical situation and see how the results obtained from the theory agree with the observable facts. A particularly good opportunity for testing the currently accepted employment theories in this manner occurred at the end of World War II, when the discontinuance of the massive war production program and the return of some ten million men from the armed forces to civilian life was clearly due to make some far-reaching changes in the economy. Here was a situation in which an accurate forecast of the conditions that were about to develop was of prime importance to the nation, and a great many economists of all schools of thought, in government, in educational institutions, and in private industry, applied themselves to the task of forecasting the course of events. The result was one of the most amazing demonstrations of ineptitude ever staged by a learned profession. For once the economic “experts” were all in substantial agreement. There was a difference of opinion as to whether the number of unemployed would be as low as the five million predicted by some of the government economists, or as high as the ten million predicted by some of the economists in the employ of the labor unions, but all agreed that the unemployment would reach very serious proportions, and this unanimous opinion missed the mark by such a wide margin that the collective economic face is still red even to this day.
Here are some of the details, as reported in a contemporary publication:
This is how wrong Government and labor officials were in their guesses on unemployment: the War Manpower Commission estimated that unemployment in the last quarter of this year would be 5,000,000, The Social Security Board’s guess was between 5.5 and 7.5 million, the AFL had expected 3.8 million by September and 8 million by March, and the CIO-UAW chief, R. J. Thomas, told a Senate committee August 30 that by December 31 unemployment would surely be more than 12,000,000. The startling fact is that almost three months after the end of the war, unemployment was found by the bureau of the census to be 1,520,000 in October, a decrease of 130,000 from September. And the great shift of workers from war industry is conceded to be almost complete.22
Such a situation, in which the experts, the economists who prepared these forecasts, were all wrong, differing only in degree, cannot be ascribed to mere errors in judgment. Even when we make allowances for the mob psychology that tends to reinforce the majority opinion, it is not conceivable that all such errors would have the same direction. The only adequate explanation is that the premises on which the “authorities” based their individual judgments with respect to the trend of unemployment were erroneous. When so many competent people unanimously arrive at the wrong answer, we cannot avoid concluding that the concepts upon which their reasoning was based are wrong.
This, then, explains why all attempts that have hitherto been made to deal with the problem of unemployment have failed; why the most determined efforts of the Roosevelt administration hardly even dented the unemployment rolls until the outbreak of World War II created a labor shortage overnight; why unemployment is still one of our most serious domestic issues in spite of all of the “new knowledge” of the underlying principles that Keynes is supposed to have contributed. The trouble is that in order to deal effectively with any problem, the first requisite is that we must know what we are doing. As the old adage has it, if we wish to teach a dog, the first essential is to know more than the dog. Before we can solve the unemployment problem we must have a reasonably good idea as to the origin and nature of the problem, and the way in which it responds to the various kinds of action that we can take. The outstanding aspect of the present situation is that almost all of the concepts and theories currently in vogue in this field are either completely erroneous or at least wrong in some essential respect.
Inasmuch as this remarkable assortment of misconceptions and unjustified assumptions constitutes the foundation upon which existing employment ideas and policies are based, the whole subject is now in a state of confusion. In order to clear the air so that we may proceed to the development of a correct theory of employment and an effective practical program based on that theory, without the handicap of having to deal with mistaken ideas and beliefs at every juncture, it will be desirable at this time to call the roll of this amazing collection of conceptual errors, reserving for later treatment only those items that are closely tied in with the subjects that will be given special attention in the subsequent pages.
It is, of course, necessary to be highly critical of these erroneous ideas, and of the actions and proposed actions based upon them, particularly since some of them stand squarely in the way of achieving the primary objective of the present study. However, criticism of ill-advised actions that are aimed at commendable objectives, and of the theories underlying those actions, poses some problems. A simple statement of the case for the opposition is not sufficient. The case in favor of such actions is invariably argued on the basis of the objectives, and it is automatically assumed by the supporters of the proposed measures that whatever opposition may be encountered is directed against those objectives. In view of the unimpeachable character of the aims of most of these proposals, the dissenter can thus be shrugged off as being in league with the forces of unrighteousness. Under these circumstances it is essential to bring out the exact nature of the objections to the unsound actions and proposals, and to the theories on which they are based, emphatically and in detail, to make it clear that it is their results that are being challenged, not their objectives. But the emphatic criticism of current thought and policies that is necessary for these reasons opens the door to a charge that the presentation is unduly harsh and polemic. At this time, therefore, it seems advisable to point out specifically that no discourtesy is involved in stating that someone, or an entire profession, for that matter, has made a mistake. The critical tone of the presentation is not a matter of choice; it is a matter of necessity. John R. Platt states the case in these words:
If you have a hypothesis and I have another hypothesis, evidently one of them must be eliminated. The scientist seems to have no choice but to be either soft-headed or disputatious.23
ERROR NO. 1: There are not enough jobs to go around.
Here is the grandfather of all of the errors in the prevailing concepts of the employment situation: one of the most costly and destructive delusions that ever fastened itself upon the human race. A very substantial share of the blame for the almost incredible lack of progress toward solving the unemployment problem since it first made its appearance a few hundred years ago is directly chargeable to those who originated and those who have perpetuated this barefaced perversion of the facts. What makes its widespread acceptance so astounding is that the economic realm is full of readily accessible and incontrovertible evidence that explicitly contradicts any assertion that there is a lack of jobs or a lack of work to be done.
For instance, in every depression we hear the statement that unemployment exists because the economy can no longer generate enough jobs to take care of everyone who wishes to work, and that some action must therefore be taken to cut down the labor force or the working hours to accommodate the working time to the work available. But every depression or recession was preceded by a period in which there were enough, or very nearly enough, jobs to go around, and was followed by a similar period of reasonably good employment. This is enough in itself to make it clear that there are enough potential jobs, and that the employment difficulties that we encounter are not due to any lack of work to be done, but to an inability, on the basis of the existing inadequate knowledge, to recreate at will the conditions under which full employment materializes.
There are those who attempt to explain away this discrepancy between popular beliefs and oft repeated experience by contending that during boom times we are overproducing and, in effect, using up some of the jobs that would otherwise be available in the following period. But those who use this argument are simply drawing it out of thin air without consulting the pertinent statistics. The records show that during boom times we are invariably reducing our inventories; that is, we are using up the entire product of our full employment and still a little more. It is after the downswing starts that inventories begin to rise.
But it should not even be necessary to refer to the voluminous facts and figures that refute this hoary error; it should be self evident that if even one individual has some unfilled wants, and is willing to work to satisfy them, there is more work to be done: another potential job. And if there are millions in this same situation, as there are in a depression, then there are millions of potential jobs. When these individuals cannot find employment, the fault lies with the economic organization. The problem is not a lack of potential jobs; it is a lack of effective methods and procedures for converting the potential jobs into actual jobs.
This is an instance where consideration of the simpler forms of economic organization can be helpful in clarifying issues that have become clouded because of the complexity of modern economic life. It is obvious that in the economy of the isolated individual, family, or tribe, there is no limit to the amount of work available. The amount of work actually done is not limited by any lack of jobs, but by the extent to which the individuals concerned are willing and able to work to satisfy their own wants and those of the group to which they belong. Evolution of the economic organization from its original simple form to the present complex mechanism does not change the underlying fact that there is no limit to the amount of work that can be done. The only inherent limitation on man’s work is that imposed by his inability or unwillingness to put forth further effort. Any other limitation that is now effective is simply a result of defects in the economic machinery.
The prevailing tendency to blame unemployment on a lack of potential jobs is just another manifestation of that ingrained characteristic of the human race which makes man unwilling to admit shortcoming or failure. Those who share, in greater or less degree, the responsibility for organizing and administering the economic life of the community—the specialists in “pure” economics who should have determined the correct theoretical principles and relations in the employment field, the specialists in applied economics who should have utilized these principles to develop sound and effective measures for maintaining a high level of employment, the lawmakers who should have made the decisions that would have put these programs into effect, the businessmen, labor leaders and other administrators who should have put the weight of their influence behind such programs and exerted their best efforts to make them successful—have all failed, in one way or another, to meet the requirements of the situation. Inasmuch as each group, aside from the economic theorists, can lay the blame on those preceding it, there are probably few individuals who recognize any personal responsibility for the failure, but all are aware that no one has had the answer to the problem of how and where to find the necessary number of jobs, and the path of least resistance for all concerned has been to conclude that there is no answer; that there simply are not enough jobs to go around. The first essential in laying the groundwork for an effective employment program is to realize that this hypothesis of a lack of potential jobs has no foundation in fact; it is nothing but a declaration of the bankruptcy of existing employment theory and practice.
ERROR NO. 2: Reducing the size of the labor force or the hours of work is a cure for unemployment.
Here is one of those conclusions so common in economics that seem so simple and obvious on casual consideration that they are usually accepted without question, yet are quickly seen to be totally false as soon as they are given any critical scrutiny. This error number two is, of course, a corollary of error number one. If the number of available jobs is limited, then it is evident that reduction of the labor force is one way of bringing the workers and the jobs into balance. In fact, reduction of the total number of man-hours applied to labor is the only effective method of accomplishing this result if there is a definite limit on the amount of work to be done. But as soon as it is realized that there is no limit to the number of potential jobs, and that unemployment is purely a result of defects in the job-creating machinery which prevent it from operating at 100 percent efficiency, it becomes equally evident that reducing the size of the labor force, or any equivalent measure, is not a cure for unemployment. If the job-creating machinery only functions at 95 percent efficiency today, and we therefore have five percent unemployment, there is no valid reason to expect that it will function at 100 percent efficiency next month, irrespective of the number of persons seeking employment. On the contrary, it will be shown in Chapter VI that, if we are in a similar stage of the business cycle, the efficiency of the job-creating machinery will still be only 95 percent, and if we withdraw five percent of today’s workers from the labor force in the interim, we will again have five percent unemployment next month, in addition to the live percent that were arbitrarily withdrawn from the labor force.
There is ample factual evidence to confirm this theoretical appraisal of the situation. The rate of unemployment shows no correlation whatever with the size of the working force. Perhaps the best demonstration of this fact is the post-war experience with employment that was discussed earlier in this chapter. If the commonly assumed relation between the volume of unemployment and the size of the labor force were actually valid, the return of some ten million men from the armed forces and the release of millions more from the war industries, the great majority of whom became job seekers almost immediately, obviously would have created a serious shortage of jobs. The course of future events seemed so clear at the time, both to economists and to laymen, that those few dissenters such as the present author who put forth contrary views were greeted with derision. But to the dismay of the confident forecasters, all of whom were relying on the “limited number of jobs” concept, the expected huge unemployment stubbornly refused to develop, and the millions of additional workers were quickly and smoothly absorbed into the civilian industries. The explanation that will be derived in Chapter VI is that unemployment has no relation to the size of the labor force; it is entirely immaterial whether there are fifty million men to be placed in jobs, or a hundred million. The return of the war veterans and the release of workers from the munitions plants therefore did not contribute to unemployment, and should not have been expected to make any such contribution, except to the extent that “frictional” factors have a temporary effect, in that they delay placement of these workers in jobs that are actually waiting for them.
As these postwar developments, together with many other similar, but less spectacular, employment experiences, clearly demonstrate, the theoretical analysis is correct in asserting that the amount of unemployment at any particular time is determined by factors that are independent of the number of available workers and of the length of the work week. Consequently, no improvement of the employment situation can be accomplished by reducing the work force or the hours of work. The proposal now being advanced by some of the labor unions, and by economists who adhere either to the union viewpoint or the “Age of Abundance” philosophy, that would reduce working time to thirty hours per week, or some such figure, for the purpose of spreading the work is thoroughly unsound. Further reduction of working hours will no doubt be in order from time to time, so that some of the benefit of increasing productivity can be taken in the form of more leisure rather than more goods, and we may ultimately get down to thirty hours per week or even less, but as a means of combating unemployment, the purpose for which it is now being advocated, this idea is completely worthless.
If all unemployment were to be wiped out at a given moment by reducing hours and sharing jobs, the creation of new unemployment would begin immediately, and it would not be long before the involuntary unemployment was right back where it started, with the arbitrary unemployment due to the shorter hours added. Instead of reducing unemployment, this kind of a program merely reduces employment. On top of the existing amount of unemployment, which would not be relieved in the least, except very temporarily, the adoption of a 30 hour week would superimpose an additional ten hours of forced unemployment each week, reducing the general standard of living accordingly.
It makes no difference whether the same hourly wage rates are continued and the weekly earnings drop, or when the hourly rates are increased to maintain the previous weekly money earnings. In either event, a general reduction of working hours from forty per week to thirty per week would mean a 25 percent lower standard of living; that is, the total volume of goods and services available for use would be reduced by 25 percent. No amount of wage juggling can alter this fact. The standard of living is fixed by the volume of production, not by the level of money wages. The rate of production per man-hour is a quantity that is not subject to change except through very slow and gradual processes. Consequently, if working hours are cut one quarter, production is also cut approximately one quarter, and the average amount of goods available for each person is reduced accordingly. Real wages that is, wages measured in buying power, the only economic standard of measurement that has any real meaning—are therefore reduced 25 percent regardless of whether or not money wages are maintained. If the same weekly wages are paid for shorter hours and less production, prices go up in proportion.
Of course, if one particular group of workers can obtain a reduction in working hours without a corresponding loss in pay while hours remain unchanged elsewhere, the favored group will prosper at the expense of all other workers, just as they would if they alone were able to secure higher wages. But we cannot all gain at each other’s expense, and if all are treated equitably and the reduction in working hours is the same for everyone, then everyone has to pay for the added leisure by a reduction in his real wages. There is no way by which the fundamental laws governing the economy can be evaded. We cannot get something for nothing.
All other proposals that contemplate improving the employment situation by reducing the working force or the hours of work—earlier retirement of workers, keeping the youth in school longer, more and longer vacations, etc.—are equally as unsound as the reduction of the work week, so far as their employment aspects are concerned. Some of them may very well have merits of a different nature, but all proposals of this kind should be judged on the basis of the relative value of goods and leisure, together with whatever non-economic justification they may have. They contribute nothing toward improvement of the employment situation.
ERROR NO. 3: Unemployment during recessions is due to overproduction during the booms.
The factual evidence which refutes this fallacy has already been cited. If such an explanation were true, then there would be a huge piling up of goods inventories during the boom periods, and a gradual utilization of these stocks during the recession that follows. Actually, the statistics show that the inventory fluctuations are relatively insignificant, seldom more than a small fraction of one percent of the total national product, and the variations that do occur are almost invariably the direct opposite of what this overproduction theory envisions; that is, inventories fall during the boom periods and do not begin to rise again until after the downswing starts.
ERROR NO. 4: Continuous growth of the economy is essential for full employment.
“The essential requirement for the maintenance of high employment is a steady growth of total demand for goods and services at an adequate rate”.24 This quotation from Stein and Denison is a statement of a point of view that is definitely in the 100 percent class; it is accepted by almost 100 percent of the economists, and it is 100 percent wrong.
Once again we need to turn back to a consideration of the status of the small economic unit in order to get the facts into the proper perspective. Obviously a small primitive community does not have to grow, nor does it have to change. It can go on day after day and year after year on essentially the same basis; with a stable population, with everyone working, and, because technological progress is practically non-existent, without appreciable change in the rate of production. Such communities are not hypothetical; they have existed and do exist even today. Furthermore, it is clear that if the environmental factors become less favorable—if rainfall decreases, for instance—there might well be a negative rate of “growth of total demand for goods and services” in such a community without creating any unemployment. In fact, under such circumstances there would probably be a tendency to require more hours of labor by the members of the community in order to offset, to some degree, the loss in production due to the harsher environment.
In this simple type of economic organization, where money is unknown, there is no correlation between employment and investment, or between employment and saving, or between employment and growth. Everyone who is able to work does work, and whatever the community is able to produce is consumed. The nature of the allocation of effort between goods for immediate consumption, durable goods, and production tools may have an important bearing on the current and future standard of living, but it has no bearing on employment. If the workers have a voice in the matter, their hours of employment are determined by the extent to which they are willing and able to work to obtain the goods that they desire. If they are subject to authoritarian control the determining factors are their ability to work and the extent to which the rulers consider it advisable (or safe) to drive them.
Now if we extrapolate this simple situation to larger and more complex units, it can readily be seen that exactly the same considerations still apply to the matter of employment, irrespective of the size or complexity of the economic organization. The objective of economic effort remains the same: individuals work in order that they may have the benefit of the products of their effort. If the prevailing economic system, whatever it may be, operates properly, the individual will still work that amount of time that is necessary in order to obtain the goods that he wants. Whether the economy is growing or not growing is wholly irrelevant. Whenever, as at the present time, the economy is not operating properly, with the result that the individual workers are not able to exercise the “work or leisure” option, the action that needs to be taken is to correct whatever defects exist in the employment machinery. Economic growth is an entirely independent matter that should be considered on its own merits.
There is much concern at the moment because of an apparent conflict between major economic objectives. As expressed by Clark Kerr, “The policies and conditions which give rise to stability of the price level are not always the same as those which yield full employment or high rates of growth”.25 According to the findings of this work, Kerr’s statement is meaningless. There are no “policies and conditions” which determine the stability of the price level and the rate of growth and the level of employment. There are certain policies and conditions, specifically those having to do with the time at which purchasing power is utilized, that determine the stability or instability of the price level; there are other policies and conditions, specifically those having to do with technological progress and the rate of capital formation, which determine the rate of growth of the economy; and there are still other policies and conditions, the nature of which will be discussed in Chapter VI, that determine the level of employment. All of our realistic objectives in these areas can be attained by measures of the appropriate character that operate independently of each other.
ERROR NO. 5: Technological progress, research and invention are necessary in order to provide jobs for all.
Two different arguments are advanced in support of this theory. To one school of thought this is simply a corollary of the growth hypothesis. If we must have growth, they argue, then we must develop new and better methods, since it is primarily through such improvements that we can achieve growth. The previous comments regarding the growth error apply to this hypothesis as well.
The other line of argument is that the population is currently increasing at a substantial rate, and therefore a large number of additional jobs will have to be created to provide employment for the additional workers. These jobs will not be forthcoming, say those who adhere to this point of view, unless we develop new products and new services that are attractive to the consumers. The fallacy in this reasoning is that the additional population has the same needs and desires for the current types of goods as the existing population, and consequently if x percent of the existing work force is now employed in producing goods of these categories, it will require the efforts of x percent of the additional workers to produce the additional goods of the same kind that will be required by the additional population. The extent to which we are able to approach full employment is independent both of the size of the population and the size of the labor force.
ERROR NO. 6: Lack of natural resources causes unemployment.
We are frequently told that Country A cannot maintain full employment because it lacks the natural resources to serve as a basis for industry. The same argument is occasionally encountered in discussions of regional problems in the United States. Since it is evident that the existence of natural resources coal, iron, oil, timber, etc.—does normally result in the establishment and growth of industries utilizing these natural products, this contention has an air of plausibility. The erroneous nature of the underlying premises is clearly visible, however, if we look at the matter from the standpoint of a Crusoe economy. Obviously Crusoe’s work would not be reduced if he moved to an island less favored by nature; on the contrary, he would have to do more work to maintain the same standard of living. The same principle still holds good in the world of today. A country or region deficient in natural resources does not have less work to do than one more richly endowed; it has to do more work to get the same results. Such a country may lack many things, but there is one thing it does not lack, and that is plenty of work to be done. Whether or not it is so organized economically and politically that this work actually gets done is another issue.
All of the errors discussed in the preceding chapter owe their existence wholly or in large part to the fallacious basic assumption that there is a limit to the amount of work to be done. In the discussion that follows we will be concerned mainly with a similar family of economic errors stemming primarily from a somewhat vague concept that we may rather loosely express by the statement that “employment creates employment”.
ERROR NO. 7: The multiplier.
In its simplest form, the erroneous basic concept that is the principal subject of this chapter makes its appearance as J. M. Keynes’ famous “multiplier”. Most of the standard textbooks give long and complicated explanations of the so-called multiplier effect, involving the “propensity to consume” and other currently popular economic concepts, but we can find simpler and more understandable definitions elsewhere in the economic literature. Robert Heilbroner says, “The multiplier describes the fact that additions to spending (or diminutions in spending) have an impact on income that is greater than the original increase or decrease in spending itself”26
Joan Robinson puts it this way: “When an increase in investment takes place… employment will increase, and more profits will be earned, in making the… other goods for which the market has now improved… Larger incomes again lead to more consumption, and so on round and round”.27 This is the notorious “pump-priming” theory which Keynes persuaded the Roosevelt administration to use as the primary weapon in combating the huge unemployment created by the Great Depression, and which proved such a resounding failure in practice. As visualized by Keynes and his disciples, all that is necessary is to make a start by providing some new employment in one place or another—just enough to prime the pump—and this will set regenerative forces in motion that will ultimately result in a very much greater increase in employment.
Theoretically, if this process of increasing employment works out as the sponsors of the “multiplier” contemplate, there should be no end to the multiplying effect, and once started, even in a small way, it should go on and on until the entire labor force is employed. As Hansen sees the picture:
It is quite clear that any increase in employment in construction work and in the manufacture of materials entering into construction will increase the demand for consumers’ goods and so cause an increase in secondary employment as a byproduct of the increase in primary employment. This is not difficult to see. Indeed, as soon as one thinks about it, it is much more difficult to see why the “chain reaction” does not go on and on.28
But the reaction definitely does not go on and on, and the “pump primers” therefore recognize that there must be leakages somewhere in the process so that the multiplier has a finite rather than an infinite value. Keynes believed that the multiplier would not be less than 5 in a country such as the United States, and talks of values as high as 10. If “the multiplier is 10”, he says, “the total employment caused by (e.g.) increased public works will be ten times the primary employment provided by the public works themselves”.29
One of the difficult tasks involved in a presentation such as that in the present work is to place sufficient emphasis on the most glaring weaknesses of existing thought without stepping on so many sensitive toes that the logic of the presentation is lost in the confusion of antagonistic emotional reactions. Ordinarily it is preferable to tone down the discussion, and to treat the prevailing errors somewhat more gently than they actually deserve. In describing the accepted thinking in the employment area, however, it is essential to try to convey to the reader a full appreciation of the almost incredible manner in which far-reaching basic assumptions extracted out of nothing at all have been accepted by economist and layman alike, without any serious attempt to check them against readily ascertainable facts that would have riddled them completely. Here we must emphasize, regardless of how many tender feelings may be bruised, that this is not a case in which the economic profession has considered the situation carefully and has arrived at the wrong conclusions, something that can easily happen to anyone. This is a case where the profession has based its conclusions on assumptions whose falsity is practically self-evident under even a minimum of critical scrutiny.
No one who observes the millions of idle workers during a major depression, lacking the goods to make life tolerable, and able and willing—desperately anxious, even—to work to obtain those goods, and who still contends that there is no more work to be done, and hence no potential jobs for these workers, can lay claim to having given any intelligent thought to the situation. He has simply taken it for granted, without doing any serious thinking at all on the subject, that since these idle workers cannot find jobs, there are no jobs, actual or potential. Once this colossal error is accepted, the door is wide open for a whole assortment of fallacious ideas of the kind discussed in the preceding chapter. Before we can even begin to make any real progress toward a solution of the unemployment problem it is absolutely essential to get rid of this pernicious doctrine and all of its derivative errors listed in Chapter IV.
The widespread acceptance of the basic fallacy underlying the first group of errors that will be examined in this present chapter, the concept embodied in Keynes’ multiplier, is perhaps a little more understandable than acceptance of the patently false contention that unemployment is due to a lack of potential jobs, because the erroneous nature of this assumption is not quite as self evident, but even so, it would have taken no more than a minimum amount of critical scrutiny to expose the fallacy. The reason why Keynes and his followers who espouse the multiplier doctrine have failed to give the matter this minimum amount of thoughtful consideration is not entirely clear, but we may charitably assume that they simply did not recognize that there was any question involved which required any such consideration. This is obviously true of Alvin Hansen, for example. “It is quite clear”, says Hansen, in the statement previously quoted, “that any increase in employment in construction work… will increase the demand for consumers’ goods”, and since this was so clear to him, he evidently did not consider it necessary to make any careful examination of the proposition to see whether or not it is actually true.
This is a very common error in human thought. Elaborate and carefully reasoned theories are based on premises that are simply taken for granted, because they seem obvious on superficial consideration, and when these theories fail to work out in practice—when the multiplier fails to multiply, for example—their sponsors still cling to them as stubbornly as ever, on the ground, as Keynes once commented in a case of this kind, that the logic of their development is “indefeasible”. But logic involves more than good reasoning. However sound the reasoning process may be, the right answers cannot be obtained from the wrong premises, and a careful scrutiny of the premises upon which these theories are based is therefore essential to a determination of their validity or lack of validity. A thorough, painstaking, and systematic examination of economic fundamentals, and the basic assumptions upon which current economic theory is founded, is one of the principal features of this present work, one of the major items that distinguishes the scientific approach from that of the present-day socio-economist, and the new and different conclusions which are here reached with respect to many economic issues are mainly the result of the discovery of serious errors in basic assumptions that have hitherto been accepted without examination.
In the case now under consideration, a critical analysis quickly shows that the central idea behind the concept of the multiplier, the assumption that the payments to those who supply the labor and capital required by an added increment of production will increase the purchasing power available for buying other goods, is completely false. A simple mathematical example will demonstrate this fact. Let us assume, for purposes of this inquiry, that the total production in a certain self-contained community has a value of $1,000,000 per year. This means that the suppliers of the labor and capital services utilized in producing these goods are paid $1,000,000, which is then available for purchasing the million dollars worth of goods that are produced. Now let us assume that a new factory in this community employs hitherto idle labor and starts producing goods valued at $100,000 per year. Since those who supply the labor and capital for this new venture, directly or indirectly, now receive $100,000 annually for their services, the total purchasing power of the community has been increased to $1,100,000. Out of this total an amount of $100,000 is required for the purchase of the products of the new factory, leaving $1,000,000 available for the purchase of all other goods. This, of course, is just exactly where we were to start with.
This example illustrates a general proposition. We can substitute any community for the one specified, with any current rate of production (corrected for external transactions, if any), and assume any addition to production, and we will always arrive at the same answer: the full amount of the purchasing power generated by the production of the additional goods is required for the purchase of those goods. The community has gained to the extent of the value of the additional goods produced, but there has been no addition to the purchasing power available for buying other goods.
The introduction of additional goods into the community by reason of the new employment does have an effect in changing value relationships, and there is always a possibility that some enterprising firm or individual may see an opportunity to take advantage of this change by undertaking some kind of a productive activity. But there is no assurance that this kind of a secondary effect will materialize, nor will it necessarily increase total production and employment if it does, as it may very well take place at the expense of other producers, in which case it may even reduce total employment. The “multiplier” is therefore wholly fictitious. Any added employment enriches the community to the extent of the value of the products of that employment, but it serves no other economic purpose; there is no “pump priming” effect on employment in general. The failure of the pump priming undertaken in the thirties was not accidental; it was inevitable.
ERROR NO. 8: Non-productive employment increases the wealth of the community.
One of the well-known aspects of erroneous basic ideas is that a logical extension of these ideas leads to absurdities. This is the principle of the reductio ad absurdum, one of the standard tools of logical analysis. The multiplier concept provides a good illustration, as a logical development of the consequences of this proposition leads to the absurd conclusion that assigning individuals to useless work enriches the community.
There is a very strong tendency on the part of the specialist in any branch of human endeavor to belittle the conclusions of so-called “common sense” in application to his field of specialization, even to the extent of ridiculing those who attempt to look at these subjects from a common sense viewpoint. It is true, of course, that in many instances the prevailing common sense conclusion is seriously in error but, in general, such mistakes are due to inadequate or erroneous basic information rather than to anything inherently wrong in the idea of applying common sense to the matter in question. Common sense is essentially the result of a largely unconscious process in which past experience is analyzed and rather hazy generalizations are formulated as guides for the appraisal of new ideas. It therefore does in a loose and unsystematic manner the same kind of thing that science does in an organized and systematic way, and unless it is thrown off the track by a misunderstanding of the true nature of some pertinent factor (which could, and often does, happen to scientific analysis as well) common sense is very likely to arrive at conclusions that are at least a close approximation to the truth. It follows that unless a significant error can be clearly recognized in the premises on which the common sense viewpoint is based, any conclusions that are directly opposed to common sense should be examined very critically and with the utmost care before they are accepted.
This error number eight demonstrates the result of ignoring that wise precaution. Nothing could be more directly opposed to common sense in the economic field than the idea that we can enrich ourselves by doing useless work, yet this is exactly what Keynes, Beveridge, Myrdal, and others of the same school of thought are specifically claiming. Keynes tells us explicitly, “Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen in the principles of the classical economics stands in the way of anything better”.30 Both Keynes and Beveridge emphasize that it is not necessary for the public works programs which they advocate as a cure for unemployment to produce anything of value. Beveridge, in his “full employment” program, flatly proclaims the doctrine that the usefulness of the work is a minor matter, and where other employment is lacking he suggests digging holes and filling them up again.31 Keynes agrees: “Public works even of doubtful utility may pay for themselves over and over again at a time of severe unemployment”.32
It is a sad commentary on the state of economic knowledge two hundred years after Adam Smith that leading figures in the economic profession can advance, in all seriousness, such a preposterous contention as this assertion that we can make ourselves prosperous by spending our time and effort on useless tasks. Economists are rather prone to bewail the “economic illiteracy” of the general public which makes them unwilling in so many instances to accept the prescriptions that are handed to them by the economic “authorities”, and to do full justice to all, it must be conceded that in many cases the public would be well-advised to pay more attention to the economists. However, in dealing with many other issues, such as this question of useless work, it is decidedly fortunate for the nation that the lawmakers and the general public listen to the ordinary common sense rather than to Keynes and his disciples.
Both the economists and the nation that they are attempting to serve would be better off if the economic profession would make more use of simple economic concepts such as that of a Crusoe economy, instead of ridiculing and belittling the study of these simple situations. An explanation in terms of these simple concepts would be much more likely to be understandable to the ordinary layman, and the general public would be much more inclined to accept the economists’ recommendations if they were set forth in these terms. If Keynes, for example, were able to show how Crusoe could make himself more comfortable and prosperous by spending his time doing useless work, he would find it a great deal easier to convince the general public of the validity of his contentions with respect to the virtues of pyramid building by modern society. On the other hand, if the general practice of his profession were such as to require him to study the applicability of his theories to a Crusoe economy before publicizing them, there would be far less likelihood of his bringing out any such fantastic idea.
It cannot be too strongly emphasized that whatever economic benefit we get from any work that we do, public or private, is confined entirely to the value of the product. There is no gain to any other segment of the economy. If we undertake a public works project, we simply buy that project, just as we buy anything else. If we build pyramids, as Keynes suggested, then we are buying pyramids. We pay a certain price, and for this we get the product, the pyramid, or whatever it may be. If this product has little or no value to us, then we have simply wasted whatever we put into it. The widespread impression that putting men to work on public projects “increases purchasing power” and improves general business conditions is a delusion: a very costly delusion. The full amount of the purchasing power paid out to those who supply the labor and capital for a public project is required to buy (that is, to pay for) that project itself, and there is nothing left over for buying anything else.
Furthermore, it should be recognized that while the nation as a whole gains a pyramid, if workers who would otherwise be idle are assigned to pyramid building, the ability of regularly employed workers and other recipients of normal incomes to buy consumer goods is reduced by the difference between the cost of the pyramid and the cost of maintaining the workers in idleness. The taxpayer must simply accept his interest in the pyramid in lieu of the consumer goods that he would otherwise be able to buy. In order that there may be any gain to the taxpayers by reason of providing employment for those who would otherwise be idle, the employment must be self-supporting; that is, the marketable values produced must at least be commensurate with the net cost.
ERROR NO. 9: “Getting money into circulation” improves business conditions and creates employment.
This is the crude form of the multiplier theory, a form in which it is doubly dangerous because it is so vague that it can be applied to almost any kind of economic quackery, ranging all the way from Beveridge’s “useless employment” and Keynes’ “wasteful expenditure” to such economic absurdities as Social Credit and the Townsend Plan. Those employed on useless work, contends Beveridge, will give employment to others “through what they earn and spend”. The basic idea behind this statement is absolutely false. If men who would otherwise be idle are given employment on useless work and are paid from government funds, the only economic result is that those who are regularly employed are forced to share their earnings with the erstwhile unemployed. The total real income, the value of the useful goods produced, is not changed in any way; it is merely divided into more and smaller shares. A job is self sustaining only if it produces marketable values at least equal to the compensation paid to the worker. Whenever we create jobs that are not self sustaining, the income of the regularly employed members of the community has to be reduced to make up the difference between the values produced and the amount that the workers are paid. There is no magic by which the deficiency can be met in any other way. Plain ordinary common sense will tell us that much, and the most elaborate and exhaustive study of the economic system cannot do anything but confirm it.
All of the consumer subsidy programs that aim to bolster the economy by payments to the aged, to the indigent, to some other special group, or to the population at large, from government funds, have exactly the same economic standing. These schemes for “getting money into circulation” create nothing, and since “something for nothing” is a delusion, whatever gains accrue to the recipients of the subsidies must come out of the pockets of the other members of the community. All that such programs accomplish is to transfer purchasing power from one group of consumers to another. They have no effect, favorable or otherwise, on the general operation of the economy.
ERROR NO. 10: High wage rates increase consumer buying power, and therefore increase employment.
One of the amazing features of present-day thought with respect to employment is that such a large proportion of the most widely accepted ideas are not merely incomplete or subject to minor errors; they are completely and utterly wrong. None of the concepts discussed thus far in this chapter is even partially correct. Not one has any validity at all. The same is true of this error number 10, and here again, there has been an almost incredible failure to look at the facts which so clearly show that the prevailing belief is untenable. The most obvious and most utterly conclusive of these facts is that this alleged method of increasing buying power and employment does not work when it is deliberately utilized for the purpose. There is probably no country in the world where this has not been tried time and time again. If high wage rates were the answer to the major economic problems, these problems would not long endure; raising wages is one of the easiest, most popular, and most commonly invoked of all of the measures that are employed by nations in their attempts to get out of economic difficulties of one kind or another. But the result is always inflation, not more buying power. And, of course, it could not be otherwise. The buying power of a nation, in real terms, is equal to its production, and the money wage rate simply establishes the ratio between money purchasing power and real purchasing power. Changing this ratio by increasing wages does not alter real purchasing power in the least.
It is true that this is not an economists’ error; it is a popular error, one that is most aggressively promoted by the labor unions, whose members definitely do profit, at the expense of all other workers, if their wages can be raised earlier and higher than the others. Few present-day economists, aside from those in the employ of the labor unions, lend any support to the popular opinion that the high standard of living in the United States is due to the high level of wages. Anyone who has given the subject even a minimum amount of careful study realizes that it is a high rate of productivity that makes a high standard of living possible, not a high money wage rate. But the economists are not able to perform their function of straightening out the warped thinking on this subject because the economic theories to which they subscribe do not enable them to understand just what a change in money wage rates does do to the economy in general. “The consequences of general wage change remain among the most controversial and least understood subjects in economics”,33 admits Lloyd G. Reynolds. In the first edition of his popular textbook, Paul Samuelson also made a revealing statement on this subject:
The only formally satisfactory theory of determination of factor prices for the economy as a whole is one of “general equilibrium”, in which there is a simultaneous interplay of the supplies and demands for all economic magnitudes under conditions of either perfect or imperfect competition as the case may be. Unfortunately, there is little that can be said about this general supply and demand problem which is very useful in understanding the distribution of income.34
These words not only admit inability to understand the wage situation but also, quite unintentionally, reveal the reason for this inability. Samuelson characterizes the determination of “factor prices”, including wages, as a “supply and demand problem”. This is another of the serious errors in present-day economic thought, an error which was pointed out specifically by Keynes, but persists, seemingly as widely accepted as ever. As Keynes demonstrated in his analysis, the determination of the real wage level is not a supply and demand problem, and it cannot be solved by supply and demand methods. Average real wages under any given set of economic conditions are determined solely by productive efficiency, and they cannot be altered by any change in money wages. This means that the true price of labor cannot be changed by any manipulation of the money wage rate, and it is recognized by all that unless the price can be varied, supply and demand considerations are not applicable. There is no expedient, Keynes insisted (correctly), by which labor as a whole can change its real wage “by making revised money bargains with the entrepreneurs”.35
If foreign trade is conducted on an “even exchange” basis, without any residual balance of trade one way or the other, it is a profitable activity for all concerned, but it is not a job producer. On the contrary, the gains made by exchanging products which we produce efficiently for others which can be produced at lower cost in foreign lands enable us to maintain the same standard of living with less labor, if we choose to take the benefit in this way. If we maintain a so-called “favorable” balance of trade an excess of exports over imports—the foreign trade creates employment, but, to the domestic economy, it is non—productive (useless) employment, the equivalent of Beveridge’s digging useless holes. Of course, the foreign recipients of the products of this employment benefit from them, and if our citizens wish to donate their labor as a form of “foreign aid”, they get whatever satisfaction may be derived from helping their neighbors, but the “favorable” balance is a burden on the domestic economy, not something beneficial.
ERROR NO. 12: Unemployment is an unavoidable product of the business cycle.
It is true that any business recession, whether or not it actually reaches depression proportions, has an adverse effect on employment under the conditions that now exist, and in a serious depression the fall in employment is catastrophic. This reduction in employment, and consequently in production, is the most serious feature of the depression—the thing that occasions the widespread distress and hardship that have placed depressions next to wars as the greatest of national calamities—and it is only natural that this should come to be regarded as the essence of the depression. But, in fact, as will be demonstrated in the pages that follow, the current stage of the business cycle is only one of many items that have, or could have, an effect on the controlling factor that determines the amount of unemployment. Thus, there is no direct and necessary connection between the stage of the business cycle and the rate of unemployment. By utilizing measures of the kind described in Part Two of this work full employment could be maintained even in the most severe depression.
ERROR NO. 13: We cannot have full employment without some inflation.
Here is a strange outgrowth of error number 12; doubly strange in that it is not only wildly implausible in the light of economic experience as a whole, but cannot be logically derived from the premises on which it is based. Nevertheless, it is widely accepted, and freely asserted in the most uncompromising manner. “The lesson (from experience in the post-war years) is that there can be full employment only at the expense of monetary stability, and reasonable monetary stability only at the expense of some unemployment”.36 So says the summary of an appraisal of the problem that appeared in the October 1966 issue of Fortune. Walter Heller expresses the same idea in asserting that “there is no earthly way… to achieve price stability or to deflate without knocking people out of jobs”.37
As indicated in the first of these quotations, the economists’ conclusion as to the existence of this dilemma is based on empirical studies, although the interpretation of the results of those studies has been influenced to a major degree by the economic theories of J. M. Keynes. The prevailing tendency is to discuss the problem in terms of the “Phillips curve”, an empirical relation between wage increases and unemployment formulated by A. W. Phillips of the London School of Economics. “The existence of Phillips curves”, says G. C. Archibald, “in the sense of well-established relations between the rate of change of wages and the level of unemployment, is fairly clear for the post-war period”.38
The Phillips curve can also be expressed in the more significant form of a relation between price increases (inflation) and unemployment, and modified curves of this nature can also be found in the economic literature. (See, for instance, the curve by Samuelson and Solow in the issue of Fortune mentioned above.) A few investigators working with the empirical data have even gone so far as to derive a specific numerical value for the relation between the rate of unemployment and the rate of inflation. Klein and Bodkin, for example, in a study prepared for the Commission on Money and Credit, conclude that every additional million persons added to the unemployment rolls would reduce the rate of inflation by about ¾ index points.39
The identification of empirical relationships of this nature is a basic technique in science, and information thus derived plays a significant role in scientific research. But the interpretation of the empirical findings, particularly with respect to whatever limitations may exist on the generality of the observed relations, introduces many opportunities for error, and even in the scientific field, where the ever present hazard of misinterpretation is clearly recognized, and rigorous precautions are observed, investigators are often led astray by misjudging the meaning of the empirical results. It is not surprising, therefore, that the economists, to whom this is a relatively new field of activity, have made some serious errors in their interpretation of the results of the employment studies.
What the studies by Phillips and others have actually demonstrated is that during a certain selected period of time—one in which governmental policies, labor relations, and other influences, aside from the normal fluctuations of the business cycle, that might be expected to have a bearing on employment, were reasonably stable—there has been a relation of an inverse nature between inflation and unemployment. The conclusion that we are justified in drawing from the observed facts is that under some circumstances inflation has a beneficial effect on employment. There is nothing in the observations that warrants concluding, as the economists have done, that this is a general relationship: one that holds good under all circumstances. The experience of the last few years, in which high rates of unemployment have coexisted with high rates of inflation, merely emphasizes what should have been clear from the start; that is, extrapolating a very limited experience into a general relation is unsound practice.
History shows the instability of the Phillips curve tradeoff—if, indeed, there is any effective trade—of.40 (George L. Bach)
The empirical observations provide still less justification for the prevailing opinion that inflation is the only means by which employment can be increased. Obviously, inability to detect the effects of other employment factors during the relatively short period under consideration (a period deliberately selected because of the apparent absence of some of the influences that may have affected employment at other times) does not even demonstrate that no such factors were operative during this period. It merely shows that the net effect of any favorable and unfavorable factors that may have existed was not great enough to be detected. The empirical evidence provides no assurance that these factors, if they exist, will always be negligible in their net effect, nor does it exclude the possibility that under different conditions there may be still other factors that enter into the employment situation.
Furthermore, conclusions derived from experience during a period in which employment was allowed to drift with the economic tides, and was not subjected to any significant degree of deliberate control, cannot legitimately be applied to a program such as that contemplated in this work, in which it is proposed to create conditions that will result in full employment. Thus, in spite of the contention that it is grounded in experience, the current belief that full employment cannot be attained without inflation is wholly unfounded. The mistake in this instance is not drawing conclusions out of thin air, the practice that is responsible for so many of the errors discussed in this and the preceding chapter, but reaching conclusions that are far wider than anything the evidence will support. The relation between inflation and employment, and the significance of J. M. Keynes’ theories in this area, will be discussed further in Part Two, after some theoretical groundwork has been laid in Chapter VI.
ERRORS: General comments
This long list of errors in current thought with respect to employment should be sufficient, even without the further evidence of a similar nature that will be forthcoming later in the discussion, to confirm the earlier assertion that current thought on this subject is almost totally wrong. It must be conceded that such a conclusion is difficult to accept, in spite of the fact that the evidence in its support is simply overwhelming. On first consideration, the possibility that a large portion of the extensive and detailed structure of employment theory laboriously erected by generations of competent and conscientious economists could be totally erroneous seems hardly credible. But a closer examination of the factors involved, giving due weight to the known characteristics of human thought processes, makes it evident that such a result is not only possible, but inevitable, under the circumstances that have existed during the time that this system of theory has been developed.
To begin with, it should be realized that every basic error in a theoretical development gives rise to a great many derivative errors. Most of the items discussed in this and the preceding chapter, for example, are simply variations or logical consequences of two basic misconceptions. Hence, instead of saying that a very large part of the existing structure of theory is wrong, we can make the same point by saying that the existing theoretical structure contains two serious basic errors: a statement that is more readily acceptable, even though it amounts to the same thing. Furthermore, there is a very good reason why we can expect to find some such mistakes in the foundations of existing theory.
The key factor here is the well-known tendency of the human individual to believe that which he wants to believe, and to reject that which is emotionally distasteful to him. One of the principal reasons why physical science has progressed so much faster than other fields of endeavor is that comparatively few scientific items excite any significant emotional reaction. No one is much concerned, for instance, whether “quarks” exist or do not exist, and the current issue as to their existence can be pursued on an open-minded basis, at least until some definite opinions are reached one way or the other. From this point on, there will be a tendency on the part of each individual investigator to accept any evidence confirming his opinion more readily than any evidence against it. Ultimately, when an idea achieves wide acceptance, and the opinion that it is correct becomes general, the bias in its favor increases to the point where it constitutes an obstacle to further progress, as any innovator in the scientific field can testify. But as long as a person is biased in favor of an opinion merely because it is his opinion, and not because of any emotional attachment to the underlying ideas, the obstacle is not insurmountable.
However, in the non-scientific fields, including economics, the emotional factor is dominant. Man wants to live better with less effort, and he therefore has a built-in bias toward any theories or proposals that promise more for less—the contention that raising wages improves the economic status of the workers, for example—and a similar bias against all attempts to point out the painful realities, such as the fact that the citizens of the nation can have more goods to enjoy only if they produce those goods. In the absence of any professional commitment to submit all conclusions to an adequate test of some kind, such as the agreement with the observed and measured facts which is, at least in principle, required by physical science, this bias in favor of the pleasant dreams and against the hard realities of economic life extends to the professional economists as definitely as to the ordinary layman.
But economics in its entirety is based on the unwelcome fact that man must work to produce that which he wishes enjoy, and the laws and principles by which the economy is governed are, by and large, nothing more than the details of how this edict is enforced. The bias against the unpleasant and the disagreeable, which the economist shares with the man-in-the-street, is therefore a prejudice against economic reality: an attitude that is bound to lead to a great many wrong conclusions. It should be no occasion for surprise, therefore, when a cold-blooded scientific analysis of economic processes, such as that carried out in this work, finds the existing structure of theory honeycombed with error. Under the circumstances this result was inevitable.
Efforts to evade the “work or starve” edict, the decree that man can have what he wants in the economic field only if he earns it, usually take the form of more or less elaborate programs designed to get something for nothing, and one of the principal tasks carried out in the study here being reported was to remove the wrappings and the ornamentation from the most popular of the current theories and proposals for economic betterment, and to verify that at bottom they are nothing but schemes that attempt to circumvent the natural law which prohibits something for nothing by approaching their objective in a circuitous manner. However ingenious these schemes may be, whether they take the form of subsidies, wage or price manipulation, monetary devices, or more complicated economic contrivances of one kind or another, they never work. The result is never that which the originators promise; it is always inflation or some other undesirable product. We may epitomize the existing situation by stating that the greatest error of modern economic thought, the illusion that underlies most of the specific errors that have been discussed in the last two chapters, as well as those considered elsewhere in the pages of this work, is the widespread and persistent belief in the reality of “something for nothing”.
Throughout the realm of naturally occurring processes, dispersion of individuals about the normal or average point follows some probability function of the general type
y = ke-ax²
This particular expression is one way of writing what is known as the normal probability law. An extraordinary range of phenomena, including such diverse items as dispersion of shots fired at a target, distribution of heights and weights, and errors in measurement, has been found to be governed by the normal law or its close relatives, and it is quite apparent that this is a relationship of general applicability in connection with random occurrences.
One of the fundamental facts of economics is that there is a variation of a random nature in the efficiencies of the individual production units. Many factors contribute to this result. Some units have better equipment to work with, some have more favorable locations, some have a more competent labor supply to draw from, some have access to better or more plentiful raw materials, and above all, some have the benefit of more competent managerial and supervisory staffs. The latter factor alone would be sufficient to assure a wide distribution of efficiencies, since human abilities in any field are extremely variable—nature does not pay any attention to the dictum that “All men are created equal”. We can be certain, therefore, that the efficiencies of the producing units will be distributed over a substantial range, in accordance with a probability function resembling the normal probability law; that is, a large proportion of the total number will occupy positions in the vicinity of the average, with the percentages dropping off sharply in both directions, so that there are many that are moderately above or moderately below the average, but relatively few that are much above or much below.
If we represent the total production of goods in a self-contained economy by V, the average production per worker is V/n, where the symbol n denotes the equivalent number of full time workers. In the event that all producers were equally efficient in the creation of values, the average production per worker in each producing unit would also be V/n. But since all producers are not equally efficient, the actual average production per worker in each individual production unit is kV/n, where k is a factor representing the relative production efficiency. At average efficiency this factor k is equal to unity.
The distribution of productive efficiency between individual workers or individual producers is not within our control. It belongs to that important group of phenomena which is governed by natural laws outside the scope of human interference. It does not follow, however, that these phenomena are outside our field of knowledge. On the contrary, many of the apparently haphazard and unpredictable items that go to make up the world as we find it are, in reality, subject to precise mathematical evaluation, as long as we deal with the characteristics of a group and do not attempt to treat individuals separately. In the present instance, we know that the factor k is variable. We do not need to know the exact values applicable to the different producers. All that is of interest to us, for present purposes, is that these values follow a probability relationship, and the distribution of the values is essentially independent of the absolute level of productivity. It therefore will not be materially altered by any change that may take place due to a general improvement in technological knowledge. Such an improvement merely pushes the whole distribution curve up without changing its general shape. We can therefore set down as the first principle entering into the employment situation:
PRINCIPLE I: There is a substantial and unavoidable variation in the productive efficiencies of individual producing units.
The quantity kV/n is not only the average production per worker in the individual unit. When expressed in monetary terms it also represents the amount per worker employed that is available to the producer for meeting the costs of production. But in our modern economic organization there is no assurance that this will be enough to meet the minimum production cost. Most of the components of this cost are determined by considerations that have no relation to the actual values produced by the individual enterprise. Taxes are largely inflexible, the only outstanding exception being taxes on net income. Interest is as immovable as a granite cliff. Rents are much the same. Wages were somewhat flexible in earlier days, but the wage structure is becoming more and more rigid by reason of legal action and pressure from the labor unions. Only profits are free to accommodate themselves to the income of the enterprise.
The sum of the fixed components establishes a minimum production price (cost) which the producer must be prepared to meet in order to stay in business. The only way it can be met is through the creation of sufficient values by the act of production (unless the enterprise is subsidized). The production kV/n must therefore be high enough to equal the minimum production price, otherwise the business fails. In mathematical terms, the factor k must not fall below a fixed limit which we will hereafter call the minimum productivity limit, or survival limit.
PRINCIPLE II: The fixed components of production price establish a minimum productivity limit (survival limit) below which producers cannot continue operation.
But this is just the thing for which we have been looking: an explanation of the existence of unemployment. We have found that there is a practically unlimited amount of work to be done, and hence there are countless potential jobs available; far more potential jobs than there are potential workers. Something, however, keeps these potential jobs from becoming actual jobs. Some powerful and relentless factor interposes a veto and forces millions of workers into idleness while an untold amount of useful work remains undone. Obviously we must unmask this grim tyrant and learn its nature before we can undertake development of remedial measures in an intelligent way. The answer stands out in bold relief just as soon as we begin considering the problem in an orderly and unbiased manner. Employment is not correlated with the wage level, or the “propensity to consume”, or the “maturity” of the economic system, or the interest rate, or the current level of investment, or the activity of sunspots. It is a function of the survival limit. The higher the survival limit, the more difficult it is for business enterprises to meet the minimum requirements for continued operation, and the more enterprises that fail to meet these requirements and close their doors, the greater the unemployment becomes.
PRINCIPLE III: Volume of employment and efficiency of production, other things being equal, are functions of the survival limit.
This is the answer to the greatest enigma of the whole employment situation: why there are not enough jobs when even basic needs remain unfilled. Neither the amount of potential work nor the number of potential workers affects the unemployment rate.
PRINCIPLE IV: The percentage of unemployment is independent of the size of the labor force.
If the survival limit is low enough, all job seekers can have work irrespective of the total number of workers involved. If the limit is raised too high, a certain percentage of the workers will be without employment no matter how much work there is to be done. Addition of workers to the labor force will not cause unemployment, nor will withdrawal of workers cure it. The percentage of unemployment is not determined by the size of the labor force, but by the level at which the survival limit is set by the prevailing social and economic policies, and the relation of this level to the natural distribution of human abilities.
Here, in these four basic principles that have been stated is the general theory of employment that we need in order to chart our way toward the goal of a guarantee of full primary employment. Previous theories, we now find, have been looking in the wrong directions. Employment is not a wage issue, as seen by the classical economists, or a demand issue, as visualized by the Keynesians, nor is it a question of a limit to the amount of work to be done, as the visionaries of the “Age of Abundance” school contend. Aside from the frictional unemployment due to the shortcomings of the agency, or organization, (if any) that is responsible for getting workers into jobs that are ready and waiting for them, whatever unemployment exists is due to the unrealistically high efficiency requirement that has been imposed, quite unintentionally, on the individual production units as a condition of continuing operation. We cannot have full employment under present conditions because there are not enough producing enterprises in operation to supply the necessary jobs, and there are not enough producing enterprises in operation because the productivity requirements are too drastic.
The essential step that must be taken in order to reduce the unemployment is to lower the survival limit. Measures based on previous employment theories have been, or could be, effective only to the extent that they accomplish such a reduction. Under some special conditions, a reduction in wages will increase employment, or at least prevent a threatened decrease, as contended by the adherents of classical economics, because in these particular circumstances a wage reduction has the effect of lowering the survival limit. Aside from these special situations, however, wage reductions have no effect on the survival limit, and consequently they are not, as a general proposition, a remedy for unemployment. Similarly, Keynes’ program of increasing employment by means of an inflationary addition to the demand for goods will achieve its purpose to a certain limited extent under appropriate conditions, because under these conditions price inflation reduces the survival limit. But once we realize that it is the reduction of the survival limit that produces the desired result, and that the addition to demand is only a means to this end, it becomes clear that the Keynesian program of substituting inflation for unemployment is neither adequate nor desirable. When we know just what is needed we can proceed with the formulation of measures that will achieve the desired results directly, rather than having to depend on an incidental feature of some program directed at a different primary objective.
The irony of the existing situation is that the ogre that has subjected us to the deprivation and suffering that accompany unemployment is a creature of our own creation. By freezing interest, rents, wages, and other components of production price we have unwittingly established an unreasonably high efficiency limit, and whenever a producer fails to meet this stringent requirement, we liquidate his business and kill the jobs that he was providing. In our blind efforts to remedy this situation, we have only made matters worse by adopting such measures as increased government spending, higher minimum wages, and more widespread application of union wage scales, which, unless accompanied by the necessary counterbalancing actions, simply drive the survival limit still higher.
It is essential to bear in mind that this is purely a matter of the relation of the efficiency of the individual producer to the general average; it does not mean that the general level of production costs is too high. If this were true, all producers could raise market prices and restore the balance between costs and income. But the producer whose income from his products is below the survival limit cannot raise his prices to overcome this disadvantage; to do so would merely drive his business into the hands of his competitors. His only chance is to increase his productive efficiency so that his income rises above the limit. Otherwise he must give up the struggle.
Nor can we improve the situation by raising the general level of efficiency through improvements in technology, or other means. As previously pointed out, an increase of this kind would not change the distribution of efficiencies, and since the survival limit is related to the average efficiency and not to the absolute efficiency, the position of each producer relative to the survival limit would remain unchanged. We cannot alter the fact that human abilities vary, and consequently we cannot establish efficiency limits based on the general average without running the risk of setting these limits too high, and thus forcing some producers out of business when we need them to keep the workers employed.
It might seem, on first consideration, that the answer to this problem would be to replace the liquidated enterprises with others that could use the same labor and capital more efficiently. But there are insurmountable obstacles in the way of such a solution. The surviving enterprises cannot expand to absorb the displaced workers because the size of the individual production units is limited by other factors, and it is difficult to organize efficient new enterprises in the required numbers. In recent years business failures have averaged about 15,000 per year, and this is not the full measure of the problem, as more than a hundred thousand additional businesses ceased operation each year, and no doubt inadequate earnings were responsible for a large proportion of these dropouts. Just to keep even with these losses is a formidable task.
Furthermore, if we did succeed in replacing the sub-standard producers with more efficient enterprises, this would still not take care of the problem, because this action in itself would drive the survival limit still higher—“sharpen competition”, in the language of the businessman—and would force additional firms into bankruptcy. Replacing less efficient with more efficient units raises the average productivity by some factor a, increasing it from V/n to aV/n. Since the factor k is practically unaffected by this change (if it varies at all under these circumstances it increases), the survival limit rises from kV/n to akV/n. This means that any firms which were just above the survival limit originally are now just below the limit, and must close their doors. Replacing these, in turn, by more efficient enterprises, if such could be found, would topple still more of the weaker producers. An excessively high survival limit is a very serious economic handicap that cannot be evaded.
On the other hand, the higher we can keep the survival limit the greater the efficiency of our productive organization, and the more goods we are able to produce per unit of labor actually employed. This is not speculation or assumption; it is a direct mathematical relation. Since we have a fixed distribution of efficiencies to start with, the more we eliminate from the bottom of the list the higher we raise the average efficiency of the remainder. If we drop the survival limit too low we permit many inefficient producers to continue operations when for the good of the community they should be forced to give way to others who could make more effective use of the same labor and capital facilities. The optimum condition exists when the survival limit is just low enough so that alternative work can be found for anyone whose job is lost due to the inability of his employer to meet the minimum productivity requirements. Setting it any lower would sacrifice production because of inefficiency; putting it higher would lose production because of unemployment.
PRINCIPLE V: The optimum survival limit is the highest level at which full primary employment can be maintained.
We can now see why it is that mass unemployment has been a by-product of our modern industrial economy, and why it exists side by side with the highest degree of technological and managerial efficiency. As long as production is carried on primarily by the self-employed, when individual farmers produce the raw materials, the butcher, the baker, and the candlestick maker prepare them for use, and the small shopkeeper distributes the finished products to the consumers, the survival limit is low. Only taxes, rent, and interest on a relatively small amount of borrowed capital are fixed elements of production price. The worker must get enough to live on, but aside from this qualification, wages, the preponderant item in the total cost, are free to conform to market conditions. The cobbler, in his capacity as a workman, never tells himself, in his capacity as a producer, that he will close down the shop with a picket line before he will accept anything under the union scale. He may meet hardship when conditions are adverse, but not unemployment.
But we of the present day, not recognizing the fundamental principles that are involved, go merrily on our way raising the survival limit higher and higher by one measure after another. We increase the use of capital in our productive activities and finance our enterprises by more and more bonds, the most inflexible of all credit instruments; we establish wage scales in the most efficient and prosperous establishments and we force the weaker producers to conform, we continue imposing more and higher taxes on business; we pass minimum wage laws in the fatuous belief that we are placing a “floor” under purchasing power. Then when all of these actions have raised the survival limit to the point where a substantial proportion of our business enterprises have been forced to close their doors, and their former employees are walking the streets, we cap the climax by pushing the limit up still farther through additional taxation in order that we may raise money to keep these victims of our mistakes busy on leaf raking. And when this has the inevitable result of taking us from bad to worse, the standard remedies that are proposed are further increases in minimum wage rates, more aid to the unions in the enforcement of rigid wage scales, still higher business taxes, and bigger and better programs of leaf raking.
The effect of the increase that has taken place in the survival limit in the last few decades stands out clearly when the business statistics covering this period are reviewed. In addition to the booms and recessions of earlier eras, we now have chronic troubles of a different, but related, character. Booms and recessions due to the influence of the money and credit reservoirs on the purchasing power stream are consistent in their effects on the various segments of the economy. In a boom all groups are prosperous; in a recession all share in the losses. When business is booming employment is at a peak, wages are high, the leading business enterprises make substantial profits, and the less efficient producers at least manage to make both ends meet. In a depression the entire situation is reversed. Employment is low, wages drop to some extent, even the strongest and most efficient firms see their profits dwindling away, and the weaker concerns fall by the wayside.
But we now frequently find ourselves in a situation in which there is no consistent pattern at all. Just before World War II, for example, we were not having “good times” or “bad times” or any recognizable intermediate stage between the two. In reality there was prosperity for some and depression for others. To the worker who was actually employed the times were good, for his wages were higher than ever before, but for the eight million who were without jobs the depression was still in full bloom. The conspicuously well managed giants of the business world—General Motors, General Electric, Woolworth, etc.—and their smaller counterparts in every corner of the nation enjoyed a record volume of business and earned profits on a par with those of the boom year of 1929. But at the same time the going was rocky for the new enterprise, the inadequately financed concern, and the business whose management was not up to the general average. As a result, the vital statistics of business indicated an unhealthy trend: mortality was high and births of new enterprises were below normal.
The principle of the survival limit furnishes an explanation for this apparent anomaly. In a depression the fall of the price level and the consequent decrease in income from the sale of goods affects all producers, large or small, efficient or inefficient. Good earnings are reduced to poor earnings, poor earnings are reduced to losses, and losses become bankruptcies. But a situation created by an excessively high survival limit is quite different from a depression. An increase in the survival limit means nothing to the more efficient concerns; it affects only those whose income is substantially below average. The superior enterprise is not disturbed when wages are established on the basis of the conditions existing in the more prosperous firms and then forcibly applied to the industry as a whole. It is only those in less fortunate circumstances that suffer. Perhaps the plight of these particular producers may not arouse any widespread sympathy. After all, they went into business knowing that there were risks involved, and their difficulties are, at least in part, chargeable to their own shortcomings. But the issue that we are discussing is not a matter of being lenient with these less efficient producers; our concern is with the general operation of the economy. Whether we sympathize with the laggards or not, we must take some action to keep a certain proportion of them in business if we are to have full employment. We cannot liquidate the producers and still have the jobs.
A disturbing feature of the present situation is that ever since the strong trend toward increased rigidity of the production price structure got under way during the 1930 depression, the rise in the survival limit has been concealed by an almost continuous inflation. Just as soon as the inflationary effect of one war began to subside to some extent, we entered another. Unless some corrective action is taken, it is therefore not unlikely that the full force of the changes that have taken place during the last forty years will strike suddenly when some economic dislocation occurs. Obviously, the time to take some effective countermeasures is now, when we are getting what amounts to a stern warning, before we get into very serious trouble. The trend toward an ever increasing survival limit must be reversed.
In view of the direct relation between the survival limit and productive efficiency, complete abolition of the limit is highly undesirable. What we want is full employment at maximum productivity. There is no sound reason why we should be willing to settle for anything less. In order to reach this goal we must devise a program whereby just the right amount of flexibility can be introduced into the production price structure; that is, we must keep the survival limit at or near the optimum. We must overcome our present difficulties by modifying this limit to the extent necessary to prevent unemployment, not by abolishing it altogether and forfeiting the tremendous productive superiority that characterizes the prevailing American system. Taking the path of least resistance, the socialistic solution of the employment problem, dropping the survival limit to zero, is simply acceptance of defeat in our battle for the highest possible standard of living.
The essential feature of the individual enterprise system is that each producing enterprise must stand on its own feet. Each producer operating under this system must generate enough values to pay wages, general taxes, and all of the capital costs except profits. The profits (and consequently the income taxes) may drop to zero, but unless the remaining costs can be met either from current income or from reserves withheld from past income, the enterprise fails. Rents, interest, and other capital costs (except profits) are almost impossible to modify, under existing conditions. Taxes, with the exception of those applicable to net income, are also fixed items; there is a well-known aphorism that classifies taxes along with death as the only ultimate certainties of human existence. Outside of such flexibility as may exist in wages, the producer has no margin except that provided by profits and income taxes. Where wages are unyielding, the survival limit is equal to average productivity less these two items. Considering the large and inescapable variations in human ability, as well as the many other variable factors that enter into the relative productivity, the margin is very small, and experience shows that it definitely is not adequate to assure full employment.
Now let us look at the practicability of lowering the survival limit to the point where enough of the marginal enterprises will be able to continue operating to provide employment for the entire labor force. How far can we go, and what repercussions will we encounter? So far as the general economy is concerned, any useful production that can be obtained from workers who would otherwise be unemployed is an addition to the total community income, regardless of the amount paid out in wages. But as a practical matter, it is necessary to consider the reaction of those persons who are regularly employed and would have to foot the bills, as well as to ask ourselves if this is the best that we can do. If we put the unemployed on work of low value and pay reasonable wages, we reduce the share of the national production that goes to the regularly employed workers, since they will have to make up the difference between wages paid and values created. Such a program will be highly distasteful to those who bear the burden, and it can hardly be regarded as a satisfactory solution of the employment problem.
It does not follow, however, that a productive efficiency above the existing survival limit is necessarily required to overcome this objection. On the contrary, all well-managed enterprises recognize that when trade is dull and business that will earn a normal profit is not available, rather than shut down part or all of the facilities it pays to look for something that will at least do a little better than take care of the direct costs. The fixed charges and much of the overhead expense go on just the same whether the plant operates or not, and it is good policy to earn a little toward these costs rather than nothing at all. The sub-standard producers bear the same relation to the general economy that this emergency type of business does to the individual producer. Rather than allow workers to be idle when jobs at full productivity are not available, it is profitable to all concerned—the worker, the producer, and the regularly employed public—to permit some sub-standard producers to continue operating and providing jobs as long as they meet the direct costs (wages), even though they contribute little or nothing toward the community “overhead” costs: taxes and capital costs.
The relative amount of other-than-labor cost varies widely from one industry to another and between individual business concerns, but a review of available statistics indicates that it is normally upward of twenty five percent of the direct wage payments. The producer, if left to his own resources, cannot employ labor that is merely self supporting. His employees must be capable of producing, with the facilities and the supervision that he is able to supply, somewhere in the neighborhood of twenty five percent more goods than the equivalent of their wages just to enable him to break even. But to the community at large all costs other than wages are “overhead”; that is, enterprises that fail and cannot be replaced pay no rent, no interest, and no taxes, and when the general economy cannot exact the full twenty five percent overhead charge it will pay to take twenty percent, or ten percent, or no overhead at all, rather than force the workers into idleness and still get nothing.
Even some of the labor cost itself is actually the equivalent of a “fixed” charge against the general economy. We must allow the worker enough to live on whether we find him a job or not. It is safe to say, therefore, that any auxiliary work program designed to take care of those for whom we are unable to find normal jobs is sound if it creates marketable values equal to the difference between the wages paid and the sum that would be necessary to maintain the worker on welfare or on unemployment compensation. The more nearly the values approach those created by normal employment under the prevailing productivity standards the greater the benefit that accrues to the economy as a whole.
Expressing the foregoing in numerical terms, a reduction of approximately fifty percent in the survival limit will give us additional jobs that are less costly to the regularly employed population than maintaining the unemployed workers in idleness, but if we can keep the reduction within twenty five percent we will have auxiliary jobs that are entirely self-supporting.
The next question that naturally arises is whether the potential number of self-supporting jobs is adequate to meet the needs. In order to arrive at an answer to this question it will be necessary to establish the mathematical nature of the relationship between the survival limit and the number of potential jobs. Those who are unfamiliar with mathematical treatment may be skeptical about the feasibility of identifying quantities that do not actually exist at the moment, but this is commonplace. In this case it requires nothing more than a process of interpolation. It is true that the calculations will not have any high degree of accuracy, but this is not due to any lack of precision in the method; it results from the inadequacy of the business statistics that are available. Actually, however, we do not require great accuracy. We do not need an answer that is correct to the last decimal place. All we want to know at the moment is whether a twenty five percent reduction in the survival limit will give us only a very small increase in the number of available jobs, or will give us a relatively large increase approximating the proportionate change in the survival limit itself.
We know from business records that the amount of extremely profitable work, the kind that will produce goods worth five or ten times the labor costs, let us say, is very limited. The amount of work that will produce values equal to two or three times the labor cost is much greater, and as we come still farther down the scale the available work increases rapidly, until, as indicated by the figures previously quoted, there is enough work producing more than approximately 125 percent of the labor cost to take care of all but a small fraction of the workers (when cyclical unemployment is absent). Below the 125 percent productivity level we have no actual data, because the existing rigidities prevent the survival of any enterprise that falls below this limit. We do have one more item of information, however, as we know that there is an infinite amount of work at zero productivity; that is, if we merely look for something to do without requiring that the effort produce anything of value, the field is unlimited.
Since it is evident that the volume-productivity relation is a continuous function below the 125 percent mark as well as above it, the fact that each variable approaches infinity as the other approaches zero indicates that the curve representing the relation between the productivity requirement and the number of available jobs must approximate a hyperbola. The slope of such a curve, irrespective of its exact form, is about 45 degrees in the neighborhood of the principal axis. This means that a reduction of 25 percent in the survival limit will cause an increase in the number of available jobs that will also approximate 25 percent. Inasmuch as the slope of the curve is decreasing, the farther the survival limit is dropped the greater the proportionate gain in the number of jobs that are made available. The special significance of these figures is that between 125 percent productivity (the present approximate limit for continuity of private enterprises) and 100 percent (fully self supporting work) there is a huge reservoir of potential jobs capable of providing self supporting employment to more than a quarter of the working population, if necessary.
The number of self supporting jobs that can be generated by a program of selective lowering of the survival limit is therefore greatly in excess of the requirements, and such a program can stand on its own feet without asking for any contribution from the workers employed on normal jobs. All that is needed to put it into operation and transform a surplus of workers into a surplus of jobs is to make appropriate arrangements to exempt this special employment, to the degree that is necessary, from the normal requirement that all private work must carry its proportionate share of the community overhead expense: capital costs and taxes. This overhead assessment can be waived in application to the extra employment without transferring any of the burden to others, as the idle labor does not contribute toward the overhead costs in any case, and it is immaterial whether this exemption comes as a result of idleness or as a result of a special concession to make the employment of otherwise idle workers possible. Practical means of carrying this policy into effect will be explored in Chapters XI and XII.
Lowering of the survival limit is the only positive and unlimited corrective for unemployment. Every person who is willing and able to work can be provided with a productive job by this means irrespective of the cause of his idleness. Even if business booms and depressions are allowed to persist, an effective control of the survival limit can prevent any impairment of the employment situation. No other measure can do this under any kind of an economic system, for it is mathematically impossible to devise a scheme that will enable producers to continue paying out more than they take in. In order to maintain full employment, in the true and unequivocal sense of the word “full”, we must either arrange some method of modifying the survival limit under our existing individual enterprise system, or we must reverse the wheels of progress and turn to some subsidized “made work” program or to a socialistic economic system, either of which drops the limit to zero, with the inevitable accompaniment of drastically reduced productive efficiency.
The same concern for keeping the productivity of the economy at the highest feasible level which logically dictates choosing the first of the foregoing alternatives also requires that we restrict the modification of the survival limit to a minimum, since any such action does involve some decrease in productivity. It is therefore essential that effective and efficient facilities be provided for placing workers in the jobs that are available, or can be made available, in normal fully profitable employment. Otherwise the survival limit will have to be lowered an additional amount to compensate for the inefficiency of the job placement organization. Appropriate measures for improvement of present policies in this area will be discussed in Chapter X.
As matters now stand (in early 1976) unemployment has remained at disturbingly high levels for so long that some governmental action aimed at correcting this situation is politically essential. In the absence of a clear understanding of the cause of unemployment, such as that developed in this present work, the only expedient that is being suggested in governmental circles and in the media is to expand the application of the two kinds of actions that are currently regarded as the only available means of reducing the amount of unemployment: (1) inflationary stimulation of the economy to produce more jobs in the private sector, and (2) additional public employment. According to the findings outlined in the preceding chapter, these measures will improve employment to some extent because, and only because, they accomplish a reduction of the survival limit, and the extent to which they accomplish their objective will depend on the amount of that reduction.
The effectiveness of an employment program in reaching its primary objective is not, however, the only point that needs to be taken into consideration in evaluating the overall merit of the program. Most devices of this nature, including the two mentioned above, involve costs of one kind or another, either direct costs of operation, or indirect costs due to unfavorable effects on other aspects of the economy. For a complete assessment of the desirability of any such action we therefore need to weigh whatever results are obtained against the costs that are involved. Before proceeding to the identification of more effective and efficient measures we will examine the current program from this overall standpoint, so that we will have a base for comparison when we appraise the new proposals. In this chapter we will discuss the public employment, and Chapter VIII will then explore the effect of inflation on the employment situation.
Public employment, as applied in an individual enterprise economy, is, of course, a small-scale application of collectivism: authoritarian control over employment and production. From the relation between the survival limit and the volume of employment it is easy to understand why the collectivists can promise full employment. This relation applies with equal force to a collectivist economy, despite the common assumption that socialism and other collectivist forms of economic organization are governed by a set of economic principles entirely different from those applicable to the American individual enterprise system. Like so many of the other misconceptions that have vitiated the usefulness of present-day economics, this assumption is the result of inexact and superficial consideration of the pertinent facts. In reality, the basic principles applicable to one type of economic organization must be applicable to all types; otherwise they would not be basic principles. Man cannot alter the rules that govern his activities; the basic laws of nature take no heed of human institutions. All natural laws are expressions of basic truths, and they are universally valid without regard to the nature of the prevailing economic organization. Certain principles may have no significance under some economic systems. In a barter economy, for instance, the principles governing the use of money have no meaning, but the laws are still on the statute books of nature, and if the use of money is inaugurated, they take hold immediately.
So it is with the matter of employment. Socialism has access to no source of jobs that is not equally available to any other economic system. It cannot alter the basic fact that the volume of employment is a function of the survival limit, nor can it evade the relationship between the survival limit and productive efficiency. But it solves the employment problem by dropping the survival limit to zero, subsidizing the less productive units at the expense of the community as a whole, and ignoring efficiency: a solution which is entirely feasible, although extremely costly, under any economic system. Of course, this is effective as a job provider. As soon as we cease to require the work to meet any prescribed standards of usefulness, there are an infinite number of jobs available. All that we need to do is to admit defeat, and then there will be no more economic battles to fight.
In a collective economy it is not necessary for a job to meet any rigid standards of productivity. All too often there is no requirement that any tangible values at all result from the work. Leaf-raking and boondoggling are not unique products of emergency organizations created during depressions and other times of economic stress; they are merely very visible manifestations of a situation that is inevitable when government is the employer. Productive efficiency is not something that comes about automatically. It is achieved only by hard work and sustained effort, and unless the attainment of a certain standard of productivity is mandatory, efficient production cannot be expected.
This is not a question of willingness. An incompetent factory manager cannot secure efficient production no matter how good his intentions may be, nor can a competent manager secure efficient production from inefficient equipment. The only effective answer to the problem of attaining productive efficiency is a system which sets up definite standards, and then ruthlessly eliminates those enterprises and those managers that are unable to meet these standards. Everyone knows that the individual enterprise system, wherever it has been allowed to operate, has been vastly more productive than socialism, communism, or any other collective economy. The advocates of collectivism have a large assortment of alibis and excuses for this state of affairs, and contend that a collective economy could be more efficient if properly administered, but a careful examination of the underlying principles makes it plain that the superiority of the individual enterprise system from a productivity standpoint is not accidental, but inevitable. Whenever our raw material is an assortment or a random mixture, the recognized method of getting a product that meets high standards is to identify and screen out the sub-standard units.
The advocate of collective institutions is inclined to look upon productive efficiency as a matter of motivation, and it is his contention that it is quite feasible to set up an effective substitute for the pecuniary rewards upon which the individual enterprise presumably relies. Public recognition of accomplishments, he points out, may be as effective a stimulant as greater earnings. Whether or not this contention is valid as a general proposition is rather questionable. Boulding tells us that “This (the matter of incentives) is a problem which is extremely difficult for any large collectivized system of distribution to solve”.41 But in any event, motivation is no more than a secondary consideration in the operation of the individual enterprise system. This system rewards the efficient performers, to be sure, but its high productive efficiency is not due primarily to the motivation generated by these rewards; it is a result of the fact that the system ruthlessly eliminates those who do not measure up to its standards. This is something that publicly owned enterprises cannot duplicate. D. P. Moynihan points out, “We have never been able to create in government the equivalent of the market where you get rewarded for good performance, penalized for bad”.42
In spite of the widespread prejudice against inequality, it is nevertheless true that the human race displays a wide range of individual abilities in every line of endeavor. Clear-thinking observers must recognize this fact, even if they deplore it. As Frank Knight states the case: “Sentimentally, I abhor inequality perhaps as much as anyone; but nature has clearly ordained otherwise”.43 It may be possible to motivate all individuals to substantially the same degree (although this is very doubtful), but great differences in individual ability are unavoidable, and a system which has no provision for identification and removal of the less capable managers and supervisors, together with the enterprises that are no longer technologically justified, cannot be anywhere near as efficient as one that does.
The built-in mechanism for elimination of the least efficient producers, and the least efficient operations of each individual producer, is the explanation for the tremendous superiority which the individual enterprise system has always shown over all collective economic systems; the primary reason why the United States is now so far ahead of any other country in its productive capacity and standard of living; the reason why a free enterprise country like West Germany could snap back so quickly from an economic disaster of major proportions; the reason why a collective enterprise cannot compete on even terms with individual enterprises and can only exist where it has a subsidy or a monopoly enforced by the state. The productive efficiency of any economic organization is dependent primarily on the effectiveness of the provisions which this organization makes for the handling of the functions which call for the exercise of business skill and ingenuity. The most effective provision that can be made for insuring efficient performance of these functions is to remove those individuals and those enterprises which fail to measure up to current standards. This the individual enterprise system does, but the collective systems do not.
These facts have not gone entirely unnoticed by the economists. Boulding, for example, tells us, “It would be remarkable indeed if the individuals whose heredity and upbringing had granted them unusual capacities for innovation were at the same time individuals whose position in society automatically gave them control over the resources needed to make innovations”44 and also that “Economic progress cannot take place unless there is some provision in society for processes which are judged in some way ‘superior’ to displace those which are judged by similar criteria to be ‘inferior’… It is in this sense that competition can be said to be a prerequisite of progress”.45 And the socialistic complaints about “wasteful” competition are well dismissed by J. M. Clark in this statement: “Economists… recognize that it (competition) may not be strong enough unless it is sufficiently severe to be called ‘destructive’ or ‘cutthroat’ by some of those who are exposed to it. This is largely because one of its important services is to weed out inefficient enterprises more rigorously than a human judge or jury would have the hardihood to do”.46
In the individual enterprise system, where the consumers’ preferences, expressed through the market mechanism, are in command, productive efficiency is the requirement for continued existence of the production unit, and the survival limit is a definite criterion that determines whether the efficiency in any given case is or is not adequate. In a collectivist economy, where the ultimate control is in the hands of the political authorities, the requirement for the survival of an economic enterprise is that its political effects must be favorable from the standpoint of the rulers. Of course, some degree of productive efficiency is necessary to prevent unfavorable political reactions, but efficiency is not a primary consideration. For instance, abandonment of unprofitable enterprises, an action that is essential for high productivity, and is achieved automatically in the individual enterprise system, is extremely difficult in a collectivist economy because it has adverse political effects. Where efficiency is required for survival, we get efficiency. Where the requirement for survival is political advantage, we get political advantage, not efficiency.
Collectivist economic programs are often portrayed as innovations, something new on the economic scene that holds great promise for the future, but the truth is that the authoritarian type of economic organization is one of the oldest of human institutions, and has been applied to all sizes and kinds of economic communities, from the isolated tribe to the largest of nations. The original authoritarian economy, the communal organization, antedates the private property system by tens, perhaps hundreds, of thousands of years, and there is no middle ground between the two that has not already been covered in the course of the long swing from the original communal plan to the present-day semi-individualistic economies.
The primitive forms of economic organization were based on the family model. In the family there is no definite attempt to correlate benefits received with efforts expended; on the contrary, the very young and the very old live entirely on the products of the efforts of those of working age. As families expanded into groups of families, and groups coalesced into tribes or communities, the family type of economic organization, the communal system, was carried along. Even today a substantial part of the population of the earth lives under this system. The nomadic tribes, for instance, perform their work under the direction of the chiefs, the products of their hunting, fishing and other efforts are gathered in a common storehouse, and the needs of each member of the group are met from this storehouse in accordance with policies dictated by custom or the will of the heads of the tribe.
As the size of the political unit increased—small tribes became large tribes, and large tribes became nations—the work involved in directing the economic activities of the community soon exceeded the capability of any one individual and some provision had to be made for assistance. Two main lines of development have been followed in transferring these economic functions from the political chief to other individuals, and all of the prevailing economic organizations of the present day are products of one or the other of these lines of development, or else are combinations of the two in varying proportions.
The first expedient that was employed for the purpose of lightening the burden of the chief was that of assigning some of the duties to assistants and advisers, while maintaining the centralized authority. To meet the demands resulting from still further increases in the size of the units this authoritarian organization was expanded by the creation of sub-chiefs—viceroys, governors, local administrators, etc.—each with his own complement of assistants and advisors, and all responsible to the authority of the chief of state. The primary functions of such organizations were—and still are—political rather than economic. Some of the subordinate officials may be assigned exclusively to economic responsibilities even in the smaller groups, and in the larger units the economic administrators often have a considerable degree of autonomy, but it is important to keep in mind that the ultimate authority in this type of organization is always political. The entrepreneurial functions, the actions that determine the efficiency with which labor and the services of capital are converted into goods, are performed by subordinate officials working under the direction of and subject to the authority of the political chief, and political considerations therefore take precedence over all others.
The second main line of development of economic organization is based on transferring the primary responsibility for economic functions from the political hierarchy to the individual workers and owners of capital. Even in the very early stages of growth of organized societies it must have been obvious that there are substantial advantages in the employment of individual initiative in carrying on trade between economic units, as we find merchants on the scene even at the dawn of recorded history. By this time many of the rulers had also discovered that there are likewise definite advantages to be gained by permitting farmers to plan their own production, retain ownership of their products, and sell them wherever they can obtain the best prices, thus relieving the state of all of the responsibilities of production and marketing, and leaving it only the relatively simple and pleasant task of taxing the proceeds. From the very beginning this individual enterprise system proved itself vastly more efficient than the rival authoritarian form of economic organization, and as a result it is now, and has been ever since it originated, the prevailing economic system wherever it is permitted by the political authority.
The undeniable fact is that an increased amount of state control over the economy is a reversion to the primitive rather than an advance into new territory. This is not necessarily an argument against such a change. We are, however, entitled to take notice of the principle that evolutionary processes are normally irreversible, and that those who attempt to swim against the tide of change seldom make much progress. It is not impossible, but it is clearly improbable, that good results will be accomplished by an attempt to reverse a trend which has continued for thousands of years. We should be ready to make such an effort if careful analysis shows that the change is truly desirable, but it is well to be very cautious whenever we know that the odds are decidedly against the type of a change that is being contemplated.
The contention that “things are different now” is particularly likely to be misleading. Many persons sincerely believe that more authoritarian control is necessary because the present-day economic system has become too complicated to be handled in any other way, but when we look far enough back into the past to eliminate the effect of short-term fluctuations, we find that the trend away from centralized direction of economic life and the trend toward greater complexity have gone hand in hand through the ages.
Those who propose to provide jobs for everyone by socializing commerce and industry, in whole or in part, are in effect telling us that the way to get around our present difficulties is to eliminate the standards of productivity by which our economic system is now governed, and to put labor to work on anything that comes along, regardless of how little, in terms of consumer values, is accomplished. But letting down the bars by going to socialism and dropping the survival limit to zero does not exempt us from the operation of economic laws. The stern realities cannot be dodged that easily. We still get only what we produce, no more, no less. If we exempt some individual activities from the requirement that they must produce enough values to justify themselves, we merely transfer the burden to others. If we abandon the productivity limits entirely by adopting socialism, we pay through a general reduction in the standard of living. Someone must feed and clothe those who are assigned to work on pyramid building or its equivalent; someone must make up the deficiency when socialized enterprises are exempted from the rule that they must produce enough to pay their own way.
These comments are equally applicable whether we are considering a completely socialized economy, a single government operated business enterprise, or an employment program that depends upon public works or other public service employment. The difference is only in degree. Public works as a haven for the unemployed have gained a very widespread acceptance in recent years. The general public reaction to the welfare principle: maintaining the unemployed in idleness on a bare subsistence scale of living, is decidedly unfavorable, and although it is commonly recognized that employment on public works is considerably more expensive than welfare payments or unemployment compensation, there is a general feeling that the workers are better off doing something than being idle. It is also argued that whatever useful work is accomplished, however meager it may be, is better than nothing. It must be admitted that there is some merit in these contentions. As long as we limit the choice to public works or nothing, there is a good case for public works. But there is no good reason why we should be satisfied with a program that rests its case on being better than nothing at all. The objective of this present work is to formulate a program that will provide employment which is self-supporting, and therefore will not be a burden on the community at large. Under the circumstances, we will have to judge the public works proposals by the extent to which they measure up to this much more rigid standard.
Unfortunately, public works originated for the purpose of providing employment are inherently low in value. This is self-evident in the case of projects originated in the middle of a depression period such as that of the thirties. Almost all of these projects are items which have already been passed over by the local communities as not worth the cost, even in good times when nonessential projects can be judged by a much more liberal standard. Furthermore, there is little or no incentive toward construction efficiency, since efficiency tends to defeat the primary purpose of the work, that of providing employment for the maximum number of workers. Even the best of these projects therefore has a very low value, and they grade sharply down to those of the leaf raking variety which have no value at all discernable to the naked eye.
It has been suggested that it would be possible to curtail government construction in boom times and have a budget of needed projects ready to be started immediately whenever an employment emergency develops. No doubt some increase in the project values would result if such a program could be carried out. It is questionable, however, if the proponents of this plan have given sufficient consideration to the obstacles in the way of making it a success. In particular, they are overlooking the very important fact that, in spite of the many extravagant and unnecessary projects that find their way into the public works programs, most public improvements in normal times are undertaken because they are needed. If the school population increases, we need another school building; if the City Hall burns down, we must replace it; if the traffic gets too heavy for some of our streets, we must widen them; if the city expands, we must extend the sewer system. We cannot justify letting these things go for an indefinite period of years until we happen to have a depression. Of course, there are some items of a long range character that can be saved until the time is ripe from an employment stand-point, but such jobs constitute only a relatively small fraction of the projects carried out under public auspices.
Furthermore, it is not as simple as it sounds to have these projects all planned and laid away on ice ready to be brought forth on short notice. Detailed plans drawn up a dozen years ago are not likely to be of much use for today’s construction. In the meantime the needs have changed, the environment of the proposed project has probably been modified, the availability of construction materials has undoubtedly undergone important changes, technical knowledge has widened, and the world in general has moved along to the point where the, original plans are, in all probability, as out of date as last year s fashions. By the time the projects can be restudied and redesigned, the business cycle is likely to have passed on to another phase, where the additional government spending operates in the wrong direction. Instead of the balanced employment condition at which the public works proposal is aimed, actual experience with previous experiments along this line indicates that if we adopted a full scale policy of utilizing public works as an employment regulator we would find ourselves at times with millions of unemployed in spite of the firm commitment to full employment, while at other times we would have millions of workers engaged on government projects of limited utility when genuinely productive jobs in private industry could have materialized.
In view of these points, and all of the human factors involved, it is extremely doubtful if even the best of intentions will increase the project values materially. We must face the fact that low values are inherent in the conception of public works for employment purposes. If we confine these works to projects justified on a merit basis, we secure higher values but eliminate most of the benefit to employment, since the need for additional public works and the need for stimulation of employment are largely non-coincident. If we make employment the primary consideration, values drop.
An important point is that the total value of all current public works proposals is not equal to the sum of the values placed on the individual projects when they are separately appraised. Total public works values are limited by the proportion of their income that the taxpayers are willing to divert from other uses to financing these projects. When the public works expenditures begin to encroach significantly on personal standards of living, the value of additional public works projects falls to near the zero mark.
One of the major weaknesses of the scheme of using public works as an employment balance wheel is that when business is subnormal and additional employment sources are particularly needed, the ability and willingness of the public to buy improvement projects in lieu of goods for personal use are both at a minimum. In the 1930 depression, families actually went without adequate food and clothing while they were buying highway beautification and mural paintings. No one would submit to this knowingly and voluntarily; it is possible to carry out such a program only under the cloak of misrepresentation: repetition of the false assertion that there is not enough work in normal productive activities.
When we subject the public works proposal to the other tests of a sound auxiliary employment plan, it fares little better. It is extremely poor from the standpoint of fitting the worker to the job. Only a fraction of the unemployed workers have ever done construction work before, and for many of them there is an unpleasant physical ordeal to be faced. As the proportion of women in the work force continues to increase, this factor will assume still greater significance. The wage scales and other labor policies on the “made work” projects are generally unsettling to business, and last, but not least, such a program provides an ideal vehicle for political maneuvering by the party in power, a definite menace to the national welfare.
The only sound public works policy is to recognize public improvement projects as a way of spending, and to consider them on their merits in comparison with other ways in which we might wish to use our income. Diversion of any part of the national productive capacity to public works when it could be used to better advantage in the production of some other class of goods is a waste of our resources and a demonstration of inefficiency.
The foregoing comments with respect to public works are equally applicable to other kinds of public service employment, and the whole concept of public jobs as a means of alleviating unemployment must therefore be condemned as a costly and inefficient method of handling the situation. We can do much better than this.
Inasmuch as the shortcomings of public employment as a source of additional jobs, as discussed in the preceding chapter, are generally understood, and it is recognized that the use of this expedient is “to some extent a desperation measure”,47 the current employment program relies mainly on the stimulation of the private economy by means of an inflationary tax cut, the only other tool that is now regarded as being available for the purpose. The deliberate use of inflation as a means of increasing business activity and employment is based on J. M. Keynes’ economic theories, and to see just how our present findings apply to this situation, it will first be desirable to have a clear idea as to just what Keynes’ contentions with respect to employment actually are. His theory was developed as an alternate to the so-called “classical” theory of employment, the previously orthodox economic doctrine in this field, and his explanations are expressed mainly in terms of contrast with the earlier views.
“The classical theory of employment”, he says, “has been based… on two fundamental postulates… namely:
Translating the second postulate from the professional jargon of the economist to the vernacular, he arrives at this alternative, and more understandable, statement: “That is to say, the real wage of an employed person is that which is just sufficient (in the estimation of the employed persons themselves) to induce the volume of labor actually employed to be forthcoming”.48
Keynes accepts the first of these two postulates but denies the second. The most fundamental objection to this proposition, he says, is that it involves “the assumption that the general level of real wages is directly determined by the character of the wage bargain”.35 In an extended analysis he shows that this assumption is erroneous, and he arrives at the same conclusion reached in the present analysis; that is, the general level of real wages is fixed by factors which operate independently of the bargaining process, and it is not altered by any manipulation of money wages.
According to Keynes, the “classical” economists’ basic mistake in their analysis of the employment situation is a result of their explicit or tacit acceptance of Say’s Law of Markets, a principle formulated by J. B. Say, one of the early French economists, which asserts that inasmuch as the price paid by the buyer is income for the seller, the act of production creates all of the purchasing power required to buy the product. Keynes termed this principle “an optical illusion, which makes two essentially different activities appear to be the same”.49 By virtue of its acceptance of this law, “The classical theory assumes… that the aggregate demand price (or proceeds) always accommodates itself to the aggregate supply price…That is to say, effective demand, instead of having a unique equilibrium value is an infinite range of values all equally admissible; and the amount of employment is indeterminate except in so far as the marginal disutility of labor sets an upper limit. If this were true, competition between entrepreneurs would always lead to an expansion of employment up to the point at which the supply of output as a whole ceases to be elastic”. Thus Say’s Law, Keynes contends, “is equivalent to the proposition that there is no obstacle to full employment”.50
Since there obviously is some obstacle to full employment, and since the ability to manipulate the real wage level assumed by the classical theory does not actually exist, Keynes rejected that theory and formulated a new concept in which for a given “propensity to consume” and a given rate of new investment. “There will be only one level of employment consistent with equilibrium”. He summarized his new concept in these words:
The outline of our theory can be expressed as follows. When employment increases, aggregate real income is increased. The psychology of the community is such that when aggregate real income is increased aggregate consumption is increased, but not by so much as income… Thus, to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume when employment is at the given level.51
Here, then, we have Keynes’ employment theory, as presented by its author, together with his explanation of the principal points of conflict between his ideas and the theoretical outlook shared by most of his predecessors: the “classical” theory. This classical theory is a wage theory; that is, it is based on supply and demand reasoning applied to the price of labor. Since a lower price, according to the classical ideas, will increase the demand that is, the number of jobs—there would appear to be no obstacle to full employment if the workers are willing to accept the appropriate wage. But the adherents of this viewpoint are victims of that unquestioning confidence in the universal applicability of the supply and demand principles that so often leads economists to apply these principles to issues which are not supply and demand problems at all. Considerations of supply and demand are not applicable to any situation unless the price is variable, and as Keynes has emphasized, the real wage rate, the true price of labor, is fixed by external factors (the factors that determine the rate of productivity) and cannot be arbitrarily changed. Money wage rates can, of course, be manipulated, but this does not alter the workers’ actual compensation in terms of buying power, and such wage changes therefore have no supply and demand implications.
The significant quantity in the labor market is not the money wage, which is merely a label, but the real wage, the wage in terms of buying power, and it is not possible for the average real wage to be raised too high. Indeed, the average real wage is not subject to any arbitrary change. As Keynes pointed out, “there has been a fundamental misunderstanding of how in this respect the economy in which we live actually works”. The real wage level, he asserted, is determined by “certain other forces” and cannot be altered “by making revised money bargains with the entrepreneurs”.35The markets automatically convert the money wage rate, whatever it may be, to the real wage rate determined primarily by productivity.
To replace the classical “wage” type of theory, no longer tenable after the factors which determine the level of real wages are clearly understood, Keynes proposed that we may call a market type of theory: one which is based on the changing situation in the goods markets. Inasmuch as Say’s Law, in its original form, established a direct connection between the wage level and the market price level (in Keynes’ words, this law implies that “the aggregate demand price always accommodates itself to the aggregate supply price”) he found it necessary to break the connection by repudiating Say’s Law and giving the total demand for goods an autonomous status.
The effect of an excess of saving over investment, according to Keynes, is to withdraw purchasing power from the active stream, thereby decreasing “aggregate demand”. This reduction of demand cuts the income of the producers and forces curtailment of productive operations, thus creating unemployment. By way of example, he cites “sinking funds, depreciation allowances” and other such financial provisions made to compensate for the depreciation or obsolescence of physical assets. “Take a house which continues to be habitable until it is demolished or abandoned”, he explains, “If a certain sum is written off its value out of the annual rent paid by the tenants, which the landlord neither spends on upkeep nor regards as net income available for consumption, this provision… constitutes a drag on employment all through the life of the house, suddenly made good in a lump sum when the house has to be rebuilt”.52 As Keynes saw it, this “financial prudence” is disastrous. “In so far as our social and business organization separates financial provision for the future from physical provision for the future so that efforts to secure the former do not necessarily carry the latter with them, financial prudence will be liable to diminish aggregate demand and thus impair well-being, as there are many examples to testify”.53
This is the so-called “paradox of thrift” that has aroused so much antagonism against Keynes’ ideas among those who hold to what Samuelson calls the “old-fashioned doctrine” that thrift is always a virtue. According to his explanation of the Keynesian thesis, “under some circumstances, private prudence may be social folly”, and “attempts to save… really lead only to decreases in income”. Whether or not thrift is appropriate, he tells us, depends on the stage of the business cycle; that is, on “whether or not national income is at a depressed level”.54 If so, the answer of the “new economics” is increased government spending to bring “aggregate demand” up to the desired levels.
From the foregoing description it can be seen that Keynes’ theory is not a “general theory of employment”, as he called it, but a theory of the business cycle, and his conclusions with respect to unemployment, insofar as they are valid, apply only to the cyclical addition to total unemployment. Instead of the direct relation between inflation and employment which the followers of Keynes think that they see in their Phillips curves and other empirical data, what actually exists is a relation between inflation and business activity, together with a relation between business activity and cyclical unemployment.
Furthermore, Keynes’ theory is an incomplete explanation of the business cycle. Our analysis shows that he was correct in asserting that the basic cause of business recessions is the withdrawal of purchasing power from the active stream. But he failed to recognize that a deficiency in the rate of investment is only one of a number of ways in which purchasing power can be diverted into some form of storage, and later released from that storage in the rising phase of the business cycle. Instead of being the key factor about which all else revolves, as the Keynesians see it, the relation of saving to investment is only one element of a large and complex purchasing power movement.
Our analysis also indicates that in repudiating Say’s Law and replacing it with the concept of an autonomous demand, Keynes made a serious error. As mentioned earlier, the argument against this law which he considered conclusive is that, on the basis of Say’s Law, “there is no obstacle to full employment”, whereas experience shows that in reality there is such an obstacle. This argument has now been invalidated by our finding that the existence of unemployment is not a purchasing power phenomenon, but the result of an excessively high survival limit. The real difficulty here, we find, is not that Say’s Law is incorrect, but that it is incorrectly applied. It is not actually a “Law of Markets”, but a Law of Production. Goods and purchasing power are produced at the same time, by the same act, and in the same quantity. Keynes was correct in asserting that this does not assure availability of the purchasing power in the markets at the right time and in the right quantity, but separating “aggregate demand” from total purchasing power production and giving it an autonomous status introduces a “something for nothing” aspect into the economic process that confuses the issues, and is responsible for much of the trouble in which the economy is now entangled.
These errors and inadequacies in Keynes’ business cycle theory are of sufficient importance to justify extended consideration in any general treatment of the cycle, but from the standpoint of the employment question that we are now discussing, they have relatively little significance. Keynes’ conclusion, in essence, was that the cycle results from fluctuations in the flow of purchasing power into the goods markets, and our analysis confirms this finding as a general proposition, even though it arrives at different conclusions with respect to the details. It follows that the results of this analysis agree with Keynes’ recommendation with respect to the use of countercyclical fiscal and monetary policies as an effective means of eliminating, or at least dampening, the cyclical swings. Since these policies are subject to deliberate control, it is possible to create inflation by government actions to offset deflationary tendencies in the private economy, and vice versa. This is the theory on which the present efforts to increase employment by cutting taxes are based.
For a full understanding of the possibilities and the limitations of this kind of a program it is necessary to recognize just what it does to the survival limit. This limit is related to the cost of production, or, as we have called it, to emphasize the relationship to the market price, the production price. (Keynes called it the “supply price”.) The distinctive feature of the inflationary stage of the business cycle is that the volume of purchasing power flowing into the markets, and then back to the producers, is greater than that currently generated by production. The difference goes into the variable production costs, principally profits, and the ratio of fixed costs to income, the survival limit, therefore decreases, with a corresponding increase in the volume of business and employment.
In the downswing of the cycle, these conditions are reversed. Now the purchasing power entering the markets is less than that generated by production (that is, some is being held out of the stream) and the returns to the producers decrease. This decrease in producer income increases the survival limit, the ratio of fixed costs to income. Many businesses cannot raise their productive efficiency enough to meet this higher limit, and are forced to cease operation. The less favorable prospects for earnings likewise reduce the formation of new business enterprises. Employment therefore decreases.
A Keynesian “addition to aggregate demand”, such as that resulting from a tax cut financed by inflationary borrowing is effective in counteracting the loss of employment during a recession because the inflation that it causes brings the survival limit back down toward the normal level. But there are strict limitations on the amount of reduction that can be accomplished.
The first point to be recognized in this connection is that if the countercyclical principle is followed, and the inflationary stimulus is limited to overcoming the effects of deflation in the private sector of the economy, the most that can be accomplished by this means is to offset the abnormal increase in the survival limit resulting from the deflation, and thereby to reduce the unemployment rate to the level that prevails under stable economic conditions, a level which is currently somewhere in the neighborhood of five percent. This is probably as much as the authorities are hoping to accomplish at present, and the conclusion reached by the present analysis therefore is that the inflationary program now under way is capable of accomplishing its objective if it is applied on a sufficiently massive scale, and not nullified by coincident deflationary measures. It should be clearly understood that it is the inflation caused by the deficit financing required by reason of the tax cut that improves the employment situation, not the tax cut itself, and there is no way by which the results of inflation can be obtained without having the inflation.
The experience of the last few decades, which has demonstrated that Keynes’ prescription of inflationary governmental actions to counteract the loss of employment in the deflationary stage of the business cycle has a substantial degree of effectiveness, has led to a rather widespread belief that there is a direct connection between inflation and employment, and that we are consequently confronted with a dilemma. As expressed by Reynolds: “When we say we are aiming at full employment, we mean really that we want a desirable level of employment. And this is related to how much inflation we are willing to tolerate”.55 Inflation is generally regarded as the lesser of the two evils, and recent economic policy in the United States has therefore been aimed at using inflationary measures not only to offset the effect of deflation on employment, but to reduce unemployment to still lower levels. But the actual result of the application of this policy is that we now have both inflation and unemployment.
Those who have put their trust in a “trade-off” between inflation and unemployment are greatly disconcerted by what is taking place, and are complaining that the economy is no longer “following the rules”. Of course, the truth is that they have misunderstood the rules. Inflation does not, of itself, increase employment. Under certain circumstances it increases the profitability of business operations, and thereby decreases the survival limit, which, in turn, results in more employment. Thus, as long as the inflation is working against a deflationary situation—that is, profitability is being brought back up from a sub—normal level it is effective from the employment standpoint. But when profitability rises above the normal level, no more than a transient effect can be expected, as competition from new enterprises attracted by the favorable earning prospects now drives the average profitability back down toward normal, regardless of the inflationary additions to purchasing power. Inflation then becomes part of the existing business climate, business enterprises accommodate themselves to it, just as they do to taxation, and the inflationary effect on profits terminates. The improvement of employment dies with it.
The vigorous promotion of inflationary measures by the so-called “liberal” elements of society is typical of the impatient, emotional approach to economic questions that is so prevalent in the world of today. These liberal groups have little sympathy for business, particularly big business, and are, ostensibly at least, strongly committed to the improvement of the economic position of the individual consumer. But the inflation that they are promoting so assiduously is very kind to business, as most of the inflationary unbalance goes into added profits, while the consumer suffers a double blow, first paying the full cost of the inflation in the form of higher prices for everything that he buys, and then bearing the brunt of the economic dislocations during the deflationary period that ultimately follows.
In this case, as in so many others, the policies adopted on the basis of emotional reactions and good intentions, without adequate consideration of their ultimate effects, are producing results that are just the opposite of those which the advocates of these policies claim that they favor. This lack of correlation between the emotional aims of economic actions and the direction that the results of these actions actually take is one of the greatest obstacles standing in the way of solutions for our most serious economic problems. When those who advocate inflation and other policies that work to the detriment of the individual citizens claim to be their best friends, and are widely accepted as such, whereas those who try to keep the economy on the sound basis that is most beneficial to both worker and consumer are charged with a lack of sympathy for the “common man” because they oppose well-intentioned but unsound measures, it can hardly be expected that wise economic decisions will follow.
This emphasizes the desirability of replacing the emotional approach to economic questions with the kind of cold-blooded scientific analysis and reasoning that are being used in this work. Good intentions are seldom sufficient in themselves to produce good results in any field—indeed, their futility is proverbial—but in economics, where the good intentions usually take the form of trying to circumvent the basic economic law that prohibits something for nothing, they are not only futile but definitely destructive.
Summarizing the contents of this chapter, we may say that the Keynesian remedy for unemployment—inflation—has a legitimate place in a comprehensive employment program, but its usefulness is severely limited. It is not actually an employment measure; it is a business stabilization measure, whose contribution to employment is merely to prevent creation of an abnormal addition to unemployment through cyclical fluctuations in business activity. We cannot reach the goal of full employment by the inflation route.
To the scientist, the widespread tendency to accept defeat and quit trying to find satisfactory answers to our economic problems is one of the most disturbing features of the current outlook on economic affairs. It seems almost incredible that the same human race which has surmounted one physical obstacle after another, and is now in a position to claim a substantial degree of mastery over the forces of nature, should surrender ignominiously in the face of a challenge posed by economic institutions of its own making. Yet that is just what is implied by most of the proposals for meeting the unemployment problem that are now receiving serious consideration, and the same defeatist attitude is painfully apparent in many other economic areas.
Because of the Vietnam war and the accompanying inflation, which have kept unemployment at what have been considered tolerable levels for a number of years, the problem receded into the background temporarily, and is only recently resuming a prominent place in the public consciousness. For a survey of thinking on the subject we therefore need to go back a decade to the last period in which it was a subject of general concern. In 1963, for example, the opinions expressed by A. J. Jaffe of Columbia University were cited in Business Week as typical of existing ideas with respect to the employment issue:
He thinks the job of getting full employment will have to fall on some combination of earlier retirement or later departure from school, a shorter work week, and a speedup in the growth of consumption. In Jaffe’s judgment, the surest way to assure full employment… is to cut the average length of the work week.56
A more detailed outline of what may be considered as typical thought on the subject is provided by the following list of “solutions” to the employment problem most generally advocated at that time by “leading authorities on economic problems” (from an article in the U. S. News and World Report,57 with selections from the explanatory comments included in the article).
- Solution 1: Spur investment.
- Utilize methods such as reduction of corporate tax rates and faster tax write-offs on spending for new plant and equipment.
- Solution 2: Spread the work.
- This is approach being pushed by labor leaders.
- Solution 3: Move forward slowly.
- Retard the advance of automation and mechanization of industry so that fewer workers are displaced by machines.
- Solution 4: Export workers.
- Send Americans to areas where there are shortages of workers.
- Solution 5: Enlarge foreign aid programs.
- Tie these programs to U. S. goods and services, giving a lift to sales and employment in this country.
- Solution 6: Create outlets overseas.
- Make opportunities for American men and machines by developing other areas of the world.
- Solution 7: Expand public works.
- Solution 8: Accept unemployment.
- Assume that a certain level of joblessness is inevitable.
It is true that we do not often encounter such a forthright and candid admission of defeat as number 8 in this list of “most generally advocated solutions”: the one that proposes that we should “accept unemployment”. But most of the other alternatives in that list, as well as many of the other suggestions that are not included in the “most generally advocated” category, are similar admissions of defeat, differing only in that they try to disguise that brutal fact in one way or another. The great majority of present-day proposals for handling the unemployment situation are not directed toward increasing productive employment; they are simply directed toward sharing the burden of unemployment.
The critical tenor of the preceding paragraphs is not directed at the principle of sharing the burden; it is directed against the acceptance of defeat. If the unemployment problem were, in truth, incapable of solution, sharing the cost thereof would be eminently reasonable, and if equitably distributed should not be a particularly heavy burden in this country, as the efficiency of the individual enterprise system is so much greater than that of any competitor that the average standard of living of the community in general, after taking care of liberal payments to those involuntarily unemployed, would still be far above that which could be attained under any other economic system thus far developed. And even if we do not concede that the problem is inherently insoluble, sharing the burden as a temporary expedient until something better is available is obviously justified from the standpoint of equitable treatment of all concerned. But to settle for any program of sharing the burden in lieu of a genuine solution of the unemployment problem is pure defeatism.
As soon as we adopt, and put into effect, a full employment program of the type outlined in this work, there will be no more unemployment burden to share, and the primary purpose of the sharing measures now in effect, or currently advocated, will be eliminated. However, most of these programs have collateral aspects of one kind or another which will induce their partisans to continue promoting them irrespective of whether or not they are needed from the employment standpoint. It therefore seems advisable to discuss the most important measures of this type, with special reference to their applicability under conditions of full employment.
Reduction of working hours.
The concept of sharing the burden of unemployment by sharing the available work was discussed at length in Chapter IV, and needs no further comment here, except as a matter of emphasis. To the extent that the workers prefer leisure to goods, reduction of working hours is entirely in order, but the whole idea that there is a limit to the amount of work that can be made available is totally false, and reducing hours of work for the purpose of sharing employment is a costly mistake. The same is true of all of the other means of enforcing involuntary idleness that are currently in vogue, such as high overtime premiums, mandatory retirement at a specified age, and limitation of the earnings of social security recipients. While it is generally agreed that our economic goal should be a higher standard of living, we deliberately enforce policies which reduce production, the only agency by means of which that higher standard of living can be attained, irrespective of how we define the “higher standard”. Such glaring inconsistencies as this raise considerable doubt as to the legitimacy of the title “sapiens” which the human race applies to itself.
All that has been said with respect to limiting production by reducing working hours is equally applicable to those practices which limit the productivity during the working time. For some strange reason, however, the general public attitude toward these practices is altogether different. Because of the general acceptance of the totally false contention that there are not enough jobs to go around, the public looks with a substantial degree of approval on reduction of working hours, forcing the older employees into retirement “to make room for the younger people”, and other measures to cut down the size of the working force, but when the workers undertake to restrict their output during working hours, an action that is directed toward the same end, the public approval abruptly vanishes.
There is no logical basis for this difference in attitude. The effect on production is exactly the same whether working hours are reduced or production during working time is restricted. The general economic effect is likewise identical. In both cases the net result is simply a higher price for the consumer. The workers who restrict output but insist that they continue to receive the same wages as before are simply demanding the same pay for less work, which is not essentially different from demanding more pay for the same work, the usual objective in wage negotiations.
A great deal of criticism is directed against the labor unions for adopting work limiting practices, opposing mechanization, “featherbedding”, etc., all of which are clearly detrimental to the economic well-being of the community. The fault, however, lies not with the workers and their organizations but with those who are persuading them that there is not enough work for all, and that a certain amount of unemployment is inescapable. If this doctrine were true the labor union opposition to productive efficiency would be entirely in order. After being led to believe that there is only a limited amount of work available it is certainly not inconsistent for the workers and their organizations to take actions directed toward spreading the work among more individuals and making it last longer. If we cannot provide work for everyone we cannot legitimately condemn the efforts of the workers to distribute the available work equitably among those who want it.
The remedy is to recognize the basic principles that govern employment and revise our policies accordingly. A false doctrine such as the contention that there is not enough work for all cannot do otherwise than produce contradictions and inconsistencies at every turn. When it is once understood that there is no limit to the amount of work to be done, and that the more we work and the more productive we make our efforts the higher standard of living we can maintain for everyone, all of these contradictions will disappear, providing that we put our knowledge into practice and adopt the necessary measures to give everyone an opportunity to work. It will then be clear to all that there is no benefit to be gained by restricting production, and the bulk of the opposition to productive efficiency will vanish. In justice to the workers it should be recognized that they are not restricting production because they object to the extra effort; on the contrary the normal American worker would rather be busy accomplishing something than wasting time. But the failure to organize the economic system in a manner which insures full employment, a failure excused by the contention that full employment is impossible, has brought about a situation wherein the workers feel, with some justification, that increases in productivity are simply depriving fellow employees of their means of livelihood.
It cannot be too strongly emphasized that for the present and as far as we can see into the future there is no limit to the amount of work to be done. Unless there are developments of which we have no hint as yet, even in this atom-splitting day, we will still be living in an age of scarcity hundreds of years from now, although in the meantime we will unquestionably make much progress toward a better and more comfortable life. We can, and we must, organize our economy in such a manner that involuntary idleness can be eliminated.
A particularly noteworthy feature of the list of eight most commonly advocated “solutions” far the unemployment problem reproduced at the beginning of this chapter is the prominence accorded the idea that we should look for a foreign answer to this purely domestic problem. Three of the eight measures listed involve foreign activities of one kind or another. Enlargement of foreign aid programs, according to Solution 5, would give “a lift to sales and employment in this country”, and Solution 6 advocates that we should “make opportunities for American men and machines” by “creating outlets overseas”. Solution 4 proposes that we export our excess workers to countries that are currently more successful in dealing with their employment problems.
From the employment standpoint, the effect of all of these foreign measures, whether they operate by exporting workers or by exporting goods, is simply to reduce the number of workers or the number of hours available for domestic production. In this respect they operate in exactly the same manner as any other measure that cuts the size of the working force. Producing goods for the benefit of foreign countries is economically equivalent to the “pyramid building” that the Keynesians advocate where normal employment is lacking. If we spend our time and effort building pyramids, then we get whatever the pyramids are worth to us. We get nothing else, because the secondary effect on the economy, which Keynes and his disciples visualize, does not actually exist. Keynes’ “multiplier” is a myth. Similarly, if we spend our time and effort producing goods to give away to foreign countries, then we get whatever satisfactions we may derive from our philanthropy, and we get whatever political benefit—or loss—may accrue from the way in which our aid is distributed, but we get nothing else.
Although the fact is not generally recognized, all, or practically all, that is accomplished by a public works program undertaken as an employment measure is to share the unemployment burden. As pointed out in Chapter VII, public works undertaken for employment purposes are inherently low in value, and the net cost to the general public, after giving credit for any tangible values that are produced, is greater than the cost of supporting the unemployed on welfare or unemployment compensation. There are some collateral advantages in having these individuals at work rather than idle, but the waste of effort on these projects is so apparent, and the character of the work is so often ill-suited to the background of the individual worker, that the effect, both on health and morale, is bad. The case in favor of public works as a means of sharing the unemployment burden is therefore very weak.
The communal self help projects which make their appearance in every depression are not a factor in the current situation, but they are of interest because they provide a clear illustration of one of the possible ways of lowering the survival limit. This scheme gets around the minimum productivity limits of normal employment by forcing the workers to bear the burden of the inefficiency of the substitute work; that is, the survival limit is lowered at the workers’ expense. Since the general economic organization is undeniably responsible for the lack of regular employment, rather than individuals, this plan penalizes the individual for the shortcomings of the community: a policy which is certainly lacking in equity. In actual practice there would probably be a considerable amount of open or concealed subsidization of these projects by the government, and to this extent the general public would stand part of the cost of supporting the erstwhile unemployed, but even at best such programs are distinctly unfair to those who have to participate, and for that reason they are seldom given much consideration except in extreme emergencies.
The manner in which these projects accomplish the lowering of the survival limit that is required in order to increase employment should be noted specifically, as it has a bearing on some of the subjects that will be discussed in Chapter X. The essential element in this proposed method of dealing with the problem is the introduction of wage flexibility. The principal factor responsible for the high survival limit that now prevails in normal industry is the inflexibility of wages under present-day conditions. It is evident that if wages can be made completely flexible, as they are in these communal projects, where the worker accepts the net value of his production, whatever that may be, the survival limit drops to the point where it no longer constitutes any obstacle to full employment. Wage flexibility is therefore a feasible means of eliminating unemployment, and while it is clearly inequitable to put all of the burden of wage adjustment on those who are unfortunate enough to be unemployed, and these self help projects must be rejected for that reason, it would be entirely possible to accomplish the same results in a less objectionable way; that is, we could reduce the survival limit and thus increase employment by introducing some flexibility into all wages. The arguments for and against general wage flexibility will be explored in Chapter XI.
Industry stabilization plans.
One proposal that has received considerable attention is the stabilization of employment by action of individual industrial organizations or trade groups. Superficially this would seem to have a great deal of merit. If a large corporation employing thousands of persons can so adjust its affairs that it levels out the employment curve and carries approximately the same working force through good times and bad, it would seem at first glance that this should be a substantial contribution to general stability. But these appearances are misleading. Any stability of employment that is achieved in the individual enterprise by such means is attained at the expense of employment elsewhere in industry. The unbalance between total producer income and total production costs that is responsible for cyclical unemployment is not reduced in any way by the stabilization program of the individual producer, nor is the excessively high survival limit that is responsible for the inability of the weaker producer to continue operations relieved by continuity of employment in the facilities of his stronger competitors. The only net result of the stabilization action by the individual producer is that the burden of adjusting operations to conform to current economic conditions is shifted to others.
This situation is not altered if the stabilization is accomplished by setting up reserves in good times and drawing from these reserves when the need arises. Investment of reserve funds does not decrease the total current purchasing power of the community, nor does the withdrawal of these funds through subsequent sale of the assets increase total community purchasing power. In either case the change in the purchasing power available to the owner of the reserve fund is offset by an equal and opposite change in the purchasing power of the other party to the marketing transaction. Hence the use of reserves does not transfer purchasing power from one time to another unless these reserves are held in the form of cash. Obviously, producers in general are not able to stand the financial burden of carrying cash reserves of any significant size. These industry stabilization plans are therefore harmful, rather than helpful, as they magnify the difficulties that are faced by all producers who are not fortunate enough to be able to participate in the programs.
These comments do not apply to the elimination of seasonal fluctuations by action of individual business enterprises. Here the underlying economic situation is sound, and there is sufficient total income to maintain employment in one place if not in another. Under these circumstances, the budgeting of controllable work by individual producers to minimize seasonal peaks and valleys in the employment curve reduces the losses involved in shifting workers from job to job, and also tends toward more efficient utilization of labor. Encouragement of scheduling work in individual industries in such a manner as to reduce seasonal fluctuations in the demand for labor can therefore be listed as one of the measures that will be helpful in cutting down the size of the task to be accomplished by a direct employment program. In general, such intra-company labor stabilization works to the benefit of the producers themselves, and it will become even more profitable when an effective employment program is initiated and the floating labor supply is eliminated.
Most of the “sharing” programs are still only proposals, or measures that have been used only in a minor and somewhat incidental way. The one conspicuous exception (aside from the public welfare programs, which are not primarily aimed at relief of the unemployed) is unemployment insurance. This system, now in full scale operation, levies a tax on the workers and on their employers (the latter is, of course, passed on to the general public through the price mechanism) and from the fund thus created payments are made in specified amounts for specified periods of time to those who qualify under the current definition of “unemployed”. The unemployment benefits are, in principle, related to minimum living standards rather than to current wage levels, and are therefore substantially lower than normal wages.
As long as unemployment is permitted to exist, some program such as unemployment insurance which, to a degree, spreads the burden over the community at large, rather than concentrating it on a relatively few unfortunate individuals, is clearly justified as a matter of equity. It should be recognized, however, that this is a very unsatisfactory method of handling the problem. The only satisfactory remedy for unemployment is an adequate supply of self-supporting jobs. Spreading the burden is a poor substitute at best. By accepting unemployment and directing attention merely to achieving an equitable distribution of the loss that is incurred, the community as a whole is forfeiting a large amount of potential production, while at the same time the individuals who are affected are reduced, for the period of unemployment, from a comfortable living to a bare minimum.
Furthermore, drawing pay for not working is habit forming, and we are developing a class of professional unemployment compensation and welfare recipients that is already a serious problem, and will be still more critical in the years to come. Current proposals to liberalize the unemployment benefits are likely to aggravate this aspect of the problem. As viewed by Myrdal, “such proposals underestimate how unhealthy and destructive it is for anybody and particularly for young people without much share in the national culture to go idle and live more permanently on doles”.58
When we are able to guarantee one hundred percent primary employment by means of measures such as those discussed in this work, the need for unemployment insurance will be eliminated, and the present program can be discontinued. It will be necessary to make allowance for a short interval between jobs—perhaps something on the order of two weeks—to give the employment machinery time to operate, but, as previously mentioned, it will be quite in order to require a severance payment by the employer (to the employment agency, not to the worker), and the worker can be paid his regular wages during the interim period, whatever it may happen to be, out of the funds accumulated from these severance charges.
In order to put some teeth into the employment guarantee, it will also be necessary to require the government employment agency to pay wages at this regular rate beyond the normal interim period if there is any delay in placing the worker on a new job. Inefficient operation of the employment system could be costly under such an arrangement, but even at worst these costs will not be more than a very small fraction of the present unemployment payments. This proposed method of operation will also have the important advantage that if such abnormal costs are incurred, they will stand out in their true light as symptoms of in efficient operation, rather than being buried in the manner of the costs resulting from the widespread abuses of the existing unemployment compensation system, and initiation of corrective measures will be correspondingly facilitated.
Guaranteed annual wage.
A proposal that is very popular among industrial workers is a guaranteed annual wage. This idea also draws considerable support from the socio-economist, whose emotional reactions are strongly influenced by the workers’ viewpoint. “Such guarantees”, says Yoder, “would represent a distinctly forward step toward wage stabilization and wage security”.59 In essence, however, this is simply unemployment compensation in a different form. It has a greater appeal to the worker because it gives him a higher rate of pay during the idle period and contains no time limitations, but from the standpoint of the community at large this plan is subject to exactly the same objections as unemployment insurance, particularly the fact that it abandons the goal of maximum utilization of the potential labor supply. If such a program is put into effect a large amount of potential labor is irretrievably lost.
An argument commonly offered by the workers in support of such proposals is that office employees are, in effect, given a somewhat similar guarantee through being paid by the month rather than by the day. The weakness of this argument is that whatever assurance of continuity the office personnel may have—which is not as much as those on daily rates usually think—is not continuity of pay but continuity of employment. The nature of office work is such that there is less variation in the labor requirements than is the case in production operations, but when the work does decrease, the office employees are laid off just as quickly and just as definitely as the factory employees.
It should also be noted that the general practice of including seniority provisions in union contracts has had the de facto effect of guaranteeing continuity of employment to the more senior employees, both in office and in plant, at the expense of those with less seniority. This is, of course, directly contrary to the principle of “sharing the burden” which the labor unions are so strongly advocating in their support of such measures as guaranteed annual wages, reduction of working hours, limitation of labor-saving devices, etc., but it is rather typical of the general attitude toward these sharing measures. We favor others sharing with us, but we oppose sharing with others.
A guarantee of employment accomplishes the same objective as a guaranteed annual wage; that is, it assures each individual in the working force the income appropriate for a fully employed worker. The advantage of the employment program is the elimination of the waste due to idle time. When such a program is put into operation, any agreements such as the seniority rules that assure continuity of employment for certain individuals can remain in effect, and those workers who lose out by reason of the operation of these rules will be provided with other employment under the new program. As consumers and members of the general public, all of these workers will share in the general increase in production resulting from the full utilization of the available labor.
The concept of some kind of a guaranteed minimum income for everyone has recently become a very live issue. A number of suggestions along this line have appeared from time to time in the past, but the matter was taken out of the preliminary discussion stage by a recommendation that was made, and later abandoned, by President Nixon. There is now widespread support for such a guarantee, and before these words appear in print some legislation of this nature may have been enacted. Insofar as this income guarantee may apply to persons who are not capable of working, it is outside the scope of this discussion. Indeed, it is outside the province of economic science altogether. But the impact of such a program on the status of the employable segment of the population should have some very serious consideration.
It should be understood, however, that the issue that is being debated as these words are written, the question as to whether a plan that incorporates an income guarantee is or is not preferable to the welfare system that has been in operation for several decades, is not relevant in the context of this present work. On the basis of the findings of the theoretical study of the employment situation, as detailed in Chapter VI, the next three chapters will develop a sound, practical program whereby full-time productive employment can be provided on a guaranteed basis for everyone who is willing and able to work. The question that we will want to examine, therefore, is not whether an income guarantee is preferable to welfare, but how such a program, in application to the employable segment of the population, compares with the guarantee of full-time employment that is now possible on the basis outlined in this work.
Whether or not we should place a “floor” under income; that is, assure everyone a certain minimum income even if he is unable to engage in any remunerative work, is a separate issue—a non-economic issue—that we do not need to consider in the present connection. A guarantee of employment will give every worker the assurance of an income appropriate for the kind of work he is capable of doing. This does not prevent the community from supplementing that income, if it sees fit to do so, by subsidizing the low end of the wage scale. The issue, as it applies to those capable of working, is simply: Shall we guarantee income or shall we guarantee employment?
From an economic standpoint there can be no doubt as to the answer. Providing employment for the potential workers rather than supporting them in idleness increases the total production of the community, and raises the average income of the individuals involved in the program, while at the same time it lightens the burden on the taxpayers. Furthermore, this method of handling the problem tends to minimize the dimensions of that problem; that is, if x potential workers are without income because they are unemployed, it is never necessary to provide more than x new jobs.
On the other hand, if the problem is handled on an income basis rather than on an employment basis, utilizing welfare or some income maintenance program to compensate for the lack of income from productive activities, the dimensions of the problem are greatly increased. Whenever measures are put into effect that make it possible to live without effort, or with little effort, the number of persons who contrive to be included under the program is always very much larger than the number who would be without normal income if no such program were in existence. Under the same conditions as before, where x potential workers are without income because they are unemployed, adoption of an income maintenance program of any kind will inevitably result in several times x families being supported by the program. The income maintenance approach thus multiplies the problem manyfold.
This is not speculation or guesswork. Even the most casual consideration of the normal reactions of human beings will make it clear that this is what will happen, and an examination of experience with the welfare programs will show that this is what is happening. “Where do the people who go on AFDC (Aid to Families with Dependent Children, the largest and most costly of the welfare programs) come from in the first place?… They come from this group of people that we have grown accustomed to calling the working poor. As fast as we have been able, under the present WIN program, adopted in 1967, to train people presently on AFDC, there have been two and three and four or more families added to the rolls in these States for every one that we have taken off ”.60 So said the Chairman of the House Committee on Ways and Means in 1970. But what can we expect, when the “working poor” are offered a choice between continued labor and a life of ease under only slightly lower (in many cases, even higher) living standards? Regardless of what we call it—welfare, or income maintenance, or family assistance, or anything else—any program that takes the place of work as a source of income encourages idleness, and drastically reduces the working population of the nation.
Every program of this kind contains some provisions that are supposed to exclude those who are capable of working and supporting their families, but there are always many ways of evading the restrictions, even if the administrators of the programs attempt a strict enforcement of the rules, which, in practice, is rarely true. As pointed out in connection with the statement quoted above, the “philosophical inclinations of social workers and administrators” do not run in this direction. The net result, therefore, is just what was described: that is, the “working poor” are siphoned off into the “welfare” or “assistance” category.
Most of the proposed income guarantee programs contain provisions that permit retention of a portion of whatever amounts may be earned by the recipients of income assistance, and these are frequently cited by the advocates of the programs as incentives which will induce individuals to work. For example, Representative Hale Boggs had this to say:
This treatment of earned income would provide a strong incentive both to take employment and to increase one’s earnings. A family with a working member will always be better off than a family without a working member. This provision gives recognition in the case of the welfare recipient of a fact of life so fundamental and so obvious that the rest of us have always taken it for granted—simply that if a person would be better off working than not working he will work.61
But this is not a “fact of life”—far from it—and taking it for granted in formulating policy can lead to nothing but costly disillusionment. The average individual faced with a choice between working and not working will not work, if he can possibly avoid it; unless he feels that he will be enough better off by working to justify sacrificing the leisure. As he sees the picture, beyond the point where he can retain his full earnings he is being asked to work for half pay (or whatever fraction the plan provides), and he wants no part of that kind of a proposition.
This same provision—retention of only half of the earnings beyond a specified amount—is being utilized in the Social Security program as a means of discouraging the pensioners from working, and experience has shown that it is an effective means of accomplishing that objective. Now we are asked to believe that a measure which is specifically designed to prevent one group of income recipients from doing any substantial amount of work (because the Social Security regulations are based on the mistaken idea that removing the older workers from the labor force opens up job opportunities for younger persons), and is known to have that effect, will encourage another group of income recipients to do more work. We can only conclude that the right hand of government pays little attention to what the left hand is doing.
Furthermore, any income maintenance program applicable to employable individuals not only encourages living on a low enough scale to avoid the necessity of working, but is also grossly unfair to the normally employed worker in the income bracket just above the income “floor”. A regularly employed individual who is paid the legal minimum wage must work practically full time to earn the guaranteed annual income. But his neighbor, who manages to avoid getting a regular job, and thereby qualifies for the income assistance will receive the same total if he works only a fraction of this time. This is the kind of a situation that is responsible for the enormous growth of the welfare problem in recent years: the government is making it profitable to avoid work.
In the debate that is in progress as these words are written, the principal argument in favor of an income guarantee is that the welfare system has been a colossal failure. But the remedy that is proposed (or may already be in effect by the time this volume is published) is essentially nothing more than a larger dose of the same ineffective medicine. It is another welfare program in a slightly different form, one that can be expected to aggravate, rather than improve, existing conditions, inasmuch as it increases the amount and the coverage of the payments for idleness, and thus increases the incentive to avoid work.
A program that guarantees employment rather than income is not subject to these grave disadvantages, even if the low end of the wage scale is subsidized so that there is, in effect, a minimum income guarantee for those who are willing to work full time. What we are guaranteeing in this case is an opportunity to earn an income. Here the individual has the normal economic choice between work with income and leisure without income, not the simple choice between work and leisure that is effectively, even though unintentionally, provided by direct income guarantees.
While the case in favor of the employment alternative is particularly clear-cut from the economic standpoint, it is difficult to see where any kind of a valid argument can be offered in support of an income guarantee for able-bodied individuals once it becomes possible to guarantee employment. There are those, it is true, who go to the extreme of objecting to any measure which forces an individual to work for his living, but since someone must do the producing, the only alternative is to force someone else to do the work for him; that is, to force the employed population to work longer hours to provide a living for the person who chooses leisure. Welfare, income guarantees, or subsidies of any other kind, do not come from the government. They come entirely out of the pocketbooks of those who earn what they receive. The human race as a whole is subject to a “work or starve” edict that we cannot evade—we are being forced to work, if that is the way anyone wants to look at the situation—and if one person fails to do his part, someone else has to do it for him. Under these circumstances, it is definitely in order to insist that each individual must at least carry his own weight, if he is physically and mentally able to do so.
Living in idleness on the kind of a minimum income that can be provided under an “assistance” plan also has some highly undesirable consequences, both for the individuals that are involved and for the society in which they live. Indeed, many of the social problems that are currently attributed to “poverty”, and are cited as justification for the income maintenance programs are largely, if not entirely, due to idleness, and will be intensified by measures such as the income guarantee that increase the idle population. The only effective remedy for unemployment is employment.
With the benefit of the information developed in Chapter VI, it would be possible to proceed directly to the formulation of a practical program that would lower the survival limit enough to eliminate unemployment. Obviously, however, it will be desirable to explore ways and means of minimizing the unemployment problem, and simplifying the task to be accomplished by the direct control measures, before we take up consideration of the possible control measures themselves. Even though there are no restrictions on the amount of employment that can be created by reducing the minimum productivity requirement it is clearly advisable to avoid lowering this requirement any farther than is actually necessary, inasmuch as any lowering of the requirement will inevitably result in a reduction in the actual productivity. At this time, therefore, we will examine various possible means of increasing employment without altering the survival limit.
One of the most obvious things that can be done to reduce unemployment is to provide a more adequate system for getting workers into available jobs, and doing this promptly. Even when the economy is operating on a maximum or near maximum basis there is a substantial loss in manpower due to the necessity for each worker to search for a new job when the old one terminates. If this were strictly a matter affecting the individual alone, there might be some argument for taking the stand that it is the responsibility of each worker to find employment for himself, although the complexity of modern economic life would still make such an attitude rather hard to justify. But unemployment is not only a personal problem. It involves a loss to the general economy as well, and since the individual is not in a position to do anything more than he is already doing—that is, get out and look for a job—the responsibility clearly lies with the community to provide a remedy and eliminate this loss of productive effort. It is a serious reflection on those charged with the administration of our national affairs that no active steps have been taken to reduce this source of national waste and individual hardship until very recent years, and then only under the spur of a necessity that could not be ignored.
Furthermore, the existing public employment agencies, even though they clearly represent a step in the right direction, are operating under a policy that is entirely inadequate to meet the requirements. The present employment services are primarily clearing houses, accepting labor that comes in and jobs that come in voluntarily, and attempting to equate the two. What is needed in order to attain our goal is to transform this passive policy into an active policy, so that we do not sit down and wait for jobs to come in; we go actively in search of jobs, just as we would go out and find sales outlets if we were marketing any of the products of our industries. And in order to sell its product, the agency must make its services more attractive to the prospective customers, the business enterprises that are the major job producers in our economy.
As matters now stand, many, if not most, of the employers regard the public employment agencies as a last resort. They keep their own lists of applicants for employment; they insert advertisements in the newspapers; they send out recruiters; they utilize private employment agencies, and so on; all of which would be wholly unnecessary if their needs were being met by the government agencies. The mere existence of long columns of “help wanted” ads in the daily papers is a clear indication that something is seriously wrong. What these employers are spending their money trying to get should be available more readily, in greater detail, and without cost, at the government employment agency.
But there is a basic conflict of interest between the employers and the agency. The employers want the best qualified men or women who are available. The agency, on the other hand, wants to place as many of the less qualified workers as possible, in order to minimize the number of persons who are without work for long periods of time, and the placement procedures are therefore set up in such a manner as to restrict the employers ability to pick and choose. Consequently, the employers resort to other sources from which they get better results, and tend to limit their use of the public agency to a minimum. This conflict of objectives is inevitable as long as there is a labor surplus, but it will be eliminated when we adopt a program that will make jobs available for all, and this will clear the way for a constructive cooperation between the agency and the employers.
The work of the agency should not be limited to placing those who are actively seeking employment. The loss to the nation by reason of idle labor is just as great whether the idleness is due to inability to find work, or to a lack of aggressiveness or initiative in looking for it. After having placed all those who apply for work, the employment agency should actively seek additional labor to fill more jobs.
When the employment program is first initiated it will, of course, be directed mainly toward achieving full primary employment, since this is the number one objective. As soon as the primary employment picture is in good shape, the agency should begin promoting secondary employment. In addition to looking for more full time workers, as suggested in the preceding paragraph, active programs should be undertaken to locate seasonal and other part time jobs and to locate workers to fill such jobs. Action should be taken, either through voluntary agreements or through governmental measures, to remove existing impediments to such part time work—union rules, industry employment restrictions, etc., the justification for which will no longer exist when full primary employment is guaranteed.
It is not sound public policy to force anyone to work, if he prefers the leisure to the products of effort, and has accumulations of wealth on which he can live, so that his idleness does not impose a burden on anyone else. Such compulsion would be contrary to the fundamental purpose for which we are attempting to improve the efficiency of economic processes, that of making life more pleasant and enjoyable. But it is a definite loss to the community, not just to the individual, if a worker remains idle when he would prefer to work. We cannot dismiss this as the worker’s own personal problem; it is also a concern of the community as a whole.
Subsidizing mobility of labor.
The placement of all available workers cannot be accomplished by a mere process of looking for existing employment opportunities; it also requires utilization of various expedients for creating additional opportunities. Heretofore the activities of the government employment agencies have been predicated mainly on the theory that employment is a private transaction between employer and employee, and the government only enters into the picture as a kind of benevolent and helpful outsider who cannot afford to make any appreciable expenditure in extending his assistance. But in reality the community has an interest in the matter that is at least coordinate with that of the other two participants. If anything, the public interest in the employment transaction is greater than that of the employer, for often the question as to whether the additional labor will be profitable or unprofitable is very much on the borderline so far as the employer is concerned, but additional employment of a normal character is always profitable to the community. The lack of logic in the present policy can be seen when we realize that after refusing to spend a small amount of money to place a worker in a job, the government turns around and spends a large amount to maintain him in idleness, in addition to sacrificing the contribution that the worker would make toward the community overhead expenses if he were regularly employed.
As brought out in Chapter VI, when all of the workers that can be given employment by the mere process of locating existing employment opportunities have been placed, it is profitable to the community to make such expenditure as is necessary to provide jobs for the remaining workers as long as the values created by this auxiliary employment are equal to the wages paid, or in an emergency, are sufficient to cover the difference between the wages paid and the amounts that would otherwise be allowed on welfare or unemployment compensation. On the basis of estimates cited in the previous discussion, this means that in order to place the unemployed on jobs in private industry the community would be justified in subsidizing the additional employment to the extent of at least fifty percent of the normal wages, if necessary. In certain special instances it is possible to create additional employment in competitive industry, where adequate production of values is guaranteed, at a cost far under this allowable figure of fifty percent. Opportunities of this kind obviously should not be neglected. One such profitable field that can be opened up by the adoption of a policy of spending a reasonable amount for employment expansion is contingent on increasing the mobility of labor.
Even under depression conditions there are jobs going begging in some locations, due primarily to the fact that neither the worker nor the employer can afford to finance the move from the worker’s home to the location of the job. This cost looms up like a mountain to the worker who has little or no reserve funds, particularly since the lack of any guarantee of a fixed term of employment makes the move a gamble on his part. It is also a major obstacle to the prospective employer, who has only a very small margin of profit expectancy at best, but it actually represents only a very minor percentage of the total expenditure for the labor involved, and to the community as a whole the cost of meeting the moving expense is insignificant compared to the gains that would be realized from the increased employment.
Some objection may be raised to the use of the term “creating employment” in a case of this kind where all that we are doing is making a potential job available by providing transportation to the job site, but in reality this is as much as we do by the use of any employment measure. Wherever there is work to be done, a potential job exists, and whatever employment action we may take, irrespective of its nature, simply converts that potentiality into a reality.
At any time when there are jobs available in one location and workers for whom no regular jobs can be found in another location, the employment agency should be authorized to transport the workers and their families to the location of the work, and back home again at the conclusion of the job, if necessary. In most cases it will not even be necessary to return the workers to their original homes. They can just be moved on from one location to another as the requirements develop, until they decide to settle down and take root somewhere. Because of the seasonal peaks in various industries and the concentrated labor demands of major construction projects it is decidedly advantageous to have a high degree of labor mobility, and there are enough workers who like to jump around from place to place and to enjoy the higher incomes that can be earned on this type of work so that the desired flexibility can be attained without inflicting a hardship on anyone.
One of the principal obstacles that stands in the way of adopting such policies, even when they are obviously beneficial to all concerned—public, employer, and employee—is the prevailing fear that someone will profit from the transactions. In this case the contention will no doubt be raised that we would be giving the worker something for nothing, enabling him to travel around the country at public expense, and that we would be favoring the employer of temporary labor, permitting him to make additional profits. Actually, however, all participants in this proposed program would earn what they receive, and no one would get any gratuity. The worker who is willing to move about from job to job and fill in where he is needed is performing a useful service that most workers would not want to undertake, and there is no injustice to anyone if he is given the assistance that is required to make the moves possible. Both the government and private employers customarily absorb part or all of the moving expenses of permanent employees who are transferred from one working location to another. What is now being proposed is simply an extension of this same principle, applying it in all cases where the worker’s move is made in response to a genuine labor need. There is no intention of suggesting payment of moving expenses incurred for the worker’s own purposes, or of assisting employers in luring men away from other jobs.
Here again it is necessary to point out that the driving force behind all economic transactions is the expectation of making a gain. No sales would be possible, for instance, unless the purchaser believes that the goods are worth more to him than the amount he has to pay for them. If he considered the money and the goods exactly equal in value, there would be no object in exchanging one for the other. No work is ever done voluntarily unless the worker values his wages or the satisfactions resulting from the work more than he values his leisure.
When we want to set up a program to accomplish a desired economic result, the only effective policy is to recognize this basic economic principle and to work out the details of the plan in such a way that those who participate and help to make the program a success will gain by so doing. There is nothing immoral or unethical about such gains, whether they be in the form of wages or “fringe benefits”, or in the form of interest, rent, or profits. Regardless of what name we apply to them, these gains constitute payment for services rendered. The fear that “someone will profit” from the expenditures that we make is absurd. What should rightfully concern us is not whether anyone makes a profit, but whether all earnings—wages, profits, or anything else—are commensurate with the value of the services rendered.
Any measure that profits the community as a whole without loss to any of its individual citizens is worthy of our approval, but from a purely logical standpoint, a measure that enriches the community collectively and at the same time confers additional benefits on individuals over and above the collective gain is still more desirable. The proposed subsidizing of labor mobility is in the latter category. The national economy makes the major gain, but both the worker and the employer also benefit from the additional employment that is made possible.
Retraining of displaced employees.
When we eliminate cyclical unemployment by countercyclical measures, the most important employment problem remaining will be the prompt placing of those released from their jobs by the inevitable fluctuations in the demand for labor on the part of the individual producing enterprises. In general, this will not involve any extensive redistribution of the kind of labor. Carpenters released from a completed construction project will be absorbed by a newly inaugurated project, and so on. Furthermore, the workers thus released will be mainly those whose employment is understood to be temporary, either by reason of the impermanence of the work itself, as in the case of construction, or because they are extra workers hired to meet temporary peaks. Hence these workers will have no particular “vested rights” in their specific jobs: All that we can undertake to do for each of them is to guarantee that he will be provided with some other job of an appropriate character. A much different situation will exist with reference to those employees of relatively long standing whose usefulness in their regular occupations comes to an end because of technological improvements: introduction of labor-saving devices, etc.
Almost everyone agrees that raising the general standard of living is a worth-while goal, and most of those who give serious thought to economic matters regard “growth” of the economy (which is the same thing seen from another direction) as a desirable objective, yet it does not seem to be generally appreciated that neither growth nor a higher standard of living can be attained unless a great many individuals are separated from their present jobs. A higher real income can only be achieved by means of increased productivity; that is, more production per worker. If each person were satisfied to receive the benefit of the greater income, a ten percent increase, for example, in the form of ten percent more of the same items—eat ten percent more food, wear ten percent more shoes, spend ten percent more time in the dentist’s chair, use ten percent more aspirin, and so on—there would be no dislocation of employment. But we do not eat more food as our income rises; the change, if any, is likely to be in the other direction. And so it is with a large part of our purchases. We hold to our existing level of consumption of these items, and allocate the added income to the purchase of different goods. This means that employment in the production of basic foods and other items in the “inelastic” category must drop as productivity rises.
Furthermore, consumer preferences are continually shifting as habits change and as new and improved products appear on the market. The automobile, for instance, destroyed a number of industries, but created a host of new ones. Every such change means that some workers lose their jobs. This technological unemployment due to increasing productivity and changing consumer demand is an important feature of the present-day economy, and it must be given special attention in any full employment program.
There is no question but that the increase in productive efficiency due to inventions and technological improvements is immensely profitable to society as a whole. The sum total of the improvements of this kind is the difference between our present scale of living and that of the Cave Dwellers. As a matter of general public policy, therefore, it is evident that such inventions and innovations should be encouraged and promoted. We find, nevertheless, that there is a substantial body of opposition to these technological advances, which has made itself known in the past primarily by stubborn and tenacious passive resistance on the part of the workers, but more recently has come out into the open and has produced various restrictive rules, either adopted unilaterally by the labor unions or made the subject of working agreements with the employers. In some foreign countries this movement has made even more headway, and has resulted in a great deal of unwise legislation designed to discourage labor displacement by mechanization, and to penalize employers who resort to labor saving equipment.
Here, then we have a direct conflict between the general public interest and the attitude of certain groups of workers, particularly industrial employees. How can we reconcile these opposite viewpoints? The first requisite is that we understand the fundamental basis on which the workers rest their case. Naturally they do not all go through the process of analyzing their own mental reactions and determining the underlying reason behind their opinions, but it is clear that in essence they are taking the stand that the individual should not be sacrificed for the sake of the general welfare. When we stop to consider this proposition carefully it is hard to avoid the conclusion that it represents a forward step in the development of sound social policy and as such it is destined for greater rather than less acceptance as time goes on. But it does not follow that preservation of individual economic security and technological progress are incompatible. If we put the right kind of policies into effect, we can have both.
The cost of protecting the displaced worker’s economic position is definitely a charge against the benefits accruing from the improvements, but satisfactory progress toward a solution of the existing problem is impossible until it is more clearly recognized just who it is that derives the major benefit from such improvements and should consequently stand the cost of protecting the interests of the displaced individual. Thus far, where any attempt has been made to protect the worker against deterioration of his economic position by reason of the introduction of labor saving devices it has been assumed that the benefits of these improvements accrue to the employer, and hence the costs involved in protecting the worker’s position have been assessed against him. The result has been a stifling of progress.
Productive efficiency in all countries where this policy has been followed is lagging well behind the mark set in the United States where restrictions on such innovations are as yet relatively limited. American engineers who examined conditions in the British coal mines during and after World War II were literally amazed at the failure to use modern equipment and methods, and the British government has officially admitted the validity of these criticisms. Other nations which have enacted legislation penalizing improvement and innovation, or have permitted extra-legal action toward the same ends, have similarly experienced enormous losses due to inefficient operation of their facilities. Results of this kind do not “just happen”. They indicate something radically wrong with the approach to the problem.
There is actually no mystery as to where the trouble lies. The employers do not gain appreciably from the introduction of labor saving devices, in the long run, and hence any action toward saddling them with the associated labor adjustment costs simply blocks these improvements out of industry. The originator of a labor saving innovation gains a temporary advantage by putting it into effect, but his competitors do no more than restore their original competitive position by following suit, and as soon as they do so the advantage to the originator disappears. The gain to the employers from this source is therefore so limited and so transient that any extraneous burden placed upon it simply kills all incentive for improvement.
The only positive and certain gain from the innovation goes to the consumer; that is, to the general public. If we accept the contention that the individual worker should not be made to suffer by reason of industrial progress, then the costs involved in making him whole should be borne by the general public, not by the employers. This is not a question of equity to the employer. He is not injured by actions which force him to retain antiquated and inefficient equipment and methods, as long as his competitors are in the same predicament. The real issue here is a matter of arriving at a policy which will not place impediments in the way of progress; one that will assess the relatively small cost against the beneficiaries of a large gain, so that further development of more efficient methods and equipment will be encouraged rather than discouraged.
There are those who see sinister implications in any suggestion that costs of this kind should be met from public funds. But where the benefits are received by the public as a whole, there is no other practical method of equitably apportioning these costs. The employment agency should be authorized to arrange for the retraining of workers displaced by technological improvements, so that they can be placed in jobs where they will earn equivalent wages, and the costs involved, including maintaining the workers’ normal standard of earnings during the training period, should be met from the general employment funds.
Fortunately, most of the skills that are involved in these technological changes are in demand elsewhere, and the workers with these qualifications can be fitted into new jobs without any serious difficulty. Whatever problems may develop are identical with those involved in handling frictional unemployment, and can be resolved in the same manner. Providing new employment for those technologically displaced individuals who have no skills that can be transferred to other productive operations is a more difficult problem, but there can hardly be much question as to the nature of the approach that will have to be utilized. So far as possible, the workers will have to be fitted to the available jobs. This is a big undertaking, to be sure, but one which presents no insurmountable obstacles. It is true that the trend toward a more complex technology is eliminating more and more of the unskilled jobs, and thereby increasing the dimensions of the training problem. Ultimately, this may bring us to a limit beyond which more training will not accomplish its purpose. At this point we would have to reverse our procedure and begin tailoring some of the jobs to fit the kind of labor that is available. For the present, however, the answer to the technological aspect of the unemployment problem is education and training.
Special education and training.
In addition to the training program for technologically displaced workers which is being recommended primarily as a means of assuring equitable treatment of these workers and thereby removing an obstacle in the way of technological progress, the employment agency should be authorized to carry on whatever additional educational or training activities are necessary in order to place surplus workers in available jobs. This is essentially the same kind of an action as moving the worker to the location of an existing job opportunity. In the one instance we assist the unemployed worker to meet the geographical requirements for employment; in the other we assist him to meet the requirements as to education and experience. The objective in both cases is the same. We take a worker who cannot be provided with a normal job in his present location, or with his present skills, and we qualify him for a job that would otherwise remain vacant.
It should be understood that what is here being recommended is a program of education and training directed specifically and solely toward channeling surplus labor into available jobs. This is the only kind of a training program thus far suggested that is economically self supporting. Our analysis shows that we can profitably create new jobs to utilize existing shills, or we can profitably upgrade skills as a means of filling existing jobs, either of which adds to total employment and produces enough benefits from the added production to more than cover the costs involved. But these benefits are not great enough to cover both the cost of training workers for specific jobs and the cost of creating such jobs when the training is complete. Nor can we justify training employed workers for better jobs under this employment program, as in this case there is no assurance of any direct production of additional values to make the training self-supporting.
Such training may be eminently desirable for social reasons, and in the long run it may prove beneficial economically as well as socially, but it is part of the general problem of public education; it has no place in the kind of an employment program that is here being proposed. It should be remembered that this program is based on a theoretical analysis which indicates that there is an immense reservoir of self supporting jobs in private industry that can be made available by appropriate measures. What we have set out to do is to design a practical plan for this purpose, so that we will be able to guarantee full employment. As pointed out in the earlier discussion, it is the self-supporting feature of this added employment that makes an absolute guarantee feasible, and in working out the details of the program we must therefore be careful to avoid including items which are not self supporting, however attractive they may seem when judged by some other criterion.
This caution is particularly necessary under present conditions because a substantial amount of job training is now being done under government auspices and it would be easy to jump to the conclusion that what is here being recommended is simply more of the same kind of thing. But this is not true. The objectives of the existing program are totally different; they are, in general, social objectives rather than economic objectives. They are not aimed primarily at providing employment but at upgrading the economic status of whole segments of the economy, and this puts them far out of the self-supporting class.
In order to be self-supporting, an employment program must limit its objectives. It must confine itself to providing workers with jobs of the kind which they are now qualified to handle, and training only the relatively small number, if any, that are currently required to take care of definite shortages of certain skills. Furthermore, this training, when and if it is necessary, must be limited to small steps so that the cost is minimized; that is, the need for highly skilled workers should be met from among those who are already skilled, the additional skilled workmen should be drawn from the ranks of the semi-skilled, and so on. Nothing more than this can be accomplished on a self supporting basis. Whether or not the large expenditures that are necessary for the more ambitious programs now under way are actually justified is beyond the scope of this work. In any event they are entirely separate and distinct from anything that is required of a program whose objective is simply to enable guaranteeing full employment.
Handling of “unemployables”
The increasing rigidity of the wage structure has contributed to unemployment in yet another way, by preventing the employment of those who by reason of age, physical disability, or other causes, are unable to meet the full standards of productivity set by the able-bodied labor force. In earlier times when the economic organization was simple enough that the desirability of achieving the maximum possible production was apparent to everyone, these handicapped persons were permitted to undertake such tasks as were within their capabilities, and they were compensated accordingly. The idea of maintaining them in idleness merely because they were unable to perform a full day’s work every day would have been greeted with derision if anyone had the temerity to suggest it. But today, with maximum production as desirable as ever, in spite of all of the smoke screens that have been thrown up to confuse the issue, we are rapidly approaching that very condition. In recent years it has been almost impossible for these people to secure employment in major commercial or industrial enterprises, except where temporary conditions such as a war emergency have necessitated waiving the usual employment policies. Smaller businesses are still carrying the load to a certain extent, but minimum wage standards established by law or enforced extra-legally by the labor unions are gradually driving the substandard workers from this field as well.
It must be conceded that both the labor unions and the legislators who are trying to put a “floor” under wages are aiming at objectives that are not open to criticism. They feel that a certain level of income is necessary to enable the worker to maintain a reasonable standard of living for himself and his family, and the minimum wage laws are designed to force the employer to pay at least enough to meet this minimum requirement. But the effects are far different from those which the sponsors are trying to achieve, as usually happens when economic actions are taken on the basis of sentiment without due regard for economic realities. Minimum wage laws do not force employers to pay the minimum scale of wages to those that are unable to earn them; they merely prevent the employment of such persons. If a minimum wage law were introduced under a truly descriptive title such as “An act to prohibit the employment of persons unable to meet normal standards of productive efficiency” quite a few eyes might be opened.
The same comments apply to the actions of the labor unions in this field. In their efforts to “protect” their wage structures by preventing the establishment of sub-normal wage scales for persons of sub-normal ability they are doing a rank injustice to these handicapped people. There is no question but that the net effect of the minimum wage laws and minimum union scales (so far as the latter are applied to sub-standard workers) has been harmful to the very class of workers they were intended to benefit. Some have received higher wages because of these minimums, it is true, but many more have been forced out of their jobs and on to welfare, and still more have been prevented from securing jobs that would have been available to them at a wage which they could earn. This was one of the major factors responsible for the heavy unemployment in the immediate pre-war years, and it is a large contributor to the present “hard core” of unemployed. The difficulty lies in the fact that minimum wage laws or minimum wage scales are negative only. They do not assure the workers these minimum wages; they merely prevent them from working for less. In order to reach the true objective at which the minimum wage laws are aiming it would be necessary to supplement these negative edicts which forbid employment at sub-minimum wages with positive action that would assure employment at the higher scales.
But the sub-standard workers cannot earn these minimum wages anywhere, and an employer cannot pay them more than they are able to earn, because if he does this, either voluntarily or under compulsion, he soon ceases to be an employer. The truth is that the worker is subject to a limit of the same nature as the survival limit of the business enterprise. If the enterprise is not able to produce enough values from the labor and capital that it utilizes, the income from its operations is not sufficient to keep the business alive, and its doors must close. If the worker is not able to produce enough values from his labor, the income accruing to the employer from the use of this labor is not sufficient to pay the minimum wage, and employment therefore terminates, or never materializes in the first place. One of the essentials of a complete employment program is a recognition of this fact, so that some provision can be made whereby the “unemployables” can be absorbed into productive work. This is another job for the government employment agency. Arrangements should be made by the agency to certify these sub-standard workers so that they can be exempted from the application of minimum wage scales of any kind.
This action, together with the present coverage of the Social Security system, which relieves the employer of any responsibility for the care of these workers after their productive days are over, will remove the obstacles that now stand in the way of employment of these individuals, and if the agency puts forth an effort to find appropriate jobs there is no doubt but that most of them could be suitably placed, especially after the floating labor supply has been eliminated by the full employment program that will be outlined in Chapter XIV. The production effort during World War II gave a practical demonstration of how the total national output can be stepped up well beyond ordinary limits by expanding the working force to include, among other additions, those normally classified as “unemployable”. There is no sound reason why the benefits of this policy should be limited to the increased production of instruments of warfare. We can make better use of it for constructive purposes.
Whether or not persons who are unable to earn standard wages should be subsidized by the community to bring their incomes up to the levels at which the minimum wage laws are aiming is a question beyond the scope of this work. Certainly forcing them out of employment and into idleness is not the answer. Measures to enable them to pay their own way so far as possible clearly constitute the first and most essential step in any sound program.
The history of human progress clearly reveals that problems of long standing have remained problems primarily because erroneous and misleading beliefs about them block the way toward advances in knowledge. When the cobwebs of misconception and error are finally swept away and the light of truth is allowed to shine in, the solution is not long delayed. The development of medicine, for instance, has been one long continuous struggle against prejudice and ignorance, both within and without the medical profession. As long as plagues were believed to be Divine punishment inflicted on a sinful people, no significant progress toward overcoming them could be expected. As long as microorganisms were believed to be spontaneously generated, the development of preventive medicine was definitely inhibited. As long as malaria was attributed to “bad air”, the murderous anopheles remained unchecked.
It is not surprising, therefore, to find that the lack of progress toward a solution of the unemployment problem is due to the same cause. In fact, with all of the effort that has been put forth, and the innumerable plans and programs that have been devised and tried out for this purpose, it seems hardly possible that the answer could have been missed unless this were another case of the same kind: another instance where the most strenuous efforts have been fruitless because they have been directed into the wrong channels. And this is just what we find when we undertake a detailed study of the situation. After careful and accurate analysis, the inescapable conclusions are that the accepted ideas with respect to the basic principles governing employment are almost one hundred percent wrong, and that the answer to the employment problem can be found in just about the only place where no one has looked for it.
It is only natural that a statement of this kind should be received with considerable skepticism. There is a general impression that the strenuous efforts put forth by a myriad of individuals and organizations over a long period of years must have explored every nook and cranny of the subject, and it is hard to believe anyone who claims to be approaching the problem from a new direction. But this is a case where we can apply the old legal maxim that “the facts speak for themselves”. The new theory of employment developed in Chapter VI points directly at the place where additional self-supporting employment can be found, and clearly indicates the type of program that must be set up to take advantage of these employment opportunities. Both the program that will be outlined in this work, and the source of jobs which it taps, lie far outside the field that has heretofore been explored by those attempting to devise methods of expanding employment.
The first departure from previous theory lies in the demonstration that employment is independent of the state of business, even though in practice both are usually affected simultaneously by the same primary factors. It has commonly been assumed that business prosperity and full employment go hand in hand, and the great majority of the plans that have been suggested for the reduction of unemployment are indirect measures which attempt to reach their objective by stimulating business activity. Our analysis shows, however, that the presumed correlation between employment and normal business prosperity does not exist. Full employment, under existing conditions, cannot be reached except near the top of an unhealthy boom, which must inevitably be followed by a recession and a recurrence of unemployment. A stable, prosperous business situation without a boom, as matters now stand in the absence of any direct employment program, necessarily involves a substantial amount of unemployment because of the effect of the survival limit.
The importance of this point cannot be overemphasized. It definitely rules out all of the proposals for achieving full employment by indirect means. Some of these indirect programs may be quite useful in an auxiliary capacity. Countercyclical measures, for example, are capable of eliminating some of the most serious unemployment, if properly applied. But such measures will not assure full employment. On the contrary, by preventing booms they may make a certain amount of unemployment permanent unless accompanied by further action directed specifically at creating employment. Only a direct employment program can assure permanent full employment.
It was demonstrated in connection with the discussion of employment theory in Chapter VI that the volume of employment is definitely a function of the survival limit. It necessarily follows that no program can be successful in providing full employment unless it does reduce the survival limit in one way or another. Those who have not gained a clear understanding of the concept of the survival limit may find this statement hard to accept. Some will point to the fact that an inflationary price rise has no effect on the producer’s fixed costs, yet it does increase employment. But the survival limit is not determined by the fixed costs alone; it depends on the relation of fixed costs to total costs. Inflation increases profits, and thus lowers the survival limit by reducing the percentage of fixed to total costs. Deflation, acting in the inverse manner, increases the survival limit, with the result that business failures and unemployment both rise.
It may seem to other skeptics that assigning the unemployed to public works or other government jobs created for employment purposes is a very simple and easy way of evading this principle. But the truth is that the creation of such jobs constitutes a very radical lowering of the survival limit. It has been dropped to zero, since there is now no requirement that any actual values be produced.
In private industry each enterprise must produce enough to pay wages, taxes, rents, and interest; otherwise it fails. As an illustration, the total of these fixed cost items for a certain firm may amount to twenty five dollars per day per employee. If the goods that are produced are only worth twenty dollars per day per employee, the business must cease operating. There is no way by which it can continue paying out twenty five dollars for every twenty dollars that it takes in. But after killing off the enterprise that was able to produce twenty dollars in values for every day’s labor, we turn around and put the former employees on “made work” of some kind which probably does not produce more than two or three dollars per day in values, if it produces anything at all. As the system now stands, the twenty dollar work under private auspices is prohibited because the survival limit is twenty five dollars; the two dollar public work is possible because the survival limit on government projects is zero.
Obviously this policy is absurd. It is permitted to exist only because the true principles governing employment have not heretofore been recognized. Once the dominant role of the survival limit is understood, the answer to the employment problem is self evident. We must lower the survival limit in private industry in some manner that will enable us to employ our surplus labor on twenty dollar production when sufficient twenty five dollar production proves to be unattainable. A program set up on this basis will not be a burden on the general economy in the manner of unemployment benefits or government “made work”; if properly designed it can produce sufficient definite and tangible values to make it self supporting.
All of the facts that have been uncovered in this study of the fundamentals of the employment situation point consistently to the conclusion that additional work of sufficient productivity to pay its own way can be found only within the boundaries of private industry. Here alone do we require labor to be more than self supporting under normal conditions, and hence this is the only place where there is any reservoir of additional self supporting jobs that can be tapped by an auxiliary employment program. The individual enterprise system carries a heavy load of community overhead expense—taxes and capital costs—and all work coming within the scope of the system is normally required to bear its proportionate share of these overhead costs as a condition of survival. Each enterprise that utilizes labor must produce not only enough values to pay the wages of that labor but also enough additional values to cover taxes and capital costs. But in between this normal productivity requirement, the normal survival limit, and a lower productivity level at which the work would merely be self-supporting (that is, would produce only sufficient values to pay wages) there is a vast amount of potential work which can be called upon to provide fully self sustaining employment for those who would otherwise be unemployed, and would carry none of the overhead burden in any case.
Socialistic or communal projects cannot provide such work as long as the normal production operations are being handled by private enterprise, because activities exempt from the requirement that they must meet the productivity standard established by the highly efficient individual enterprise system simply do not meet that standard. Public works cannot solve the problem because work justified on its own merits does not fit into an employment stabilization from a time standpoint, and any additional work originated for employment purposes is necessarily low in value.
It should again be emphasized that when we put the unemployed on public works projects we are cutting down our potential consumption of goods for personal use and buying public works instead. It makes no difference whether we spend from current income or borrow the money; we still construct public works only at the expense of other goods that we could have produced and used. So far as the public projects may be preferred to private goods, this is entirely in order. The taxpayers are perfectly willing to deny themselves some personal luxuries to build schoolhouses, for example. It is doubtful, however, if any substantial expansion of public works for employment purposes would ever be approved by the public if the facts were thoroughly understood. But if we assign the erstwhile unemployed to jobs in private industry which produce enough values to be self-supporting, there is no diversion of taxpayers’ income away from other goods, even though these jobs do not stand the normal proportion of the community overhead expense. The auxiliary employment stands entirely on its own feet, and the workers for whom new jobs are created are paid from the values which they have produced by their own efforts.
It may not be clear at first glance why there should be a fundamental distinction between public employment and private activities that involve exactly the same kind of work. We can see the difference, however, by looking at a typical example: housing. If the government builds a housing unit as a part of a “slum clearance” project, the cost is assessed against the taxpayers sooner or later, and the income available for the personal use of those taxpayers is decreased by this amount. They have bought slum clearance instead of goods for their own use. From a social viewpoint this may be a more commendable use of the purchasing power, but economic science passes no judgment on such questions. As students of economic realities we merely note the very evident fact that public works are an item of expense to the taxpayers. But if the house is built under private auspices, it is sold on completion to someone who gets the same kind of utility from it as from any other goods for his own individual use. This purchaser stands the cost, and no burden is imposed on the taxpayers.
Most of the professional economists of the present day are preoccupied with sociological objectives, and favor enlargement of government spending because they regard many of the expenditures currently falling within the so-called “public sector” much more favorably than they do any increase in consumer expenditures. It must be conceded that there is something to be said on behalf of many of the changes in priorities that these economists are advocating, just as it could be argued rather persuasively that the nation would be better off if we consumed more milk and less beer. However, these questions are not relevant to the employment problem, and should not be injected into matters of employment policy.
Identification of the true cause of unemployment, an excessively high survival limit, points directly at the way in which the goal of full self-supporting primary employment can be attained without any unnecessary sacrifice of productive efficiency; that is, we must take steps to lower the survival limit just enough to reach the full employment goal, and no farther. But we cannot accomplish this reduction by resetting a dial or by passing a law. We must take some action or actions that have an effect on the survival limit. There are many possible actions of this kind, just as there have been many actions, aimed at altogether different objectives, that have resulted in raising the survival limit to its present excessively high level. Our task is to select, from among these various possibilities, a combination of measures that will enable us to reach the employment objective with the least possible detrimental side effects.
Aside from the socialistic solution, dropping the survival limit (the productivity requirement) to zero, and accepting the inevitable decrease in productivity, there are three general types of measures to be considered: (1) measures which will prevent loss of jobs by reason of the downswing of the business cycle, (2) measures which will enable enterprises that are self supporting, but cannot meet the normal requirement that they be enough more than self-supporting to make a substantial contribution to the community overhead expense, to continue operating and providing employment, and (3) measures which will create new self supporting jobs.
As indicated in Chapter VIII, the application of countercyclical fiscal and monetary policies, in accordance with the theoretical understanding that is now generally accepted among economists, will be adequate, if properly handled, to prevent cyclical losses of employment. Our analysis indicates that further clarification of the theoretical basis of these countercyclical policies will enable increasing their effectiveness very substantially, but this is a matter that can be left for later consideration, inasmuch as the information that is now available, and is not subject to serious dispute, is sufficient for present purposes. No other measure of type 1 needs to be considered, and the balance of this chapter will therefore be devoted to an examination of possible measures of type 2.
The most obvious type 2 action is to make all business taxes (federal, state, and local) payable out of current earnings only. The present policy of giving the tax collector the first claim against the income of a business enterprise is nothing short of absurd. In the 1930 depression, for instance, many businesses that would have been able to meet their payrolls and general operating expenses were forced to close their doors, and add their employees to the growing relief rolls just because they could not produce enough additional values to pay interest and taxes; whereupon the bondholders ceased getting their interest, and the government ceased receiving tax payments, just the same. At a time when unemployment was the most serious problem facing the nation, an immense number of fully self supporting jobs were eliminated simply because they were not more than self-supporting.
And this manifest absurdity is not confined to depressions. It is a continuing process that is a heavy contributor to unemployment throughout good times and bad. For example, a pending reorganization plan for the Penn Central Railroad contemplates abandoning about half of the 20,000 miles of track now included in the system. And why? One of the primary reasons, so the news media report, is that the railroad is unable to earn enough to pay its taxes. So half of its facilities will be abandoned, an immense capital investment will be wiped out, a very large number of jobs will be eliminated, and when the smoke clears away there will be no collection of taxes on this half of the business because there will be nothing left to levy taxes on. Nor is this the whole story. It is conceded that some of the lines scheduled for abandonment supply essential services, and the government spokesman quoted in one news release says that these will have to be replaced in some manner or other by the government or by local interests (at a loss, of course). In other words, if the existing policies are maintained, and this proposed abandonment project is carried out, the governmental agencies that are involved will actually be paying for the dubious privilege of destroying thousands of self supporting jobs.
This graphic example not only illustrates the need for more “cushion” in the operation of business enterprises—something that will offset the increasing rigidity of the wage structure and permit a number of the enterprises that are just below the present survival limit to continue operating and furnishing employment—but also points very clearly to one of the first actions that ought to be taken to reduce the survival limit and provide the additional cushion. General taxes on business should be made a contingent claim, like income taxes or non-cumulative preferred stock dividends, to be paid when and if there are earnings available for the purpose, rather than mandatory items that have to be met even if they kill the enterprise.
A particularly important point in this connection is that in many cases the inability of an enterprise to meet the normal requirements is only temporary. New undertakings, for instance, usually have to pass through a lean period in which expenses are high from the start while the volume of business builds up slowly. If the available funds are insufficient to meet these initial losses, as often happens, the enterprise simply collapses financially before it ever gets a fair start. Eliminating taxes while there are no earnings, together with some further assistance, if needed, of the kind that will be discussed in Chapter XII, will enable a certain percentage of these businesses to get through the critical period and take their places as full participants in the economy. Similarly, many firms encounter temporary adversity, for one reason or another, and here again, the tax exemption will be needed for no more than a limited time. In all probability, the present situation of some of the railroads is in this temporary category, as there are clear indications that economic factors are beginning to shift back in favor of rail transportation. Providing self supporting employment for the otherwise unemployed segment of the labor force is a very profitable measure even where the necessary waiver of the normal contribution to community overhead has to be permanent, and this fact that, in many instances, the need for the waiver will be no more than temporary is a significant plus factor that makes the proposed program all the more attractive.
This proposal for assessing business taxes only against earnings will undoubtedly be greeted with a chorus of disapproval from the anti-business element, particularly from those who do not want to see the existing defects in the individual enterprise system corrected, because they want to replace it with some form of collectivism. But these individuals raise no objection to applying this same principle by way of the income tax—indeed, they are usually among the strongest supporters of high corporation income taxes—and if the principle is acceptable in the one instance, extending it to some additional taxes can hardly be open to legitimate criticism. Contrary to what these opponents will probably allege, there is no “giveaway” involved; the community is far better off financially by not collecting these taxes, and thus permitting the hard pressed enterprises to continue operating and furnishing employment which is fully self supporting, even though it is not more than self supporting, as normal employment in private business is required to be.
A major obstacle in the way of meeting financial emergencies, particularly in the case of the railroads, utilities, and other enterprises with large fixed capital investments, is the inflexibility of bond interest. Profits may disappear completely, and general expenses may sometimes be cut, but unless the bondholders get their regular payments right on the dot there is trouble, with bankruptcy looming at the end of the road. It is beginning to be recognized that this lack of flexibility in bond interest is inimical to the public welfare in times of stress, and recent changes in the bankruptcy laws have sharply restricted the ability of the bondholders to enforce their claims to the extent of closing down the debtor’s business. Under the present laws, the bondholders are often forced to compromise and accept less than the contract rate of interest, regardless of their own inclinations in the matter. This development of public policy, which is likely to expand in scope in the future, is a step toward lowering the survival limit and enlarging the business cushion. The general approval with which it has been received suggests the possibility of going still farther in this direction and imposing drastic restrictions on corporation financing by means of bond issues, perhaps to the extent of prohibiting this type of financing altogether. The result would be a substitution of preferred stock for bonds, and a very substantial decrease in the rigidity of corporate financial structures.
Of course, such a policy would increase the costal capital for business purposes, at least temporarily, but this should not be a serious objection as long as all corporations are subjected to the same regulations so that the competitive situation is not altered. It would be necessary to liberalize the rules governing the type of investments permissible for insurance companies and other institutions of a fiduciary nature to enable them to follow this change from bonds to stocks, but again this is no serious obstacle. The tendency is already in that direction, and stabilization of business by eliminating unemployment would make the preferred stocks of well-established concerns better risks than their bonds are now, with the possibility of a serious depression always hanging over them. As in all changes of this kind, it would be desirable to make the transition gradually to give business time to accommodate itself to the new conditions.
One possible means of reducing unemployment that is quite popular among economic theorists is that of making wage rates flexible, so that when production income declines wages can be adjusted downward to restore the equilibrium between income and expense, instead of laying off workers and reducing volume. It should be noted, however, that this is not the kind of wage flexibility that was discussed in connection with the development of the theory of employment in Chapter VI. The latter did not involve periodic adjustment of wage rates in general as contemplated by the economists; it referred only to the setting up of a program under which it would be possible for different enterprises to pay different wages for the same kind of work.
In earlier eras the wage structure possessed both kinds of flexibility. There were no important restrictions on the ability of the producers to control wages except the overall governing factor of competition. Consequently, in periods of recession, when the use of labor became relatively less profitable and a labor surplus developed, wage policies varied. Some of the more prosperous concerns maintained the previous level of wages, but there was nothing to prevent less profitable enterprises from hiring surplus workers at some lower rates which made it possible for these businesses to continue operating in spite of their reduced income. In recent years, however, there has been a marked stiffening of the wage structure, due largely to the efforts of the labor unions, supported strongly by public sentiment, expressed not only through sympathy with the unions in wage controversies but also through legislation and public pressure on employers. As matters now stand, there is a strong resistance to wage cuts under any circumstances, and also a growing tendency to level out all wage differentials between employers by means of industry-wide wage settlements.
This increased rigidity of the wage structure is unquestionably one of the major reasons for the growing seriousness of the unemployment problem. Forcing the less efficient producers (who, like the poor, we will have with us always, for no matter how much we may raise the general average there will still be some below others) to pay the same “union scale” as their more fortunate competitors simply drives the weakest of them out of business, and this same lack of wage flexibility makes it doubly difficult for new enterprises to take the places of those that fall by the wayside.
It is apparent, therefore, that the possibility of improving employment conditions by increasing the flexibility of wage rates and thereby lowering the survival limit deserves serious consideration. Since two distinct kinds of flexibility are involved, it is desirable that we should study each one independently. Let us first examine the advisability of making the general level of wages variable so that it can conform to the ups and downs of the business cycle. This is the proposal that has strong support from the economic profession.
In beginning a discussion of this subject it is necessary to have a clear understanding of the basic fact that unemployment is a result of powerful and impersonal economic forces, not of voluntary anti-social actions on the part of the employers. In spite of repeated assertions to the contrary, reduction of the working force is an action that is taken by business enterprises only with great reluctance, except in the special case where the labor requirements are decreased by technological advances. Reducing the amount of direct labor in the absence of such improvements means reducing the volume of production, and in view of the persistence of fixed charges and overhead costs, lowered volume has serious effects on profits.
Indirect labor, such as that used for maintenance purposes, does not have the same immediate effect on production volume, but such work cannot be omitted or postponed without incurring substantial additional costs. Failure to keep maintenance up to normal often necessitates ultimate expenditures far in excess of those which would have been required to carry out a normal orderly maintenance program. Reduction of employment in either the direct or indirect category is therefore directly contrary to the desires of the ownership and management of the producing organizations. As a rule the producer will take a very substantial cut in profits before he will reduce employment to any significant degree, and when he gets down to a certain minimum he will let profits disappear entirely and even dip into his reserves, if he has any, to meet an operating loss before he will make any further cuts or close down altogether. The record shows that during the worst of the 1930 depression a large proportion of the business enterprises of the country were actually operating at a loss.
The particular significance of these points is that profits and producer reserves, together with producer income taxes, form a cushion by means of which some of the business shocks are absorbed and not transmitted to employment. Unfortunately for the effectiveness of this cushion, however, only the strongest producers have adequate reserves, and a very large number of the weaker ones are operating so close to the zero profit mark even in good times that they have no appreciable profit margin either. This raises the issue as to whether it might be desirable, for the sake of continuity of employment, to vary wage rates in accordance with business conditions and thereby widen the business cushion, so that producers could still continue to operate and provide employment even though income dropped somewhat below the level that would otherwise force the weaker enterprises into bankruptcy.
Careful examination of this proposition, however, shows that it applies the regulation in the wrong place. This type of wage flexibility is aimed at overcoming the effects of cyclical business fluctuations, and to the extent that it is effective it achieves the necessary equilibrium between production price and market price by manipulating the former to meet the antics of the markets. This is contrary to all sound principles of regulation. What is needed is a governor at the place where the fluctuations originate—the markets—so that the net result is a smoothing out of the cycle rather than an attempt to keep both ends of the machine dancing to the same tune. Furthermore, if we eliminate the business cycle entirely by countercyclical measures, as we can, and should, do, the principal argument for this kind of wage flexibility is no longer valid. If there are to be no variations in general business conditions there is no merit in providing a method of modifying wages to conform to such variations.
When we turn to the second type of wage flexibility, we are confronted with a different situation. In this case the proposal is that arrangements be made to permit the less profitable enterprises to pay somewhat lower wages than their more efficient contemporaries, instead of following a rigid “union scale” or conforming to “prevailing wages”. This would have the effect of lowering the survival limit and enabling some of the concerns in this class to continue operating and providing employment when they would otherwise be forced out of business. Unlike the other wage proposal just discussed, this program would be effective in any stage of business prosperity, for even at the peak of a boom there are producers going out of business because of inability to make both ends meet.
When considered purely from the employment standpoint this proposal is sound. It accomplishes the necessary lowering of the survival limit in a direct and effective manner. But the remedies for economic ills are like the remedies for physical ills in that we cannot judge them entirely on the basis of their effectiveness in accomplishing their primary purposes. We must also look at their side effects. The strongest objection to this type of wage flexibility is that it is unjust to the employees of the less profitable enterprises. While the trend to industry-wide bargaining has been due in large part to a belief that there are some tactical advantages to be gained by large-scale negotiations, there has also been a growing recognition of the inequity involved in paying one man less than another simply because he happens to be employed by a less profitable enterprise. Of course, the same situation still exists, in an even greater degree, between different industries. An individual who happens to be working in an industry that is favorably situated from the standpoint of pricing its product is often paid more than twice as high a wage or salary as an individual doing exactly the same kind of work in a less favored industry. But the continued existence of a social inequity in one place does not alter the fact that elimination of that inequity in another place is a step forward. Reestablishing wage flexibility between employers in the same industry would undo what has been accomplished in this respect, and we must therefore conclude that, from an overall standpoint, this would not be a satisfactory method of accomplishing the desired reduction of the survival limit.
As time goes on, no doubt still other methods will be devised for reducing the survival limit for the benefit of those business enterprises that are just below the level of productivity at which they can continue operation under present conditions, and each such suggestion should be considered on its merits. As matters now stand, however, the changes in policies with respect to taxes and fixed interest financing appear to be the most desirable type 2 measures for inclusion in the initial phase of a full employment program.
After the measures discussed in Chapter X are put into operation so that full advantage is taken of all of the jobs that are already available in the economy, the simplest way of reducing the amount of unemployment still remaining is to take steps of the kind recommended in Chapter XI to decrease the loss of existing jobs. It cannot be expected, however, that these measures will take care of the entire problem. There will still be some jobless individuals, and in order to enable implementing the positive guarantee of employment that was listed in Chapter II as one of the essential elements of a fully satisfactory employment program, we must be prepared with a direct means of placing these unemployed individuals in jobs. As brought out in the theoretical discussion, this will require a selective lowering of the survival limit to make the additional jobs possible.
In the normal operation of the individual enterprise system there is a definite guarantee that labor will be used only on the production of goods that meet the current standard of values, as determined by the judgment of the consumers in the markets. The private producer in effect insures the general economy against any waste of productive effort, as the owners of the business stand the loss if any mistake is made that results in inadequate production of economic values. This production guarantee makes it possible to set up an auxiliary employment program on a definite and positive basis, devoid of any guesswork as to the costs involved or the results that will be obtained. It is rather strange that this big reservoir of potential jobs has remained so long unnoticed. Only within the last few decades have the first timid suggestions as to the opening up of this prolific source of additional employment begun to make their appearance, and, as might be expected, these initial proposals have been so badly handicapped by being tied to current economic misconceptions that they have not received the attention which the potentialities of private industry as a source of additional employment actually deserve.
One type of program that is occasionally proposed contemplates the subsidizing of private construction projects. The backers of such proposals deserve some credit for recognizing the possibility of accomplishing a substantial increase in employment by means of a relatively small contribution toward the construction costs, but their program is based on the erroneous idea that the proportionately heavy drop in durable goods production which accompanies a business recession is a causal factor. They are therefore proposing to subsidize an increase in private construction as a means of reestablishing the “balance” between durable goods and transient consumer goods. This present study indicates that the presumed causal relation does not exist; that all goods are alike so far as the general economy is concerned; and that the relatively greater decrease in production of certain types of goods in times of economic stress is not due to any “maladjustments” but to a natural and logical process of selection whereby purchase of the least essential and most durable goods is curtailed in preference to reducing the buying of more essential and less durable goods. Correcting these presumed defects in the economy is merely treating symptoms, just as if we were to attempt to cure smallpox by covering up the spots.
Several suggestions along the line of reduction of taxes to encourage employment have made their appearance, and a proposal by Nicholas Kaldor in 1936 actually reached the point of recommending a direct subsidy for private employment.62 Unfortunately Kaldor made the common mistake of assuming that the volume of employment is a function of the wage level (he states that this is something upon which economists of all shades of opinion can agree). As a result of this misconception he proposes subsidizing all private employment in times of depression. If such subsidies are paid from tax funds we will have a Social Credit scheme in reverse, and nothing at all will be accomplished. The total income received by the producers will remain unchanged, as the amount available to the consumers for purchases in the markets will be decreased by the amount of taxes levied to meet the costs of the subsidy. If the funds for the purpose are raised by inflationary borrowing, the scheme would inject purchasing power into the system and it could be used as a business stabilization device. But it is a very awkward program compared to those already considered and it deserves no attention from this standpoint. As an employment program it is worthless.
The Papen Plan, tried out in Germany between September 1932 and April 1933, also attempted to reach the objective by subsidizing employment directly, producers being paid a specified sum for each new employee hired. The plan was a failure in practice, as could be expected, since both this and the Kaldor plan fail to recognize the differential character of the factors that cause unemployment. It is the enterprises whose productivity is too far below the average that are forced to close their doors and add their employees to the unemployment rolls. A measure which helps all enterprises still leaves these sub-standard producers in the same relative position—still too far below the average to continue operating. Any general action (other than a general reduction of the survival limit, which is actually a differential action as it has no effect on any producers other than those at the lower end of the productivity scale) is of no avail, since it is the relative position of the enterprise that determines whether or not it can survive. Blanket subsidies are therefore ineffective. The pioneers in this field must, however, be given credit for recognizing the employment potentialities inherent in private productive operations.
Some signs of a realization of the need for a differential type of action are beginning to appear. Garth L. Mangum, in a recent article, undertakes to discuss the possibility of creating “jobs in the private sector”.63 But his development of this theme goes no farther than a proposal for subsidizing employment of substandard workers; in effect simply a means of circumventing the minimum wage laws. This is, in a sense, a differential measure, but it is not the kind of a differential measure that will selectively lower the survival limit, and it therefore will not reduce unemployment, a point which Mangum specifically admits in saying that if some such program is adopted, “Employers are unlikely to hire more people than they otherwise would, but they can be persuaded to hire different people”. Hence this is a sociological program, not an employment program.
R. I. Nowell, in outlining a proposal similar to that advanced by Mangum, stresses the need to confine the subsidies to “new” jobs “to avoid having subsidized labor replace or compete with labor now being employed at the minimum wage rates”.64 But the weakness of all such proposals lies in the fact that new jobs are not ordinarily additional jobs. Because of the steady rise in average productivity and the shifting of consumer preferences there is a continual reduction in the number of jobs available in existing production operations, and activating the total number of potential “new” jobs of a profitable nature does no more than make up for the jobs that have terminated. In order to get additional jobs in private industry it is necessary to dip into the big reservoir of potential work that is not quite profitable under ordinary conditions, to lower the survival limit so far as this particular work is concerned, and by so doing to raise it from the unprofitable status up to the point where it will be profitable to undertake. Subsidizing the sub-standard worker does not accomplish this objective; it is merely another way of sharing the unemployment burden, as Mangum admits: another way of reducing the damaging and demoralizing effects of the minimum wage laws.
From British sources we get a suggestion that is definitely on the right track, but the coupling of this sound proposal with an unsound one indicates that here, again, the underlying principles have not been recognized. John H. Williams reports that “There are now suggestions in Britain that the way to get more work is to tax-exempt wages for specific kinds of work or beyond some standard schedule of work-time”.65 The second half of this proposal is simply another version of the Papen Plan, and would be equally ineffective, but the idea of granting tax advantages for “specific kinds of work” is definitely in order, providing that these “specific kinds” are properly selected. The essential requirement is that the tax benefits should be applied to those operations, and only those operations, which would not be able to produce sufficient values to make them feasible without this help.
Probably the underlying reason for the lack of any more extensive and widespread efforts to explore the possibilities of developing additional employment of an auxiliary nature within the field of private enterprise is the same curious public attitude toward business that we encounter so often. The individual citizen demands that he be adequately compensated for his labor, and would be highly indignant if his claim to such compensation were questioned, yet when the owners of a business enterprise attempt to operate their business in such a way as to secure equally legitimate compensation in the form of profits for the use of the productive facilities they have furnished, this same individual citizen feels that there is something immoral about the transaction; the kind of a thing that will be done away with when the millennium finally arrives and the forces of evil are overthrown.
However illogical it may be, this reaction is not particularly surprising in view of the continual barrage of propaganda devoted to the vilification of the motives and methods of business that is poured into the public ear by would-be reformers, radical theorists, well-meaning but impractical visionaries, and opportunistic politicians. Here, again, it must be emphasized that the expectation of gain is not peculiar to the businessman or the owner of capital, it is the motive power behind all economic life. Every voluntary economic transaction involves gains to the participants, either financially or in satisfactions—that is, an increase in the economic values—otherwise there would be no transactions. If we want to get results in any economic activity we must make it profitable for individuals to contribute toward the desired objective. We stimulate research and invention by granting patent rights which enable inventors to profit from their discoveries. We encourage education and training by paying higher wages and salaries to those who learn skilled trades and professions. We get high productive efficiency in private industry by rewarding efficiency with greater profits. And when we want to expand employment we must make it possible for those who put forth the efforts that are required in order to make the program a success to gain by so doing.
Altruistic motives play an important part in the operation of our social organization, but they do not provide the sustained and unremitting pressure that is required to meet the steady grind of economic life. The same reformers who are so loud in condemnation of money madness and the quest for profits would be the first to rebel if we asked them to work without pay. In this world of scarcity, where man must continually struggle to satisfy his wants, something for nothing is an illusion wherever it appears. It is just as futile to expect employers to continue operating and providing employment at a loss as to expect the workers to put forth their efforts for nothing. If we want the services of competent producing organizations to help us provide employment of an efficient character that will be self-supporting, then we must be prepared to pay for these services just as we have to pay for anything else of value.
In spite of all of the loose talk about “abundance”, earning a living is still a full time job for all but a very few, and the amount of time or effort that anyone can devote to a non-paying activity is strictly limited. But once a program is set up whereby it becomes profitable to contribute toward the employment objectives, activity in connection with this program becomes part of the process of earning a living, and a whole army of employment promoters comes into being, each individual on the alert to detect any opportunities to participate in the program and to receive the compensation for so doing. Whether or not we approve the dominant role of self interest in matters of this kind is totally irrelevant. This is the way things are. William Vickrey summarizes the situation in these words: “No large-scale high-productivity society has yet been successfully operated that has not relied to a large extent on self interest as an organizing force”.66
When we add up all of the foregoing points we arrive at a very clear and definite picture of what the auxiliary employment must be in order to meet the essential requirements and serve the desired purposes. It must consist of more work of the same kinds that private industry is now handling, under the same strong competitive pressure for efficiency, and subject to all of the automatic controls that govern our normal economic life. To make this additional self supporting employment possible, the community must forego at least a part of the contribution toward the general overhead expense, capital costs and taxes, that would normally be exacted from the products of that additional labor. Essentially that is all. The rest is detail.
Of course, it would be impractical to make the deductions from the overhead expenses directly, but this can be accomplished conveniently and effectively by collecting the full amount and making the appropriate rebate through the employment agency. In other words, after all of the expedients available for placing workers in normal jobs, including the promotional activities previously discussed, have been exhausted, and there is still more labor available, the employment agency should be authorized to offer this surplus labor at a discount for purposes which will constitute a bona fide addition to total employment. The amount of discount necessary to place the workers will vary in accordance with the existing circumstances and the agency will raise or lower the rate periodically, just as would be done with prices in any other market, keeping it at the minimum which will be just sufficient to accomplish the purpose.
From one point of view this might be called subsidizing employment, but it should be noted that, unlike the usual subsidy, this special employment discount does not call for any contribution from the community as a whole. The additional jobs are fully self supporting, and the discount is merely a means of rebating the payments which the auxiliary work has made toward the overhead expense of the community. Since this expense must be borne by the general public if these special jobs are not made available, no additional burden is placed on anyone by waiving the overhead contribution in order to provide work for those who would otherwise be unemployed.
Just how large a discount could be offered, if necessary, without taking the program out of the self supporting category is somewhat uncertain in view of the lack of adequate statistics bearing directly on this point. On the basis of the previous estimate that the net values produced in normal business operations amount to approximately 125 percent of the expenditures for labor, a discount of 25 percent of the total labor cost would be allowable. It should be realized, however, that the total new employment created includes the labor expended in the production of the materials that are utilized, as well as the direct labor, and since the workers producing the materials will not come under the discount plan, the allowable discount on the direct labor will be equal to 25 percent of the combined direct and indirect labor. The percentage of direct labor to material cost is extremely variable, but in private industry, where there is every inducement for the employer to make the use of labor as efficient as possible, the cost of materials normally exceeds the direct labor cost. It is therefore probably safe to estimate that a discount in the neighborhood of 50 percent of the direct labor cost would still leave the average job in the self-supporting range.
This amount should be more than ample for the purpose. The number of unemployed to be handled by this special auxiliary program will be relatively small if we take advantage of the various means of avoiding unemployment discussed in the preceding chapters, and since the use of these workers will be profitable, competition will keep the price down. But it should be remembered that this 50 percent is merely the self support limit, not the limit of usefulness of the program. Inasmuch as the only alternatives that are available involve maintaining the unemployed on welfare, public works, or unemployment compensation at a very heavy expense to the community, it is clear that this program would be much less costly than any alternative even if a larger discount is offered to meet some temporary situation. This employment program will not be operating on a narrow margin; it is so far superior to anything else that it has tremendous reserve strength for any emergency.
Ordinarily two pertinent questions are asked about economic proposals. First, what benefits do we get? Next, what does it cost? We then go through a process of comparing one with the other, and if we conclude that the benefits outweigh the cost, and if we have the resources to enable undertaking the project, we put the stamp of approval on it. This present program, however, is in a different class. The financial operations that it requires are merely bookkeeping transactions that do not constitute any net expenditures, and there is actually no real cost at all. Part of the “overhead” benefits accruing from the program take the form of additional tax collections, and these obviously offset an equal amount paid out in employment discounts. The balance of the gain to the community goes into capital payments (interest, rent, and profits) and theoretically it should be necessary to levy some additional taxes to divert this money back into the employment funds, but a very large amount of tax money is now being expended for unemployment compensation, welfare, and other activities designed to ameliorate the consequences of lack of employment, and since the need for most of these activities will be eliminated by guaranteed full employment, a portion of the present expenditures can be diverted to finance the new program. The balance will be a net gain to the taxpayers. The mechanics of handling these fiscal transactions are immaterial from the standpoint of the present discussion, and they are therefore outside the scope of this work.
The immense superiority of the proposed discount plan over current means of handling the situation created by unemployment is shown by the following tabulation. In this comparison the amounts shown are relative to the wage payments in normal employment, which are arbitrarily taken as 100 percent. Unemployment compensation has been assumed to be approximately half of the normal wage. The figures for values produced are the net amounts after subtracting the value of the materials used (that is, they are “value added” in the language of the economists) and they are therefore directly comparable to the labor figures. In accordance with estimates given earlier, the community “overhead” expense—taxes and capital costs has been taken at 25 percent. Net production of values on public works undertaken for employment purposes has been estimated at 20 percent of the normal competitive standard (125). This estimate is probably too high but public works make a very poor showing as an employment measure even on this liberal basis.
|Net values||Labor payments||Net gain|
|from tax funds||to community|
|Unemployment insurance||50||50 (loss)|
|Public works||25||100||75 (loss)|
Normal employment is preferable, of course, since it gives the worker his full wage and in addition contributes a percentage toward the community overhead expense. But where normal employment cannot be provided, the discount program is by far the best of the available substitutes, as it maintains full wages and produces enough net values to cover these labor payments. It is self-supporting, in the sense that it calls for no contribution from the public.
Unemployment insurance only gives the worker half as much, and the entire 50 percent is a net loss to the rest of the community because no offsetting values are produced. Public works projects usually pay the prevailing hourly wage scale, or somewhere near it, but when called upon to combat unemployment are generally unable to provide full time work, and the worker is not much, if any, better off than he is when drawing unemployment compensation. Meanwhile, the community at large is subject to an even greater burden than that which would result from maintaining the worker in idleness. The figures used in the comparison are, of course, approximations, but it can readily be seen that no reasonable variations in any of the items would change the picture to any significant extent as the superiority of the discount plan is so outstanding.
One of the principal merits of the program is that it does not disturb the ordinary routine of economic life in any way. All of the manipulation is behind the scenes, and so far as the general public is concerned, the even tenor of business and industry is maintained unchanged regardless of whether the auxiliary employment program is being used extensively, sparingly, or not at all. To the worker the auxiliary employment will be indistinguishable from normal employment. Those who are employed under the plan will be subject to the same working conditions as any other employee of the respective producers, including the provisions of existing labor contracts. They will receive the regular wages or salaries in the normal manner, and will not be parties to the discount transaction. In fact, the only difference between this and normal employment will be in the arrangements between the employer and the employment agency that make the work possible.
Placing the surplus labor in the regular area of employment greatly simplifies the problem of fitting the worker to the job. One of the major weaknesses of the public works and “work relief’ programs that have heretofore been the only alternative to idleness, in addition to the serious waste of productive effort, is their inherent inability to utilize skilled and specialized labor. After all, public works construction and maintenance constitute only one small sector of our economic life, and it is out of the question for this restricted type of work to do justice to the many special skills developed in the numerous other fields of endeavor. It is not only a waste of human resources to put a highly skilled mechanic or a professional man out with a wheelbarrow; it is a definite blow to community morale. To be sure, the employment agency should not undertake to provide everyone with exactly the job for which he is best fitted. There may be more piano tuners or wild animal trainers out of work than can be used at the moment, and it is not sound public policy to incur additional costs to give a person something more to his liking when a reasonably suitable job is available. But on the whole, the range of jobs that will be opened up will include most of the major categories of gainful occupations, and it should be possible to fit the workers to the jobs within satisfactory limits.
To complete the coverage of the requirements of an ideal auxiliary employment plan, it should be mentioned that the program as outlined will not be susceptible to political manipulation. This is not the entering wedge of an expensive subsidy program, the kind of a measure that the legislators are under continual political pressure to liberalize. The plan contemplates full employment at full pay from the very start, and there is no room for any enlargement of its benefits. Furthermore, the worker who has been guaranteed continuity of employment by society as a whole can hardly be made to feel any special gratitude toward the political party that happens to be handling the governmental machinery at the moment. This is no trivial matter. A further growth of the political philosophy that developed during the depression of the thirties would have some ominous implications for the future.
As indicated in the earlier discussion, any measure or combination of measures that accomplishes a reduction of the survival limit will increase employment, and consequently there is considerable latitude for choice in the formulation of an employment program. But the more general types of measures, such as those discussed in Chapter XI, will inevitably leave some residue of unemployed individuals, and in order to implement a positive guarantee of continuous employment the program must contain some feature which provides for the direct placement of these individuals in specific jobs. The proposed discount program is an effective and efficient means of meeting this requirement.
What kind of work can we include under the proposed discount program? The answer is that we are not concerned as to what it is, so long as we make certain that it constitutes a genuine addition to employment. We do not have to worry about whether the labor will be used efficiently, or whether the goods that are produced will be salable. Under the individual enterprise system the employer, in effect, guarantees that the labor will be used productively. If there is any failure to meet the productivity requirements, the loss does not fall upon the community, as it does under collective ownership; it is absorbed by the owners of risk capital. The general public does not have to be concerned as to whether an employer gets his money’s worth out of labor regularly employed, and by handling the auxiliary employment under comparable conditions, the same freedom from care can be enjoyed with respect to the efficiency of the additional work.
The government employment agency has no functions in connection with the auxiliary employment plan but to regulate the discount rate to meet changing conditions, and to see that the surplus labor is placed only on bonafide additional work. This latter function is the only thing about the whole program that requires the exercise of any more than routine judgment and discretion. Obviously we would get nowhere by permitting the discount labor to replace workers on regular employment. Nor would we be any better off to allow displacement of the regular workers to take place indirectly through competitive processes. The surplus labor must be placed on genuine additional work. As has been stressed throughout the discussion, our theoretical analysis makes it clear that this must be work which, in the absence of the discount program, would not be done because it is not quite profitable.
The objective of all of the recommendations that were made in Chapter XII is the same as that of the measures proposed in Chapter XI; that is, to make additional self supporting employment possible by exempting certain specific operations from the normal requirement that they must be more than self supporting. It should be noted, however, that the mechanism of the proposal discussed in Chapter XII is not the same as that of the earlier recommendations. The suggested changes in policies with respect to business taxation and fixed interest financing would permit some of the existing enterprises that would otherwise be forced into bankruptcy to continue operating and furnishing employment. Here we would produce a net increase in employment by avoiding some of the normal loss of self supporting jobs.
But even though there are a number of factors which would induce the owners to keep unprofitable enterprises in operation, at least for a time, if this is made possible by such policy changes as those which we are suggesting, we cannot expect new enterprises to be organized unless there is a reasonable expectation of profit. In order to generate new employment we must therefore set up our program on the basis of additional work rather than additional enterprises. Since it is not practical, in this case, to arrange a direct exemption from taxes and capital costs, this additional work will be required to make its full normal contribution toward the community overhead expense, and the equivalent of the exemption will be returned to the producing enterprise in the form of a discount on the labor, thus accomplishing the same objective in a different manner. Unlike the unprofitable enterprise, however, the unprofitable work is not automatically identified. It is therefore essential to make certain that the labor discount is authorized only for work which represents a genuine addition to employment, and will not be offset by any reduction of employment in competitive operations.
The simplest method of avoiding any disruption of competitive relations that might affect employment is to assign the workers to additional production of a non-competitive nature. For purposes of this program the term “non-competitive” should be understood as meaning not directly competitive. In one sense, all producers are competing with all other producers; “competition for the consumer’s dollar”, as it is often called. But in the present instance we do not need to consider this generalized form of competition because the additional employment adds to the total consumers’ dollars just as much as it adds to the products competing for those dollars, and the relative position of the competitors is unchanged. On the other hand, if we were to permit a shoe factory to utilize the discount labor on direct production of shoes we would enable this producer to lower prices and sell more shoes, but most of his additional sales would be at the expense of other shoe producers, who would have to cut down production and lay off workers.
When there is only a relatively small labor surplus, as will be true when business cycles are eliminated, or reduced to a minimum, and an employment promotion policy is being followed, there is little need for utilizing anything other than the non-competitive type of work as a source of jobs for the surplus labor. In general, this will consist of items which are now just below the profitability point under normal conditions and which can be moved into the profitable class by a moderate discount on the labor. A typical example is the salvage of used materials. Under normal conditions an extremely large amount of material goes to waste simply because the cost of salvage exceeds the value of the material, often by only a relatively small percentage. During World War II the values of much of this material rose above the salvage cost because of war-created scarcities, and as a consequence huge quantities of such materials were reclaimed. The same result can be achieved by the reverse process through the operation of the discount program. If labor for salvage and reconditioning is available at a discount, the salvage cost will drop below the value of the material, and salvage operations will again be profitable.
Salvage work has some special features that make it particularly appropriate as a source of auxiliary employment. One of these is the fact that it utilizes mainly the type of labor of which we have a growing surplus, and it therefore aids in dealing with the problem of fitting the workers to the available jobs. Another point that is of special significance at the present time is that salvage operations can make a substantial contribution to the improvement of environmental conditions that is currently a very live issue.
The list of jobs that would be transformed from potentialities into actual providers of employment by a moderate cost reduction is a long one. Closely related to salvage is the utilization of products—agricultural or forest products, for example—that are currently being wasted or under-utilized because of temporary local surpluses or lack of accessible markets. Many property improvement projects that are not economically feasible at full labor cost—construction of fences and retaining walls, leveling and landscaping, even painting in some circumstances—could be brought within the program. Larger undertakings such as reclaiming of waste lands (swamps or logged-off lands, for example), extension of utility services into sparsely populated areas, pollution control projects, protection against erosion, more intensive exploration of natural resources, etc., could also be authorized when a large enough labor surplus is available.
Another major source of additional employment can be opened up by authorizing the use of the discount labor to perform specific operations that are customarily handled by machinery. This involves a decrease in productive efficiency, of course, but the cause of the present unemployment problem is our attempt to maintain too high a standard of productivity, and the logical remedy, the one that is being proposed in this work, is to back down just a little to the point where we can maintain full employment without sacrificing any more efficiency than is actually necessary. As long as some decrease in productivity must be allowed, it is immaterial whether this comes as a result of doing certain work that is not quite profitable on the basis of normal standards or whether it comes as a result of doing certain other work in a less efficient manner than usual.
Inasmuch as the present high productivity and the accompanying unemployment have resulted largely from factors that have encouraged the replacement of hand labor by machines, a partial return to hand work is a logical and effective means of accomplishing what needs to be done. In taking this course we are simply backing down the same path on which we climbed to the present level. Of course, preference will be given to those types of work in which the machine has the least advantage over hand labor. Like salvage and some of the other work previously mentioned, this program will have the added advantage of utilizing mainly the kind of labor of which we have the greatest surplus.
The proposed use of the discount plan as a part of a comprehensive employment program will require it to handle only a relatively small residue of unemployment, together with temporary fluctuations of a minor character. For this reason the employment agency will confine its activities mainly to short-term commitments, so that the workers can be recalled promptly when normal jobs develop. There are, however, some special circumstances under which it might be desirable to supply the surplus labor on a more extended basis. It would no doubt be advisable, for example, to take advantage of any opportunity to place substandard workers on a long-term basis.
Another objective that might be accomplished in this manner is to facilitate the establishment of certain kinds of new business enterprises. The financial problem that is involved in launching a new business was pointed out in Chapter XI, and the proposed policy of making business taxes a charge against earnings only was cited as a means whereby these new undertakings could be helped to survive the critical initial period. Where the enterprise is essentially non-competitive, either because of the nature of the product, or because of the location of the operations, the discount plan could also be applied; that is, the employment agency could make a commitment to supply discount labor for a period of time long enough to enable the business to overcome the initial disadvantages.
Construction is usually one of the first items that is suggested in connection with increasing the availability of employment. As stated earlier, construction subsidies have previously been proposed as a business stimulation measure. But major construction is not very well adapted to participate in the auxiliary employment program, except possibly in serious depressions. No advantage would be gained in allowing the use of the surplus labor on projects already planned and initiated, since the employment generated by these projects will materialize without any assistance, and the time lag involved in getting new projects under way would make this new work useless for the purpose of meeting short-term labor fluctuations.
Some of the minor construction projects, miscellaneous improvements, and certain types of maintenance work are not subject to the same considerations that affect the major construction jobs, and might be included in the auxiliary employment program. The regular day to day maintenance work has the same status as direct production labor, but there are many items that are to some degree optional, at least from a short range standpoint, and where a backlog of deferred work of this nature exists it could be brought into the program. If the discount plan is put into effect during a period of heavy unemployment, it will be expedient to make considerable use of this source of jobs at the start, as it can be made available quickly by getting the cooperation of large employers. After the plan is in full operation, however, it will probably be advisable to exclude industrial construction and maintenance, except for some special cases, because of the problems involved in distinguishing between eligible and non-eligible work in this area.
But this maintenance type of work will still play an important role as a source of employment, as it is not limited to industrial enterprises. Almost every farmer and homeowner has a budget of maintenance and minor improvement projects that he would like to carry out if they were not so costly, and any material discount on the labor cost would activate a large number of such projects. Furthermore, much of this work is of a character that would be suitable for the so-called “unemployable” workers, and hence this is another field that has some important advantages from the standpoint of placing the surplus workers.
Much of the work that has been mentioned as suitable for inclusion under the discount program, particularly salvage and reconstruction, can conveniently be handled by very small scale operations. In fact, there is a great deal of potential work that now goes undone simply because it is not available in large enough quantities to fit the requirements of present-day business and industry. In dealing with such situations it will often be appropriate for the unemployed worker to undertake the entrepreneurial functions. For instance, an unemployed carpenter may wish to apply his own efforts, with or without some helpers, to the reconstruction of a deteriorated building; an unemployed truck driver may wish to use his own equipment in hauling surplus products from one area to a distant market; an unemployed auto mechanic may wish to undertake the reconditioning of some cars, or parts thereof, or may wish to open up an auto repair shop in a location where no such service is currently available, and so on.
From the standpoint of the employment agency self employment accomplishes the same objective as employment by others, and when an entrepreneur removes himself from the unemployment rolls by such an undertaking he is entitled to the same discount for the same period of time on his own labor that would have been appropriate if he were assigned to work for some other employer. In view of the well-known preference that many individuals have for working “on their own”, even where the returns may be somewhat less than would result from other employment, this type of activity can be an important source of auxiliary employment, if properly cultivated.
One thing that can not be done under this program is to assign the discount labor to public projects. There will, of course, be considerable pressure for such an extension of the authorized job categories from governmental agencies that are hard pressed financially, and from individuals who do not have a clear understanding of the fundamentals on which the auxiliary employment program is based. “Let us have some of the benefit of this cheap labor”, will undoubtedly be the rallying cry. But government employment already gets the equivalent of the proposed discount. Aside from some indirect payments in the purchase of materials, and a relatively small amount of bond interest, governmental bodies pay no capital costs, no property taxes, and no excise taxes. We cannot rebate their contribution toward the community overhead expense as a means of creating additional self supporting employment because they make no significant contribution of this kind.
Furthermore, the objective of the program is to create the additional employment at no cost to the taxpayers, so that a positive guarantee of continuous employment will become feasible. Assigning the discount labor to public projects that are essential and will therefore be undertaken in any event does not create any additional employment. But if this labor is assigned to projects which are not essential and would not otherwise be undertaken, the entire cost of the projects is an additional burden on the taxpayers. The employment objective therefore cannot be attained by utilizing the surplus workers on either essential or non-essential government projects. A meaningful guarantee of continuity of employment is possible only if enough jobs of a self-supporting character can be made available, and more jobs of this nature can come only from the area in which normal work is required to be more than self supporting.
In normal times, the workers that will need to be provided with jobs under the discount plan will be mainly those with limited skills, and the kinds of activities that have been discussed thus far are well adapted to the requirements. However, under the conditions that may develop when the economy undergoes a drastic change, such as a transition from wartime to peacetime production, there is likely to be a temporary surplus of workers in more specialized categories. Placement of such workers will require some special efforts on the part of the employment agency, and usually will call for the opening up of some job sources that are not included in the normal program.
For example, there may be a temporary surplus of scientific and engineering personnel. One of the expedients that can be utilized in such a situation is to apply the discount plan to research and development, a field which has an almost unlimited potential for expansion, and is particularly suitable for the purpose because there is relatively little non-labor cost involved. This means that the discount on the labor is nearly equivalent to a corresponding reduction in the total cost, and the employment program can therefore be made very attractive to the employer. Research is not a competitive activity in the sense in which the term is being used in determining the suitability of different kinds of work for inclusion under the discount program; that is, an increase in the research undertaken by one firm does not have the effect of decreasing the amount of research done by this firm’s competitors. If they react at all, they are more likely to increase their own research.
It should be understood that special measures of this kind to support undertakings that will provide jobs for surplus workers with highly specialized skills are appropriate only to meet temporary conditions. They cannot be justified for the purpose of dealing with a continuing surplus of such skills. Some jobs will always be considered more desirable than others, and the applicants for such jobs will outnumber the vacancies, inasmuch as the nature of the work that needs to be done is not determined by the preferences of the workers, but by the requirements of the community. Where there is a continuing surplus, it will be necessary for the agency to divert some of the less qualified applicants for such jobs into other work of an appropriate character until equilibrium is reestablished.
Office work is an example of a category that is subject to a practical limit. The number of office jobs cannot expand indefinitely; it must bear at least a general relation to the amount of direct production that is currently going on. The functions of the employment agency in this area should therefore be confined mainly to placing workers in available jobs, and the discount plan should be utilized only in very exceptional cases. If a continuing surplus of applicants for office work develops, it will be necessary to take the same action as indicated in connection with a possible oversupply of scientific and engineering personnel; that is, some of the less qualified applicants will have to be shifted into other occupations—perhaps into the service industries.
If countercyclical policies are carried out in at least a reasonably efficient manner, the possibility of another depression such as that of the thirties will be permanently eliminated. The amount of unemployment to be handled by the new full employment program will therefore approximate that which now exists during periods of relative business stability, roughly about five percent of the working force. This total should be reduced more than fifty percent by the various employment aids discussed in Chapters X and XI, if they are put into effect, and by the reduction of business uncertainties as a result of the stabilization program. On the other hand, there are many individuals who would prefer to work but have been discouraged by the difficulty of finding employment, and have quit looking for jobs, with the result that they are no longer included as “unemployed” in the official statistics, and these workers will reenter the labor force when jobs become readily available. Taking all of these factors into consideration, it may be anticipated that, after the program is in full operation, the discount plan will not be called upon to take care of more than two or three percent of the able—bodied working force.
The types of work that have been discussed in the foregoing paragraphs should easily provide all of the additional jobs that are necessary in order to deal with a situation of this magnitude. Some rather large discounts may be required in order to get the plan into operation initially, but after it is generally realized that there are worth-while gains to be made by participation in the program the agency will have the benefit of the efforts of a host of workers and entrepreneurs who are interested in locating job opportunities from which they can gain some personal advantage. The individual enterprise system is successful because thousands of persons are continually on the alert for opportunities to better their own situations by contributing to the efficient operation of the system; that is, by increasing the production of economic values. The discount system will operate in exactly the same way, and it will therefore fit easily and naturally into the existing economic system.
Just in case the adoption of the full employment plan is delayed too long, or the program is mishandled after it is put into operation, so that a depression is allowed to develop, it will be advisable to supplement the foregoing discussion with a consideration of the additions that will need to be made to the categories of discount work to take care of the added load that will develop under these circumstances. It was pointed out earlier that one of the principal merits of the discount program is that it accomplishes its objectives unobtrusively. Under normal conditions, it is highly desirable to control the employment situation by inconspicuous behind-the-scenes manipulation rather than by measures which attract attention, as the latter may well induce psychological reactions on the part of the general public that will tend to increase the problems of control. In the midst of a depression, however, the conditions are quite different. Here a fear psychology is already dominant, and if any change in the public attitude results from the actions which are taken toward improvement of the existing situation, it will be a change for the better. Hence drastic and spectacular moves which indicate the willingness and ability of the authorities to take hold of the situation are likely to go a long way toward increasing confidence, and thereby lessening the task which has to be accomplished.
It should be recognized, however, that nothing in the auxiliary employment program proposed in this work actually requires this confidence on the part of the public. The program is based on taking certain specific economic actions which necessarily produce certain specific results regardless of the state of public opinion, and it is not subject to any limitations as to how severe a situation it can handle. But it is obviously easier and simpler to cope with a less severe dislocation of general economic conditions, and the psychological effect of clearly visible governmental action is helpful for this reason.
Bold and effective actions, considerably beyond the scope of the normal program, can be taken with respect to increasing employment whenever they are justified by the seriousness of the existing situation. The general nature of these more drastic measures must, of course, be the same as that of the normal features of the program. There must be a selective lowering of the survival limit, and, as we have found, this can best be accomplished by applying a discount to the labor cost on certain classes of work that would not otherwise be economically feasible. What we would do, therefore, in an emergency is to broaden the categories of work to be included in the auxiliary employment program.
In some special cases this program could be extended to direct production without affecting the competitive equilibrium. Many businesses are essentially non-competitive insofar as the effect of any change in the labor cost on the competitive position is concerned. Railroads, for instance, have their rates fixed by the regulatory authorities, and cannot take business away from each other by price concessions regardless of any operating cost advantages that one or the other may enjoy. It is therefore feasible to authorize the use of surplus labor by the railroads, or any other similarly situated enterprises, for any purpose, as long as it involves an actual addition to their working force, and does not represent work for which they obviously would have had to employ additional workers in any case.
It should be clearly understood that the objection to the assignment of the discount labor to competitive production does not rest on the premise that an increase in the volume of goods thus produced is undesirable. The doctrines of the “overproduction” school of thought have already been thoroughly exploded in the earlier pages. The only object of this restriction is to prevent the increase of production by one producer at the expense of others, an action that disturbs normal business relations without making any gain in employment. Where the competitive advantage can be eliminated by one means or another there is no objection to using the surplus labor on direct competitive production. In fact, such action is positively essential if the unemployment is very severe. Equalization of competitive advantage can therefore be classified as a feasible expedient for placing the surplus labor in a serious employment crisis.
In a field where the number of competitors is small it is quite possible that voluntary arrangements could be made between the concerns involved so that a joint application for the use of surplus labor for the expansion of direct production could be submitted. Such agreements in which all interested parties contract for extra help could be greatly stimulated by promotional work on the part of the employment agency when and if the surplus labor supply is large enough to warrant such action.
A still wider extension of the method of equalization of competitive advantage, one which has a practically unlimited field of application, is available through action taken on the initiative of the agency itself. In a period of depression, when practically all producers are operating at sub-normal levels, it is not necessary to wait for voluntary agreements; the employment agency can arbitrarily authorize the use of surplus labor by all employers in any selected industry up to a specified percentage of the existing production force. This would not compel any employer to use the extra workers, but few could afford to pass up the opportunity and allow their competitors to gain a price advantage.
In the ordinary application of the auxiliary plan, where it will be called upon only to take up the small amount of slack remaining after business conditions have been stabilized at a high level, the output of most industries will be at or near their peaks, and it would not be advisable to undertake any compulsory increases of production as there would be no data available concerning the amount of each kind of goods that could be absorbed by the markets when purchasing power is increased. Such measures were therefore not recommended as a part of the regular program, especially since other means of an unquestionably suitable character were available. In dealing with a depression situation, however, we do have ample data of this kind. We know how much of each variety of goods was marketed under normal economic conditions, and it is a safe assumption that an increase in purchasing power to the same level would absorb approximately the same quantities of specific consumer goods. Since the extra employment will provide the required purchasing power, and we know from previous experience that the consumers will buy these particular goods when they have the income, we are safe in going ahead with this forced increase in production. It is quite unlikely that the use of this kind of a measure will ever be required, even if a depression is allowed to develop before effective action with regard to employment is taken, but if drastic and spectacular action toward providing employment is ever needed, this is the step to take.
It should be emphasized that there is no limit to the application of this auxiliary employment program. We are accustomed to thinking of emergency employment measures as something on the order of public works programs, which obviously cannot be carried beyond a certain point because someone has to produce the goods that the workers on the public projects consume, and when the public payroll gets too large the burden on the productive workers becomes intolerable. But here we have a program wherein the workers that are assigned to the specially created employment, whether it be in an economic crisis or under normal conditions, do their own producing of economic values, and are not a burden to anyone. Even if we were to have a depression more severe than that of the thirties, we could still put the entire labor force to work on efficient production by this means, and maintain them there indefinitely.
This is a very significant point. It means that we have finally arrived at an employment program which enables us to guarantee full time employment at normal wages to everyone who is willing and able to work. There is much talk of security these days, but as long as there is no assurance of steady employment, and each individual has to rely on the hope that the taxpayers will continue to support him if he is out of work, security is no more than a grim jest. As long as they are available, unemployment insurance, welfare, or minimum income guarantees will help to cushion the blow, to be sure, but the ordinary worker never drives the wolf far enough away from his door to enable him to continue very long on a partial income without serious hardship. “The textbooks… concede”, says Galbraith, “that we must settle for something less than completely full employment”.67 But nothing less will serve the purpose. We must overrule the textbooks. Certainty of employment is the cornerstone of any security program worthy of the name. Here we have the means by which it can be accomplished.
This brings us to the end of our task. By means of a systematic and orderly method of analysis, utilizing the standard methods and procedures of the physical sciences, the true nature of the factors governing employment has been determined, and this knowledge has made it possible to identify the modifications in our existing economic organization and policies that are necessary in order to reach the long-sought goal of permanent full employment at maximum productivity. Finally a sound practical program for putting these changes into effect has been outlined, a program which will not disturb existing economic relations in any important respect, but will accomplish the desired ends fully and effectively.
This program promises no economic miracles, no “Age of Abundance”, no life of untroubled leisure. On the contrary, the outstanding characteristic of the scientific approach utilized in this work is that, unlike present-day economic thought, it recognizes that there are certain inescapable realities in the economic world: we cannot get something for nothing; we must first produce that which we wish to enjoy; we cannot have our cake and eat it too; we cannot increase the total by redistributing its parts; we have no magic method of producing without working; all these and many more. The sound thinker cannot accept proposals which conflict with these fundamental limitations, no matter how praiseworthy their motives, for he knows that they can end only in bitter disappointment. But full employment and economic stability are not visionary goals; they are reasonable and practical objectives that can be reached by relatively simple methods, once the basic principles involved are clearly understood, and the community makes the decision to give these goals the priority that is necessary.
One of the principal obstacles that stands in the way of solving economic problems is the general reluctance to confine the remedial measures to the primary purpose. Almost everyone who takes part in the formulation of plans for action has some other ax to grind, some personal interest to be served, or some pet theory to be promoted, and not infrequently more attention is paid to the furtherance of these collateral aims than to the principal objective toward which the efforts are supposed to be directed. No doubt much of this injection of extraneous issues into the situation is done by persons who are entirely sincere and honest in their convictions. The human mind is so constituted that it is easily convinced by any argument in favor of proposals that operate to the individual’s own personal advantage. So the farmer believes that the shortest road to national prosperity is “parity prices” and other “farm aid”; the businessman contends that the best route is via lower business taxes and less restrictions on enterprise; the labor unions look upon higher wages as the cure-all; while the sociologists see a heavy program of spending on paternalistic projects as the Great White Way to better times. But whether the advocates of such detours from the main objective are sincere, or are just trying to take advantage of an opportunity to advance their real purposes under cover of some more generally accepted goals, the result of emphasizing the secondary issues is always the same: progress toward the primary goal is inhibited.
In all probability many persons will be critical of the program that has been developed in the preceding chapters because it fails to correct what they consider serious defects in our economic life. Those who feel that a more equitable distribution of income is the greatest need of the present day will find the program lacking because it makes no change in income distribution; those who see the continued progress of the organized labor movement as the only hope for the improvement of the lot of the working population will consider it sterile because it gives the labor unions no new advantage; those who believe that organized labor is already unduly favored will regard the plans as faulty for exactly the opposite reasons; and so on almost without end. But the goal of this study was not the curing of all economic ills. Long experience in the physical sciences indicates that such broad and complicated objectives must be reached one step at a time, not all in one jump. The specific purpose of this study, as defined at the outset, was to set up a program which would enable us to institute and maintain full productive employment. In conformity with the standard practice in the physical sciences, attention has been concentrated exclusively on this primary objective, and the program that has been developed has been deliberately shaped in such a way as to make no change in existing economic relations, except where, and to the extent, absolutely essential to the attainment of the specific goal.
This does not imply a lack of sympathy with respect to other economic aims. On the contrary, it will be conceded that there is much merit in some of these collateral objectives. But proposals for attaining such ends should stand on their own feet. If they are sound, and meet with public approval, they do not need to be mixed up with measures originated for some other purpose. If they are unsound, or unacceptable to the public, they should not be permitted to sneak in under cover of some genuinely desirable objective.
The sound method of procedure, the scientific way, is to bring about the desired results without disturbing other aspects of economic life. Then, if further improvements in the system are suggested, they can be considered and acted upon separately, without incurring the hazard that controversy over these extraneous matters will block progress toward the goal of full productive employment, which presumably is approved by almost everyone. So the present study has divorced this primary objective from all other economic aims, no matter how desirable these may seem to the author or to others.
There will no doubt be those who object to the proposed program because it enables some employers to make a profit from the utilization of the surplus labor which they obtain at a discount. A “dole for capital” some demagogue is sure to call it. But, in fact, this employment program merely recreates the conditions which exist in normal commercial and industrial operations. Under these normal conditions, the suppliers of capital receive compensation in the form of profits for the use of this capital that makes productive employment possible. When the unbalanced purchasing power situation during a recession, or the normal effect of the survival limit, prevents an employer from securing any such payment (profits) for his services, we cease to get the services. If we count on the employers continuing their operations and providing jobs at a loss to themselves, we are expecting something for nothing, an age-old economic mirage that always ends in disillusionment.
It would be equally logical to criticize the program for proposing to pay full normal wages on the auxiliary work, rather than the mere subsistence wage that the worker would get through unemployment insurance or welfare, but it does not take a confirmed cynic to realize that there will not be as loud an outcry against this angle of the plan, even though in both cases the principle is the same: a full and equitable payment for services rendered. We must realize that the attainment of permanent prosperity necessarily involves making provision for all of the ingredients that go to make up prosperity, including both normal profits and normal wages. We cannot have peak performance when either labor or the suppliers of capital are on a starvation diet.
With this preliminary explanation, the conclusions of this work can be summarized in the following recommendations. It should be understood that what must be accomplished in order to provide jobs for the unemployed workers is simply to lower the survival limit an appropriate amount. There are many different kinds of economic actions that can be taken for this purpose, and the recommendations that are being offered here are not the only possible means of reaching the goal; they merely represent a selection from among the various possibilities, a combination of measures that will accomplish the objective efficiently, and without undesirable collateral effects. Adoption of these measures will enable the permanent full utilization of the nation’s productive resources at the maximum rate of production that is possible at the prevailing level of human ability and technological knowledge.
These measures will eliminate the basic cause of unemployment, and will enable guaranteeing full-time primary employment. Their ability to accomplish this objective can easily be verified without any disturbance of normal economic life, as they are not far-reaching and radical changes, but mild correctives which strengthen the existing system rather than reconstructing it. We do not have to wait for an extreme emergency before putting these proposals to the acid test. Even under presumably “normal” conditions there are several million persons seeking work, and millions more who would be willing to work if jobs could be found more readily. At the moment, the number of unemployed individuals is substantially greater than normal. The proposed program can demonstrate its efficiency by finding jobs for these workers, and the definite guarantee can follow when its feasibility is clear.
Unlike the proposals which involve increased government control over industry, or other basic changes in the existing economic system, this program will do its job quietly and unobtrusively. In fact, few persons will even be aware that it is in effect, except insofar as they realize that securing employment is no longer a problem. Furthermore, there will be no net cost to the taxpayer; whatever expenditures are necessary to carry out the program will be offset by additional sources, or potential sources, of government revenue that are created by the program. In practice, it will probably not be necessary to call upon these added revenue sources, as even with all of the proposed expenditures for labor discounts, employment promotion, education and training, the total costs should still be less than the current outlay for unemployment compensation and for that portion of the current welfare expense which originates by reason of unemployment. As indicated in the summary, it is suggested that the present unemployment taxes be maintained for the time being, gradually diverting more and more of the funds to the new program as unemployment diminishes. This will minimize the need for additional appropriations, and will be a very smooth way of making the transition to the new system.
The only serious threat to successful operation of the program, the only thing that could prevent it from accomplishing the theoretically feasible goal of providing full employment at no cost to the taxpayers, is bureaucratic inefficiency: the well-known tendency of government agencies to settle down into a comfortable routine rather than putting forth the effort and initiative that are required for efficient operation of any complex undertaking. But even at worst, what we will get from the plan is full employment at some cost, and this cost should certainly be substantially less than the present expenditures for maintaining the unemployed workers in idleness. We can have all of the many tangible and intangible benefits of guaranteed full employment without any additional cost, even if the optimum results are not obtained.
Furthermore, we can hardly justify rejecting any proposed program on the ground that government agencies are not capable of handling it efficiently as long as the only alternatives are other, far less satisfactory, measures that must also be carried out by government agencies. If government is inefficient, this is all the more reason for adopting policies such as those herein recommended, which rely upon government action only to a minimum degree. Whatever inefficiencies there may be in the operation of the proposed discount plan will at least have the merit of being very conspicuous, so that we can easily recognize them and thereby put ourselves in a position to apply some pressure toward correction.
In essence, what the present study has disclosed is that all that is needed in order to achieve a stable economy with permanent full primary employment is to make a few minor adjustments of the economic mechanism. There is nothing basically wrong with the existing system; on the contrary, the analysis shows that the impressive results that it has achieved in practice are a direct result of the sound principles on which it operates. Rather than being an aimless jumble of confused and unrelated entities, as painted by its detractors, the existing American economic organization has emerged from the analysis as a closely integrated mechanism, largely automatic, capable of fine adjustment, and governed by fixed and undeviating principles. It is not the creaking and outmoded machine that its opponents visualize, a loose-jointed conglomeration of indefinite and extremely changeable relations that “just grew” without any rule or order, but a highly efficient operation that is readily responsive to intelligent control.
Note: Missing even page numbers are blank pages between chapters, since chapters usually start on an odd page.