Roll Call of Errors (I)
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.