Mises Daily Articles
Involuntary Unemployment: The Case of Serbia and Croatia
The current economic crisis has captured pretty much everyone's attention by now. The debates over what caused it are ongoing. One of the popular debates revolves around the question of who is right, the Keynesians or the Austrians. While this article does not aspire to answer that particular question, I hope it will shed some more light on the cornerstone of J.M. Keynes's theory: the involuntary unemployment assumption.
In his 1936 treatise, The General Theory of Employment, Interest and Money, Keynes states that
[m]en are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.
He argues that this (odd?) situation is closely related to the inability of businesses to lower the wage rate and the population's insufficient willingness to consume. The cure, according to Keynes, is government intervention — increased spending or an increase in the money supply. I am not convinced that this is true.
First, in order to be employable at some point in the future, the unemployed must have some way of sustaining their livelihood. They could acquire food and other necessities by using up some of their assets (if they have any), or receiving a gift from others (charity), or obtaining government financial assistance. Alternatively, the unemployed could search for individuals that might benefit from their services.
A job outside one's speciality or an extralegal job can carry a stigma; it often isn't someone's first choice for employment; but any exchange of goods and services between consenting parties — if it doesn't infringe on the property of a third party — is a productive activity against which I have no objection. While it would be more comfortable to get money for nothing, this would not be the wisest long-run policy solution to unemployment.
To make the questionable nature of involuntary unemployment a bit clearer, I would like to share a story about the kind of "unemployment" that has no assets to be used up, no charity, and no government financial assistance — nothing but a clear mind and a reasonably healthy body. The story goes sharply against the Keynesian idea of the cure for unemployment. In fact, it reveals a better cure — a will to be employed.
In August of 1995, together with about 250,000 other inhabitants of Croatia, my family was relocated to Serbia in about a week during the military operation "Storm" conducted by the Croatian army. At that time, Serbia was already in a deep economic crisis caused by a series of disastrous economic policies, with reckless expansion of the money supply being at the centre of the problem. The official unemployment rate was well over 30% and average household income at about 20% of the 1989 level.
One would expect that the additional inflow of unemployed labor, corresponding to roughly 2.5% of Serbia's population, would only contribute to the number of the already existing unemployed people, living off the crumbling social-assistance programs, spending the remaining family savings, or smuggling cigarettes and gasoline from Romania and Bulgaria. This is also what most of those using the Keynesian model would suggest.
But this was not what happened. Most of these people came with just a few hundred German marks in their pockets and a bag of clothes. There was no time to speculate whether it was better to collect social assistance, spend some family savings, or sell some assets before getting into the unpleasant business of looking for any job. And most of us did not even expect or want any government assistance.
As my father once sarcastically said, "We got enough help from them already, and we are paying back through our nose," alluding to the fact that we ended up as refugees as a result of a violent conflict between the Serbian and Croatian governments over the control of the area we lived in. Another statement of his from that time that I will always remember was "I can do better than that!" This was a comment referring to the "collective centers" for housing of refugees that were provided by the government in the first weeks after our exodus.
As one would suspect from the general economic indicators mentioned above, the government's ability to extract any more resources from the economy and transfer them to the new wave of unemployed people was seriously limited. Thus, our low expectations were actually a good thing for government planners. On top of everything, as noncitizens, we did not have voting rights, so the government's incentives to do anything in our favor were low. But, even in the unlikely event of getting the voting right, the level of disillusionment about the ability of the government to improve anything was quite high, so most of us did not care about using that potential right.
After the first days of confusion, when most families were housed in sports stadiums, vacant schools, closed-down factories etc., many managed to make arrangements for longer-term accommodations in a matter of weeks. These arrangements were made with owners of old farmhouses, cottages, and in general, with anyone who was willing to supply an empty livable space on their property in return for some service.
My parents and I found a family of emigrants who lived in Germany and would come to Serbia only on holidays (so it could even be said that we were fortunate that our misfortune coincided with their holiday time). Over the next five years, my father and I improved everything that could be improved in the four houses owned by this family, from fixing bad electrical installations and plumbing to reinforcing concrete balconies, paving the yard, replacing the roof tiles, undertaking interior renovations and performing general property maintenance. My mother made everything shine, and the garden was always full of flowers.
The owners obviously benefited from this service, especially because the property was prone to burglary prior to our arrival. Of course, we benefited from having a home to live in. In addition, my parents helped with the farm work in the local monastery. In return, we got a piece of land to use for our own crops. Aside from that, in the village we lived in, there were jobs to be done on a daily basis, from fieldwork, fixing fences, planting trees, and garbage clean up to chainsaw and other machinery repair.
In the following months and years, the majority of the 250,000 new residents of Serbia took every job that they could find, even for a day. There was no ditch that was too hard to dig, no mortar too hard to mix, no weed too hard to cut, no crops too hard to harvest, no car or truck too hard to fix. The list goes on and on. Most of the jobs were in emerging small businesses and agriculture, as the state-owned firms were increasingly collapsing.
Many of these people had university degrees, but not many places needed those kinds of skills. What was needed was hands-on work on the maintenance of the old and the building of new (but different) capital goods. A classmate of mine, a brilliant mind, did not want his parents to finance his university education so he started a number of short jobs, until he ended up working as a sander for an automotive body shop. The shop grew over the years and now he is one of the head managers there.
In the first months and years after 1995, most people worked for money, for food, for clothes, for anything. They saved as much money as they could and used the food and clothes. The German mark was the most valuable currency for storage, while the domestic dinar was virtually worthless. This money was not saved in a bank because most banks were already bankrupt due to the galloping inflation triggered by the daily printing of new money by the National Bank of Yugoslavia. Saving the domestic currency was as rational as committing suicide.
"Under-the-mattress" saving was the only reasonable option left, and so we used it. Most people had one major goal on their mind — to have a home again. Some, like my parents, put more emphasis on financing their children's education.
One might argue that this was all useless, since, given the limited amount of German marks in the economy, if one saves, this takes away from the whole pool of money available for spending and saving by others. But, when saving money, that person is not taking away the existing goods and services available for exchange. These goods and services still exist and can be exchanged, given that there is some positive, infinitesimally divisible amount of money in the economy. Under-the-mattress saving reduces the quantity of money in circulation relative to the quantity of goods and services available for purchasing, and this only lowers the money prices of those goods and services.
More importantly, one saves money in order to finance future investments, which will bring higher productivity and more goods and services available for consumption in the future. The total amount of money in the economy may still be the same, but the amount of goods and services that can be bought using this same money will be larger.
Thus, what is being stored is not the physical quantity of money but the future value of the projects that will be completed using this money. The limited amount of money was not an obstacle for saving in this case. It is true, however, that without a banking system one needs to wait for one's own savings to accumulate in order to finance a project. I am not sure if most of my countrymen understood this reasoning, but they surely acted as if they did.
The new settlements near Belgrade and throughout Serbia that started appearing in 1997 provide some evidence that all this work and saving, even as primitive as it was, was not in vain. These settlements were built with the money and labor of the current owners, former refugees from Croatia. Many of my family members and former neighbors live there. The legal status of these settlements is still questioned by the state, but these people decided that they would rather take that risk than wait for help that will never come. The few who did not take their lives into their own hands and waited for government support are still waiting.
Since the year 2000, after the October 5 Revolution, more market-oriented individuals have entered the state structure, and the banking system has been restored. Judging by the dinar's exchange rates against the major world currencies, the increases in the money supply seem to have been kept at a reasonably low level.
Saving has become more productive per unit of time because those that want to start an investment project do not need to wait for their own savings to grow to the required level or to directly search for persons willing to lend their savings. The banking system allows for intertemporal exchange of savings among a vast number of individuals and the investment sector provides the medium for exchange.
Most of the home owners in the new settlements are still working hard and either saving up or borrowing in portions to finance smaller projects on their property. Many of them are running small businesses from their homes: car and tire repair, convenience stores, butcher shops, bakeries, wood-cutting and carpentry shops, trucking services, construction contracting, and so on. Others managed to find more permanent employment in emerging local businesses.
I don't think that these people would agree with J.M. Keynes's conclusion to his 1936 treatise that "the outstanding fault[s] of the economic society in which we live" is "its failure to provide for full employment." Most of them would tell you that the outstanding fault of the political society in which we live is its failure to provide for full respect of people's lives and property, and that people are perfectly capable of managing their own lives, which includes the decision to allocate their time into looking for other individuals who might need their services.
The people in this story survived not because of but despite the government's interventionist policies.
 Keynes, J. M. 2006. The General Theory of Employment, Interest and Money (New Delhi: Atlantic Publishers & Distributors), pp. 14.
 However, there are indications that the central bank is trying to expand credit beyond the limit that the banks feel comfortable with. Recently it was announced that the negotiations between the Serbian Association of Banks and the central bank ended with the conclusion that the borrowing limit will be raised from 30% to 40% of the borrower's net income. This has lead to a strange situation where the banks are announcing this change but urging the borrowers to be careful in deciding how much to borrow (text translated from Serbian using Google Translate).
 Keynes, p. 341.