Books / Digital Text

9. Production: Particular Factor Prices and... > 2. Land, Labor, and Rent

G. The "Problem" of Unemployment

An economic bugbear of our times is “unemployment.” Not only is this considered the pre-eminent problem of the “depression” in the “business cycle”; it is also generally considered the primary “problem” of the “capitalist system,” i.e., of the developed free-market economy. “Well, at least socialism solves the unemployment problem,” is supposed to be the most persuasive argument for socialism.

Of particular interest to us is the sudden emergence of the “unemployment problem” in economic theory. The Keynesians, in the mid-1930's, inaugurated the fashion of declaiming: Neoclassical economics is all right for its special area, but it assumes “full employment.” Since “orthodox” economics “assumes full employment,” it holds true only so long as “full employment” prevails. If it does not, we enter a Keynesian wonderland where all economic truths are vitiated or reversed.

“Full employment” is supposed to be the condition of no unemployment and therefore the goal at which everyone aims.

In the first place, it should be emphasized that economic theory does not “assume” full employment. Economics, in fact, “assumes” nothing. The whole discussion of alleged “assumptions” reflects the bias of the epistemology of physics, where “assumptions” are made without originally knowing their validity and are eventually tested to see whether or not their consequents are correct. The economist does not “assume”; he knows. He concludes on the basis of logical deduction from self-evident axioms, i.e., axioms that are either logically or empirically incontrovertible.

Now what does economics conclude on the matter of unemployment or “full employment”? In the first place, there is no “problem” involved in the unemployment of either land or capital goods factors. (The latter condition is often known as “idle” or “unused capacity.”) We have seen above that a crucial distinction between land and labor is that labor is relatively scarce. As a result, there will always be land factors remaining unused, or “unemployed.”22 As a further result, labor factors will always be fully employed on the free market to the extent that laborers are so willing. There is no problem of “unemployed land,” since land remains unused for a good reason. Indeed, if this were not so (and it is conceivable that some day it will not be), the situation would be most unpleasant. If there is ever a time when land is scarcer than labor, then land will be fully employed, and some labor factors will either get a zero wage or else a wage below minimum subsistence level. This is the old classical bugbear of population pressing the food supply down to below-subsistence levels, and certainly this is theoretically possible in the future.

This is the only case in which an “unemployment problem” might be said to apply in the free market. But even here, if we consider the problem carefully, we see that there is no unemployment problem per se. For if what a man wants is simply a “job,” he could work for zero wages, or even pay his “employer” to work for him. In other words, he could earn a “negative wage.” Now this could never happen, for the good reason that labor is a disutility, especially as compared to leisure or “play.” Yet all the worry about “full employment” makes it appear that the “job,” and not the income from the job, is the great desideratum. If that were really the case, then there would be negative wages, and there would be no unemployment problem either. The fact that no one will work for zero or negative wages implies that in addition to whatever enjoyment he receives, the laborer requires a monetary income from his work. So what the worker wants is not just “employment” (which he could always get in the last resort by paying for it) but employment at a wage.

But once this is recognized, the whole modern and Keynesian emphasis on employment has to be revalued. For the great missing link in their discussion of unemployment is precisely the wage rate. To talk of unemployment or employment without reference to a wage rate is as meaningless as talking of “supply” or “demand” without reference to a price. And it is precisely analogous. The demand for a commodity makes sense only with reference to a certain price. In a market for goods, it is obvious that whatever stock is offered as supply, it will be “cleared,” i.e., sold, at a price determined by the demand of the consumers. No good need remain unsold if the seller wants to sell it; all he need do is lower the price sufficiently, in extreme cases even below zero if there is no demand for the good and he wants to get it off his hands. The situation is precisely the same here. Here we are dealing with labor services. Whatever supply of labor service is brought to market can be sold, but only if wages are set at whatever rate will clear the market.

We conclude that there can never be, on the free market, an unemployment problem. If a man wishes to be employed, he will be, provided the wage rate is adjusted according to his DMVP. But since no one wants to be simply “employed” without getting what he considers sufficient payment, we conclude that employment per se is not even a desired goal of human action, let alone a “problem.”

The problem, then, is not employment, but employment at an above-subsistence wage. There is no guarantee that this situation will always obtain on the free market. The case mentioned above—scarcity of land in relation to labor—can lead to a situation where a worker's DMVP is below a subsistence wage for him. There also may be so little capital invested per worker that any wage will be below-subsistence for many people. Even in a relatively prosperous society there may be individual workers so infirm or lacking in skill that their particular talents could not command an above-subsistence wage. In that case, they could survive only through the gifts of those who are making above-subsistence wages.

But what of the able-bodied worker who “can't find a job”? This situation cannot obtain. In those cases, of course, where a worker insists on a certain type of job or a certain minimum wage rate, he may well remain “unemployed.” But he does so only of his own volition and on his own responsibility. Thus, suppose that perhaps half the labor force suddenly insisted that they would not work unless they received a job in New York City in the television industry. Obviously, “unemployment” would suddenly become enormous. This is only a large-scale example of something that is always going on. There may be a shift of industry away from one town or region and toward another. A worker may decide that he wants to remain in the old town and insists on looking for a job there. If he fails to get one, however, the fault lies with himself and not with the “capitalist system.” The same is true of a clerk who insists on working only in the TV industry, or of a radio employee who refuses to leave for television and insists on working only in radio. We are not condemning these workers here. We are simply saying that by their decisions they are themselves choosing not to be employed.

The able-bodied in a developed economy can always find work, and work that will pay an over-subsistence wage. This is so because labor is scarcer than land, and enough capital has been invested to raise the marginal value product of laborers sufficiently to pay such a wage. But while this is true in the general labor market, it is not necessarily true for particular labor markets, for particular regions or occupations, as we have just seen.

If a worker can withdraw from the labor market by insisting on a certain type of work or location of work, he can also withdraw by insisting on a certain minimum wage payment. Suppose a man insisted that he would not work at any job unless he is paid 500 gold ounces per year. If his best available DMVP is only 100 gold ounces per year, he will remain unemployed. Whenever a man insists on a wage higher than his DMVP, he will remain unemployed, i.e., unemployed at the wage that he insists upon. But then this unemployment is not a “problem,” but a voluntary choice on the part of the idle person.23

The “full employment” provided by the free market is employment to the extent that workers wish to be employed. If they refuse to be employed except at places, in occupations, or at wage rates they would like to receive, then they are likely to be choosing unemployment for substantial periods.24

It might be objected that workers often do not know what job opportunities await them. This, however, applies to the owner of any goods up for sale. The very function of marketing is the acquisition and dissemination of information about the goods or services available for sale. Except to those writers who posit a fantastic world where everyone has “perfect knowledge” of all relevant data, the marketing function is a vital aspect of the production structure. The marketing function can be performed in the labor market, as well as in any other, through agencies or other means for the discovery of who or where the potential buyers and sellers of a particular service may be. In the labor market this has been done through “want ads” in the newspapers, employment agencies used by both employer and employee, etc.

Of course “full employment,” as an absolute ideal, is absurd in a world where leisure is a positive good. A man may choose idleness in order to obtain leisure; he benefits (or believes he benefits) more from this than from working at a job.25 We can see this truth more clearly if we consider the hours of the work week. Will anyone maintain that an 80-hour work week is necessarily better than a 40-hour week? Yet the former clearly represents a fuller employment of labor than the latter.

One alleged example of a possible case of involuntary unemployment on the free market has been suggested by Professor Hayek.26 Hayek maintains that when there is a shift from investment to consumption, and therefore a shortening of the production structure on the market, there will be a necessary temporary unemployment of workmen thrown out of work in the higher stages, lasting until they can be reabsorbed in the shorter processes of the later stages. It is true that there is a loss in income, as well as a loss in capital, from a shift to shorter processes. It is also true that the shortening of the structure means that there is a transition period when, at final wage rates, there will be unemployment of the men displaced from the longer processes. However, during this transition period there is no reason why these workers cannot bid down wage rates until they are low enough to enable the employment of all the workers during the transition. This transition wage rate will be lower than the new equilibrium wage rate. But at no time is there a necessity for unemployment.

The ever-recurring doctrine of “technological unemployment”—man displaced by the machine—is hardly worthy of extended analysis. Its absurdity is evident when we look at the advanced economy and compare it with the primitive one. In the former there is an abundance of machines and processes completely unknown to the latter; yet in the former, standards of living are far higher for far greater numbers of people. How many workers have been “displaced” because of the invention of the shovel? The technological unemployment motif is encouraged by the use of the term “labor-saving devices” for capital goods, which to some minds conjure up visions of laborers being simply discarded. Labor needs to be “saved” because it is the pre-eminently scarce good and because man's wants for exchangeable goods are far from satisfied. Furthermore, these wants would not be satisfied at all if the capital-goods structure were not maintained. The more labor is “saved,” the better, for then labor is using more and better capital goods to satisfy more of its wants in a shorter amount of time.

Of course, there will be “unemployment” if, as we have stated, workers insist on their own terms for work, and these terms cannot be met. This applies to technological changes as well as any other. The clerk who, for some reason, insists nowadays on working only for a blacksmith or in an old-fashioned general store may well have chosen a large dose of idleness. Any workers who insisted on working in the buggy industry or nothing found themselves, no doubt, unemployed after the development of the automobile.

A technological improvement in an industry will tend to increase employment in that industry if the demand for the product is elastic downward, so that the greater supply of goods induces greater consumer spending. On the other hand, an innovation in an industry with inelastic demand downward will cause consumers to spend less on the more abundant products, contracting employment in that industry. In short, the process of technological innovation shifts workers from the inelastic-demand to the elastic-demand industries. One of the major sources of new employment demand is in the industry making the new machines.27

  • 22. Capital goods will remain unemployed because of previous entrepreneurial error, i.e., investing in the wrong type of capital goods.
  • 23. See Mises, Human Action, pp. 595–98. As Mises concludes, “Unemployment in the unhampered market is always voluntary.” Particularly recommended is Mises’ critique of the theory of “frictional unemployment.”
  • 24. Economics does not “assume mobility of labor.” It simply analyzes the consequences of a laborer's decision to be “mobile” or “immobile,” the latter amounting to a voluntary choice of at least temporary unemployment.
  • 25. The “idleness” referred to here is catallactic, and not necessarily total. In other words, it means that a man does not seek to sell his labor services for money and therefore does not enter the societal labor market. He might well be very “busy” working at hobbies, etc.
  • 26. Hayek, Prices and Production, pp. 91–93.
  • 27. Cf. Fred R. Fairchild and Thomas J. Shelly, Understanding Our Free Economy (New York: D. Van Nostrand, 1952), pp. 478–81.
Shield icon library