Rothbard on unemployment

With the constant debates and handwringing about the high rates of unemployment that have plagued the US and many other nations since the manifestation of the current economic problems in 2008, one needs to think carefully about the curious phenomenon of mass unemployment. I used the word curious for two main reasons. First, mass unemployment appeared with the advent of the industrial revolution. Second, since human wants are insatiable, there is always work to be done, thus there can never be a situation in which the demand for labor has been satisfied.

As a side note to my first point, students of Roman history will point out the large scale unemployment that plagued the city of Rome beginning in the last couple of decades of the  Roman Republic and extending into the empire. However, this was due to one of the most curious market dislocations in history, the enormous number of slaves imported into Italy due to Rome’s wars of conquest. The resulting unemployment was then exacerbated by the practice of providing welfare benefits to purchase the political support and loyalty of the masses. Curiously, we do not hear of mass unemployment in the provinces.

To return to my main point, Austrian economists have repeatedly pointed out that because mankind’s wants can never be satisfied, there is always work do be done. Additionally, there is always productive work to be done. Thus, there should be no mass unemployment. Indeed, Rothbard points out that even so called “frictional” unemployment that could emerge as the structure of production adjusts to new circumstances (as during the liquidation of malinvestments during the “bust” phase of the “boom-bust” cycle) will not result in mass unemployment if wages are permitted to adjust quickly to the new economic landscape. “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.“*

Many have argued that new technologies have created large scale unemployment. For example, there are no longer employment opportunities for switch board operators. However, Rothbard begs to difffer: “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.“*

Then why is mass unemployment such a problem? Since there is always work to be done, due to the impossibility of fully satisfying human wants, and there are those who seek money income via employment, why is there a problem matching supply and demand for labor services? As Austrian economists have repeatedly pointed out, mass unemployment is a choice made by various economic actors who refuse to allow wage rates to decrease in order to equilibrate the supply and demand for labor services. Thus, Rothbard says: “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.“*

While clearly the availability of various welfare measures will ensure that a certain amount of unemployment is a permanent feature of the modern welfare state. Welfare benefits are not infinite in duration, so there are people who desire productive jobs, yet are still unemployed. Unfortunately, in the modern welfare state, wages are sticky downward. Meaning that wages rarely decrease in nominal terms and that businesses that are forced to reduce expenditures resort to layoffs rather than salary reductions. Frankly, I don’t know why this is the case. Austrian economists writing in the 1960s and 1970s usually cited intransigent labor unions as the cause. Due to the demise of labor unions in the private sector over the past couple of decades, this explanation is no longer valid. Is the reluctance to reduce salaries a matter of culture? If so, why did this attitude appear and why does it persist despite the obvious misery it causes?

* All quotes are from Chapter 9, Section G of “Man, Economy, and State” by Murray Rothbard.

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