Growth Demand And Employment

Generally speaking, the rise of capitalism in the industrial economy has been characterised by the pursuit of improved labour productivities; that is, by increasing the amount of output per worker. This was generally achieved by replacing human labour with machines, first in agriculture and in manufacture. Later, machines reduced workloads and increased outputs in the home, in industry, in transport, and in commerce. In the words of the Abbé le Blanc, an enthusiastic commentator on the industrialisation of eighteenth-century Britain, machines 'really multiply men by lessening their work'.

On the local level, one effect of this process was the wide-scale dislocation of the labour pool, on which I have already commented. It was this dislocation which prompted the civil unrest characterised most memorably by the Luddites. On the macro-scale, however, the surfeit of labour made available by the new machines was absorbed by new and expanding industries which were able to increase their profits for as long as the demand for their products was maintained. Ever since those early days, the goal of the industrialist has been to aim for continual improvements in labour productivity: more and more output per worker. From his or her point of view, the more output obtained per worker employed, the greater the income from sales, and the more profitable the enterprise.2

For as long as the nation as a whole can maintain full employment, this pursuit of improved labour productivity inevitably means that economic output increases. Conversely, of course, for as long as demand continues to grow, improved labour productivities do not lead to unemployment. But what happens in such a system when demand stagnates or reduces? In these circumstances, the systematic pursuit of improved labour productivities inevitably leads to reductions in the labour force. At the national level, this means unemployment. With more people unemployed, the spending power in the nation is reduced, serving to depress demand even further. Increased unemployment also means increased national spending—for instance on welfare payments. And this means the government must either borrow money or raise more in taxes. Borrowing money may increase long-term costs and reduce international confidence. Raising taxes reduces consumer spending further still, forcing the economy into a spiral of recession.

Dealing with this situation in the twentieth century has given rise to one of the fiercest and most divisive debates in the history of economics: that between Keynesian economists and the monetarists.3 It is instructive to spend a few paragraphs analysing this argument because it provides a very clear illustration of the structural difficulties in which the industrial economy is still embedded.

The debate centres on the complex issue of unemployment.4 Economic theory identifies a certain 'natural rate' of unemployment. This arises because of structural factors such as the continuous and inevitable change in the pattern of demand and production, and the existence of people whose physical or mental handicaps make them 'unemployable' in a job market geared towards specific forms of labour.5 In addition, natural unemployment takes account of the impacts of trade union or organised labour pressure to enforce a minimum wage rate. But unemployment is also predicted to rise temporarily (in the eyes of the theory) when demand drops, until wages and prices have adjusted to a new equilibrium level.

According to the Keynesians, the appropriate response to 'demand deficiencies' is for the government to spend more money in order to stimulate new investment and generate new demand. This process is supposed to lift the economy into a new period of economic growth which will soak up the increase in the unemployed labour pool. The Keynesians gained almost complete ascendancy in economic thinking in the two decades following the Second World War. But they were drawn up short in the early 1970s by the biggest recession since the 1930s, characterised both by soaring inflation and by escalating unemployment. Suddenly, the Keynesian philosophy found itself incapable of answering the demands of the situation and came under attack from a new school of thought: monetarism.

The monetarists believed that government policy aimed at artificially inflating demand would disrupt the natural operation of the market and lead to unacceptable levels of inflation. Instead, the monetarists revived the same classical economic principles which

Keynesianism had replaced thirty years or so previously. The centrepiece of their argument was the assertion that the market will itself solve the problem of unemployment and restore balance to the economy. As unemployment increased, they argued, this would drive down the wage rate, reducing the cost of labour to employers and allowing them to increase their production capacity by taking on more workers. This would simultaneously reduce unemployment, increase production and stimulate new demand. The appropriate role of government was just to reduce the response time of the market's natural tendency to rebalance itself at full employment.

The monetarists insisted, for instance, that governments should aim to reduce income taxes. Such taxes create a price differential between the level of wage an employer is prepared to offer and the level of wage a worker is prepared to accept. Equally, the monetarists argued, unemployment benefits should be reduced, because these reduce the incentive for workers to find work at the going wage rate. Additionally, monetarism perceived a need to reduce the power of trade unions, which might be able to negotiate a wage rate above the equilibrium, freemarket wage.

The monetarists' philosophy was essentially one of non-intervention. By recalling the early doctrine of Adam Smith's 'invisible hand' (see Chapter 2), it provided the foundations for the 'free market' economics which has been pursued vigorously in most Western nations since the late 1970s, and whose effects will probably dominate the global economic and industrial climate well into the twenty-first century.

There are several instructive points to draw from this discussion. In the first place, neither the Keynesians nor the monetarists really contested that the key to maintaining full employment in the economy was to stimulate demand growth. Allowing demand to stagnate or fall was paramount, in their eyes, to allowing the economy to fall into a vicious cycle of unemployment, underinvestment, and recession—exactly the opposite of the virtuous circle represented by economic growth. As former British Prime Minister Edward Heath remarked: 'The alternative to expansion is not an England of quiet market towns linked only by trains puffing slowly and peacefully through green meadows. The alternative is slums, dangerous roads, old factories, cramped schools, and stunted lives.'

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