Monthly articles (English and French) on the theme "Querying economic orthodoxy"

No. 36 - December 2008

Abandon obsolete theories!


The new capitalist régime which has taken shape over the past thirty years, following the demise of industrial capitalism, is incapable of providing full employment.
Robert Castel (1), Le Monde, 9 July 2008

If this régime cannot satisfy our needs as workers, it is because it is based on a fundamentally defective theory.

The degradation of the world of work

In the early 1960s, when I was a student, finding a job was a pretty simple matter. It was more a case of employers pursuing us, than of us striving to impress them. I remember being part of a group of students who were invited by a leading Scottish life assurance company to spend three days being shown over their offices, having lengthy discussions with senior management, being entertained to lunch in good style… much to the amazement of my parents, who remembered the conditions of a generation earlier, in the 1930s, when the struggle to find an employment was even tougher than it is today.

Why have we fallen back towards the conditions of a bad old age which seemed for a while to be ancient history, never to be repeated?

Practical problems often have theoretical roots. In the writings of the Austrian economists, whose theories dominate today's world, these roots fly off the page, slap into your face. Try, for example, Ludwig von Mises (1881 - 1979), a Viennese academic who spent much of his career in America, where countless neoconservatives still venerate his memory. He is considered one of the 'greatest' among the economists of the 'Austrian school'. In his hefty tome Human Action, published in 1949, you will find the following observation (2):

Labour [in general terms] is the most scarce of all primary means of production because every variety of production requires the expenditure of labour…on the labour market of a market society there are buyers for every supply of labour offered.

An unrealistic theory

That is what Mises grandly called the law of labour, and this so-called 'law' is one of the foundations of his economic theory.

Translated into more everyday language, it means that workers, considered as a whole, are normally in short supply. All the energy and raw materials that are needed by businesses are relatively abundant; they can generally be obtained readily and without paying silly prices. Any shortages or inflated prices that restrict production are most likely to be in the labour market, not in oil or electricity, minerals or crops. Therefore, workers are always in good demand. Anyone who wants a job can find one without much difficulty.

What can this have to do with the world as we know it, where in most trades and professions jobs are easy to lose and devilish hard to find? Well, Mises had the excuse that he was writing at the end of the 1940s, when unemployment was indeed, in most developed countries, very low by today's standards. In 1948, for example, average unemployment rates (3) were 3.6% in the United States, 2.1% in Canada, 1.5% in the United Kindom, 3.4% in Germany, 2.0% in France, 1.9% in Australia.

Present-day realities

Clearly, that was a very different world from the one we know. Our problem is that, over the last thirty years or so, we have made the big mistake of adopting economic policies recommended by Mises and his friends. Such policies might have been suitable, up to a point, for the conditions which prevailed when he wrote Human Action. Today, they are clearly not what we need. Economic policymakers today are like those legendary old generals who were always valiantly fighting the previous war, and thereby losing the war in progress.

In our present-day economies, clearly labour is not generally scarce. Employers may still have difficulty filling vacancies calling for particular skills that are not so easily found; but, in general, the supply of workers looking for jobs runs well ahead of the demand for them. That is why we have persistently high unemployment levels.

Yet, according to the cocksure Mises, unemployment should not be a problem. Why not simply drum up sufficient growth to employ all the jobseekers? Mises assures us that the inputs required for growth, other than workers, are abundant. We are not short of energy, or of raw materials; only of workers. He simply assumed this, without offering any real proof. Perhaps it was partly true in 1949. But not today.

Only a few months ago, oil was trading at $150 a barrel, and most other commodities were following its example. Minerals, foodstuffs, timber, cotton, were all riding high in response to rising demand from the expanding Asian economies. Inflation was a big worry. Any further attempts to pump up growth in the West would soon have sent the cost of living through the roof.

The end of conventional growth

And inflation is by no means the only problem that threatens us, if we try to grow our economies faster in the conventional manner. Even worse is the menace of further damage to our environment or degradation of our climate, not to mention exhaustion of the sources of some raw materials. The human race is overconsuming the planet's resources - now by as much as 30%, according to the latest Living Planet report released by WWF (4) a few days ago.

In fact, we have three resource problems. The first is that supplies of some overexploited resources are simply running out - or have already run out. In the old fishing grounds off Newfoundland, stocks of cod have fallen to very low levels and have failed to recover, even though commercial fishing has been banned, or severely restricted, since 1992. In Aberdeen, the 'granite city' of northern Scotland, I one visited a builder whose offices overlooked a huge hole in the ground, the former Rubislaw quarry. Most of Aberdeen came out of that hole, he told me, but now, we can no longer work the quarry. There's no granite left there - or anywhere else in Scotland.

The second problem is that, with some resources, supply is still abundant but demand is running ahead of supply. We can still grow plenty of timber, but enough to keep up with increasing human demands? The answer seems to be no; worldwide, we are cutting down trees faster than we are planting them; some trees, such as certain types of mahogany, are now endangered species.

The third problem is that too heavy use of resources can cause its own problems, quite apart from the possible exhaustion of the resources themselves. The most obvious example is oil. There are those who believe that world oil reserves are much bigger than current estimates suggest. Yet even if they are right, we need to limit our oil consumption, so as not to deprive our descendants, but also to avoid huge pollution and climatic problems. So there is a kind of pseudo-scarcity - the resources are there, but we need to avoid using them too intensively.

Whichever resource is the most scarce today, it is certainly not labour. One might even argue that, over the world as a whole, labour is now the most abundant resource. Worldwide, well over 200 million people are unemployed, and many more are not fully employed. Mises' assumption no longer makes any sense. But many people in business, in government, in the academic world that is teaching the next generation, still regard Mises as one of the greatest economists.

The consequences of an outdated theory

What are the consequences of building our economic policies on a theory that assumes labour is scarce and everything else more abundant?

First, the theory implies that labour, because of its scarcity, is in an inherently strong bargaining position. It has therefore no need for the solidarity of trade unions or the protection of legislation on working hours, on minimum wage rates, on conditions of dismissal and benefits for the unemployed. Thus Mises wrote (5) that assistance granted to the unemployed is a means of making unemployment last, rather than making it disappear. The disastrous financial implications of unemployment benefits are manifest. So, over the last thirty years, policies have been designed to weaken unions and partially dismantle protective legislation.

Second, if labour is thought to be the scarcest resource, others being more abundant, it is natural for every organisation to seek ways of using less labour, even if that means using more of other resources. Your local station no longer has staff on duty at all times; just a machine to sell tickets. Your bank discourages you from drawing cash over the counter - there is a charge for doing that; you are supposed to use the hole in the wall. When you telephone an office, nobody is on the switchboard to take your call; you have to converse with an answering machine. The town council doesn't employ men to sweep the streets the old-fashioned way; it has invested in noisy, air-polluting machines to improve productivity, ie get the job done by fewer people, while using more oil. But it's oil we should be cutting down on, not manpower!

Third, the theory implies that we can, in principle, eliminate unemployment simply by conventional growth - by producing and consuming more of everything. Today, for very good reasons, that is no longer possible.

Alternative strategies

So, what is the answer? The first step is to clear our heads of false or outmoded theories. Once we have accepted the idea that raw materials in general are scarce, or at least pseudo-scarce, while labour is abundant, we can rethink our obsession with conventional growth. We need to produce and consume differently.

Instead of relentlessly pursuing labour productivity - trying to produce more with the help of fewer people - we should go for energy productivity. We should strive to produce the goods and services we need, and to live day by day, in ways that use less energy - or, at least, less non-renewable energy. In theory, wind and solar power can provide far more energy than the human race currently consumes. But transition to a truly energy-efficient and non-polluting economy will be a long-term project requiring huge inputs of capital and labour over many years. To achieve this, we need to change our way of thinking; our top priority needs to be energy saving (or energy conversion) rather than labour saving.

We should make 'consumer durables' that are indeed durable - that last for donkeys' years with occasional repairs or upgrades - instead of things that wear out in a few years and are discarded. Even if our durable machines are made in the Far East, we are not going to send them there for repair; that will have to be done here, creating more jobs. Banks should give good personal service to customers, rather than to make them do the work themselves on automata, which consume a lot of electricity.

Instead of grumbling about obstreporous trade unions, we should encourage responsible, well-run unions, and actually join them. Labour does indeed need protection against the vagaries of world markets. If strong unions retard, in some respects, the pace of innovation and change, should we worry? Too rapid change means overconsumption of resources (replacing obsolete three-year-old computers). Too rapid change means an unstable world in which it is increasingly hard for people to keep their foothold in the economy. Hence, more unemployed; more miserable, hopeless, people who have to be paid to do nothing. Too rapid change means a world in which people feel disoriented; so some of them turn to reactionary political or religious movements that purport to offer a return to changeless traditions.

A sombre warning

Mises himself, though he assumed that labour was the scarcest resource, warned that, one day, things might be different. And his warning (6) is frightening:

We may try to imagine the conditions within a world in which all material factors of production are so fully employed that there is no opportunity to employ all men [note: no mention of women] or to employ all men to the extent that they are ready to work. In such a world labor is abundant…if it were a market society, wage rates paid would not be enough to prevent starvation. Those seeking employment would be ready to go to work for any wages, however low, even if insufficient for the preservation of life. They would be happy to delay for a while death by starvation. There is no need…to discuss the problems of such a world. Our world is different. In our world there is a shortage of manpower…this state of affairs could be changed by such an increase in population figures that all material factors required for the production of foodstuffs are… fully exploited.

Today, we do indeed need to discuss the problems that Mises dismissed so curtly. His argument clearly admits that, in a world where labour is relatively abundant, the free market in labour, that Mises so ardently desired, does not work. In these conditions, workers do indeed need to unite to defend their interests. Mises' vociferous arguments against trade unionism are no longer relevant, if they ever were. And we need good old-fashioned regulations on hours of work, minimum wages and other conditions of employment.

It is time to stop trying to run our economies on the obsolete assumptions of the free-market economists, be they those of Mises' Austrian school, or their near cousins, the neoclassical economists whose idol is Milton Friedman.

* * * * *



1 Robert Castel, a French sociologist, is the author of several books on psychiatry and on social issues

2 Ludwig von Mises, Human Action (William Hodge & Co., London, 1949), chap. 7, #3

3 Figures from the Yearbook of Labour Statistics 1948-49 (International Labour Office, Geneva, 1950)

4 See introduction (page 2 in the Report)

5 Mises, Socialism [Die Gemeinschaft (1922)], trans. J Kahane (Jonathan Cape, London, 1932), chap. 34, #4

6 Mises, Human Action, chap. 7, #3