Posts Tagged ‘Classical Economists’

G.R. Askwith on the Labour Exchanges, Modern Job Centres and the Deliberate Creation of an ‘Reserve Army of the Unemployed’

March 7, 2016

I found a very interesting little snippet in T.O. Lloyd’s Empire to Welfare State: English History 1906-1985 3rd Edition (Oxford: OUP 1986). On page 16 he discusses how the Liberal government in 1908 set up the Labour Exchanges as a way of putting prospective employers and unemployed workers in contact with each other. He notes, however, that G.R. Askwith, who was the leading negotiator in labour disputes at the time, was later quite critical of them. He believed they made it too easy for employers to return to the Nineteenth century notion of ‘a reserve army of the unemployed’.

Which gives a clue where Hayek and Milton Friedman got some of their crappy ideas about the optimum level of unemployment from. The Angry Yorkshireman has pointed out that one the central ideas of the Chicago school, of which Friedman was a part, was that there should be an unemployment rate of 6 per cent in order to keep wages low. He’s point out how this idea permeates modern Tory economic dogma. When Osborne therefore starts making noises about combating unemployment, he is not talking about trying to return to full employment, or even getting it as low as possible. He deliberately makes vague and ambiguous comments, that sound as though he means to combat unemployment, but in fact mean that he intends to maintain the six per cent level. His intentions only become clear once you understand his policies’ basis in Friedman’s weird and unpleasant ideas.
It’s clear from this that Friedman got that part of his economic theory from 19th century Classical Economists.

It also seems to me that while Askwith may have been wrong about the Labour Exchanges, he would be absolutely right about modern Job Centres. Firstly, the recruitment aspect has been removed from them completely, and given to private recruitment centres and government outsourcing contractors. These in turn have been found to be monumentally inept at actually getting people into full-time paid work. In fact, they’re worse than the unemployed just looking for work on their own account without their dubious help.

Secondly, the Jobcentres are now run according to the Victorian notion of less eligibility. They try to make things as hard for the unemployed as possible in order to throw them off benefit. The attitude seems to be to harangue and bully people into finding work, or putting them on workfare to act as an unpaid labour force for the Tories’ backers in industry.

All this makes me wonder whether the failings of these organisations to get people into work aren’t actually part of their design. The government needs the electorate to believe it’s doing everything it can to get the unemployed into work, while actually maintaining a pool of the unemployed to keep those in work poor and desperate. And so the slightest excuse is found to throw the sick and unemployed off benefit, but not to make sure they’ve found work.

A Keynsian Critique of Monetarist Low Wage and Unemployment Policy

March 8, 2014

Keynes Book Cover

Michael Stewart’s book, Keynes And After, (London: Penguin 1987) 3rd edition, is a study of Keynes’ economic theory aimed at the popular market, rather than professional economists. It attempts to explain it clearly, examine the rival Monetarist theory, and then demonstrate that Keynsianism remains economically valid and a better model of the economy than Monetarism, while making suitable adjustments to it. Although published in 1987, the book and its arguments remain extremely valid.

The Coalition government has pursued a policy of strict wage restraint, which has led to wage freezes or increases below the rate of inflation. As a result, much of the population has seen a decrease in real, take-home pay. They have attempted to justify it as necessary to pay off the massive public debt. It’s also assumed that somehow such pay freezes will curb inflation, and so promote economic growth.

Other sections of the Tory party have also demanded this, along with longer working hours, such as the authors of Britannia Unchained, so that Britain can remain competitive alongside workers in the Developing World, such as India and China, in the global market place. This is basically a Neo-Liberal restatement of the classic Monetarist arguments used by Thatcher that unemployment was the result of British wages being too high.

The Coalition is also determined to destroy the welfare state and cut unemployment benefit on the grounds that its present level makes it more attractive for some workers to go on the dole, thus pricing themselves out the labour market. As the Angry Yorkshireman over at Another Angry Voice has shown, Monetarism itself demanded that there should be a constant unemployment rate of about 6 per cent in order to keep the price of labour down. This partly invalidates any claim that Monetarism can combat unemployment. Stewart also refutes the Monetarist argument that lowering wages will some how reduce unemployment in the section ‘Reducing the Real Wage’, where he states

We saw in Chapter 8 that an important strand in monetarist thinking is that unemployment is the consequence of workers refusing to work for the real wage rate established in the market. If workers reduced their supply price – i.e. offered to work for lower real wages – they would find employment. For a fall in the price of labour will increase the demand for labour just as a fall in the price of apples will increase the demand for apples. In short, for unemployment to fall, all that is needed is for workers to accept a cut in the real wage. So the argument runs.

Although the argument may have a certain intuitive plausibility, the truth is not so straightforward. The issue of the relationship between real wages and unemployment is surrounded by controversy. One reason for this is that the matter arouses strong passions. The price of labour is not quite the same thing as the price of apples; it represents, viewed from another angle, the money on which a worker and his family have to live. Since it is the lower-paid workers who suffer most from unemployment those who lack skills, or who possess skills no longer in demand – talking of reducing real wages in order to bring down unemployment is to talk of reducing even further the living standards of people in the poorest 10 or 20 per cent of the population. Moreover, the devices which monetarist-inclined governments may adopt in order to persuade people to work for lower real wages can also be highly contentious. Reducing income tax or employees’ social security contributions, so that employers can pay lower wages to unskilled workers, without these workers’ take-home pay being affected, is one thing. It is quite another thing to adopt a series of measures, as the Thatcher government did, to reduce the real value of the social security benefits received by the unemployed. To monetarists who think that they unemployed are making a cool calculation about the advantages of being out of work rather than in work, this may seem reasonable. To those who do not believe that most unemployment is voluntary, it represents an inexcusable attack on the living standards of people who are already poor through no fault of their own.

Whatever the emotions aroused by this issue, it is at an intellectual level that it must be resolved. And it is clear that the idea that unemployment is caused by excessive real wages, and that real wages must be reduced if unemployment is to fall, is open to a challenge along a number of different lines. It is a measure of the extent to which monetarism represents a resurrection of the fallacies of classical economics that some of the lines of argument amount to little more than a restatement of some of the points made by Keynes in the General Theory, and discussed in Part One. But there are other arguments as well.

First of all, as was pointed out above, wages, although a cost to the employer, represent income to the employee. A cut in real wages is therefore likely to reduce workers’ consumption and, via the Multiplier mechanism discussed in Part One, the incomes and consumption of other workers. Thus there will be a fall in the output of the economy and a rise, not a fall, in unemployment. (To put it slightly more technically, the downward shift in the supply curve of labour represented by the cut in real wages may be offset, or more than offset, by a downward shift in the demand curve for labour, leaving the level of employment unchanged, or even lower than it was before.) With Keynesian techniques of demand management this adverse effect on incomes and employment could of course be counteracted by tax cuts or increases in public expenditure. But, as we have seen, monetarists reject the need for demand management, and argue that wage cuts will in themselves lead to a rise in employment. The reason why this should be so is very difficult to discern.
(pp. 183-5).

Now it is true that the Coalition is using some of the techniques of Keynesian demand management, like removing social security contributions for some workers, and a cut in taxation. It is claimed that these are reducing unemployment, though this is extremely dubious. Following Thatcher herself, all the administrations have altered the statistics to show that unemployment was falling when in fact it was much higher. The Coalition is no different, and Mike over at Vox Political has suggested that the true level of unemployment may be as high as 9 million. Similarly the tax cuts are designed only to benefit the rich, and so most people are now poorer due to the Coalition’s economic policy. As the above has shown, when workers’ wages are reduced, other workers suffer as people naturally spend less buying their products. So I very much doubt that the government’s cuts have led to increased domestic consumption and stimulation of the economy.

Thomas Spence on the Working Class as the Creators of Prosperity

March 1, 2014

Spence Book Cover

Back in the 1980s Margaret Thatcher and the New Right declared that the entrepreneurs, businessmen and the financiers were the ‘Creators of Wealth’. This is another appropriation by the right of the claims and slogans of the left. Previously, the term ‘Creators of Wealth’ was used by the Left, chiefly Marxists, to refer to the working class. There was, for example, the Communist slogan, ‘All wealth to the creators of wealth!’ promising the people the true value of their products, if not exactly power. That was to be held exclusively by the Communist party as the ‘vanguard of the proletariat’.

The attitude that the working class are the creators of wealth ultimately goes back to the idea of classical economist, like David Ricardo, that the value of a product was determined by the amount of labour taken to produce it. The classical economists themselves followed Adam Smith in advocating free trade. The early radicals built on this demand more political rights and economic reforms for the working classes – the ‘labouring poor’.

The late 18th and very early 19th century radical, Thomas Spence, strongly argued that all of Britain’s prosperity ultimately rested, not with the landlords and aristocracy, but with the labourers and working people, who physically worked the soil and made industrial products. He urged that Britain should be transformed into a federation of autonomous communes, in which all the inhabitants, including women and children, should govern, and parish lands taken into the collective ownership of the parish. In his pamphlet, The Rights of Infants, he defended this system of the communal ownership of land against the view of the great contemporary revolutionary, Tom Paine, that the people, who worked the land really only had only a claim to a tenth of it. Spence rebutted this in the following passage

BUT stop, don’t let us reckon without our host; for Mr Paine will object to such an equal distribution of the rents. For says he, in his Agrarian Justice, the public can claim but a Tenth Part of the value of the landed property as it now exists, with its vast improvements of cultivation and building. But why are we put off now with a Tenth Share? Because, says Mr. Paine, it has so improved in the hands of private proprietors as to be of ten times the value it was of in its natural state. but may we not ask who improved the land? Did the proprietors alone work and toil at this improvement? And did we labourers and our forefathers stand, like Indians and Hottentots, idle spectators of so much public-spirited industry? I suppose not. Nay, on the contrary, it is evident to the most superficial enquirer that the labouring classes ought principally to be thanked for every improvement.

Indeed, if there had never been any slaves, any vassals, or any day-labourers employed in building and tillage, then the proprietors might have boasted of having themselves created all this gay scene of things. But the case alters amazingly, when we consider that the earth has been cultivated either by slaves, compelled, like beasts, to labour, or by the indigent objects whom they first exclude from a share in the soil, that want may compel them to see their labour for daily bread. In short, the great may as well boast of fighting their battles as of cultivating the earth.

The toil of the labouring classes first produces provisions, and then the demand of their families creates a market for them. Therefore it will be found that it is the markets made by the labouring and mechanical tribes that have improved the earth. And once take away these markets or let all the labouring people, like the Israelites, leave the country in a body and you would immediately see from what cause the country had been cultivated and so many goodly towns and villages built.

You may suppose that after the emigration of all these beggarly people, every thing would go on as well as before: that the farmer would continue to plough, and the town landlord to build as formerly. I tell you nay; for the farmer could neither proceed without labourers nor find purchasers for his corn and cattle. It would be just the same with the building landlord, for he could neither procure workmen to build nor tenants to pay him rent.

Behold then your grand, voluptuous nobility and gentry, the arch cultivators of the earth; obliged, for lack of servants, again to turn Gothic hunters like their savage forefathers. Behold their palaces, temples, and towns, smouldering into dust, and affording shelter only to wild beasts; and their boasted, cultivated fields and garden, degenerated into a howling wilderness.

Thus we see that the consumption created by the mouths and the backs of the poor despised multitude contributes to the cultivation of the earth, as well as their hands. And it is also the rents that they pay that builds the towns and not the racking building landlord. Therefore, let us not in weak comm9iseration be biased by the pretended philanthropy of the great, to the resignation of our dearest rights. And if our estates have improved in their hands, during their officious guardianship, the D-v-l than them; for it was done for their own sakes not four ours, and can be no just bar against us recovering our rights.

Rights of Infants

Now clearly you do need talented businessmen and entrepreneurs, who can set up and manage businesses. But Spence is right about the vital importance of the working classes and how they do the physical works that creates civilisation and prosperity. And this is still a vitally contested point. Obama in many ways isn’t noticeably different from many other American presidents. Despite his introduction of more state medical assistance, he still has the same very strong ties to Wall Street. This has not, however, stopped the American Conservatives viciously attacking him as a Communist. A year or so ago there was a lot of Republican American carping centred around the slogan ‘You didn’t build this!’. Reading between the lines, I got the impression that Obama had dared to state the obvious: that all the American people built their country, including those who physically laid the bricks and mortar, and not just big businessmen like Donald Trump. And that clearly touched a nerve.

The power of organised labour is still feared by the Tories over here. After all, the miners managed to beat Ted Heath, and so, when Thatcher got the chance, she destroyed the British mining industry, and organised the mass transfer of jobs from Britain to less truculent workers in the Developing World, thus devastating the British industrial base. However, even in this era of globalised markets, big business still needs the markets provided by the mass of the working and lower middle classes. There’s an interesting piece over at Another Angry Voice about this, where the Angry Yorkshireman proves that the Tories’ policy of paying low wages actually makes no sense. He points out that Henry Ford, the ferociously anti-Semitic and anti-socialist industrialist deliberately paid his workers very good wages, so that they could afford to buy more, and so stimulate business. It’s also why FDR in his New Deal introduced a limited form of state unemployment assistance. He felt that if the unemployed were able to continue buying goods, this would continue putting money into the economy and so help end recessions. This, however, isn’t good enough for the Conservatives, who would rather keep the poor in abject poverty, even if this does harm the economy, simply out of viciousness, spite and a desire to hang on to their privilege and status.

It’s about time this was challenged, and the poor started getting back their share of the nation’s wealth.


Ian Duncan Smith: Along with Cameron and Osborne, has a policy of spite and vindictiveness towards the poor, just preserve the government’s own social position no matter what the economic and social costs.