The Nature of Unemployment

While doing some research on History Stack Exchange, I came across this answer concerning unemployment, and I thought it was relevant to share here:

There is no such thing as a “labor shortage”. “Labor Shortage” is just a propaganda term used by employers who are trying to find some excuse to pay less.

For example, many manufacturers complain that there is a “shortage” of machinists. What this means is that they would like to pay machinists $10 an hour and, surprise, surprise, no machinist wants to work for $10 an hour. If the manufacturer offered $100 an hour, he would have machinists coming out of his ears. He would have machinists lining up at his front door wanting to work for him. He would have machinists flying from all over the world to work at his factory.
Likewise, employees use the same political language. They say there is a “job shortage”. Of course, there is no job shortage. If you are willing to work for $5 an hour you will find hundreds of employers willing to hire you. In fact, for $5 an hour * I * will hire you.

There is no such thing “labor shortages” and “job shortages”. They are just made up terms used by people for political purposes.

https://history.stackexchange.com/a/12977

That’s an interesting take on it. Of course, there might be a true labor shortage if there literally weren’t enough people to keep society running, in which case we would have zero unemployment. This would be an “all hands on deck” situation where everyone’s labor is required simply to survive.

Another phrase you’ll often hear is that we need to import people to the jobs “Americans won’t do.” Well, they would do them if you paid them well enough. The fact is, this is just an excuse by employers to keep wages low.

Another exchange clarifies the point:

I think he meant labour shortage in the sense that there were actually more available jobs than workers. – Saal Hardali May 27 ’14 at 17:49

You don’t seem to get it. There are an infinite “number of jobs”. If you and your friends agree to work for me for 25 cents an hour I will hire you all, even if you have a thousand friends. I just “created” 1000 jobs instantly. You seem to have the erroneous idea that “jobs” are some kind of fixed commodity. A “job” is just some guy willing to pay some other guy to do something. – Tyler Durden May 27 ’14 at 18:08

Another question asks whether there was unemployment in ancient Rome. The commenter answers that what we think of as “unemployment” was not relevant to earlier pre-capitalist societies::

The modern definition of unemployed is “having looked for work recently”. I’m not entirely sure that definition is appropriate for Rome. Modern Western Liberal Democracy is organized around the notion that “companies” provide employment, and that people seek employment. Unemployment results in a dramatic decline in economic and social status.

Although there were workshops in Rome, and there were teams that organized to perform tasks that no individual could, I’m not aware of anything that resembles the modern limited liability corporation. Roman politics and economics were based more on relationships than on companies. Romans belonged to a family, and to a tribe, and usually to some kind of patron/client relationship. Depending on their social class, they may have also belonged to one or more social organizations (e.g. burial society). If someone wanted to work, they would rely on these connections to find them employment. “Unemployment” didn’t really result in the kind of economic and social decline we find today because these social bonds provided a safety net. If for some reason you were isolated from your social network, that might be a definition similar to “unemployed”, but there were mechanisms (adoption, social organizations, etc.) that made the social networks fairly resilient.

https://history.stackexchange.com/a/12821

There is no unemployment in foraging societies either, for example. Unemployment presumes a market society where we must earn wages or some sort of other income to survive. The wealthy rely on passive income from investments; the rest of us have to sell our labor. And despite the insistence of the “financial independence” crowd (Mr. Money Mustache, et. al.), is is not possible for all members of society to live off of passive income. It also assumes that we have enough surplus in the first place to invest in passive-income generating schemes, which most of us do not by design. We can’t all be six-figure software engineers (in which case, software engineers would not worth very much).

What brought this to mind was this discussion with Warren Mosler over MMT’s counter-intuitive idea that unemployment is actually created by governments, and the unemployment rate is always a policy choice. In other words, it is not like a hurricane or a fire that is out of our control. It is a human-created phenomenon. Here is Mosler explaining some important aspects of the job market:

[15:41] “The labor market is not a fair game, with or without unemployment, because people have to work to eat. Business only hires if they can make a certain return on equity that they think is a good deal, otherwise they don’t hire. Nothing bad happens to them if they don’t hire. And so mainstream, elementary game theory will tell you this is not a fair game, and so you’re going to expect real wages to gravitate towards subsistence levels, whatever that is, unless there’s some support for labor.”

“Now, we used to have a lot of support for labor with labor unions, and then in the 1980’s they were all broken, and that’s when the wedge started being driven between productivity and labor, where the productivity kept going up, but everything started going to profits instead of wages. It’s pretty clear in the data that that’s what happened, because labor lost its support…The principle is that real wages are going to stagnate near subsistence unless you do something to support them because its not a fair game.

“You could have unemployment down to everybody’s got a job except this one last guy who’s unemployed, and then he sees a job offer. Well, he’s got two choices—take the job or his family can’t eat. It’s not like all these other people have jobs so I can demand more money. You look at his position—he’s not in any better position because everybody else has a job. So it’s absolutely not a fair game.

So it shouldn’t be any surprise that wages aren’t going anywhere, even with unemployment coming down. The Philips curve doesn’t seem to be working the way some have suggested…which says as that as you get towards lower and lower unemployment wages will go up and up. It’s just not happening, and that’s why.”

This seems to be lost on nearly all economists, who are stumped by the fact that wages aren’t rising, even in the face of “full” employment. But why would they?

The economy may be booming, but nearly half of Americans can’t make ends meet (L.A. Times)

The fall in those wages has alarmed some economists, who say paychecks should be getting fatter at a time when unemployment is low and businesses are hiring. “This is odd and remarkable,” said Steven Kyle, an economist at Cornell University. “You would not normally see this kind of thing unless there were some kind of external shock, like a bad hurricane season, but we haven’t had that.”

The falling wages promise to exacerbate historic levels of U.S. inequality. Within the labor force, it means workers who were already making less are falling further behind. And if private laborers as a whole are seeing their earnings flatten while the economy as a whole grows at an annual rate of more than 2 percent, that means the gains are going almost exclusively to people already at the top of the economic ladder, economists say

For the biggest group of American workers, wages aren’t just flat. They’re falling. (Washington Post)

Then Mosler explains the basics about why unemployment is an artificial creation of the state, rather than a “natural” phenomenon. In doing so, he explains the origin of money, and what the public debt really is—the money supply:

[26:20] “The other critically important contribution of Modern Monetary Theory is that the cause of unemployment, by design, is taxation…The monetary circuit theory begins with businesses borrowing money to hire people. MMT says, no, the money story begins before then. Why is anybody working for this money to begin with? Where does the money story start? It starts with a government trying to provision itself.

“We show examples like when the British colonized Ghana. They wanted to grow coffee there. How do you do it? What you have is a state—the British at the time—that wanted to move resources, which was human labor, from whatever these people were doing in Ghana before they got there in a non-monetary society. They wanted to get them into the coffee fields…”

“What the British did was they implemented a tax. They started a new currency—let’s call it the crown—and so they offered crowns for people who wanted to come work in the coffee field. But nobody wanted to work for crowns, nobody had ever heard of it; there’s no reason to give up hunting and fishing and taking care of the children to go down to the coffee fields and pick coffee for this crown thing…So what they did was, they implemented a hut tax. They all lived in these grass huts. They said there’s going be a ten crown a month tax on every hut, and if the hut doesn’t pay its tax, we’re going to go burn it down. They had the military.”

“So now they’ve created this tax liability – everybody has to pay 10 crowns a month or get your house burned down. And so now they’ve created something which didn’t exist before-that’s people looking for paid work in a currency, which is what we call unemployment. Unemployment is not people looking for volunteer work for the American Cancer Society who can’t get a job — it’s people who need money. And it’s created by taxation. In a non-monetary society where you don’t have monetary taxation, there’s no unemployment as we know it. There can’t be. It’s just not applicable.”

And so the taxation, by design, is there to create people who need the currency for the further purpose of provisioning the government — in this case, provisioning the British with labor in their coffee fields. They would then have all these people showing up looking for work in the coffee fields, and now they could hire them and pay in crowns because the people need it to pay the tax. They understood that they had to get paid first before they could pay the tax. The British would spend first and then collect the tax. And, of course, the British would always spend more than they collected, because people would earn the money first, and they would earn more than was needed to pay the tax normally…”

So the British always ran a deficit; they always spent more than they collected, and those extra crowns they spent were called the money supply. Those were the crowns people had in their pockets or in their homes, or the merchants would have them in their shops, and they all knew that the British would spend more than they collected, and that’s where the money supply came from, and that spending more than you collect is called deficit spending, and the amount that you spend that more than you collect is called the public debt, and they all knew the public debt was the money supply, as they casually called it back then. Today we’ve lost sight of that.”

We have twenty trillion of public debt; what is it? It’s not wrong to define it as the money supply for the economy. If the government has spent twenty trillion more than they’ve taxed, and those dollars sit out there in bank accounts, until they get used to pay taxes. So the twenty trillion are the dollars spent by the government that haven’t yet been used to pay taxes. That’s our public debt, and that’s all it is.

The money story starts with the government trying to provision itself, which is very different form the mainstream story.

I did some research into the British efforts in Ghana. What Mosler stated above is confirmed on the BBC’s own Web site:

One of the central pillars of colonisation was tax. The European powers did not want Africa to be a drain on their treasuries, and they wanted the colonies to pay their own way. They also wanted people to enter into the cash economy. Taxation was a way of driving people into working for money.

The competence of a French colonial official might often be measured by how much tax he was able to collect. This could be in the form of a poll tax or a tax on homes. For the ordinary people, especially those who were not earning money through labour or selling goods, taxation was an intolerable burden. Resentment turned to anger in many parts of Africa…

The Story of Africa (BBC)

Here is some more detail about the British and French colonial activities in West Africa: 8: Colonial Rule in West Africa (WASSCE History Textbook)

So the libertarians are partly right where they say that taxes are imposed by state violence. Where they fall down is the fact that these were effectively unmonetized traditional societies before state violence, and not barter economies like Adam Smith imagined. International markets destroyed these societies; they were not an integral part of them, except as supplemental places of surplus exchange. It was the violence itself that created the markets of which libertarians are so deliriously enamored!

They were also created by law. The competitive labor market in Britain was established in 1834, before which, industrial capitalism as a social system did not exist. What Britain did internally it later did externally.

Colonialism and hut taxes destroyed the traditional provisioning methods of these societies. Rather than the traditional subsistence agriculture which had always fed the people, the colonizers wanted farmers to grow cash crops for export. This meant that food producers were now dependent upon the money gained from selling that crop to buy whatever else they needed, including food. And the amount of money they gained from that crop was entirely determined by distant global commodity markets over which they had no control.

Sometimes people wonder how it is that a country like Côte d’Ivoire can produce a nonedible crop such as cocoa but at the same time have difficulty feeding its people. The answer to this question involves two factors: colonialism and the introduction of cash crops.

The European colonial powers in sub-Saharan Africa, most notably France and Britain, expanded indigenous agriculture to include cash crops geared to the wants of European consumers and industries. The production of these cash crops for export depended upon plantation and sharecropper systems. Britain organized the commercial production of cocoa in Ghana, wool and coffee in Kenya, and tea in Zimbabwe. France arranged the production of peanuts in Senegal and Mali, and cocoa and bananas in Côte d’Ivoire.

The economic shift toward cash crops significantly decreased the production of goods for local food needs and at the same time destroyed indigenous handicraft industries.

The kingdom of Bugunda, in what has been Uganda since 1894, provides a good example. Once Bugundan peasants were forced by British colonists to produce cotton and coffee for export, the local barkcloth and pottery crafts disappeared. Likewise, people began working in mines, fields, and plantations for export production in order to pay household or hut taxes and retain access to land. As a consequence, indigenous societies lost cultural knowledge and agricultural production for local food needs declined. Indigenous labor and resources were used to sustain and develop European urban and industrial needs.

Child Labor in Sub-Saharan Africa, by Loretta Elizabeth Bass p. 32

So the “staving African” and “starving Indian” stereotypes were a product of the creation of Market society, and not natural features of their daily existence, and certainly not due to “low IQ” as the Alt-Right race fetishists would have it. The “poverty line” used by international agencies is exclusively determined by the cash income earned by people in these post-colonial economies. The fact that there was no poverty line before colonialism is always ignored. Today, the raising of the poverty line in developing countries is used as the primary defense of Neoliberalism by its supporters.

Capitalist logic defines poverty in strict monetary terms, such as the poverty line, in which people don’t possess enough money to purchase basic goods from the market. In this way, capitalism not only makes people dependent on the market for survival, but also does not acknowledge alternative factors which contribute to human wellbeing, such as health, education, affection, the environment, or life in the community.

The Obsolescence of Capitalism (Medium)

Later, marketing boards were introduced to deal with the random price fluctuations that were the cause of so much misery:

The extraction of the agricultural surplus for urban/industrial development has been a common objective of both colonial and postindependence rule. Colonial authorities imposed various taxes (head taxes, hut taxes) and compulsory planting of selecting export crops to stimulate the production of export crops and to capture the agricultural surplus. Shortly after World War II, the British colonial government introduced marketing boards in their East and West African colonies following the relatively successful record of marketing boards in Australia and New Zealand since the 1930s. The objective of the marketing boards was to stabilize producer prices and foreign exchange earnings and to reduce interseasonal price movements.

In the 1960s and the 1970s, numerous African governments introduced grain boards to control producer prices and food grains and to channel food to the urban centers. Boards usually accumulate and carry stocks to mitigate both intra- and inter-annucal flucturations in price and supply, and develop distribution systems to facilitate the transfer of grain from surplus to deficit regions.

A Survey of Agricultural Economics Literature Volume 4; edited by Lee R. Martin pp. 44-45

A lot of MMT’s recommendations are about creating a “marketing board” for jobs—a “job board” for society was it were, that would stabilize prices and demand for the commodity called “labor”. These would provide ways for people to earn the money that market society requires as a condition of survival rather than leaving it up to the “free” market, which has devastated so many communities across the world.

ADDENDUM: This is tangential, but one of the comments I sometimes see in discussions surrounding economics is something on the order of, “capitalism has always existed…”

Um, no. This is an incredibly ignorant statement, and oblivious to economic history. Yet it’s surprising how many people seem to believe it, or toss it off as if were some sort of obvious statement. It’s only possible if we define capitalism so broadly as to lose all meaning of the term. I thought this comment to an article at the Guardian did a good job of illustrating what’s wrong with this kind of reasoning:

Jesus. Capitalism involves people thinking rationally about their self interest therefore all instances of people thinking rationally about their self interest are engaging in capitalist modes of though.

Football is a sport that involves players running therefore anyone who is running is a football player.

Christmas is a religious festival marked by people exchanging gifts therefore whenever people exchange gifts they are celebrating Christmas.

11 thoughts on “The Nature of Unemployment

  1. The situation in Ghana is mirrored more recently in the United States by the Whiskey Rebellion. The US created a tax, the good farmers thought that tax should be payable as a percentage of their crop/live stock. The US said, nope gotta be Liberty Silver Dollars or nothing.

    1. That’s interesting; I didn’t know that. It was probably pretty hard to get your hands on official U.S. currency back then, especially on the frontier. That would have been made even harder when the U.S. went back on the specie standard causing a money shortage. Plus, what need did they have for money out there? I can see why they were angry. We’re never taught that in school.

      1. Saying that banks create money is technically correct but somewhat misleading.

        The US Government creates US dollars. Banks don’t create US dollars, they create deposits. Money in a deposit counts like US dollars and (under normal circumstances) spends like US dollars, but a deposit is not a pile of government-issued paper in a vault somewhere with your name on it, it is just a promissory note from the bank payable in US dollars.

        It is also true that the money promised by banks in the form of deposits far exceeds the number of US dollars available to redeem those promises. Thus it sometimes happens that a bank is not able to obtain sufficient US dollars to pay off all its promises. In 2009, several very large banks found themselves in this position.

        1. Thanks for the comment. That’s a great way of describing it. From my understanding, banks have an account at the Fed, and money the banks loan out is credited against the bank’s account at the Fed.

          Although new money is created via loans, it’s inaccurate to say the banks have the power to create money. I heard David Graeber talk about this once. He said that if the banks could create money, then why did they need a bailout from the government? Why didn’t they just “create” all the money they needed? Of course money creation is a governmental operation. If it can be created to bail out banks, it can be created for vital social needs as well.

          I’m working in a long piece about the Fed trying to dispel a lot of the crazy myths I’ve been hearing.

  2. Hm. Business creates debt that can only be paid in state-approved money. Does that mean business is an extension of the state?

    Then again, banks create debt that can never fully be repaid legally. What does that make banks?

    1. The state creates the money, but private power uses the fact that we all need money to survive day-to-day as a way to coerce us to work. Yet why do so many of us believe the state and private industry are inherently antagonistic? Maybe they’re really the same thing (cue the conspiracy Keanu meme)

  3. I love this article! When you describes the Roman times though, you miss the fact that 90% of the population were slaves… And had to be to make the “safety net” work. Also, you miss the fact that SOMETHING must bind hundreds of people together. Bondage by command produces a hierarchy of slaves. Bondage by money, while it is evolving from slaves, still produces slaves. But only money has the ability to create a no-poverty line society while the society has thousands of divisions of labor.

    1. True, but I would say money under an MMT paradigm, not money under the current scarcity paradigm. (P.S. percent of slaves was closer to a max of 45 percent, not 90)

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