A Theory of Full Employment PDF
Preview A Theory of Full Employment
A THEORY OF FULL EMPLOYMENT A THEORY OF FULL EMPLOYMENT by Y.S. BRENNER and N. BRENNER-GOLOMB University of Utrecht The Netherlands ~. " Springer-Science+Business Media, B.V. Library of Congress Cataloging-in-Publication Data Brenner, Y.S. A theory of full employment / Y.S. Brenner and N. Brenner-Golomb. p. cm. Includes bibliographical references and index. ISBN 978-94-010-3730-3 ISBN 978-94-007-0793-1 (eBook) DOI 10.1007/978-94-007-0793-1 1. Employment (Economic theory) 2. Labor economics. 3. Full employment policies. 4. Economic policy. 1. Brenner-Golomb, N. II. Title. HD5701.5.B73 1996 339.5--dc20 95-42650 CIP Copyright © 1996 by Springer Science+Business Media Dordrecht Originally publlshed by Kluwer Academic Publishers in 1996 Softcover reprint of the hardcover 1s t edition 1996 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permis sion of the publisher, Springer-Science+Business Media, B.V. Printed on acid-free paper. CONTENTS Foreword vii 1. Introduction I 2. The new feudalism: managerial oligarchy 7 3. The new market structure: globalization 13 4. The new significance ofservices 19 5. The failure ofthe neoclassical synthesis 29 6. The distribution ofnational income between investment and consumption 35 7. Overproduction, underconsumption and the business cycle 41 8. Distribution: some methodological observations 51 9. Distribution ofnational income between strata ofsociety 59 10. Distribution between the private and the public sector 69 II. The problem of the "Social Welfare Function" 79 12. The disintegration ofwestern civilized society 85 13. Truth and expediency: some introductory philosophical observations 97 14. Truth and expediency: some philosophical observations concerning science 117 15. Truth and expediency: philosophical observations concerning the humanities 137 16. The political dimension 153 17. Conclusions 173 Glossary 185 Cited literature 203 Index 213 FOREWORD This book hasthree purposes. First,toconvince professional economists who study the behaviour ofthe economic system as awhole that they must re-examine some ofthe assumptions behind the reigning economic theories. Second, to explain to the general public why the currently fashionable economic policies cannot solve the problem ofmassive long term unemployment. Third, to show that ifpeople's political engagement is revived there is hope for escaping from the economic morass and moral wasteland into which, ever since the 1970s, the fashionable policies have been leading us. To elucidate the theoretical problem the authors pass in review several recent structural developments and consider their effect on the economy. To encourage renewed public political engagement they draw attention to the risks involved in allowing things to drift on in the present direction. The avowed purpose of the book imposes the need to present it in a manner accessible atonce toprofessional macroeconomists and toawider public ofpeople concerned about today's malaise, politicians, sociologists or philosophers and others. This imposes the need not to encumber readers with the customary glut of academic references inthe text, and torefer only to the best known and politically most influential theories and to authors who are also widely known to people who are not professional economists. However to reassure readers who may have doubts about the appropriate interpretation ofthese authors' views, a list of cited literature is appended to the text which should enable them to find the book or article from which the quotation or the attributed opinions were gleaned. In addition a glossary ofterms is also appended so that those who are not familiar with economic or philosophical terminology can find the meaning ofthe terms we use without resort to special dictionaries. Although several suggestions are made as to how economic theory must be restructured to suit the new circumstances, and what action should be taken to escape the wasteland of the spirit into which the fashionable policies are leading us, the authors do not presume to offer easy answers. All they can do is indicate why, if people will abandon outworn "habits of thought" and think about alternatives, and renew their political engagement, there is hope to find useful employment for all who are able and willing to work and to put an end to the fear ofdestitution. The authors wish to thank Dr. Eric Clavering, as well as the members ofthe department ofsocial economics of Utrecht University, for the helpful comments on the various early drafts of the book, and Mrs. Maiumi Sadler-Hamada for the time she spent preparing it for publication. I. INTRODUCTION For more than a thousand years the world of the Almagest ruled supreme. Ptolemy's perception of a finite world contained in the sphere ofthe fixed stars, with the earth stationary at its centre, and the sun and other heavenly bodies revolving about it in their orbits like "jewels in their fixed mountings", remained unshaken. ln spite of the continual need to modify this perception ofthe universe to fit the calendar itwas not abandoned. It seemed self-evident and was confirmed by the Holy Scriptures. The earth was stationary in the centre of the universe. Apples landed beneath their trees, not way behind them as they would have done ifthe earth was moving; and there was no perpetual storm constantly blowing from the east. It made no difference that people saw that objects falling from the top of the mast of moving ship landed at the foot of the mast on deck and not in the ship's wake. Such is the power of "received beliefs". The most ingenious ideas were advanced to modify Ptolemy's model, but the alternative, a rotating earth revolving around the sun, was plainly too far-fetched to be considered. When early in the 16th century Copernicus dared to suggest that the sun and not the earth isat the centre ofthe solar system, his hypothesis was suppressed for thirty years and published only a year after his death. When Galileo made Copernicus's heliocentric theory plausible hewas banned bythe Church authorities and made to recant and placed under house arrest for the last years ofhis life. One could improve and supplement the Ptolemaic system, not challenge its essential "truth". Like the astronomers ofold who kept on "improving" the Ptolemaic system, Paul Samuelson, Robert Solow and others tried to bring the economic orthodoxy closer to reality. Ingeniously they lumped together indigenous self-adjusting elements into proxy variables, such as "real national income per head" or "capital labour ratio", and made them part of formulae for predicting the effects of exogenous factors on these fictitious variables representing the equilibrating economic system. Sir John Hicks transformed Keynes's critique into a "special case" ofsticky wages which originate outside the economic order and do not form an inherent part of it. Dissent from the economics mainstream dogma was either internalized or marginalised by the establishment. Arthur Cecil Pigou, inderision, called Keynes "a new Galileo" because he denied the validity ofsome major tenets of the ruling doctrine. More recent critics are either not published at all or published in journals and books which are seldom read by anyone but the converted. The point isthat while scientists' philosophical background seldom influences their answers it does determine their questions, and the final outcome can depend on this. Economists educated in the neoclassical mechanistic paradigm are ill equipped to ask questions about the organic long-term dynamic process of our complex economic life. To obtain rigour by quantification they leave out of their models the so-called exogenous variables. They admit that such variables as technological innovation, changes in social conduct, the emancipation of women, the increasing alertness to environmental hazards, may influence the economic system, but they pretend that these factors are not themselves also influenced by the economic system. They assume a one-way traffic and ignore that most ofthe forces labelled exogenous do not develop in an economic vacuum. They simply disregard the mutual influence of social and economic factors by introducing unrealistic assumptions such as "ceteris paribus". These assumptions may be expedient for the prediction of short-run microeconomic processes, but are a travesty where long-term macroeconomic processes are concerned. They transform Economics into scholastics - calculating how many angels can simultaneously dance on the point of one pin. Professor Milton Friedman tells us that he is less concerned whether an economic theory istrue ornot than whether or not his recommendations obtain the expected results. There isofcourse nothing wrong with pragmatic predictions, but they are poor substitute for fundamental science. Donald McCloskey believes that economics and other sciences must be read as rhetoric. Pragmatic decisions and rhetoric are important because they are politically effective, but expediency is the hallmark of the bureaucrat, not of the scientist. The scientist's hallmark is the search for truth. In his Nobel Lecture Professor Friedman claimed that there is little difference between economics and the natural sciences because "in both there is no certain substantive knowledge". He is wrong; there is a fundamental difference. Individuals and entire societies learn from experience: molecules do not. The reason why neoclassical economics makes proselytes is therefore not its superior scientific status but the illusion of objectivity it conveys. It answers scientists' deep-rooted urge to obtain precision by quantification. But as Ray Marshall, the US Secretary of Labour in the Carter Administration, once said: "it is better to be approximately right than rigorously wrong". There may be different perceptions of the universe and various ways of explaining how it functions, but the universe is "given" while social institutions and individuals' modes of conduct aretransient. They are the historical product of societies. Man cannot change the fact that apples fall down and not up, but by formulating a law of gravity he can calculate the required initial velocity for sending a rocket to the moon. Yet man's reaching the moon does not invalidate gravitation. But institutional changes can make nonsense of the behavioural assumptions upon which our economic theories are founded. The notion of a rational utility-maximizing individual is absurd in a Feudal context, or in an environment in which greed constitutes a mortal sin unless utility includes the expectation ofreward in a life hereafter. Unlike neoclassical economics, modem science recognises the two-way traffic between disciplines. Classical physics never produced a comprehensive theory of 2 matter. It described the behaviour ofmechanisms taking some material constants (such as density, elasticity etc.) as given. But with the knowledge gained in chemistry many questions, like why copper melts at 1083 centigrade, which were not discussed in classical physics, could be answered. This does not mean that the laws ofclassical physics were overthrown by physical chemistry. But itdoes show the limitations ofearlier classical theories. It is the same with economics; until its reciprocal relationship with other social sciences is established it will remain debilitated. It must sweep some ofthe most important questions under the carpet. It must proclaim unemployment voluntary or define it into obscurity. Professor Friedman does this by introducing the term natural unemployment. This he defines as the level ofunemployment "that would be ground out by the Walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of labour and commodity markets, including market imperfections, stochastic variability indemands and supplies, the cost ofgathering information about job vacancies and labour availabilities, the cost ofmobility and so on". In other words, natural unemployment is all the unemployment which equilibrium economics cannot account for because its sources impinge upon the neoclassical system from outside. Like Pontius Pilatus, neoclassical economics washes the curse of unemployment from its hands, creating the impression that mankind was on earth to serve the economy and not economic science to serve the needs ofman. Similarly mainstream economic theory cannot reconcile short-term with long run expectations when they run in opposite directions, nor solve the problems which arise when private and public interests are in conflict. Neoclassical economics either ignores such questions or denies their actuality. The one it declares none of its business because "proper economics" is only concerned with short term problems; the other it proclaims solved because an "invisible hand" leads people pursuing their own interest to promote that ofsociety more effectively than when they intend to do so. In essence, therefore, neoclassical economics endows rationality with a short-run individualistic subjective value-laden meaning which makes economic theory scientifically untenable. It presents laws oflimited validity in a manner which gives the impression that they are of universal applicability - as if the adding up of micro events produces a true reflection of macro reality. This is the same as concluding that our earth is flat from the observation that the oceans are not drained ofwater, and liquids flow offuneven surfaces. It is perfectly rational for a profit-maximizing entrepreneur to expand production when demand for his produce is increasing. Should his competitors be doing the same the combined output may exceed demand and his profit expectations will be thwarted. This is an information problem which can perhaps be solved. But what when the maximizing entrepreneur experiences a fall in demand? Competition will make itrational for him to reduce prices ifhe can, and ifthe business rivals do the same, to scale down his volume ofproduction. In fact, given acompetitive market, he isleft with no other alternative and his competitors are forced to do the same. But scaling down the volume ofoutput implies laying 3 off labour. With this the problem shifts from the micro to the macro level. The question becomes whether the income effect of falling prices, or lower interest rates, and perhaps the demand for labour to produce new cost-reducing equipment, is sufficiently powerful to make good the diminution in consumers' demand. If it is powerful enough then before long surplus stocks will be depleted and the higher real wages ofthose who are still employed will usher in recovery. But what ifthe loss in incomes caused by unemployment is larger than the gain in real earnings due to the lower prices? Then the entrepreneur is facing a dilemma because in the long run the revival ofhis profits requires an upturn in employment. In the short run, individually in a competitive market, he has no alternative but to dismiss redundant labour, but terminating the depression demands overall employment to be sustained. In other words, contingent necessity imposes on the individual producer the need to act contrary to his best advantage in the long-run. This contradiction between what is rational and indeed unavoidable for an individual entrepreneur, and what is rational from a wider and long-term point of view, is by no means hypothetical. It was the reality of the 1930s when neither poor wages nor low interest rates led to a restoration of entrepreneurs' profit expectations, investment and recovery. It is true that when entrepreneurs believe the recession to be short - part ofthe familiar business cycle - low costs may well encourage them to invest even though the immediate returns may not be very profitable. But this will hardly happen once they lose faith in imminent revival. Once this faith is lost, only an independent agent, who is free from the short-term rationale ofthe market place, can offer solace. In Post-War Regulated Capitalism this role was assigned to the state. Not fettered by the rationality ofthe individual profit-maximizing entrepreneur, but guided by another kind of logic, the state became a corrective agent. Itstask was to intervene where individual self-interest comes into conflict with the common good. What was not sufficiently recognized was that the state isalso no free agent and that it functions in a dynamic cultural environment, that its policies reflect power structures. As Professor Gellner observed, an egalitarian society which incorporates everyone in a shared moral citizenship and high culture, without poverty, oppression or arbitrariness, and with perpetual economic and cognitive growth, is not inscribed into any historical plan. A stored surplus needs to be guarded and its distribution enforced and no principle ofdistribution is either self-validating or self-enforcing. Conflict is inevitable, and the victors have no interest in permitting a return match. Herein lies the root cause of political coercion. In essence the utilitarian individualism underlying Neoclassical economics resembles a Newtonian system. Like particles individuals are endowed with some kind ofself-centred materialistic gravitation and driven by competition to constant motion, while the entire system is held together by their relative positioning. This is a mechanistic and not an organic perception. It excludes all variables which are not subject to the self-adjusting mechanism ascribed to competition. Collective hazards, such as nuclear disaster, water and air pollution and the prospect oflong term mass unemployment, are seen as forces which originate outside the economic system whose control is assigned to the pragmatic, "exogenous", intervention of 4 the state. The multiplicity of these corrections, and the growth of a large state controlled economic sector, which is not primarily informed by profit maximization, gave rise to many useful modifications in neoclassical models but the belief in the soundness of the conception as a whole persevered. Like Ptolemaic astronomers, neoclassical economists "corrected" the system but refused to examine its overall validity. They took and continue to take the results of institutional and social changes as data without asking in how far the economy itself precipitated them. They ignore the dynamics of socialization processes but calculate their volume and cost. Postulating that long-term massive unemployment or the proliferation ofcrime originate outside the "proper" economic system, they relegate the one to the progress of technology, trade union power, population accretion, or the legacy of the Welfare State, and the other to the realm of psychology and sociology. In most other modem sciences such a mechanistic "isolationist" approach is a stage long passed. Sombart was of the opinion that the economic philosophy behind the Free Market is dominated by three principles: acquisition, competition and rationality. The purpose of all endeavours is acquisition, the means to this end competition, and the methods employed strictly rational. He believed that the spirit of acquisition seizes not only upon all phenomena within the economic realm but reaches over into the entire cultural sphere, including social relations, and tends to establish the supremacy of business interests over all other values. "Distinct from the purposes of its owner the capitalistic enterprise takes on a separate intelligence - it becomes the locus of economic rationality which is quite independent ofthe personality ofthe owner and the staff." As a result ofthis the system imposes on society a purely utilitarian valuation of people, objects and events. The motives of entrepreneurs can be many: the desire for power, the craving for acclaim, the impulsion to serve the common good and the simple urge to action, but by virtue ofan inner necessity they all become subordinate to profit making, because without economic success these desires cannot be attained. This is a fairly accurate description ofpre-war Capitalism. Behind all this there was the constant fear ofdestitution: employers were afraid ofbeing driven out of business and reduced to the ranks ofthe proletariat, and workers feared destitution and starvation. It can therefore be said that the dynamic element in old-style capitalism was a two-pronged mechanism ofcompetition - competition between entrepreneurs for their respective shares of the market, and competition between employers and workers for their share in the fruits ofproduction. Fearful ofbeing driven out of business by more efficient competitors, entrepreneurs were inexorably driven to search for and introduce superior technological and organizational methods of production, and facing an increasingly well-organized and powerful labour force they were pressed to introduce improvements which could help them raise output per worker sufficiently to maintain the necessary profit to finance the innovations and to compensate them for the rising wages. Though it was not the exclusive driving force, this dual mechanism was not only the dynamic but also the progressive element in old-style capitalism - the element which increased mankind's ascendancy over nature and gave it the power to 5
The list of books you might like
