Understanding Unemployment Term Paper

Yet, in the face of the current plague of unemployment the Keynesian economists issue all kinds of passionate prescriptions to remedy the problem of joblessness without paying necessary attention to its root causes. According to these economists, the origins of the ongoing high rates of unemployment (and of the underlying economic crisis in general) can be traced back to Ronald Reagan: his election to the presidency in 1980 and the subsequent rise of Neoliberalism brought forth an economic doctrine that has gradually led to the reversal of the Keynesian demand-management strategies of economic stimulation. So, for most Keynesian/liberal economists and politicians, Reagan is the pivotal figure and 1980 is the watershed year: “Before 1980, economic policy was designed to achieve full employment, and the economy was characterized by a system in which wages grew with productivity.

This configuration created a virtuous circle of growth. Rising wages meant robust aggregate demand, which contributed to full employment. The questioning and the gradual abandonment of the Keynesian strategies took place not simply because of purely ideological proclivities or personal preferences of Ronald Reagan and other “right-wing” Republicans, as many Keynesians argue, but because of actual structural changes in economic or market conditions, both nationally and internationally. As discussed in my previous essay on this subject [2], Keynesian-type policies were pursued in response to the Great Depression and in the immediate aftermath of WW II as long as political forces and economic conditions of the time rendered those policies effective, or profitable. Those favourable conditions included nearly unlimited demand for US manufactures, both at home and abroad, and the lack of competition for both US capital and labour, which allowed US workers to demand decent wages and benefits while at the same time enjoying higher rates of employment.

By the late 1960s and early 1970s, however, both US capital and labour were no longer unrivalled in global markets. Furthermore, during the long cycle of the immediate post-war expansion US producers had invested so much in fixed/constant capital, or capacity building, that by the late 1960s their profit rates had begun to decline as the capital-labour ratio and other “sunk costs” of their operations had become too high. Just as the regular and timely adjustment of the level of water behind a dam is crucial to a smooth or stable use of water, so is an “appropriate” size of a pool of the unemployed critical to the profitability of capitalist production. “The industrial reserve army,” Marx wrote, “during periods of stagnation … weighs down the active army of workers; during the period of over-production and feverish activity, it puts a curb on their pretensions.

The relative surplus population is therefore the background against which the law of the demand and supply of labour does its work. It confines the field of action of this law to the limits absolutely convenient to capital’s drive to exploit and dominate the workers” [5]. It is clear that the Marxian theory of the reserve army of labour, which shows how unemployment arises and why it is necessary to capitalism, provides a much better understanding of the current plague of unemployment than the Keynesian view, which blames it on “Neoliberal” capitalism—and which is essentially tantamount to explaining something by itself. While prima facie this sounds like a reasonable suggestion, it suffers from the problem of issuing useless or ineffectual prescriptions based on inaccurate or flawed diagnoses.

Not surprising, repeated Keynesian calls of the recent years for embarking on Keynesian-type stimulus packages in order to help end the recession and alleviate unemployment continue to sound hollow. For, under the changed conditions of production from national to global level, and in the absence of overwhelming political pressure from workers and other grassroots, there are simply no refills for Dr Keynes’s prescriptions, which were issued on a national (not international or global) level, and under radically different socio-economic conditions—the solution now needs to be global. Theoretically, the Keynesian strategy of a “virtuous circle” of high employment, high wages and economic growth is rather simple: massive government spending in the face of a serious economic downturn would raise employment and wages, inject a strong purchasing power into the economy and create a strong demand, which would then spur producers to expand and hire, thereby further raising employment, wages, demand, supply.

Many well-known Keynesians have in recent years repeatedly put forth this strategy of economic stimulation—only to see them fall on deaf ears. That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages, but the bargain is over. Corporate profits are up right now largely because pay is down and companies aren’t hiring. But this is a losing game even for corporations over the long term. Without enough American consumers, their profitable days are numbered. After all, there’s a limit to how much profit they can get out of cutting American payrolls [7]. The second problem with Professor Reich’s (and his Keynesian co-thinkers’) argument of “high wages as the engines of virtuous cycles” of growth and expansion is that wages and benefits are micro- or enterprise-level categories that are decided on by individual employers and corporate managers, not by some macro or national level planners (as in a centrally-planned economy) of aggregate demand.

In other words, individual producers (large or small) view wages and benefits first, and foremost, as a major cost of production that needs to be minimized as much as possible; and only secondarily, if ever, as part of the national aggregate demand that may (in roundabout ways) contribute to the sale of their products. This is another example of how Marx’s theory of capitalist exploitation and wage-determination (as a subsistence-based historical category) is superior to the Keynesian view that, in a manner of wishful thinking, hopes that producers would be wise and generous enough to pay “sufficient” wages in order to sell their products! Keynesian economists passionately talk about “virtuous cycles” of high employment, high wages and high growth as if there are no limits to such expanding, upward spiralling cycle.

It is well established, however, both theoretically and empirically, that such virtuous cycles are bound to be temporary because as they expand they also sow the seeds of contraction. A discussion of economic cycles and the underlying theories of capitalist crisis is beyond the purview of this essay. A major flaw of the Keynesian reform or restructuring package is that it consists of a set of populist proposals that are devoid of politics, that is, of political mechanisms that would be necessary to carry them out. They rest largely on the hope that, in an independent or disinterested fashion, the state can control and manage capitalism in the interest of all. This is, however, no more than wishful thinking, since in reality it is the powerful capitalist interests that elect and control the government, not the other way around.

In response to criticisms of this kind, Keynesians are quick to invoke the experience of the “golden years” (1948-1968) of the US economy in support of their arguments. It is true that during that long cycle of expansion high employment, high wages, high demand and high growth reinforced each other in the fashion of a virtuous cycle.