The Fear of Full Employment
BROCKWAY, GEORGE P.
The Dismal Science THE FEAR OF FULL EMPLOYMENT BY GEORGE ? BROCKWAY The other day a friend sent me a clipping from the morning paper. My friend is a poet, whom I occasionally charge with...
...I'm not one of 'you economists.' The pessimists of your clipping know that if business gets really good the Federal Reserve Board will get nervous about inflation and raise the interest rate, and that lowers the capitalized value of all stocks and bonds...
...It is that cruel, but it doesn't have to be...
...If you sell short, you can't lose...
...Please give me the name of a good discount broker...
...Surelyyour Webster or OED has all the words," I remarked cuttingly, "and only one of them has more than three syllables...
...The law of diminishing returns nevertheless continues to be an article of faith among neoclassical economists because it is essential underpinning to marginal analysis and general equilibrium theory, about which I hope to talk another day...
...My friend is a poet, whom I occasionally charge with deliberate obfuscation, and she was, she said, getting some of her own back...
...If I believed that our system were inevitably, necessarily and, indeed, systematicallythat cruel, I'dbeon the barricades in a minute—and I like to think I would be joined by most of those who thoughtlessly repeat the dismal doctrine...
...Keep your shirt on," I advised...
...she asked, showing she can use ordinary speech when she wants to...
...Their unanimity is very curious, first because few, if any, other economics propositions command such universal assent, second because it is among the most unequivocally dismal notions in all this dismal science, and third because there is no evidence whatever to support it...
...It is the practically unanimous opinion of everyone who talks about the subject that our system, of which we are told to be so proud, must condemn upwards of 6 million people to lives of undeserved squalor, uselessness, and hopelessness...
...In the United States, the decade of the 1960s produced an almost perfect Phillips Curve ending in a vertical ascent, leading Milton Friedman and others to infer that if unemployment fell to 4 per cent, inflation would rage indefinitely...
...The world is more prosperous than it was in Turgot's day because of economies of scale, incessant innovation and the creativity of money...
...I know you economists are even more devoted to metaphors than we poets are, but I thought you were all enamored of the one about a rising tide lifting all boats...
...My poet friend asked me why, if the unemployed had jobs, they couldn't produce goods at least equal in value to their wages...
...Plausible or not, the modern world— especially the capitalist world—doesn't work that way...
...I don't mean that no evidence is offered...
...This inference is so satisfyingly dismal that belief in it has become a test of orthodoxy, even though the preceding and succeeding decades produce graphs that might very well have been traced by a seriously deranged butterfly...
...If it's in danger of overheating, why not put more water in the boiler...
...A bigger picture is presented by the runaway inflations of our time that are regularly flashed on the screen to scare us into doing something drastic about inflation now, before we all have to get wheelbarrows to carry our worthless money to market to buy a loaf of black bread...
...Eureka...
...That may be said to be the small picture...
...So why isn't full employment the cure for inflation...
...I don't know how a poet gets a hundred dollars in royalties," I said, "but you're absolutely right...
...But she paid no attention...
...Yes," shereplied, "and many of my poems are made up of even shorter words...
...Why hasn't anyone discovered this before...
...You mean, if I invest my royalties in a hundred-dollar bond that pays five dollars a year, and if the interest rate goes up to 10 per cent, then my bond will be worth only fifty dollars...
...I don't believe our system has to be that cruel, however...
...If business is bad," she said, "poor earnings will send stock prices down...
...Its roots are very deep, reaching down to the "law of diminishing returns," first formulated by Anne Robert Jacques Turgot in the 18th century and subsequently accepted without question by economists from Jean-Baptiste Say on the Right to Karl Marx on the Left...
...My god, they're talking about fellow human beings...
...If the doctrine were sound, those countries would have had full employment and overheated economies to start their runaways...
...Even if all these millions were fully qualified and fully motivated, given the inexorable working of the system, they would still be unemployable...
...Exactly the contrary, though, was the case...
...I mean that the evidence offered is false or irrelevant or both...
...These examples do not support the doctrine, either...
...Let's think about that for a minute...
...See illustration...
...The clipping she sent me read as follows: "Economists have become more pessimistic in recent days because the mostrecent batch of economic statistics, including yesterday's strong employment report, suggests that the economy may be picking up steam and may overheat...
...Practically all economists, businessmen, bankers, politicians, and journalists are united in endorsement of this doctrine...
...To complete the empirical record, we may note that today, of all non-Communist industrialized nations, Japan has the lowest unemployment and the lowest inflation...
...Since the facts so flatly contradict the theory, how did the theory get started...
...Unlike 18th-century agriculture, the industrial economy is not a closed system, with a finite amount of land, but an open system, based on credit, and open to the future...
...And if business is good, higher interest rates will send the market down...
...On the other hand, we have many times had inflation in peacetime, and we have perversely tried to control it by raising the interest rate in order to curtail production...
...Besides the Weimar Republic runaway, the prime examples are Hungary after World War II and Brazil today...
...Not only that, but in the year of lowest unemployment, inflation was lower than in all except four of the 40-odd years in question...
...Of course, that adds up to 15-20 million men, women and children when you count their dependents...
...Well, why isn't it...
...It is certainly plausible...
...Don't look at me," I objected...
...Then there wouldn' t be more money chasing fewer goods, would there...
...Well, consulting Economic Reportof the President, 1988, I find that since World War II there have been 20 years in which unemployment was at a lower rate, 26 years with lower inflation, and no fewer than 16 years where both inflation and unemployment were lower...
...These figures certainly do not support the doctrine...
...This was, of course, a run-ofthe-mill news note of the sort we have all read many times, and I wondered why it was bothering my friend...
...I couldn't think why...
...We could use some of her guileful questioning in high places, and particularly in regard to the received doctrine that high employment makes for high inflation...
...What I'd like to know is, what kinds of idiots are made pessimistic by an economy's picking up steam...
...Each one suffered from appalling unemployment, and Brazil still does, without in anyway impeding or controlling the inflation...
...she cried...
...We have not, after all, ever had full employment except in wartime, when inflation of civilian prices is to be expected because civilian production is necessarily curtailed...
...If the proposition weren' t so dismal, it wouldn't be worth troubling about...
...It's a shame that my friend is merely one of the unacknowledged legislators of the world...
...I've outdone Archimedes...
...Certainly our leaders consider them so good that they seem able to congratulate themselves without embarrassment...
...In the year of highest inflation, unemployment was higher than in seven of the years...
...In short, there is no relevant evidence reliably connecting high inflation and full employment...
...But look at what it means: It assumes that inflation is the worst economic misfortune that could befall us, and it asserts that in order to avoid— or simply to control— inflation, we must prevent several million people from having jobs...
...Whatgives...
...I gave her a ring...
...There's no way the stock market can go up...
...I sincerely want to be rich...
...We're given tounderstand that right now, with inflation running at about 4.5 per cent and unemployment at about 5.4 per cent, things are perhaps actually a little better than can be expected...
...Who's obfuscating now...
...Just as agricultural costs rise when production is extended to less favorable land, so it seems that industrial expansion should require the use of less and less suitable materials and less and less efficient workers...
...she asked...
...Also, in 1958 the law was joined by the Phillips Curve, which seems to demonstrate a reciprocal relation between unemployment and inflation in Great Britain from 1862 to 1957, just as the law might predict...
Vol. 71 • October 1988 • No. 18
