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I recently wrote an article on how Ben Bernanke’s explanation of the rate of unemployment rests on Keynesian economics. He blames a lack of aggregate demand. This was Keynes’ explanation for all forms of unused resources, which he presented in The General Theory of Employment, Interest, and Money (1936).
I argued, as free market economists have argued for almost two centuries, that an unemployed scarce resource is unemployed because its owner has priced it above the market.
A scarce resource, by definition, is a resource for which there is greater demand than supply at zero price. If supply can meet demand at zero price, then the resource is not scarce. It is like air.
It is possible for supply to meet demand in a market in one geographical region but not in another. In this case, this is not a free resource. It is a resource that is not being used in one region, but if transportation and other costs of moving it from one region to another are lower than the price in a distant region, an entrepreneur has a profit opportunity. He can buy low (zero) in one place, pay money to move it to another place, and sell high.
This analysis is based on the logic of human action. Men seek to improve their situations. If investors see a way to take advantage of other people’s lack of perception of a price spread, some investors can and will buy low and sell high. The price spread will disappear. That is because the ignorance that created the price spread disappears.
The process is universal. There may be social costs associated with certain transactions, such as moral revulsion at a particular activity, but this does not violate the general law of markets. The moral revulsion adds a cost to the transaction. This reduces the number of people who are willing to buy low and sell high in a specific market. But the logic of the process is in no way affected. It is not true that “every man has his price.” It is true that the higher the price that would-be buyers offer, the larger the number of sellers who are willing to supply the item.
“NOT IN MY MARKET!”
One of the problems that every defender of the logic of the free market eventually encounters is the reader who responds, “What you are saying may be true in other markets,’ but it is not true in my market.”
Without exception, I have found that the person making this criticism is the recipient of some sort of subsidy by the government. He does not wish to lose this subsidy. So, he argues that the logic of the free market either does not apply to his market, or if it does, it should not be allowed to apply. The government should therefore stop all profitable transactions – buying low and selling high – by the threat of violence.
Problem: the government cannot stop price equalization at zero price. Government is not a zero-cost resource. The government must extract money from some taxpayers in order to interfere with any market.
The government can increase the cost of participating in a market. Because of transaction rising costs, the supply of the controlled item is reduced. But demand remains. For liquor or drugs or weapons-grade plutonium, there is still demand out there. It will be supplied, as the economist says, at some price.
IMMIGRATION
Let me offer an example. A reader who read my original article on Bernanke’s analysis of unemployment began sending me a series of emails. The initial one is representative.
I am a longtime admirer of your work, so I very pleased you had decided to analyze the Bernanke Unemployment presentation.
But I was very disappointed with the outcome. What you wrote is fine as far as it went, but how can the current U.S. joblessness issue be considered without any reference to the ongoing very heavy levels of immigration?
You rightly fault Bernanke for only being willing to consider the demand side of the equation, but the labor supply issues you point to are overshadowed by the fact that a million or so legal and illegal immigrants are arriving every year – a situation which did not exist in the Great Depression.
The writer wants government controls on immigration. I understand the case against immigration. It relies on such factors as government welfare programs that aid immigrants: higher taxes. It relies on an analysis of the naturalization process. The immigrants may get the vote, or their adult children will, and then they will vote for more welfare programs: higher taxes. Furthermore, their cultures are different, and this increases the costs of adjustment for existing residents. Immigrants impinge on existing residents’ comfort zones.
The question at hand, however, is hired hands. Do immigrants cause increased unemployment?
The critic is a Keynesian. He does not see this, because he does not understand Keynes. Let me explain.
KEYNESIAN AGGREGATES
Keynes argued, and his disciples still argue, that the cause of unemployment is insufficient aggregate demand. This is another way of saying that the cause of unemployment is excessive aggregate supply. The fact that Keynesians never put it this way does not affect the analytical truth of the argument.
An accurate analysis of unemployment must always be discussed in terms of these three factors: supply (at a specific price), demand (at this price), and time (at a prevailing rate of interest). Keynesians and non-Keynesians agree on this. The disagreement comes when the discussion turns to this: supply of what, demand of what, and interest rate set by what.
The Keynesian is a collectivist methodologically. He looks at aggregates. He recommends government programs that affect aggregates.
The Austrian economist is a methodological individualist. He looks at a specific resource offered at a specific place at a specific time.
The Keynesian blames a lack of aggregate demand for unemployment in general. He focuses on the demand side. Logically, he could just as well focus on the supply side: aggregate labor. He could just as easily call for government programs to reduce the supply of aggregate labor. He could call for immigration quotas. The fact that he doesn’t is due to his preference for government spending. He hates to focus on supply-side issues.
The Austrian blames a lack of price flexibility, either because of government restrictions on prices (floors) or stubbornness on the part of the participants. Either the seller of goods/services (buyer of money) is stubborn, or else the buyer of goods/services (seller of money) is stubborn. One of the participants is saying no to the offer.
But this is not unemployment. The seller of goods/services is holding on to whatever it is he has to sell. This is called reservation demand. The seller of money is doing the same. Each is an owner. Each has the legal authority to offer to trade. Each thinks that what he owns now is a better deal than owning what the other person has at the asking price.
KNOWN RESOURCES ARE ALWAYS EMPLOYED
The idea of unemployed resources is conceptually flawed. Resources are always employed. Someone owns them. This was the point that W. H. Hutt made in 1939 in his classic book, The Theory of Idle Resources. You can download it for free here. The anonymous commentator on Mises.org has stated its thesis well.
Hutt goes for the heart of Keynes’s prescription for recovery, which was to get idle resources moving, whether that is money, capital, or labor. If something isn’t being employed right now, it is being wasted.
Hutt responded at length that there is nothing uneconomic or necessarily inefficient about an idle resource. It is the decision of the owner to hold back when faced with a long-term plan, a judgment call concerning risk, a high reservation wage, or a demand for larger cash balances.
This is certainly true as regards labor. In a changing economy, people move from sector to sector, something choosing periods of unemployment over employment at low wages. This makes sense for them. For this reason, it makes no sense to craft policies designed to achieve “full employment” since this means overriding human choice. . . .
The economic environment is plagued with enormous unemployment – the ultimate idle resource. What is the problem? Is it a macroeconomic problem of aggregate demand? Or is it is a simple labor pricing problem alongside legal restrictions? Hutt takes the latter position, and utterly crushes the Keynesian view.
Hutt was responding to Keynes’ theory of insufficient aggregate demand. I am responding to my critic’s position: excessive aggregate supply. They are the same argument, analytically speaking. The Keynesians call for government intervention to control aggregate behavior. This is called macroeconomics. Macroeconomics rests on this proposition: badges and guns more trustworthy than competitive bidding by individuals for the use of scarce resources.
April 3, 2012
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2012 Gary North
