The Cure for Unemployment

Mr. Holmes is a retired aeronautical engineer in Bellevue, Washington. He has written, lectured, and organized study groups to help understand and preserve freedom.

The cure under discussion here does not refer to the elimination of all unemployment. Some unemployment is voluntary and some is caused temporarily by unavoidable natural catastrophes such as earthquakes and floods, or by human error and misfortune. Rather, we are concerned about those arbitrary, deliberately applied forces in the marketplace—attempts to raise wages above free-market levels. Such forces, to the extent that they accomplish their objectives, cause totally unnecessary and permanent unemployment. Bitter frustration and misery for countless thousands of would-be workers is the inevitable result.

During the Great Depression of the thirties, the fear of unemployment panicked Americans into letting down the bars to the so-called liberals; and for about five decades, these liberals have addressed almost every conceivable human problem by being liberal with other people’s money—collected, or printed, by the government. For a time it seemed that no great harm was being done. But now it has become apparent to more and more citizens that this kind of cure-all results in intolerable degrees of taxation and inflation, accompanied by a growing amount of unemployment.

Current political philosophy, to a great extent, recognizes the crucial importance of reducing inflation. Consumers are disgruntled over constantly and rapidly rising prices. But suppose prices are forced to level off by restricting the increase in the money supply, while wages continue to be forced upward. Marginal employees will lose their jobs. Unemployment will increase. If this should precipitate another wild orgy of disastrous governmental intervention as it did in the thirties, it could lead to the ultimate extinction of the freedom of individuals that has made America the most desirable place to live on Earth.

On page 291 of his book, The Failure of the New Economics (New York: D. Van Nostrand Company, 1959), Henry Hazlitt defines the requirement for full employment in this manner: “No matter how low total monetary demand falls, full employment could exist at the appropriate relationship of wage-rates to prices. No matter how high total monetary demand is pushed, unemployment will exist if an unworkable relationship exists between wage-rates and prices.”

Free Competition for Jobs

But what is the “appropriate relationship” between wage-rates and prices? How can such a magic relationship be established?

Nothing could be simpler. Allow every person looking for work to accept a job at the highest wage he can get. Let him bid freely. This is a job for individuals. Only individuals, acting as flee, responsible persons, can solve the problem. The cure for unemployment is free competition for jobs. Only a free market can arrive at “the appropriate relationship” between wage-rates and prices.

There is no reason for such an idea to put an end to labor unions. In fact, it could stimulate the formation and growth of a whole network of unions of a new breed, or of one or two great labor organizations that would embrace all who contribute brains and brawn, from newsboys to top executives.

The collective (the union) would employ its resources to assist each and every individual member to make the best possible bargain, suitable to that person’s tastes and desires. Computerized data covering national and worldwide conditions of vital importance to job seekers could be made available exclusively to members. Such data could be catalogued by localities, industries and individual employers, and could include such aspects as weather conditions, living conditions, prospects for growth and advancement, and how well individual employers treat their employees. No attempt whatever would be made to bargain workers’ services en masse, like selling a trainload of cattle. No attempt whatever would be made to influence a wage level as such. The practice of letting a completely free market establish wage levels would be held sacred.

An organization of this kind might prove to have far more appeal to the average workman than most present organizations. Despite the coercive powers that unions currently possess, they have had trouble in their attempts to increase membership. Probably the reason is that a majority of workers value their individual independence above any advantages that might be enjoyed by virtue of membership in a union.

A few months ago, I experienced an example of this desire for independence. I was having my car repaired in a shop that was being struck by the union in an attempt to obtain a closed shop. One of the union members, an excellent mechanic, was still in there working. When I asked him about it, he said “I’ll be damned if they’re going to tell me what I can and can’t do!” The guarantee of complete freedom of individual choice, and the assurance that no one would ever be asked to endure the trauma of a strike, would undoubtedly be attractive to a great many prospective members.

Labor unions are correct in seeking better economic conditions for their members. But they have failed to obtain the best possible conditions for all of their members, because they have refused to recognize the hard realities of the marketplace. They have persistently ignored the Law of Demand for Labor: the higher the wage asked, the fewer the number of workers that will be hired; and the lower the wage asked, the greater the number that will be hired. This law is rigidly enforced by the decree of millions of potential purchasers of the products of the labor involved—truly “dictatorship of the masses.” The Law of Demand cannot be repealed.

Collective bargaining, as presently practiced, attempts to raise the wage level of a group of workers above the current level. To the extent that the effort is successful, eventually—not immediately, but eventually—it will mean that some of the members of that group will be laid off, will be unemployed. At the higher cost of production, employers will find that higher prices must be asked in order to maximize profits. The higher prices will result in decreased quantities purchased by the buying public.

It will normally take considerable time for employers to learn to what extent the quantity purchased will be reduced due to the higher price, but the ultimate unhappy result is inevitable. “The mills of the gods grind slowly, but they grind exceedingly fine.” Unfortunately, this time lag obscures the cruel result of collective bargaining as presently practiced.

Minimum Wage Laws

Minimum wage laws have the • same restrictive effect as collective bargaining. They destroy the natural right of certain persons to bid effectively for a job. By raising wages by force, or the threat of force, above the free market wage, it is decreed, absolutely, that some will not be hired who wish to be hired. This is especially sad because it victimizes the young, the uneducated and the inexperienced—the very poorest of the would-be competitors in the labor market. It keeps some from ever getting on the ladder of accomplishment, and thus creates frustrations that often lead to drugs and crime.

Incidentally, these practices of bringing about artificially high wages point up the injustice of deciding economic matters by majority vote. Those who are still able to obtain and hold jobs at the higher wages are normally in the majority. They can hardly be blamed for favoring the process, even if they realize the dire consequences for the minority who suffer. Furthermore, in the broader political arena, the majority of the voters probably fail to understand these causes of unemployment. But whether they do or not, they salve their feelings, whether they be feelings of guilt or sympathy, by sanctioning further governmental violence in the form of robbing those still fortunate enough to have jobs, hopefully in favor of those who have been forced out.

Fortunately, there are indications that there is a better climate of understanding in the political and industrial world of today than existed in the thirties. And it is especially encouraging that such improved understanding is present where it counts most: in labor union leadership. Evidence of this appeared recently in a column on page one of the Wall Street Journal of September 30th, 1981, entitled “Bargain Year,” by Robert S. Greenberger. A chief economist of one major union is quoted as saying “I’d be surprised if there’s a lot of demand for big increases next year, Most of us will be happy just to hold on to what we’ve got.”

That kind of talk is sensible and heartening. But consider the problem that even the wisest and most considerate labor leader is up against in trying to sell the services of tens of thousands of workers in one big lump. There is no conceivable way in which anyone can know what the correct wage should be for all those workers, either individually or en masse, even for a day. And the current custom is to try to establish such a correct wage for up to three years in advance! No wonder we are in trouble.

Remove the Chains

That trouble is haunting us in the form of the twin diseases of unemployment and inflation. Only a free market for goods and services can bring about the price and wage adjustments necessary to cure those diseases. Modern development of data processing and communication is rapidly becoming so potent that such essential adjustments can be accomplished in short order. Millions of individuals, each acting in his or her own best interest in view of his or her present circumstances, can arrive at the best possible solutions pronto. All that is necessary is to remove the shackles.

The farsighted labor leader of the future will see that removing the impediments to full employment amounts to freeing the whole labor movement to grow and serve its members as never before.

There is virtually no limit to the kinds of service that a free-market union could offer its members. Small businesses often find it difficult to offer their employees such benefits as insurance and pensions. They can only compensate for this lack by paying higher wages. A large union could furnish the opportunity to buy inexpensive group insurance, and could also set up efficiently operated retirement funds.

The union could offer educational courses in self-improvement and economics. A thorough understanding of the benefits and ultimate fairness of a free-market system could do much for the peace of mind and contentment of union members. Such courses could explain that profits and losses are our only guide concerning what to produce and what not to produce, in accordance with the wishes of the whole buying public, and that this, incidentally, is why enforced communism can never work to the advantage of the citizens. It could be shown that the larger the profit, the sooner the adjustment to producing larger quantities of something that is suddenly discovered to be very desirable, pulling workers into newer fields by means of higher wages.

Minimizing Business Cycles

It could be shown that, so long as we have fractional reserve banking, we seem bound to experience business cycles, and that a practice of free competition for jobs and free competition for help tends to dampen the swings. Not only can full employment be hastened during the downswing by bidding wages down as necessary, but rapidly increasing wages during the upswing would have some tendency to lessen the overinvestment that occurs in times of euphoria. That a free market for help is superior to present-day collective bargaining at such times was demonstrated in the upswing in the economy induced by the Kennedy tax cuts of the sixties. Wages in the unorganized labor areas frequently rose more rapidly than in the unionized areas.

A flee-market union could have a beneficial impact on the attitude of employers toward their employees. For example, it might inform employers of mistakes they are making, perhaps without even realizing it, concerning the treatment of their help. I am sure that many present unions are performing this kind of service that is of mutual advantage. The union could assist employers in setting up systems for paying as nearly as possible according to value.

I was once able to establish a method for doing just that. The resulting beneficial effects on both morale and productivity were most gratifying. Men and women respect an employer who demonstrates consistently that the employees are paid fairly relative to each other. And they know who’s who. One of our supervisors tried the experiment of asking each member of his group to evaluate his fellow workers relative to each other, simply representing values by lengths along a line. He found almost total agreement among them, and with his own evaluations. There is a great deal of room for improvement along these lines among employers.

Mutual Assistance

The attitude and contentment of workers will naturally improve as they are brought to realize that by increasing their value to their employers, they are increasing their value to all mankind—that by gaining increases in their wages in this manner, they are doing the whole world a favor. In the last analysis, we are all working for each other, with employers functioning as the essential go-betweens, organizing the whole process. What a difference there is in gaining pay increases by increasing one’s value as compared with gaining them by forcing unknown workers out of competition by the threat of violence!

One of the most valuable and comforting truths that could be demonstrated to union members is the fact that producing a good or a service creates a demand for other goods and services. We trade our labor for money that we ultimately trade for other things. Before there was any such thing as money, we can picture a hunter trading an extra deer for fish caught by a specialist in fishing. But the hunter could not demand fish until he produced a deer. His product was his source of demand.

Suppose that more workers are hired at lower wages in the automobile industry. This would mean more cars to be traded for more goods and services produced by other industries. So more cars mean more demand for goods and services produced by other industries, and more goods and services produced in other industries mean more demand for cars. Everyone has more, not less, because of the lower wages. There is no such thing as a limited number of jobs, because each job creates its own demand. The only limit to this increased demand is the number of workers available. Full employment (for all who wish to be employed) and maximum possible standard of living for all is the natural condition in a free-market economy.

Incidentally, the fact that there are always only so many workers available can be very comforting to anyone who might be entertaining the fear that, in a free market, employers could drive wages down to bare subsistence levels. When all are hired who wish to be hired, that’s it. Wages can go no lower.

But of all the benefits and advantages that could be realized by a member of a flee-market labor organization, perhaps the most gratifying would be, surprisingly enough, the power to bargain! The pressure on employers to live up to standards of treatment of their employees dic tated by the market would be enormous—far greater, ultimately, than any strike threat could be. Nothing can be more compelling to an employer than to see his better workers leaving him, one by one, for better jobs, especially if some union is recording such departures and notifying its membership (and the employer) of his shortcomings.

The Power of the Market

In the early days of the Industrial Revolution, as efficiency and productivity increased with capital accumulation, this power of the market to dictate higher wages and better working conditions became so annoying to employers that they succeeded in getting maximum wage laws passed. As troublesome as such laws must have been, they were no match, ultimately, for the dictates of the market. Living and working conditions for the working classes continued to improve, and the maximum wage laws were either repealed or became dead letters.

Now, some 200 years later, political power has swung to the opposite camp. The same errors of trying to defy the natural laws of human action are being committed, but this time in the opposite direction. Instead of a shortage of workers—the condition that confronted employers when they held wages too low—we now have a shortage of jobs.

We can proceed toward the promised land of full employment only as the conventional wisdom becomes strong in the understanding of the virtues of a free market. We can reach our goals only when the mores of the community decree in no uncertain terms that the use of violence in the marketplace, even if legal, is immoral; and that that principle is particularly apt in making it possible for all who wish to work to obtain jobs.

The cure for unemployment is free competition for jobs. To the extent that this simple fact is recognized in our society, to that extent will our effort to stem the growth of governmental intervention receive an essential boost.

Further Reading