WEBVTT NOTE 19. Unemployment And Wage-Rates 1 00:00:00.000 --> 00:00:09.000 Chapter 19 Unemployment and Wage Rates 2 00:00:09.000 --> 00:00:16.000 Unemployment is caused by excessive wage rates. 3 00:00:16.000 --> 00:00:23.000 If I were put to it to name the most confused and fantastic chapter in the whole of the general theory, 4 00:00:23.000 --> 00:00:29.080 Theory, the choice would be difficult, but I doubt that anyone could successfully challenge 5 00:00:29.080 --> 00:00:35.560 me if I named Chapter 19 on changes in money wages. 6 00:00:35.560 --> 00:00:42.360 Its badness is, after all, not surprising, for it is here that Cain sets out to challenge 7 00:00:42.360 --> 00:00:49.160 and deny what has become in the last two centuries the most strongly established principle in 8 00:00:49.160 --> 00:00:57.160 in Economics, to which that if the price of any commodity or service is kept too high, 9 00:00:57.160 --> 00:01:05.520 i.e. above the point of equilibrium, some of that commodity or service will remain unsold. 10 00:01:05.520 --> 00:01:12.200 This is true of eggs, cheese, cotton, catallacts or labor. 11 00:01:12.200 --> 00:01:16.760 When wage rates are too high, there will be unemployment. 12 00:01:16.760 --> 00:01:23.880 Reducing the myriad wage rates to their respective equilibrium points may not in itself be a 13 00:01:23.880 --> 00:01:30.920 sufficient step to the restoration of full employment, for there are other possible disequilibriums 14 00:01:30.920 --> 00:01:37.120 to be considered, but it is an absolutely necessary step. 15 00:01:37.120 --> 00:01:42.880 This is the elementary and inescapable truth that Keynes, with an incredible display of 16 00:01:42.880 --> 00:01:49.160 of sophistry, irrelevance and complicated obfuscation tries to refute. 17 00:01:49.160 --> 00:01:56.360 He begins, as is his habit, by affecting to state the classical theory of the matter, 18 00:01:56.360 --> 00:02:00.160 and as is also his habit, he misstates it. 19 00:02:00.160 --> 00:02:05.640 Then he discovers this theory to be question-begging and fallacious. 20 00:02:05.640 --> 00:02:09.600 Next he applies his own method of analysis. 21 00:02:09.600 --> 00:02:15.240 I spare the reader the quotation, but if he is interested in reading an argument that 22 00:02:15.240 --> 00:02:22.080 outdoes Humpty Dumpty's best efforts in Alice in Wonderland or the complicated and bewildering 23 00:02:22.080 --> 00:02:29.520 chain of causation of a Rube Goldberg cartoon, I direct his attention to the long paragraph 24 00:02:29.520 --> 00:02:37.600 beginning at the top of page 261 and ending at the top of page 262. 25 00:02:37.600 --> 00:02:43.600 Instead of trying to unsnarl this Gordian knot one loop at a time and calling attention 26 00:02:43.600 --> 00:02:50.680 to each fallacy and irrelevance, which would only take us over ground we have already covered, 27 00:02:50.680 --> 00:02:57.400 we shall economize time by bypassing it for the moment, as well as the whole chapter and 28 00:02:57.400 --> 00:03:03.420 most of its appendix, and by quoting a couple of paragraphs from the last two pages of the 29 00:03:03.420 --> 00:03:11.660 Appendix, in which Keynes contrasts his own views with those of A. C. Pigot. 30 00:03:11.660 --> 00:03:16.540 The difference in the conclusions to which the above differences in assumptions and in 31 00:03:16.540 --> 00:03:23.220 analysis lead can be shown by the following important passage in which Professor Pigot 32 00:03:23.220 --> 00:03:26.140 sums up his point of view. 33 00:03:26.140 --> 00:03:32.580 With perfectly free competition among work people and labor perfectly mobile, the nature 34 00:03:32.580 --> 00:03:38.900 The nature of the relation i.e. between the real wage rates for which people stipulate 35 00:03:38.900 --> 00:03:43.220 and the demand function for labor will be very simple. 36 00:03:43.220 --> 00:03:49.580 There will always be at work a strong tendency for wage rates to be so related to demand 37 00:03:49.580 --> 00:03:52.580 that everybody is employed. 38 00:03:52.580 --> 00:03:57.420 Hence in stable conditions everyone will actually be employed. 39 00:03:57.420 --> 00:04:04.380 The implication is that such unemployment as exists at any time is due wholly to the fact 40 00:04:04.380 --> 00:04:11.340 that changes in demand conditions are continually taking place, and that frictional resistances 41 00:04:11.340 --> 00:04:16.740 prevent the appropriate wage adjustments from being made instantaneously. 42 00:04:16.740 --> 00:04:24.980 He concludes, page 253, that unemployment is primarily due to a wage policy which fails 43 00:04:24.980 --> 00:04:30.260 calls to adjust itself sufficiently to changes in the real demand function for labor. 44 00:04:30.260 --> 00:04:36.300 Thus, Professor Pagot believes that in the long run, unemployment can be cured by wage 45 00:04:36.300 --> 00:04:43.080 adjustments, whereas I maintain that the real wage, subject only to a minimum set by the 46 00:04:43.080 --> 00:04:49.660 marginal disutility of employment, is not primarily determined by wage adjustments, 47 00:04:49.660 --> 00:04:55.860 Though these may have repercussions, but by the other forces of the system. 48 00:04:55.860 --> 00:05:01.000 Some of which, in particular the relation between the schedule of the marginal efficiency 49 00:05:01.000 --> 00:05:07.380 of capital and the rate of interest, Professor Pagot has failed, if I am right, to include 50 00:05:07.380 --> 00:05:14.140 in his formal scheme, pages 277 through 278. 51 00:05:14.140 --> 00:05:20.380 There is a double advantage in starting our discussion of Chapter 19 with this quotation. 52 00:05:20.380 --> 00:05:27.060 One, instead of giving us Keynes's misstatement, which would first have to be corrected, of 53 00:05:27.060 --> 00:05:32.500 the classical theory of the relation of wage rates to unemployment, it at least gives us 54 00:05:32.500 --> 00:05:37.900 Pigou's statement of the classical view in his own words. 55 00:05:37.900 --> 00:05:44.120 And two, it contains the most compact and lucid statement that Keynes gives of his own 56 00:05:44.120 --> 00:05:46.680 views on the subject. 57 00:05:46.680 --> 00:05:49.900 Pigot's statement is the correct one. 58 00:05:49.900 --> 00:05:55.920 Keynes's view is clearly incorrect, though it does contain one grain of truth in a bushel 59 00:05:55.920 --> 00:05:57.660 of errors. 60 00:05:57.660 --> 00:06:02.920 This grain of truth, it may be added, is not original with Keynes'. 61 00:06:02.920 --> 00:06:09.440 Let us begin by seeing what qualifications are necessary in the Pigot Statement. 62 00:06:09.440 --> 00:06:16.220 When Pigot speaks of everybody or everyone being employed, the word everybody must clearly 63 00:06:16.220 --> 00:06:19.360 be interpreted in a restricted sense. 64 00:06:19.360 --> 00:06:24.560 It cannot be speaking of those who do not need or do not want to work, or of children 65 00:06:24.560 --> 00:06:31.400 or of the physically handicapped, or of criminals or lunatics, or those who are so incompetent, 66 00:06:31.400 --> 00:07:00.000 Again, when Pigot declares that in stable conditions everybody will actually be employed, 67 00:07:00.000 --> 00:07:07.480 He must have meant to say in equilibrium conditions. It is not stability, but the speed and precision 68 00:07:07.480 --> 00:07:15.240 of wage adjustments that Pigot is really emphasizing. Relatively stable unemployment is possible 69 00:07:15.240 --> 00:07:22.200 with a stable or frozen disequilibrium, as was shown both in Britain and the United States 70 00:07:22.200 --> 00:07:27.260 in the period between 1925 and 1939. 71 00:07:27.260 --> 00:07:33.520 Keynes capitalized on this, as we have seen, by giving it the self-contradictory name of 72 00:07:33.520 --> 00:07:36.400 unemployment equilibrium. 73 00:07:36.400 --> 00:07:42.400 The equilibrium that we should keep in mind need not be stable in the sense of static. 74 00:07:42.400 --> 00:07:49.680 That is to say, it need not refer merely to the kind of equilibrium postulated in a stationary 75 00:07:49.680 --> 00:08:08.680 or Evenly Rotating Economy. It can refer to a dynamic equilibrium postulated as being achieved by instantaneous and precise adjustments to changing conditions, or constantly being approached in practice in a free competitive economy. 76 00:08:08.680 --> 00:08:32.680 Finally, while maladjustments in wage rates are usually the principal reason for unemployment, and can be the sole reason, other maladjustments can also cause unemployment, including maladjustments among particular prices and, here is the one germ of Keynesian truth, even though improbably, maladjustments in interest rates. 77 00:08:32.680 --> 00:08:44.180 Suppose now, for the sake of clarity, we rephrase Pigot's summary in a more satisfactory form, retaining his own phrasing wherever that is acceptable. 78 00:08:44.180 --> 00:08:50.340 With perfectly free competition among work people and laborer, perfectly mobile, there 79 00:08:50.340 --> 00:08:57.700 will always be at work a strong tendency for wage rates to be so related to demand that 80 00:08:57.700 --> 00:09:01.700 all employable persons who desire jobs are employed. 81 00:09:01.700 --> 00:09:08.180 Hence, in conditions of equilibrium, all such persons will actually be employed. 82 00:09:08.180 --> 00:09:31.180 The implication is that such unemployment as exists at any time is due wholly to the fact that changes in demand conditions are continually taking place and that frictional resistances prevent the appropriate wage, price and other, even interest rate, adjustments from being made instantaneously. 83 00:09:31.180 --> 00:09:40.180 Now, if Keynes had been content to make merely these revisions, if he had been content merely to deny, in his quotation from Pigot, 84 00:09:40.180 --> 00:09:51.180 the implication that wage adjustments are the sole adjustments needed to retain or restore full employment, his objection would have been correct, even if not original. 85 00:09:51.180 --> 00:10:10.180 But Pigot's position as summarized by Keynes that most often unemployment is primarily due to a wage policy which fails to adjust itself sufficiently to changes in the real demand function for labor, page 278, is correct. 86 00:10:10.180 --> 00:10:13.180 Keynes explicitly denies even this. 87 00:10:13.180 --> 00:10:17.180 Keynes is definitely wrong, in short, when he maintains that 88 00:10:17.180 --> 00:10:22.180 the real wage is not primarily determined by wage adjustments 89 00:10:22.180 --> 00:10:25.180 but by the other forces of the system. 90 00:10:25.180 --> 00:10:27.180 Page 278. 91 00:10:27.180 --> 00:10:32.180 These other forces, it is true, even maladjustments in the interest rate, 92 00:10:32.180 --> 00:10:37.180 must be taken into account whenever there is heavy unemployment, 93 00:10:37.180 --> 00:10:44.180 But they are usually secondary to the unemployment caused by maladjustments in wage rates. 94 00:10:51.180 --> 00:11:01.180 With this correct positive doctrine in mind, it may be worthwhile to examine some of the major fallacies which led Keynes to his false conclusions. 95 00:11:01.180 --> 00:11:12.180 Perhaps the first and most important of these fallacies is Keynes's habitual confusion between hourly wage rates and total wage payments. 96 00:11:12.180 --> 00:11:27.180 In common with, I fear, most writers on economics, he uses the loose word wages sometimes to mean wage rates and sometimes to mean total payrolls or total wage income. 97 00:11:27.180 --> 00:11:37.180 The reader is seldom sure in which of these two radically different senses Keynes is using the word, and Keynes seldom seems to be sure himself. 98 00:11:37.180 --> 00:11:48.180 I do not mean to imply that he always falls into this confusion. Sometimes the distinction is clear enough in his mind and explicit in the examples that he cites. 99 00:11:48.180 --> 00:11:57.180 The confusion is nonetheless frequent enough to account for many of the otherwise inexplicable conclusions in the general theory. 100 00:11:57.180 --> 00:12:06.180 This confusion is one of the prices that writers on economics pay for trying to use simpler, popular language. 101 00:12:06.180 --> 00:12:10.180 It never occurs when they are discussing the prices of commodities. 102 00:12:10.180 --> 00:12:25.180 of Commodities. It would not occur to even a moderately competent economist to assume that if an entrepreneur raised the price of his product 20%, his gross income would increase 20%. 103 00:12:25.180 --> 00:12:45.180 If an individual entrepreneur engaged in the production of a homogeneous competitive product, such as copper, were arbitrarily to raise his price 20% above that of his competitors, his gross income instead of increasing 20% would probably disappear entirely. 104 00:12:45.180 --> 00:12:50.900 None of his product would be sold, and even if the entrepreneur were a monopolist, or 105 00:12:50.900 --> 00:12:57.820 if all the entrepreneurs in the same industry uniformly raised their prices by 20%, even 106 00:12:57.820 --> 00:13:03.880 the man in the street knows that, assuming no other change in the supply or demand curve, 107 00:13:03.880 --> 00:13:07.660 there would be a decline in the volume of sales. 108 00:13:07.660 --> 00:13:13.400 The gross income of the individual entrepreneur would not increase in proportion to the price 109 00:13:13.400 --> 00:13:23.080 In short, as far as commodities are concerned, there is no confusion in the popular mind 110 00:13:23.080 --> 00:13:27.520 between prices, volume of sales, and gross income. 111 00:13:27.520 --> 00:13:33.620 But in writing on labor, even many professional economists constantly confuse prices with 112 00:13:33.620 --> 00:13:39.740 total income because they call both by the same name – wages. 113 00:13:39.740 --> 00:13:45.560 Many economists, and this partly derives from Keynes, put forward a curious argument in 114 00:13:45.560 --> 00:13:51.700 attempting to justify their double standard, or double set of economic principles, in the 115 00:13:51.700 --> 00:13:55.420 discussion of prices and wages respectively. 116 00:13:55.420 --> 00:14:02.060 They tell us without a smile that wages cannot be treated like other costs or other prices, 117 00:14:02.060 --> 00:14:07.460 because wages are the worker's income, and if we cut this income we are not only being 118 00:14:07.460 --> 00:14:17.460 We may seem cruel and inhuman, but we correspondingly reduce purchasing power and send the economy into a downward spiral. 119 00:14:17.460 --> 00:14:24.460 Now, whatever is true in this statement is true not only of wages, but of all costs and all prices. 120 00:14:24.460 --> 00:14:28.460 Everybody's monetary cost is somebody else's income. 121 00:14:28.460 --> 00:14:37.460 The price of finished steel is a motor car manufacturer's cost, but, multiplied by tonnage, the steelmaker's income. 122 00:14:37.460 --> 00:14:46.460 The price of iron ore or scrap steel is the finished steelmaker's cost, but the ironmine's or scrap dealer's income. 123 00:14:46.460 --> 00:14:56.460 But if wage rates or steel prices or scrap prices are too high in relation to other prices or to supply and demand, 124 00:14:56.460 --> 00:15:02.260 An increase in such wage rates or prices will not lead to a corresponding increase in the 125 00:15:02.260 --> 00:15:07.860 total income of workers, or of steelmakers, or of scrap dealers. 126 00:15:07.860 --> 00:15:13.620 And it may easily lead to a decrease in that total income through unemployment or a decline 127 00:15:13.620 --> 00:15:17.940 in sales more than proportionate to the increase in price. 128 00:15:17.940 --> 00:15:24.620 It is not merely a fallacy, therefore, but a sham humanitarianism and a cruel deception 129 00:15:24.620 --> 00:15:38.460 Always to insist on wage rate increases, whether or not conditions justify them, and always to resist wage rate reductions, whether or not conditions require them. 130 00:15:38.460 --> 00:15:43.500 Elasticity of demand for labor. 131 00:15:43.500 --> 00:15:50.060 A second fallacy of Keynes's is that, even when he does explicitly distinguish between 132 00:15:50.060 --> 00:15:55.900 wage rates and total wage income, he raises the question whether the demand for labor 133 00:15:55.900 --> 00:16:03.100 is really elastic or not, or whether its elasticity can be greater than unity. 134 00:16:03.100 --> 00:16:09.220 Now Paul Douglas and A. C. Pigot, as I have already pointed out in another connection, 135 00:16:09.220 --> 00:16:16.220 had independently, before the appearance of the general theory, attempted a statistical answer to this question, 136 00:16:16.220 --> 00:16:24.220 and had come with surprising agreement to the conclusion that the elasticity of the demand for labor is about negative 3. 137 00:16:24.220 --> 00:16:32.220 This means that a 1% reduction in wages can mean a 3% increase in employment, 138 00:16:32.220 --> 00:16:36.220 if wages have previously been above the marginal productivity of labor, 139 00:16:36.220 --> 00:16:47.220 or, conversely, that a 1% increase in wages can mean a 3% reduction in employment if wages are above the marginal productivity of labor. 140 00:16:47.220 --> 00:16:58.220 I have already pointed out that it is not possible to measure the elasticity of the demand for labor, or for anything else, statistically or mathematically. 141 00:16:58.220 --> 00:17:06.220 Elasticity of demand is merely a misleading and unfortunate name for responsiveness of demand. 142 00:17:06.220 --> 00:17:15.220 It is obviously impossible to know in advance precisely how the demand for any commodity or service will respond to a change in price. 143 00:17:15.220 --> 00:17:26.220 There are too many factors in the situation, and these factors can never be assumed to be precisely the same for two successive months or minutes. 144 00:17:26.220 --> 00:17:44.220 The concept of a measurable elasticity of demand, or of a predictable responsiveness of demand, is based on the tacit assumption that when the price of a commodity or service changes or is changed, the demand curve remains exactly where it was. 145 00:17:44.220 --> 00:17:49.220 It can never, of course, be known whether this is in fact true. 146 00:17:49.220 --> 00:17:58.220 A price may have gone up because the demand curve itself has gone up, in which case there may be no decrease in the amount demanded. 147 00:17:58.220 --> 00:18:02.220 There may even be an increase in the amount demanded. 148 00:18:02.220 --> 00:18:07.220 Or a price may have gone down because the demand curve itself has gone down, 149 00:18:07.220 --> 00:18:15.220 In which case, there may be no increase in the amount demanded, and there may even be a decrease in the amount demanded. 150 00:18:15.220 --> 00:18:22.220 Now, as the very existence of a demand curve or demand schedule is purely hypothetical, 151 00:18:22.220 --> 00:18:32.220 as the slope or shape of this curve can never be in fact known, and as it can never be known precisely how much it has risen or fallen, 152 00:18:32.220 --> 00:18:48.220 or in the fashionable technical jargon, moved to the right or to the left, it follows that the elasticity of demand for any commodity or service can never be determined by comparing changes in the amount sold with changes in price. 153 00:18:48.220 --> 00:18:54.520 For these changes have occurred between two or more periods or moments of time, and we 154 00:18:54.520 --> 00:19:00.940 can have no assurance whatever that the demand curve has itself remained the same between 155 00:19:00.940 --> 00:19:03.900 those periods or moments of time. 156 00:19:03.900 --> 00:19:09.740 The demand curve may meanwhile have shifted from one position to another, or changed its 157 00:19:09.740 --> 00:19:14.100 shape or we may be on a different section of it. 158 00:19:14.100 --> 00:19:20.460 There are still other dangers in the application of the elasticity of demand concept to labor. 159 00:19:20.460 --> 00:19:26.580 We cannot legitimately speak, for example, of THE elasticity of the demand for labor, 160 00:19:26.580 --> 00:19:31.940 for this will vary with every different kind of labor, almost with every firm, and with 161 00:19:31.940 --> 00:19:35.020 every different set of conditions. 162 00:19:35.020 --> 00:19:41.140 The responsiveness of employment of all building workers collectively to changes in wage rates, 163 00:19:41.140 --> 00:19:46.760 For example, may be very high, whereas the responsiveness of employment of electrical 164 00:19:46.760 --> 00:19:53.140 installation workers alone to changes in their wage rates may be very low, because the demand 165 00:19:53.140 --> 00:19:58.260 for electricians is a joint demand with that for other building workers. 166 00:19:58.260 --> 00:20:04.380 To speak of THE elasticity of the demand for labor, therefore, may be to speak of an almost 167 00:20:04.380 --> 00:20:06.740 meaningless average. 168 00:20:06.740 --> 00:20:13.900 If its dangers and limitations are kept constantly in mind, however, the elasticity of demand, 169 00:20:13.900 --> 00:20:18.820 or better, the responsiveness of demand, can be a useful tool of thought. 170 00:20:18.820 --> 00:20:24.580 The statistical investigations of Douglas and Pigot seem to raise at least a presumption 171 00:20:24.580 --> 00:20:31.140 in favor of a usually high responsiveness of employment to changes in wage rates. 172 00:20:31.140 --> 00:20:36.980 In any case, there is the strongest possible presumption in favor of letting free competitive 173 00:20:36.980 --> 00:20:39.980 market forces decide the question. 174 00:20:39.980 --> 00:20:45.900 When unemployment exists, it exists because there is disequilibrium somewhere. 175 00:20:45.900 --> 00:20:51.020 The most likely place is in the wage rates of the occupations in which the unemployment 176 00:20:51.020 --> 00:20:52.860 exists. 177 00:20:52.860 --> 00:20:58.480 This presumption is enormously increased when such wage rates are arbitrarily held at their 178 00:20:58.480 --> 00:21:07.480 and their existing level by labor union insistence, which prevents free competitive market forces from operating in those occupations. 179 00:21:07.480 --> 00:21:15.480 And this presumption must hold either until free competition for jobs and for workers is restored in those occupations, 180 00:21:15.480 --> 00:21:25.480 or until the unions concerned have consented to a provisional reduction in wage rates to see whether such a reduction is followed by an increase in employment. 181 00:21:25.480 --> 00:21:32.480 Of course, unemployment could be caused in one occupation by an excessive wage rate in another. 182 00:21:32.480 --> 00:21:40.480 For example, some construction workers could be unemployed because wages and prices in the steel industry were too high. 183 00:21:40.480 --> 00:21:53.480 It is even theoretically conceivable to make every concession to Keynes that the disequilibrium causing unemployment might be in some relationship among prices or even in interest rates. 184 00:21:53.480 --> 00:22:07.480 But this is highly improbable unless such inappropriate prices are monopolistically controlled, or unless interest rates have been made excessive as a result of governmental monetary mismanagement. 185 00:22:07.480 --> 00:22:20.480 Another type of error that runs through Keynes's chapter 19 is his consistent failure to state all the relevant assumptions in the hypothetical illustrations that he sets up, 186 00:22:20.480 --> 00:22:30.980 and then, to come to a conclusion that could only be warranted on the basis of an assumption and often a self-contradictory one that he has failed to state. 187 00:22:30.980 --> 00:22:38.480 When we are dealing with unemployment, for example, we must assume that there is a reason for the unemployment. 188 00:22:38.480 --> 00:22:46.980 The most probable reason is that wage rates are too high, i.e. that they are above the point of equilibrium. 189 00:22:46.980 --> 00:22:54.980 This may not be so, but it is certainly one of the hypotheses, if not the first hypothesis, that ought to be considered. 190 00:22:55.980 --> 00:23:04.980 Keynes never considers it. His examples tacitly assume that wage rates are already at, or even below, the point of equilibrium. 191 00:23:05.980 --> 00:23:13.980 Only on that assumption could he reach the conclusion, as he does, that a reduction of wage rates would mean a reduction of wage income, 192 00:23:13.980 --> 00:23:21.300 income, either by not increasing employment in the least or by actually reducing it further. 193 00:23:21.300 --> 00:23:26.420 Of course, if wage rates are already at or below the point of equilibrium, it would be 194 00:23:26.420 --> 00:23:32.100 an act not only of injustice but of sheer folly to reduce them further. 195 00:23:32.100 --> 00:23:37.740 But if, as it is enormously more plausible to assume, there is unemployment because wages 196 00:23:37.740 --> 00:23:43.580 are above the point of equilibrium, then reduction of wage rates to the point of equilibrium 197 00:23:43.580 --> 00:23:52.220 would both restore full employment and increase payrolls and the total income of the community. 198 00:23:52.220 --> 00:23:58.260 Fallacies of Aggregative Economics 199 00:23:58.260 --> 00:24:04.800 At the very beginning of chapter 19, Keynes professes to find a great invalid assumption 200 00:24:04.800 --> 00:24:10.240 at the heart of the classical theory that a decline in wage rates that have been above 201 00:24:10.240 --> 00:24:14.140 of the Equilibrium Point will restore employment. 202 00:24:14.140 --> 00:24:20.000 He states the classical argument of how this will happen in a particular industry. 203 00:24:20.000 --> 00:24:25.500 He wrongly states it by giving only a special case, not the general theory. 204 00:24:25.500 --> 00:24:26.780 Then he pauses. 205 00:24:26.780 --> 00:24:32.180 The classical theory, he says, has no way of extending its conclusions in respect of 206 00:24:32.180 --> 00:24:36.680 a particular industry to industry as a whole. 207 00:24:36.680 --> 00:24:44.920 except by a false analogy, p. 260. Therefore, it is wholly unable to answer the question 208 00:24:44.920 --> 00:24:52.920 what effect on employment a reduction in money wages will have, p. 260. Where's the catch? 209 00:24:52.920 --> 00:25:00.000 Keynes explains. The demand schedules for particular industries can only be constructed 210 00:25:00.000 --> 00:25:05.160 on some fixed assumption as to the nature of the demand and supply schedules of other 211 00:25:05.160 --> 00:25:09.160 and as to the amount of the aggregate effective demand. 212 00:25:09.160 --> 00:25:14.160 It is invalid, therefore, to transfer the argument to industry as a whole, 213 00:25:14.160 --> 00:25:19.160 unless we also transfer our assumption that the aggregate effective demand is fixed. 214 00:25:19.160 --> 00:25:24.160 Yet, this assumption reduces the argument to an ignoratio elenchi. 215 00:25:24.160 --> 00:25:30.160 For whilst no one would wish to deny the proposition that a reduction in money wages 216 00:25:30.160 --> 00:25:57.160 The question at issue is whether the reduction in money wages will or will not be accompanied by the same aggregate effective demand as measured before in money, or at any rate by an aggregate effective demand which is not reduced in full proportion to the reduction in money wages, i.e. which is somewhat greater measured in wages. 217 00:25:57.160 --> 00:26:05.160 i.e. which is somewhat greater measured in wage units, pages 259 through 260. 218 00:26:05.160 --> 00:26:14.160 Now, the only reason this tangled argument is worth noticing at all is that such a tremendous to-do has been made about it by the Keynesians, 219 00:26:14.160 --> 00:26:25.160 many of whom, indeed, think that this is the great flaw that Keynes has found in classical economics and the great contribution that he has made to economics. 220 00:26:25.160 --> 00:26:35.160 Aggregate or aggregative economics, they tell us, has displaced special or partial economics, or the economics of the firm. 221 00:26:35.160 --> 00:26:40.160 The macroscopic view has displaced the microscopic view. 222 00:26:40.160 --> 00:26:52.160 Keynes's whole argument on this point is so confused that the chief difficulty in answering it is the difficulty of discovering just what the argument is. 223 00:26:52.160 --> 00:26:58.560 Let us begin by looking again at the Keynesian term effective demand. We have 224 00:26:58.560 --> 00:27:03.400 seen that there is no need for the adjective. It implies that there are two 225 00:27:03.400 --> 00:27:09.280 kinds of demand, effective and ineffective. Ineffective demand could then 226 00:27:09.280 --> 00:27:14.880 only mean desire unaccompanied by monetary purchasing power, but economists 227 00:27:14.880 --> 00:27:20.800 have never called this demand. The term demand as used by economists has always 228 00:27:20.800 --> 00:27:23.920 These meant effective demand and nothing else. 229 00:27:23.920 --> 00:27:28.040 Inserting the adjective then adds nothing but confusion. 230 00:27:28.040 --> 00:27:31.520 How then about the term aggregate demand? 231 00:27:31.520 --> 00:27:36.480 Aggregate demand may be thought of in two senses, in terms of commodities or in terms 232 00:27:36.480 --> 00:27:37.760 of money. 233 00:27:37.760 --> 00:27:42.960 Abstracting from money, the aggregate demand for commodities is ultimately the aggregate 234 00:27:42.960 --> 00:27:45.160 supply of commodities. 235 00:27:45.160 --> 00:27:49.880 The supply of one commodity is the demand for another, and vice versa. 236 00:27:49.880 --> 00:27:56.000 We are back to Say's law. And Say's law is always true. In fact, it is a truism when 237 00:27:56.000 --> 00:28:03.100 we assume prices and production to be in equilibrium. Under such conditions, aggregate demand follows 238 00:28:03.100 --> 00:28:10.100 from aggregate supply. But Keynes and McKaynesians reject aggregative economics in the one sense 239 00:28:10.100 --> 00:28:15.620 in which it is both true and useful. If the aggregate demand is thought of in terms of 240 00:28:15.620 --> 00:28:35.620 If it is invalid, as Keynes contends, to argue from what happens in a particular industry to industry as a whole, then it is no less invalid to argue from what happens in a particular firm to what happens in a whole industry. 241 00:28:35.620 --> 00:28:44.620 But as a matter of fact, the invalidity exists only in Keynes's mind and is a result of the confusion of his own thinking. 242 00:28:44.620 --> 00:28:49.620 Let us begin with a single industry and see what happens. 243 00:28:49.620 --> 00:28:52.620 There are two main cases to be considered. 244 00:28:52.620 --> 00:28:59.620 The first is that in a closed domestic industry in which prices are too high because wage rates are too high, 245 00:28:59.620 --> 00:29:03.620 and therefore the market is contracted and there is unemployment, 246 00:29:03.620 --> 00:29:12.620 suppose wage rates are reduced enough to allow prices to be reduced enough to restore the market and restore full employment in that industry. 247 00:29:12.620 --> 00:29:26.620 There is then both more employment in that industry and more production, therefore more total wages and more gross income, therefore more purchasing power for the goods of other industries. 248 00:29:26.620 --> 00:29:39.620 So, restoring employment in that industry through cutting wage rates, i.e., cutting them just enough to make the re-employment possible, has not merely left aggregate effective demand where it was. 249 00:29:39.620 --> 00:30:02.580 Let us call this industry A. Suppose now that the same thing happens in industry B. Then 250 00:30:02.580 --> 00:30:09.020 the increase in the effective demand of industry B for the products of all other industries, 251 00:30:09.020 --> 00:30:15.260 Banking, A, must add still further to the aggregate effect of demand, and so also if 252 00:30:15.260 --> 00:30:24.300 we go on to consider industries C, D, E, N. Keynes has simply raised a pseudo-problem. 253 00:30:24.300 --> 00:30:30.280 The other case, which Keynes does not consider, would be in an open international industry, 254 00:30:30.280 --> 00:30:35.580 as for example, copper. Here the price would be fixed internationally, with allowance 255 00:30:35.580 --> 00:30:47.140 The American copper industry would not be able to lower the world price, proportionately, 256 00:30:47.140 --> 00:30:51.940 or perhaps even significantly, by lowering its own wages. 257 00:30:51.940 --> 00:30:57.120 But if there were unemployment in the American copper industry, it would be, assuming the 258 00:30:57.120 --> 00:31:03.300 mines themselves were not inferior to those elsewhere, because wage rates were too high. 259 00:31:03.300 --> 00:31:08.280 They would have to be cut to make employment and the reopening of the mines possible. 260 00:31:08.280 --> 00:31:14.300 If a cutting wages did, proportionately or more than proportionately, restore employment 261 00:31:14.300 --> 00:31:19.380 in the American copper industry, however, obviously the effect would be to increase 262 00:31:19.380 --> 00:31:25.020 the effective demand of the workers and owners in that industry for the products of other 263 00:31:25.020 --> 00:31:26.540 American industries. 264 00:31:26.540 --> 00:31:33.260 Again, Keynes's problem becomes a pseudo-problem, created merely by his own confusion, not 265 00:31:33.260 --> 00:31:38.540 Not by some gap or missing link in classical theory. 266 00:31:38.540 --> 00:31:42.300 The Attack on Flexible Wage Rates 267 00:31:42.300 --> 00:31:47.100 But the chapter on wages is crammed with confusions and fallacies. 268 00:31:47.100 --> 00:31:53.240 One of the most incredible is Keynes's argument against permitting flexibility of wage rates. 269 00:31:53.240 --> 00:31:58.200 This flies in the face of everything that has been learned about economics and the advantages 270 00:31:58.200 --> 00:32:02.660 of a free economy in the last two centuries. 271 00:32:02.660 --> 00:32:08.380 To suppose that a flexible wage policy is a right and proper adjunct of a system which 272 00:32:08.380 --> 00:32:12.500 on the whole is one of laissez-faire is the opposite of the truth. 273 00:32:12.500 --> 00:32:18.660 It is only in a highly authoritarian society where sudden substantial all-around changes 274 00:32:18.660 --> 00:32:23.860 could be decreed that a flexible wage policy could function with success. 275 00:32:23.860 --> 00:32:29.620 One can imagine it in operation in Italy, Germany or Russia, but not in France, the 276 00:32:29.620 --> 00:32:32.340 United States or Great Britain. 277 00:32:32.340 --> 00:32:41.340 page 269. Such a statement fairly takes one's breath away. Laissez-faire means non-adjustment. 278 00:32:41.340 --> 00:32:51.300 Laissez-faire means inflexibility. Authoritarianism means flexibility. Flexibility means rigidity. 279 00:32:51.300 --> 00:32:58.020 One thinks of George Orwell's 1984, where war is peace, ignorance is strength, and freedom 280 00:32:58.020 --> 00:33:04.740 as Slavery, nor is the implied approval in the foregoing quotation of totalitarian economic 281 00:33:04.740 --> 00:33:09.260 controls to be dismissed as a mere momentary fancy. 282 00:33:09.260 --> 00:33:15.060 In the preface that Keynes wrote in September 1936 to the German edition of his General 283 00:33:15.060 --> 00:33:19.860 Theory, he tried to sell his system to Nazi Germany by writing, 284 00:33:19.860 --> 00:33:25.560 The theory of aggregate production that is the goal of the following book can be much 285 00:33:25.560 --> 00:33:30.840 Much more easily applied to the conditions of a totalitarian state than the theory of 286 00:33:30.840 --> 00:33:35.480 the production and distribution of a given output turned out under the conditions of 287 00:33:35.480 --> 00:33:40.880 free competition and of a considerable degree of laissez-faire. 288 00:33:40.880 --> 00:33:47.160 Keynes in brief does not believe in a free market, does not believe in a free and flexible 289 00:33:47.160 --> 00:33:48.160 economy. 290 00:33:48.160 --> 00:33:54.560 In his eyes, the very virtues of a free economy become its vices. 291 00:33:54.560 --> 00:34:00.400 In a socialized community, where wage policy is settled by decree, there is no means of 292 00:34:00.400 --> 00:34:04.800 securing uniform wage reductions for every class of labor. 293 00:34:04.800 --> 00:34:10.860 The result can only be brought about by a series of gradual irregular changes, justifiable 294 00:34:10.860 --> 00:34:16.040 on no criterion of social justice or economic expediency. 295 00:34:16.040 --> 00:34:20.960 Page 267 If important classes are to have their remuneration 296 00:34:20.960 --> 00:34:43.680 Now, in a free, non-statist, non-socialist, non-totalitarian economy, wages do not and 297 00:34:43.680 --> 00:34:51.440 cannot adjust themselves and block, as a unit, by some neat fixed round uniform percentage. 298 00:34:51.440 --> 00:34:57.640 Nor do prices adjust themselves and block, by a uniform percentage or as a unit. 299 00:34:57.640 --> 00:35:02.120 Nor does production adjust itself and block or as a unit. 300 00:35:02.120 --> 00:35:08.160 In a free economy there are literally millions of different prices, millions of individual 301 00:35:08.160 --> 00:35:14.160 No wage rates, thousands of classes of wage rates, prices of hundreds of thousands of 302 00:35:14.160 --> 00:35:18.000 different commodities of different grades and at different points. 303 00:35:18.000 --> 00:35:23.880 In a free economy, there are millions of daily adjustments of one wage rate to another, of 304 00:35:23.880 --> 00:35:30.560 one price to another, of this wage rate to that price, of that price to this wage rate. 305 00:35:30.560 --> 00:35:36.680 There is constantly going on in a free economy, in brief, an almost infinite number of mutual 306 00:35:36.680 --> 00:35:43.680 Adjustments. This is how the economy works. This is how it keeps in dynamic equilibrium. 307 00:35:44.000 --> 00:35:50.600 This is how the balance of production is maintained among thousands of different goods and services 308 00:35:50.600 --> 00:35:56.320 to meet the changing needs and desires of millions of different consumers. 309 00:35:56.320 --> 00:36:02.440 But all this conflicts with the simplistic theories of Keynes. He thinks in aggregates 310 00:36:02.440 --> 00:36:09.800 and Averages and abstractions which are mental constructs that have lost touch with reality. 311 00:36:09.800 --> 00:36:16.980 He thinks, in short, in lumps. He deals only in his own lump concepts like average level 312 00:36:16.980 --> 00:36:24.380 of wages, average level of prices, aggregate demand, aggregate supply. Production itself 313 00:36:24.380 --> 00:36:31.580 is regarded as being divided only into a few big lumps called industries. Sometimes production 314 00:36:31.580 --> 00:36:36.100 and is even regarded as one big homogeneous lump. 315 00:36:36.100 --> 00:36:43.060 Keynes cannot understand a free economy precisely because it does not consist of such lumps. 316 00:36:43.060 --> 00:36:48.380 Having reduced everything to averages, he cannot understand any adjustment. 317 00:36:48.380 --> 00:36:53.580 He is even against any adjustment that is not a uniform adjustment of each of these 318 00:36:53.580 --> 00:36:57.840 averages blocks lumps to the other. 319 00:36:57.840 --> 00:37:04.080 And announcing such a free and flexible adjustment of individual prices and wage rates and outputs 320 00:37:04.080 --> 00:37:12.120 as unjust and inexpedient, Keynes does not seem to realize that he is by implication accepting 321 00:37:12.120 --> 00:37:18.240 as both economically and ethically right the previous interrelationship of prices and wage 322 00:37:18.240 --> 00:37:19.560 rates. 323 00:37:19.560 --> 00:37:27.200 If only a simultaneous and equal reduction of money wages in all industries, page 264, 324 00:37:27.200 --> 00:37:34.320 is to be tolerated if a series of gradual irregular changes in wages is justifiable 325 00:37:34.320 --> 00:37:42.240 on no criterion of social justice or economic expediency, page 267, then it must be because 326 00:37:42.240 --> 00:37:47.680 the previous relationship of wage rate to wage rate was precisely what it ought to have been. 327 00:37:48.480 --> 00:37:55.520 This is defending the status quo with a vengeance. In brief, Keynes forms a ridiculously 328 00:37:55.520 --> 00:38:00.880 The oversimplified theory of how a free enterprise economy ought to work. 329 00:38:00.880 --> 00:38:04.480 And because it does not work that way, he denounces it. 330 00:38:04.480 --> 00:38:10.000 Then he goes on to self-contradictory arguments to prove that reducing wage rates to bring 331 00:38:10.000 --> 00:38:16.400 them more into line with economic realities would reduce or violently disturb prices and 332 00:38:16.400 --> 00:38:21.680 production, and that the way to stabilize the economy is to refuse to allow free or 333 00:38:21.680 --> 00:38:25.040 piecemeal adjustments to take place. 334 00:38:25.040 --> 00:38:35.960 Page 269 Inflation vs. piecemeal adjustment Having decided that piecemeal adjustment of 335 00:38:35.960 --> 00:38:41.840 wage rates is unjust, Keynes decides that the best way to get a uniform reduction of 336 00:38:41.840 --> 00:38:48.100 wage rates is by a little deception, i.e. by inflating or debasing the money supply 337 00:38:48.100 --> 00:38:50.600 so as to raise prices. 338 00:38:50.600 --> 00:38:56.620 It appears that only a foolish person would prefer a flexible wage policy to a flexible 339 00:38:56.620 --> 00:39:04.800 money policy, page 268, and it can only be an unjust person who would prefer a flexible 340 00:39:04.800 --> 00:39:10.300 wage policy to a flexible money policy, page 268. 341 00:39:10.300 --> 00:39:18.260 In brief, a person must be both foolish and unjust, not to prefer inflation, i.e. debasement 342 00:39:18.260 --> 00:39:24.660 of the Monetary Unit to Adjustment of Individual Wage Rates to a Change in Prices or Conditions 343 00:39:24.660 --> 00:39:27.400 of Supply and Demand. 344 00:39:27.400 --> 00:39:33.100 And one of the advantages of a flexible money policy is that one can thereby systematically 345 00:39:33.100 --> 00:39:40.960 cheat creditors and so reduce the burden of debt, page 268, and, of course, having regard 346 00:39:40.960 --> 00:39:47.660 to the excessive burden of many types of debt, it can only be an inexperienced person, pages 347 00:39:47.660 --> 00:39:54.460 Sources 268 through 269, who would hesitate to fleece creditors by paying them off in 348 00:39:54.460 --> 00:39:59.860 a debased currency rather than make honest wage adjustments. 349 00:39:59.860 --> 00:40:05.940 Because Keynes with his lump aggregate thinking is opposed to restoring employment or equilibrium 350 00:40:05.940 --> 00:40:12.820 by small, gradual, piecemeal adjustments, he can only advocate sudden, overall violent 351 00:40:12.820 --> 00:40:13.820 adjustments. 352 00:40:13.820 --> 00:40:20.820 Either we must simultaneously, he argues, slash the wages of everybody by a flat uniform 353 00:40:20.820 --> 00:40:27.140 percentage in totalitarian fashion, or we must achieve the same result by inflating 354 00:40:27.140 --> 00:40:33.220 the money supply and raising the price level so that everybody's real wages are slashed 355 00:40:33.220 --> 00:40:35.460 by the same percentage. 356 00:40:35.460 --> 00:40:41.540 But the irony of this is that if only a small specific adjustment is needed in one sector 357 00:40:41.540 --> 00:40:47.900 of the Economy, the violent remedy that Keynes recommends will be quite ineffective. 358 00:40:47.900 --> 00:40:53.740 Let us assume a situation, for example, in which all wage rates are at equilibrium levels 359 00:40:53.740 --> 00:41:00.380 except wages in the building trades, which are 10% above equilibrium levels. 360 00:41:00.380 --> 00:41:05.860 There will then probably be unemployment, not only in the building trades themselves, 361 00:41:05.860 --> 00:41:12.900 But also, say, in the steel, cement, brick and lumber industries, because of the falling 362 00:41:12.900 --> 00:41:17.140 off in demand from the building trades. 363 00:41:17.140 --> 00:41:22.900 And there will be some unemployment in the television, camera, clothing and other trades 364 00:41:22.900 --> 00:41:29.220 because of the unemployment in the building trades and the consequent fall in retail business. 365 00:41:29.220 --> 00:41:35.820 The whole situation could be cured by a 10% cut in building wages alone, which would show 366 00:41:35.820 --> 00:41:42.980 show up in the average for all industry, say, as a cut of less than 1% in wage rates. 367 00:41:42.980 --> 00:41:49.220 But such a cut in building wages alone, in Keynesian theory, would be gradual and irregular 368 00:41:49.220 --> 00:41:52.820 and hence unjust and inexpedient. 369 00:41:52.820 --> 00:41:58.000 For Keynesian theory is not interested at all in particular adjustments. 370 00:41:58.000 --> 00:42:01.020 It sees them merely as disturbing factors. 371 00:42:01.020 --> 00:42:09.020 Therefore, Keynes's remedy would be a 10% debasement of the monetary unit to raise prices and living costs. 372 00:42:09.020 --> 00:42:17.020 In other words, he would wish to raise all prices 10% and cut everybody's real wage about 10%. 373 00:42:17.020 --> 00:42:23.020 But if he could succeed in doing this, the outcome would not cure the situation. 374 00:42:23.020 --> 00:42:30.020 For after all, these adjustments had been made, wages in the building trades would still be 10% too high 375 00:42:30.020 --> 00:42:39.020 When the temporary effects of the inflation had worked themselves out, the unemployment 376 00:42:39.020 --> 00:42:45.420 would return, because the same maladjustment within the wage-price structure would exist. 377 00:42:45.420 --> 00:42:52.520 I began the last paragraph by saying, if he could succeed in doing this, I meant, if he 378 00:42:52.520 --> 00:42:59.520 could succeed in his declared goal of cutting all real wage rates by a uniform 10 percent. 379 00:42:59.520 --> 00:43:04.920 But of course, this is not what inflation of the money supply would be likely to do. 380 00:43:04.920 --> 00:43:10.000 Unless the inflation were brought about chiefly by an increase in loans or subsidies to the 381 00:43:10.000 --> 00:43:16.800 construction industry itself, a more probable effect of a general monetary inflation would 382 00:43:16.800 --> 00:43:22.720 be to increase other wages and prices to bring them approximately abreast of, that is to 383 00:43:22.720 --> 00:43:28.920 say, more nearly in equilibrium with, wages and prices in the construction industry. 384 00:43:28.920 --> 00:43:34.140 This is what would happen, that is, if the Keynesian scheme worked as planned. 385 00:43:34.140 --> 00:43:36.940 But even if it did, what would this mean? 386 00:43:36.940 --> 00:43:43.660 If wages in the construction industry constitute 9% of all wages, then the Keynesian remedy, 387 00:43:43.660 --> 00:43:51.320 at its best, would involve raising 91% of all money wages 10% in order to avoid asking 388 00:43:51.320 --> 00:43:57.100 the receivers of 10% of money wages to accept a 10% cut. 389 00:43:57.100 --> 00:44:02.980 The Keynesian remedy, in short, is like changing the lock to avoid changing to the right key, 390 00:44:02.980 --> 00:44:08.260 or like adjusting the piano to the stool instead of the stool to the piano. 391 00:44:08.260 --> 00:44:13.760 And even so, it is unlikely to be more than temporarily successful. 392 00:44:13.760 --> 00:44:18.860 For new maladjustments and disequilibria would be almost certain to occur at the higher 393 00:44:18.860 --> 00:44:20.380 scale of price. 394 00:44:20.380 --> 00:44:26.340 These, under the Keynesian ground rules, would have to be corrected by still further inflation, 395 00:44:26.340 --> 00:44:29.060 or so ad infinitum. 396 00:44:29.060 --> 00:44:34.620 Always what is relevant to economic equilibrium and full employment is the relationship of 397 00:44:34.620 --> 00:44:40.660 particular wage rates to other wage rates, of particular prices to other prices, and 398 00:44:40.660 --> 00:44:44.260 of particular wages to particular prices. 399 00:44:44.260 --> 00:44:49.600 Never of averages to averages or of the wage level to the price level. 400 00:44:49.600 --> 00:44:55.100 Such mathematical averages or average levels do not exist in the real world. 401 00:44:55.100 --> 00:45:00.940 They are mental constructs, they are fictions, they conceal the real maladjustments in any 402 00:45:00.940 --> 00:45:06.220 given economic situation, or make them appear to cancel out. 403 00:45:06.220 --> 00:45:08.740 They do not really cancel out, however. 404 00:45:08.740 --> 00:45:14.620 If we use an index number of 100 to represent each equilibrium wage rate respectively in 405 00:45:14.620 --> 00:45:22.060 four different industries, then if industry A has a wage rate index of 80, industry B 406 00:45:22.060 --> 00:45:32.300 of 90, Industry C of 110 and Industry D of 120, their average index number would be 100. 407 00:45:32.300 --> 00:45:38.540 A Keynesian statistician relying on averages and aggregates would declare wages to be in 408 00:45:38.540 --> 00:45:45.020 equilibrium. Yet the wage rate of none of these four industries would be in equilibrium. 409 00:45:45.020 --> 00:45:50.860 The solution for a restoration of equilibrium and full employment would be a mutual and 410 00:45:50.860 --> 00:46:05.860 and multiple adjustment of particular wage rates. It would not be to raise the whole level to an index number of 120 so as not to hurt the feelings or disturb the prejudices of the union leaders in Industry D. 411 00:46:05.860 --> 00:46:19.860 It is important, finally, to point out that no real adjustments of wages or prices are ever made, upward or downward, in the flat uniform simultaneous way in which Keynes implies they are made or ought to be made. 412 00:46:19.860 --> 00:46:30.540 I present on pages 284 and 285 two charts prepared for a 1948 publication by the National Industrial 413 00:46:30.540 --> 00:46:32.380 Conference Board. 414 00:46:32.380 --> 00:46:38.900 These show the percentage changes in average hourly earnings of workers in 25 manufacturing 415 00:46:38.900 --> 00:46:42.260 industries over two different periods. 416 00:46:42.260 --> 00:46:47.500 Let us see first of all what happened in the earlier period when wages were falling. 417 00:46:47.500 --> 00:46:48.500 Chart 1. 418 00:46:48.500 --> 00:46:56.740 In the period from 1929 to 1932, there was an average decline in hourly earnings in all 419 00:46:56.740 --> 00:47:05.860 25 industries of 15.6%. But the decline was different in each of the 25 industries, ranging 420 00:47:05.860 --> 00:47:15.380 from only 2.1% in the least affected to 29% in the most affected. Turn to chart 2 and 421 00:47:15.380 --> 00:47:23.100 Let us see what happened in the longer period, from 1929 to 1939, when wages were dominantly 422 00:47:23.100 --> 00:47:31.480 rising. In this period, the average rise in all 25 industries was 22%, but the rise was 423 00:47:31.480 --> 00:47:40.740 different in each of the 25 industries, ranging from 3.6% in the least affected to 37.1% in 424 00:47:40.740 --> 00:47:47.280 It is worth making some additional observations about these charts. 425 00:47:47.280 --> 00:47:53.620 The range of changes in individual hourly earnings is even greater than the charts show. 426 00:47:53.620 --> 00:48:00.180 Each of the 25 solid lines on each chart is itself an average of hourly earnings in a 427 00:48:00.180 --> 00:48:06.220 particular industry, and conceals the range within that industry. 428 00:48:06.220 --> 00:48:11.000 Students will no doubt be quick to point out that the decline in hourly earnings between 429 00:48:11.000 --> 00:48:19.500 1929 and 1932 did not prevent, and they will no doubt contend that it even intensified, 430 00:48:19.500 --> 00:48:24.220 the decline in employment and output in that period. 431 00:48:24.220 --> 00:48:27.940 But several points may be made on the other side. 432 00:48:27.940 --> 00:48:33.740 First, there is nothing in the charts to show that the declines were greatest in the industries 433 00:48:33.740 --> 00:48:37.940 where they were most needed to restore employment and production. 434 00:48:37.940 --> 00:48:44.040 Secondly, changes in hourly earnings are likely to be much greater than changes in hourly 435 00:48:44.040 --> 00:48:45.620 wage rates. 436 00:48:45.620 --> 00:48:51.260 This is because when volume of business is low, overtime rates tend to disappear, and 437 00:48:51.260 --> 00:48:56.440 when volume of business is high, overtime rates tend to pile up. 438 00:48:56.440 --> 00:49:03.020 This gives an exaggerated impression both ways of changes in standard time wage rates. 439 00:49:03.020 --> 00:49:08.920 In fact, the hourly earnings may change widely in either direction without any change in 440 00:49:08.920 --> 00:49:11.020 standard wage rates. 441 00:49:11.020 --> 00:49:16.900 Thirdly, wage rates are not the only factor governing the volume of employment at any 442 00:49:16.900 --> 00:49:18.220 moment. 443 00:49:18.220 --> 00:49:24.100 Possibly from a purely hypothetical point of view, there is always some wage rate, however 444 00:49:24.100 --> 00:49:29.580 low, capable of assuring full employment under almost any condition. 445 00:49:29.580 --> 00:49:34.020 But in practice, supplementary adjustments will be necessary. 446 00:49:34.020 --> 00:49:40.540 In practice also, no adjustment can be instantaneous or sufficiently quick to assure full employment 447 00:49:40.540 --> 00:49:45.140 at all times, even with assumed flexible wage rates. 448 00:49:45.140 --> 00:49:52.980 Finally, the striking increase in hourly earnings between 1929 and 1939, which of course meant 449 00:49:52.980 --> 00:50:00.260 And an even more striking increase between 1932 and 1939 certainly did not wipe out 450 00:50:00.260 --> 00:50:03.420 unemployment or brain full recovery. 451 00:50:03.420 --> 00:50:08.520 On the contrary, the period was one of continued mass unemployment. 452 00:50:08.520 --> 00:50:15.100 In the ten years from 1931 to 1940, there was average unemployment of 10 million, or 453 00:50:15.100 --> 00:50:20.860 18.6% of the total working force. 454 00:50:20.860 --> 00:50:23.260 A Class Theory of Unemployment 455 00:50:23.260 --> 00:50:32.260 Keynes's preference for general monetary inflation over piecemeal wage and price adjustments 456 00:50:32.260 --> 00:50:35.660 is the result of still other major fallacies. 457 00:50:35.660 --> 00:50:41.300 He does not realize that the government cannot cheat creditors through inflation if the creditors 458 00:50:41.300 --> 00:50:45.500 have full advanced knowledge of the government's intentions. 459 00:50:45.500 --> 00:50:51.580 He does not realize that a planned inflation cannot be gradual or controlled, but will 460 00:50:51.580 --> 00:50:55.140 get out of hand the moment the plan is known. 461 00:50:55.140 --> 00:51:01.360 And he does not realize that when prices are falling because costs of production are falling, 462 00:51:01.360 --> 00:51:06.000 the price fall does not endanger profit margins or employment. 463 00:51:06.000 --> 00:51:09.980 And bound up with these is still another major fallacy. 464 00:51:09.980 --> 00:51:16.020 So Keynes has poured more derision on Ricardo than perhaps on any other economist. 465 00:51:16.020 --> 00:51:22.220 He has himself adopted a primitive, Ricardian cost-of-production theory of prices, according 466 00:51:22.220 --> 00:51:27.920 to which a nation can artificially hold up its price level by holding up its wage level 467 00:51:27.920 --> 00:51:33.080 p. 268 and 271. 468 00:51:33.080 --> 00:51:40.640 To explain this fallacy, after Menger, Jevons, Boehm-Bawerk, Wickstede, Knight, Mises, would 469 00:51:40.640 --> 00:51:42.640 take too long. 470 00:51:42.640 --> 00:51:47.520 It is better to refer the Keynesians to some good modern textbook. 471 00:51:47.520 --> 00:51:52.720 Nor shall I go at length into the reasons why unemployment is not caused, as Keynes 472 00:51:52.720 --> 00:51:57.860 Mises insists primarily by maladjustments between the rate of interest, the marginal 473 00:51:57.860 --> 00:52:01.260 efficiency of capital and investment. 474 00:52:01.260 --> 00:52:07.220 It is sufficient to point out not only that his theory of interest is completely false, 475 00:52:07.220 --> 00:52:12.100 but that interest rates are extremely fluid and flexible, that they are determined by 476 00:52:12.100 --> 00:52:18.760 full competition among lenders as well as borrowers, and are not held rigid by compulsory 477 00:52:18.760 --> 00:52:24.400 Collective Bargaining, Union Monopolies and Mass Picket Lines. 478 00:52:24.400 --> 00:52:30.360 It is more instructive to inquire why Keynes put forward this extremely complicated and 479 00:52:30.360 --> 00:52:32.400 implausible theory. 480 00:52:32.400 --> 00:52:37.640 And here we may have to answer that, citing as he did with the immemorial labor union 481 00:52:37.640 --> 00:52:43.680 insistence that employment is not caused by excessive wage rates, he had to come up with 482 00:52:43.680 --> 00:52:47.580 some theory as to what does cause it. 483 00:52:47.580 --> 00:52:52.540 And as he couldn't blame the labor union leaders, what more natural and politically 484 00:52:52.540 --> 00:52:58.260 convenient than to blame the moneylenders, the creditors and the rich? 485 00:52:58.260 --> 00:53:05.040 Like Marxism, this is a class theory of the business cycle, a class theory of unemployment. 486 00:53:05.040 --> 00:53:10.420 As in Marxism, the capitalists become the scapegoats, with the sole difference that 487 00:53:10.420 --> 00:53:15.100 the chief villains are the moneylenders rather than the employers. 488 00:53:15.100 --> 00:53:21.600 And that, I suspect, rather than any new discoveries of technical analysis, is the real secret 489 00:53:21.600 --> 00:53:25.060 of the tremendous vogue of the general theory. 490 00:53:25.060 --> 00:53:28.060 It is the 20th century's Das Kapital.