A Theory of Full Employment

Nancy Brenner-Golomb

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781351315708
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

In A Theory of Full Employment, Y. S. Brenner reviews the current drift toward a society he finds neither economically expedient nor morally attractive, and N. Brenner-Golomb discusses the risks involved for science and society in the newfangled sophism hiding behind post-modern ideas and "political correctness." Both authors emphasize the need to revive the public's political engagement and revise economic theory to restore to society the humane perspective that inspired the welfare state. They contend that if people will abandon outworn habits of thought, consider alternatives, and renew their political engagement, they may find useful employment for all who are able and willing to work and end the fear of destitution. Although scientists' philosophical backgrounds seldom influence their answers, they do determine their questions, and the final outcome can depend on this. Neoclassical economists are ill equipped to ask questions about the long-term dynamic processes of our complex economic reality. They leave out of their models variables not easily quantified and prefer mathematical precision to the study of the intricacy of life. Paul Samuelson, Robert Solow, and others have tried to overcome this by grouping self-adjusting elements into "proxy" variables, thus synthesizing neoclassical and Keynesian ideas. But most of today's critics of the ruling dogma go largely unheard. This volume is intended to convince professional economists who study the economic system as a whole to reexamine some of the assumptions behind reigning economic theories. A second objective is to explain to the general public why currently fashionable policies cannot solve massive long-term unemployment. Finally, it shows that if political engagement is revived, we may escape the economic morass and moral wasteland into which, the fashionable policies have been leading us since the 1970s. This book will appeal to economists, politicians, sociologists, and a wider public concerned about today's economic malaise.

1

Introduction

For more than a thousand years the world of the Almagest ruled supreme. Ptolemy’s perception of a finite world contained in the sphere of the fixed stars, with the earth stationary at its center, and the sun and other heavenly bodies revolving about it in their orbits like “jewels in their fixed mountings,” remained unshaken. In spite of the continual need to modify this perception of the universe to fit the calendar it was not abandoned. It seemed self-evident and was confirmed by the Holy Scriptures. The earth was stationary in the center of the universe. Apples landed beneath their trees, not way behind them as they would have done if the earth was moving; and there was no perpetual storm constantly blowing from the east. It made no difference that people saw that objects falling from the top of the mast of moving ship landed at the foot of the mast on deck and not in the ship’s wake. Such is the power of “received beliefs.” The most ingenious ideas were advanced to modify Ptolemy’s model, but the alternative, a rotating earth revolving around the sun, was plainly too far-fetched to be considered.

When early in the 16th century Copernicus dared to suggest that the sun and not the earth is at the center of the solar system, his hypothesis was suppressed for thirty years and published only a year after his death. When Galileo made Copernicus’s heliocentric theory plausible he was banned by the Church authorities and made to recant and placed under house arrest for the last years of his life. One could improve and supplement the Ptolemaic system, not challenge its essential “truth.”

Like the astronomers of old who kept on “improving” the Ptolemaic system, Paul Samuelson, Robert Solow and others tried to bring the economic orthodoxy closer to reality. Ingeniously they lumped together indigenous self-adjusting elements into proxy variables, such as “real national income per head” or “capital-labour ratio,” and made them part of formulae for predicting the effects of exogenous factors on these fictitious variables representing the equilibrating economic system. Sir John Hicks transformed Keynes’s critique into a “special case” of sticky wages which originate outside the economic order and do not form an inherent part of it. Dissent from the economics mainstream dogma was either internalized or marginalized by the establishment. Arthur Cecil Pigou, in derision, called Keynes “a new Galileo” because he denied the validity of some major tenets of the ruling doctrine. More recent critics are either not published at all or published in journals and books which are seldom read by anyone but the converted.

The point is that while scientists’ philosophical background seldom influences their answers it does determine their questions, and the final outcome can depend on this. Economists educated in the neoclassical mechanistic paradigm are ill equipped to ask questions about the organic long-term dynamic process of our complex economic life. To obtain rigor by quantification they leave out of their models the so-called exogenous variables. They admit that such variables as technological innovation, changes in social conduct, the emancipation of women, the increasing alertness to environmental hazards, may influence the economic system, but they pretend that these factors are not themselves also influenced by the economic system. They assume a one-way traffic and ignore that most of the forces labelled exogenous do not develop in an economic vacuum. They simply disregard the mutual influence of social and economic factors by introducing unrealistic assumptions such as “ceteris paribus.” These assumptions may be expedient for the prediction of short-run microeconomic processes, but are a travesty where long-term macroeconomic processes are concerned. They transform Economics into scholastics—calculating how many angels can simultaneously dance on the point of one pin.

Professor Milton Friedman tells us that he is less concerned whether an economic theory is true or not than whether or not his recommendations obtain the expected results. There is of course nothing wrong with pragmatic predictions, but they are poor substitute for fundamental science. Donald McCloskey believes that economics and other sciences must be read as rhetoric. Pragmatic decisions and rhetoric are important because they are politically effective, but expediency is the hallmark of the bureaucrat, not of the scientist. The scientist’s hallmark is the search for truth.

In his Nobel Lecture Professor Friedman claimed that there is little difference between economics and the natural sciences because “in both there is no certain substantive knowledge.” He is wrong; there is a fundamental difference. Individuals and entire societies learn from experience: molecules do not. The reason why neoclassical economics makes proselytes is therefore not its superior scientific status but the illusion of objectivity it conveys. It answers scientists’ deep-rooted urge to obtain precision by quantification. But as Ray Marshall, the US Secretary of Labour in the Carter Administration, once said: “it is better to be approximately right than rigorously wrong.”

There may be different perceptions of the universe and various ways of explaining how it functions, but the universe is “given” while social institutions and individuals’ modes of conduct are transient. They are the historical product of societies. Man cannot change the fact that apples fall down and not up, but by formulating a law of gravity he can calculate the required initial velocity for sending a rocket to the moon. Yet man’s reaching the moon does not invalidate gravitation. But institutional changes can make nonsense of the behavioral assumptions upon which our economic theories are founded. The notion of a rational utility-maximizing individual is absurd in a Feudal context, or in an environment in which greed constitutes a mortal sin unless utility includes the expectation of reward in a life hereafter.

Unlike neoclassical economics, modern science recognizes the two-way traffic between disciplines. Classical physics never produced a comprehensive theory of matter. It described the behavior of mechanisms taking some material constants (such as density, elasticity etc.) as given. But with the knowledge gained in chemistry many questions, like why copper melts at 1083 centigrade, which were not discussed in classical physics, could be answered. This does not mean that the laws of classical physics were overthrown by physical chemistry. But it does show the limitations of earlier classical theories. It is the same with economics; until its reciprocal relationship with other social sciences is established it will remain debilitated. It must sweep some of the most important questions under the carpet. It must proclaim unemployment voluntary or define it into obscurity. Professor Friedman does this by introducing the term natural unemployment. This he defines as the level of unemployment “that would be ground out by the Walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of labour and commodity markets, including market imperfections, stochastic variability in demands and supplies, the cost of gathering information about job vacancies and labour availabilities, the cost of mobility and so on.” In other words, natural unemployment is all the unemployment which equilibrium economics cannot account for because its sources impinge upon the neoclassical system from outside. Like Pontius Pilatus, neoclassical economics washes the curse of unemployment from its hands, creating the impression that mankind was on earth to serve the economy and not economic science to serve the needs of man.

Similarly mainstream economic theory cannot reconcile short-term with long-run expectations when they run in opposite directions, nor solve the problems which arise when private and public interests are in conflict. Neoclassical economics either ignores such questions or denies their actuality. The one it declares none of its business because “proper economics” is only concerned with short term problems; the other it proclaims solved because an “invisible hand” leads people pursuing their own interest to promote that of society more effectively than when they intend to do so. In essence, therefore, neoclassical economics endows rationality with a short-run individualistic subjective value-laden meaning which makes economic theory scientifically untenable. It presents laws of limited validity in a manner which gives the impression that they are of universal applicability—as if the adding up of micro events produces a true reflection of macro reality. This is the same as concluding that our earth is flat from the observation that the oceans are not drained of water, and liquids flow off uneven surfaces.

It is perfectly rational for a profit-maximizing entrepreneur to expand production when demand for his produce is increasing. Should his competitors be doing the same the combined output may exceed demand and his profit expectations will be thwarted. This is an information problem which can perhaps be solved. But what when the maximizing entrepreneur experiences a fall in demand? Competition will make it rational for him to reduce prices if he can, and if the business rivals do the same, to scale down his volume of production. In fact, given a competitive market, he is left with no other alternative and his competitors are forced to do the same. But scaling down the volume of output implies laying off labour. With this the problem shifts from the micro to the macro level. The question becomes whether the income effect of falling prices, or lower interest rates, and perhaps the demand for labour to produce new cost-reducing equipment, is sufficiently powerful to make good the diminution in consumers’ demand. If it is powerful enough then before long surplus stocks will be depleted and the higher real wages of those who are still employed will usher in recovery. But what if the loss in incomes caused by unemployment is larger than the gain in real earnings due to the lower prices? Then the entrepreneur is facing a dilemma because in the long run the revival of his profits requires an upturn in employment. In the short run, individually in a competitive market, he has no alternative but to dismiss redundant labour, but terminating the depression demands overall employment to be sustained. In other words, contingent necessity imposes on the individual producer the need to act contrary to his best advantage in the long-run.

This contradiction between what is rational and indeed unavoidable for an individual entrepreneur, and what is rational from a wider and long-term point of view, is by no means hypothetical. It was the reality of the 1930s when neither poor wages nor low interest rates led to a restoration of entrepreneurs’ profit expectations, investment and recovery. It is true that when entrepreneurs believe the recession to be short—part of the familiar business cycle-low costs may well encourage them to invest even though the immediate returns may not be very profitable. But this will hardly happen once they lose faith in imminent revival. Once this faith is lost, only an independent agent, who is free from the short-term rationale of the market place, can offer solace. In Post-War Regulated Capitalism this role was assigned to the state. Not fettered by the rationality of the individual profit-maximizing entrepreneur, but guided by another kind of logic, the state became a corrective agent. Its task was to intervene where individual self-interest comes into conflict with the common good. What was not sufficiently recognized was that the state is also no free agent and that it functions in a dynamic cultural environment, that its policies reflect power structures. As Professor Gellner observed, an egalitarian society which incorporates everyone in a shared moral citizenship and high culture, without poverty, oppression or arbitrariness, and with perpetual economic and cognitive growth, is not inscribed into any historical plan. A stored surplus needs to be guarded and its distribution enforced and no principle of distribution is either self-validating or self-enforcing. Conflict is inevitable, and the victors have no interest in permitting a return match. Herein lies the root cause of political coercion.

In essence the utilitarian individualism underlying Neoclassical economics resembles a Newtonian system. Like particles individuals are endowed with some kind of self-centered materialistic gravitation and driven by competition to constant motion, while the entire system is held together by their relative positioning. This is a mechanistic and not an organic perception. It excludes all variables which are not subject to the self-adjusting mechanism ascribed to competition. Collective hazards, such as nuclear disaster, water and air pollution and the prospect of long-term mass unemployment, are seen as forces which originate outside the economic system whose control is assigned to the pragmatic, “exogenous,” intervention of the state. The multiplicity of these corrections, and the growth of a large state-controlled economic sector, which is not primarily informed by profit maximization, gave rise to many useful modifications in neoclassical models but the belief in the soundness of the conception as a whole persevered. Like Ptolemaic astronomers, neoclassical economists “corrected” the system but refused to examine its overall validity. They took and continue to take the results of institutional and social changes as data without asking in how far the economy itself precipitated them. They ignore the dynamics of socialization processes but calculate their volume and cost. Postulating that long-term massive unemployment or the proliferation of crime originate outside the “proper” economic system, they relegate the one to the progress of technology, trade union power, population accretion, or the legacy of the Welfare State, and the other to the realm of psychology and sociology. In most other modern sciences such a mechanistic “isolationist” approach is a stage long passed.

Sombart was of the opinion that the economic philosophy behind the Free Market is dominated by three principles: acquisition, competition and rationality. The purpose of all endeavors is acquisition, the means to this end competition, and the methods employed strictly rational. He believed that the spirit of acquisition seizes not only upon all phenomena within the economic realm but reaches over into the entire cultural sphere, including social relations, and tends to establish the supremacy of business interests over all other values. “Distinct from the purposes of its owner the capitalistic enterprise takes on a separate intelligence—it becomes the locus of economic rationality which is quite independent of the personality of the owner and the staff.” As a result of this the system imposes on society a purely utilitarian valuation of people, objects and events. The motives of entrepreneurs can be many: the desire for power, the craving for acclaim, the impulsion to serve the common good and the simple urge to action, but by virtue of an inner necessity they all become subordinate to profit-making, because without economic success these desires cannot be attained.

This is a fairly accurate description of pre-war Capitalism. Behind all this there was the constant fear of destitution: employers were afraid of being driven out of business and reduced to the ranks of the proletariat, and workers feared destitution and starvation. It can therefore be said that the dynamic element in old-style capitalism was a two-pronged mechanism of competition—competition between entrepreneurs for their respective shares of the market, and competition between employers and workers for their share in the fruits of production. Fearful of being driven out of business by more efficient competitors, entrepreneurs were inexorably driven to search for and introduce superior technological and organizational methods of production, and facing an increasingly well-organized and powerful labour force they were pressed to introduce improvements which could help them raise output per worker sufficiently to maintain the necessary profit to finance the innovations and to compensate them for the rising wages. Though it was not the exclusive driving force, this dual mechanism was not only the dynamic but also the progressive element in old-style capitalism—the element which increased mankind’s ascendancy over nature and gave it the power to produce the material affluence which the citizens of the technologically-advanced countries in a considerable measure still enjoy. But the fuel which kept this economic growth-producing mechanism functioning was fear. Take out fear and the entire mechanism falters. It should be obvious that it is not the intention of the authors of this book to recommend the reinstatement of this mechanism.

2

The New Feudalism: Managerial Oligarchy

The growing affluence in the first decades of the post-war era provided employers and the middle class with enough financial reserves not to be fearful of the worst, and gave workers the feeling that they were sufficiently protected by Labour Unions, social legislation, and their power at the ballot box not to be inordinately concerned about their future. Before long the “dual mechanism” driving force began to weaken; greed was taking the place of fear and complicity the place of solidarity. But greed is not like fear, it is a different kind of fuel, and when the ownership of means of production becomes divorced from their management it affects the economic mechanisms in another way.

The Free Market system allows individuals to find their places in society on the basis of competitive ability. At least in theory this means that the most able rise to the top and are therefore worthy of esteem. Consequently, unless most flagrant transgressions against the ruling moral code are brought to public knowledge, success becomes a symbol of distinction—of being good. This gradually shifts the emphasis in what is proper conduct away from an internalized moral code toward an externally imposed set of legal rules. The various Biblical dictates, which were transmitted from one generation to the next by the demeanor of elders in a moralizing setting and by oral admonitions and literature until they seemed to be “human nature” lose power. The “Thou shalt” and “Thou shalt not” reduce to “Thou shalt not be caught.”

At first sight this seems of little consequence for economic theory. Greed, well circumscribed by legal constraints, may appear to be just as good a fuel to keep competition going as fear did in the past. This is an illusion. The complexity of modern economy, and the degree of specialization which is associated with this, allows no part of the system to function in separation from most others. Without the performance of all tasks with care and on time the system grinds to a halt. But when the ownership of the most important business conglomerates is separated from their management, greed is less certain to keep the clockwork adequately functioning than fear because there is no reason why the satisfaction of owners’ “expectation of plenty” and managers’ personal aspirations must always fully coincide.

The old “Captains of Industry” were owner-managers. They operated with their own money, or with borrowed funds for which they staked their good name. Their wealth determined their position in the social hierarchy. It reflected what was taken to be evidence for their economic sagacity. The new “Captains” of large enterprises are managers whose personal wealth and attainment is less directly tied to their businesses profitability than that of the owner-managers. Shareholders, the owners of the enterprises, are of course interested in profit, but they have only indirect control over the businesses in which they hold their shares, and they compete in a quite different market from the managers’. More often than not managers’ positions are determined by their education (and the particular institution where they received it) and by their social background. They may or may not have economic acumen, but this is not the most decisive factor which determines their rewards. But their rewards, their salaries and perks, determine their position in the social hierarchy. Business success will enhance their prestige and earning capacity, but failure need not signal their ruin. Unlike the owner-managers, they can abandon a failing enterprise and become directors in another. Such managers form a new stratum of society which has more in common with a feudal estate than with a capitalist class. They exercise power over people, but do not hold this power by wealth but by virtue of position. This vests status with a new significance. Status becomes a rival to wealth in a competitive scramble for distinction.

Controlling large funds which are not their own, the members of this new élite are less careful than their forebears to avoid unnecessary costs when this can strengthen their personal prestige. Provided such expenditures can be correctly booked as business costs and if possible are tax-deductible they will be incurred regardless of whether or not they are really necessary for the business. Wealth continues to bestow numerous advantages on those who own it, and company profits remain an indispensable necessity, but the role of salaries and profits is reversed. Not current business profits but the height of his personal remuneration reflects the manager’s social status. This means that the new utility-maximizing “Captain of Industry” is no longer Adam Smith’s business-profit-seeking entrepreneur who is willy-nilly promoting efficiency, but an individual who constantly weighs his own against the enterprise’s best advantage. With this the concept utility, as it is conventionally applied in economics, becomes too narrow to reflect conflict between personal and corporation interests, and if it is extended to include craving for status it is too broad to sustain the causal mechanisms at the root of neoclassical theory. The narrow definition of utility no longer reflects economic reality, and a broader definition undermines the premiss that competition is a self-sustaining economic growth-promoting mechanism.

In the 1950s and 1960s top management was mainly recruited on the basis of the candidates’ prior scientific, technological, or otherwise professional capability. This was the Galbraithian technostructure. The more recent managerial oligarchy in most countries has risen from the ranks, inherited its positions, or received its education in schools of management which provide useful social contacts. Without going into the question whether or not such schools equip their graduates with much learning that is really functional for the efficient management o...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Table of Contents
• Introduction to the Second Edition
• Foreword to the 1996 Edition
• 1. Introduction
• 2. The New Feudalism: Managerial Oligarchy
• 3. The New Market Structure: Globalization
• 4. The New Significance of Services
• 5. The Failure of the Neoclassical Synthesis
• 6. The Distribution of National Income between Investment and Consumption
• 7. Overproduction, Underconsumption, and the Business Cycle
• 8. Distribution: Some Methodological Observations
• 9. Distribution of National Income between Strata of Society
• 10. Distribution between the Private and the Public Sector
• 11. The Problem of the “Social Welfare Function”
• 12. The Disintegration of Western Civilized Society
• 13. Truth and Expediency: Some Introductory Philosophical Observations
• 14. Truth and Expediency: Some Philosophical Observations Concerning Science
• 15. Truth and Expediency: Philosophical Observations Concerning the Humanities
• 16. The Political Dimension
• 17. Conclusions
• Glossary of Terms
• Literature Cited
• Index