About Full Employment

Okay, so for this post lets talk about unemployment and full employment, and what conditions are required for full employment.

In my earlier post I argued that free market competition is a model that is largely outdated for organizing our economy, because the conditions of production have changed drastically compared to the conditions of early capitalism. There is very little competition between businesses in most marketplaces because all of the state of the art production techniques in the highly developed industries take advantage of economies of scale, large scale production and industrial factory techniques, and other kinds of high cost specialized equipment, tools, and machinery that make most other small scale competitors obsolete. Without that competition, we don't get many of the benefits of free markets. What we get instead are markets where a few of the biggest players get to set the rules, and everyone else either has to bend the knee and find some way to position themselves in the supply chain for the biggest companies, or end up getting pushed out of the market.

I'm sure you're familiar with this phenomenon. I haven't seen articles talking about it that much lately, but I'm sure you remember how throughout the 1990s and 2000s every couple of months there was another story about WalMart panic and the devastating effects WalMart had on the local economy whenever it opened up a store in a new area. Inevitably, all of the small business boutique stores in each of those towns that shared a market segment with WalMart would end up going out of business because they couldn't compete with WalMart's prices and the convenience of having everything under one roof.

The result is that all of the good paying jobs from those small businesses went away, and they were replaced with a smaller number of worse paying jobs. Another effect is that all of that money that used to be spent on local businesses and would end up staying in circulation locally to keep the economy healthy was now being spent at WalMart. Instead of those profits staying in the community and being reinvested locally, all of the profits from those stores ended up leaving the community and all that wealth ended up being transferred into the pockets of the owners and investors. The result was local economies that had some cheaper goods, but in exchange the health of the local economy plummeted. Jobs were lost, and the jobs that remained paid worse, so less of that money stayed in the local economy.

I'm repeating myself a little bit here, but there's an important clarification here that bears repeating. This kind of healthy competition is quickly becoming obsolete/unsustainable because of the changing conditions of production. But there is another market where all of the principles we know and love about free market competition still apply, and that's the labor market.

This tendency of capitalism to treat labor as a commodity that is bought and sold on the marketplace is essential to understanding full employment, what conditions are needed for full employment to exist, why there is so much unemployment in capitalist economies despite the fact that there is simultaneously a demand for unmet needs/wants, and this analysis even helps to understand the problems with welfare in capitalist economies.

So, what do we learn about the law of supply and demand in Econ 101? The basic idea is that supply and demand is an efficient mechanism for regulating price and rationing/efficiently allocating scare resources. As supply goes down, price goes up in order to make sure that those commodities/services end up going to the places where they are wanted/needed the most and are willing to pay a premium. If supply exceeds demand, you can lower your price to a point that more people are willing to pay so you can offload all of your supply and make as much profit as you can. The reason why markets are supposed to be good at allocating resources efficiently is because private businesses are seeking to maximize their profits, and in order to maximize those profits they are bound to this self-regulating mechanism of supply and demand, and as long as there is enough competition customers get the benefits of companies competing to offer the best goods and services at the best possible prices.

When you treat labor like a commodity that is bought and sold on the market by employers, all of the same rules apply. If the supply of labor on the market goes up, the price of labor goes down. If the supply goes down, the price of labor goes up.

So in this context, what does full employment mean, and what are the results of full employment? I'm going to use the standard economist's definition of full employment, which means that everyone who is seeking employment is employed to their satisfaction and in accordance with their skill level. That means that the disabled, the retired, and those who are not seeking work for one reason or another are not included in this number, because they don't represent competition on the labor market.

So what full employment means in the terms of the labor market and in terms of supply and demand is that the supply meets or exceed the demand for labor, which results in the price of labor (i.e. wages) going up. That's good, and that's exactly what we want to happen. One of the ideals of capitalism is that it's a meritocracy where people are able to earn pay based on the value they contribute, and having your labor be in demand means that you can negotiate wages that represent the full value contributed by your labor.

If there was full employment, you wouldn't even need a union to negotiate the best possible employment contract for yourself, because the terms of the negotiation are stacked in your favor. Your employer is sitting on an investment of tools, materials, and equipment that does them absolutely no good without hiring a team of employees to apply their labor and throw those investments into motion, bringing them to life and transforming them into new use values and exchange values that can then be sold at a higher price than the materials were bought for. In fact, that investment represents a major liability for your employer, because the longer they sit on capital investments without putting them to good use, the more those assets tend to depreciate and accrue costs, such as storage costs, the natural wear and tear of time and weather, or alternatively the upkeep cost of climate control technologies that can preserve your investments, and the general depreciation of equipment and technologies due to the constant march forward of technology inevitably making your current investments obsolete.

So not only does your employer not see any benefit from sitting on capital investments and not having them be put towards a good use, they actively lose money in the aggregate if they keep sitting on their investment and are motivated to put them into use as quickly as possible. In the case of full employment, you would be able to negotiate wages that represent the full value that your labor contributes to the process, with your employer only taking enough of a cut to cover operating expenses and investment costs, just because they would be happy to put that investment to use and only break even rather than sit on that investment and have its value depreciate. Hell, they may even be willing to over-pay you and take a loss just because the loss they would be taking on depreciation isn't as bad as the loss that they're taking in production and labor costs. And because we are talking about a scenario where full employment exists, your employer knows that they must comply with your salary/wage/commission demands, because if you walk away from that negotiation there is no one readily available to replace you in that role, because by definition everyone else in the job market is already employed to their satisfaction. You would need to compete with other employers for that labor pool and potentially poach an employee from another business, and that would mean offering them a better deal than they are currently working for, which again puts the employer in the exact same negotiating position.

So I agree completely with your analysis that full employment would be tremendously beneficial for the working class. It would mean those that work the hardest, and those that have the most valuable skills would get rewarded and be able to negotiate a fair wage that represents the value they contribute. These conditions would help tremendously in bringing us closer to the free market ideals of capitalism, where all agreements are made freely between free and equal participants all pursuing their own rational self-interests without outside interference, and having this pursuit work out for the great benefit of all.

However, if we take this analysis a step further, we see that capitalism could never maintain these idealistic conditions. For one, no business would ever choose to operate with zero profits for very long. They might stay in business long enough to offload their investments so that they can break even, and then abandon the market because there's no profit to be made. Other businesses might just declare bankruptcy under those conditions and become financially ruined. The end result is that more and more businesses end up pulling out of the marketplace, because there is no longer a profit incentive for them to stay in the market. The result is a reduced demand for labor and a loss of jobs. Or, in other words, organizing the labor market in this way will always result in the market creating some level of unemployment. Organizing our economy around the profit motive of private enterprises simply cannot support full employment, because the labor market will always self regulate and introduce unemployment/under-employment if the employment rate ever gets too high and causes the price of labor to become too expensive to support profit generation.

Again, this isn't the fault of evil capitalists who just want to see people lose their jobs and starve. This is a consequence of the way we organize our economy, not a problem caused by individual bad actors. And adding regulation or removing regulations can't fix that problem, because it's a problem that is created by the organizing principles of free markets and it is a problem that is created as a natural conclusion to the laws of supply and demand. The same exact laws that cause healthy markets to give you the best goods and services at the lowest possible prices do the exact same thing when applied to the labor market. It creates a working class that is in competition with each other, forced to provide the best possible service at the lowest possible price, or else they lose out to their competition.

In fact, when you start looking at the other side of the negotiating table, you end up seeing incredible incentives for businesses to try and maintain a permanent supply of unemployed population. After all, if I am a business, my primary motivation is to maximize my profits. This means I want to push all of my operating costs as low as they could possibly go. When it comes to the labor market, that means I want to pay as little in wages as humanly possible. And the threat of unemployment is an incredibly powerful negotiating tool that I can use to depress the average wages I need to offer. After all, why should I pay you a fair wage when there is someone on the streets, desperate and willing to work for scraps? As the labor market introduces more unemployment as demand for labor regulates itself, my negotiating power becomes less and less tied to the value that I am able to provide, and instead my negotiating power becomes tied to the most desperate person who is able to replace me. If someone else is willing to do my job for scraps just to keep a meager roof over their head and some food on their plate, then I don't have any negotiating leverage to demand better wages that accurately represent the value I contribute.

A major part of what makes this leverage so effective is that capitalism has developed to a point where all of my means of survival are owned by private interests. I can't effectively opt out of these labor negotiations, because I am required to provide some kind of value to one of these private interests in order to gain access to the things I need to stay alive, like food and shelter. Labor negotiations can never be agreements that are freely made between equal parties, because of the inherently coercive power imbalance between the two sides of the negotiating table. For the vast majority of people, the freedom that capitalism provides is the freedom to choose between accepting whatever terms one of the business class is willing to offer us, or the freedom to starve.

However, what we concluded above is that in order to maximize profits, businesses want to keep and maintain a population of unemployed and desperate labor. To be a little macabre, if unemployment were literally a death sentence, then those people wouldn't stay in the unemployed population for very long. As the unemployed population starts dying off, the labor market would essentially start self-regulating back in the other direction, because the supply of labor is going down which means the price of labor would start going back up. This would be bad for profits, so it's in the best interests of societies that are organized around capitalist principles to have some kind of welfare program and unemployment benefits that are just generous enough to keep people alive, but just stingy enough to keep them looking for work. Understanding this motivation helps understand the history of social benefits in capitalist countries a lot better, and how they differ from the kinds of social spending we see in socialist countries.

In a capitalist country, welfare isn't designed to benefit the recipients. It's a tool used by the ruling class to manage the affairs of capitalists. It's a lever of control used to maintain that pool of unemployed labor so that the capitalist class can maximize their profits. This helps explain the contradiction we see in our history, where we see the recovery from the Great Depression being spurred on by some of the most successful social spending and social welfare programs ever introduced in this country, and even though our country was functionally "broke" due to the Great Depression, we mysteriously had vast funds for social spending on New Deal programs in addition to the massive cost of the war just a few years later. These programs, and the effective government stimulus in the form of war spending, were tremendously successful programs that played a huge part catapulting our country up from the Great Depression into the world's greatest economic super power. And yet when the economy is booming like it never was before, the political class is suddenly telling people that we don't have the money for all of this social spending, that it's a drain on the budget, and that we need to be fiscally responsible and cut back on all of this waste.

Of course it's ridiculous to believe that all of this social spending that we could afford during the Great Depression, spending which had tremendous returns on investment and catapulted our economy to record heights, was suddenly unsustainable and wasteful in the 70s and 80s when our country was richer than it ever was. But when you understand the role of welfare, public sector employment, and unemployment benefits as a lever of control used by the political class to manage the labor market on behalf of the capitalist class, this history and this rhetoric begins to make a lot more sense. We could afford social spending in the Great Depression because if the unemployed population started dying off, the remainder that survived could use the resulting scarcity of labor to negotiate for better wages. Also, people tend to develop revolutionary feelings if you just let them die off while you do nothing, so there was also the fear that as the population became more desperate and unable to endure the conditions of the Great Depression, people would start organizing in large enough numbers and attempt a revolution to emulate the newly created USSR. And that wouldn't be very good for the business class or the political class.

And then we also see that in the 70s and 80s when the economy is booming and unemployment is low, wages are rising as a result. The push for welfare reform and privatization of public industries isn't about "balancing the budget" or "cutting down on waste" or whatever other political rhetoric was being bandied about. It was about throwing people back into the job seeking population, creating more desperation and urgency in order to help push wages back down again.

And it has worked. If you look at a graph of wages vs. worker productivity in America, you can see a graph where wages kept rising along side productivity up until the 70s. Ever since the mid 70s, wages have either remained stagnant or gone down on average, even though average worker productivity has steadily increased over that same time period.

So social spending in a capitalist system is never going to work for the people who receive those benefits, because they are rarely designed with serving the interests of the people in mind. Our government is a capitalist government, and our social spending programs are designed with serving the interests of the capitalist class in mind.

It's true that when we start talking about welfare programs, public industry and federal jobs programs, and unemployment benefits, we're no longer talking about "pure, unregulated free market capitalism." But free market capitalism creates unemployment because of the way that the labor market regulates itself, and the free market doesn't have a good answer to this problem other than "let them die if they can't find work." There is always going to need to be some kind of intervention and regulation in order to solve this market failure.

When us socialists say things like "an injury to one of us is an injury to all of us," this is the kind of stuff they are talking about. It's not some kind of moralistic, feel good unity message. It's an organizing principle that comes out of this kind of analysis, from looking at the way that we organize society in a deeply critical and scientific way.

Of course it is possible to still stake out some kind of competitive edge in this system. It's possible to earn a decent wage by learning a skill that is in high demand and in low supply. But we see here again that the free market will regulate itself. More people will seek out the same training that you did until that market also becomes saturated and wages start getting more and more depressed. Sometimes, this process of devaluing your labor might take a generation, and you won't see the effects until your kids or grandkids start joining the workforce. Sometimes, it happens all at once when we have market crashes, market failures, recessions, depressions, and the like where entire industries are devastated over night.

And again, some of this is a necessary part of organizing scarce resources and scarce labor using competition. Capitalism isn't necessarily bad because not everyone gets to be a winner, and some people lose their jobs or their wages and need to learn new skills to look for other work. Part of that is just the pains of advancing society. I don't want to artificially keep all the horseshoe makers and horse and buggy operators in business after we've all moved on to automobiles just so that they don't have to learn a new skillset. Living in a society with scarcity means not everyone gets to have what they want, and not everyone gets to do the job that they want. That's not a problem with capitalism, that's a problem that is created by the material conditions of our society and the level of advancement we have to work with.

However, even here we run into contradictions between modern conditions and capitalism. Capitalism is an economic mode of production that was designed with the conditions of the 18th century in mind. Capitalism is able to rationally allocate scarce resources in those conditions because markets leverage scarcity against demand in order to generate profits. However, we live in very different conditions compared to the 18th century. Most of the things we have demand for aren't scarce, or don't need to be scarce. But since capitalism leaves the organization of our economy up to private enterprises, and those enterprises leverage scarcity to create profits, we see as a result all kinds of market failures and artificial scarcities created by these private enterprises in order to keep their profits high. We see a lot of our manufacturing moving away from producing durable goods and instead creating "innovations of the free market" like planned obsolescence and disposable single use products. Because if you have a durable product that you only have to sell to someone once you eventually run out of demand, but if you have a product that needs to be replaced when it breaks you have a market that keeps generating new demand, albeit in a hugely wasteful and inefficient way.

You have an artificial scarcity in the housing market. We have a housing market where millions are homeless despite the fact that there are tens of millions of properties that are just being held vacant by large property investors and speculators, because holding those homes vacant behind a large price tag that the housing market is unable to bear is more profitable than selling the house at a price the market will bear, because the demand for housing is an inelastic demand due to the fact that shelter is needed to stay alive, and that inelastic demand makes the housing market ripe for price gouging. And if the result is that a growing portion of the population is priced out of home ownership and need to resort to rental agreements at properties that are often owned by the same property management companies, those companies see that as a win-win. They get to hold onto their investment, and the renter becomes a constant source of income while receiving zero equity in the property in return.

No rational agreement made between equal parties would ever result in people paying the insane mark-ups on rent that landlords charge their tenants. The only way that agreement can be maintained is by leveraging the huge power imbalance between the two side of the negotiation. A power imbalance created by the fact that one party is able to act as a gatekeeper between the general population and their access to the shelter they need to live, and the fact that the other party to the agreement will suffer greatly if they don't manage find shelter.

Again, we don't need an economic system that was designed with solving the problems of scarcity in mind to deal with the problems of the modern economy. Our problem in the modern day isn't scarcity, it's agency. When confronted with being on the precipice of the post-scarcity world that we are so close to being able to realize, capitalism breaks down and actively sabotages that progress and holds our society back. Any rational society would be ecstatic that we now have the technology to automate some of the most tedious, monotonous, and unfulfilling jobs on the market. Automation should be a blessing, that frees up our human potential from soul sucking and pointless busy work so that we have the agency to devote our energy towards more worthwhile and more fulfilling pursuits. Art, music, the pursuit of knowledge, the inventive nature of the human spirit, doing something that leaves a mark on the world and will make you remembered fondly by future generations, these are the things that humans are passionate about and would be free to pursue if their needs weren't locked away behind private enterprises who only value their life so long as it can be used to make them profit. Instead, capitalism causes us to fear automation, because if your job is replaced by a robot your life suddenly becomes worthless because you aren't needed by the people who own your means of survival.

In a rational society, replacing labor with automation so that we can meet all of our needs with less work should mean that we are all working less to have our needs met, and we have more time that is free for us to choose what to do with. Under capitalism, automation means millions of people losing their jobs because you're in competition with the robot who took your job, and now you have to compete for a new job which helps to depress the wages for everyone else.

Capitalism simply isn't a rational way of organizing our society and our economy. We need new organizational principles designed with the 21st century economy in mind.