The statements in this post apply particularly to the economic predicament of the 1970’s and 80’s, which may recur under the pressure of modern problems. They do not necessarily hold true for every form of economic malaise; for instance, they would have been inaccurate for the Great Depression of the 1930’s.
In another response to unemployment, money is provided to employ people by the government borrowing or printing additional money to provide, for extra people, money wages at existing wage levels.
The borrowing puts more pressure on the depleted supply of loanable funds; the printing causes aggregate income to rise faster than net throughput, increasing the inflation rate. Both measures worsen ratio distortion in favour of the aggregate income channel.
Consequent on this there is downward pressure on throughput and upward pressure on money prices. So real wages fall leading to upward pressure on money wages, which worsens its cause and acts against any reduction in unemployment initially achieved.
Another scheme is to provide subsidies to lower the price and increase sales of goods in hopes of maintaining or increasing employment in making the goods. This is, in a different guise, effectively the same as the previous scheme; money is borrowed or printed to maintain money wages at a level and for a proportion of the work force that could not otherwise be achieved. Its achievement is short-lived because the consequences are the same as in the case of direct temporary job creation through increasing the money supply on the side of wages, that is, increasing the proportion of money flowing through the wages channel. The subsidy policy works against its own purpose.
A nation practising these schemes is, of course, disadvantaged in trade with countries not doing so. This makes a further contribution to the job-eliminating, counter-intentional effects of these schemes in the countries which practice them, though there may be a gain of jobs in other countries so the human race as a whole is not necessarily disadvantaged, which is what matters.
Schemes more likely actually to create jobs would entail holding the proportion of money flowing through the wages channel constant, and sharing the money round more workers by reducing money wages. This has been set forth elsewhere, as has the more practical idea of letting the proportion of money flowing through the wages channel fall by freezing money wages and allowing the natural rise in money quantity to reduce that proportion.
The theory behind the current schemes is that if greatly increased money is paid to the unemployed, either for doing nothing or engaging in activity that in itself contributes nothing to the flow of goods and services in the economy (as J.M.Keynes suggested, setting the unemployed to work digging up money buried in disused mines), then the extra money in people’s pockets will contribute so much extra to consumer demand as to stimulate enough additional structuring of goods and services to maintain the purchasing power of those working and employ all those not working at comparable real wages.
This argument has been discussed in other posts. The theory was valid for the Great Depression, but the problems in more recent times have been different.
Posts in this Series
- Review of 1988 edition of Economics for a Round Earth
- Ends and Means
- Evolution Not Revolution
- Notes on Evolution Not Revolution
- Concepts and Terms – What is ‘wealth’?
- The Throughput Chain
- The Derivatives of Wealth
- Global Inequalities in Wealth
- Economic Growth Redefined
- Misconceptions in Practice
- Borrowing to Invest to Get Rich
- Environment versus Economic Progress
- Digression: Pollution Red Herrings
- Digression: Depletion and Inflation
- Value Inflation – the Trigger, not the Bullet
- Living Standard and Quality of Life
- Digression: Resource Consumption, Jobs, and Hands Off
- When the Boom comes
- The Effect of People’s Expectations
- Hard Work – Virtue or Vice?
- Who needs the Snail Darter?
- More Dollars for Conservation?
- Non-renewable Resources – Leave Them in the Ground?
- Digression: Fast Breeder Nuclear Fission Reactors
- Minerals in National Parks – Leave Them in the Ground?
- Population and Wealth
- Left, Right and The Environment
- Digression: “So Long As We Profit, Costs Elsewhere Aren’t Our Problem”?
- Limits to Growth?
- Solar Energy – a Special Case
- The Solar-Powered Car
- Money Supply, Throughput and Inflation
- Real and Money Wages: Living Standards
- Digression: Caution about “Increases” and “Decreases”
- The Idea of Proportionate Flows Applied to Wages: the Great Depression
- Deficit Financing
- The Optimum Proportionate Flow Condition
- Digression: Thrift versus Spendthrift
- Digression: the Private Motor Car – a Basic Necessity?
- The Idea of Proportionate Flows Applied to Wages – the Stagflation of the 1970’s and 80’s
- Excessive Wages Can Cost Jobs
- Fight Unemployment or Inflation First?
- Digression: Work and Jobs
- Other “Job Creation” Schemes
- Visual and Noise Pollution
- Digression: Renewal and Recycling of Resources; Wages and Jobs
- Ratio Distortion and Consumption
- Aggregate Demand – Components and Internal Ratio
- The Slave Economy
- Employment and the Steady State
- Consumer-Led Recovery
- Interest Rates and Ratio Distortion
- Demographic Trends and Living Standards
- Digression: Bad Economics Good for Conservation?
- Coping with Aging Populations
- Stabilising the Human Population
- Costs – What Really Costs Us and What Doesn’t?
- Digression: Other Comments on Statements in UN Report
- Discussion of Costs Resumed
- Budget Balancing Methods – Cost or Gain?
- Digression: Government Expenditure – Government Employees
- Expenditure on Weapons