I | II | III | IV | V 

                           Several Economic Theories


The steady substitution of capital for labor poses a problem for the long-term stability of the labor market. Business owners invest in “labor-saving” equipment to save the cost of labor and increase profits. Since this is the principal driving force behind increases in labor productivity, it is a questionable proposition to argue that increased prosperity for workers depends on maintaining high rates of productivity increase. No, some workers will benefit from greater profits followed by higher wages, but others will lose their jobs.

In the 19th century, it was believed that shorter work hours were a way to offset job loss from capital investment. If machines made it possible to produce more with less human labor, the number of people employed might remain stable if their average work hours were reduced. However much labor efficiency improved, there would always be a need for human workers, doing their work in less time than what was previously required, to tend the machines.

Henry Ford and others advanced the theory that even if industry became heavily mechanized, the economy needed consumers to buy the production. Without consumption by human beings, there would be no need for production. Without production, there would be no profits. Therefore, it was in the interest of business owners to see that business continued to employ people in adequate numbers and at adequate levels of wages. the economy also required that people have enough free time to desire and use the consumer products that were on the market. High employment, high wages, and reduced levels of work hours were the ticket to national prosperity.

This theory was put to the test when the Great Depression began. First there was a crash in the stock market. The paper wealth of investors in stocks declined precipitously, creating general anxiety. Then there was a run on the banks. Since banks typically lend out a multiple of their deposits, many banks could not pay depositors who wished to withdraw money from savings accounts. Some went out of business. The Federal Reserve Bank tried to help the situation by shrinking the money supply and tightening credit. This was precisely the wrong move. The economy needed more money and more spending at a time when consumer confidence had reached an all-time low.

When Franklin D. Roosevelt became President, existing strategies to fix the economy had failed. The weakness of the banking system was apparent. To bolster employment, the Hoover administration had encouraged employers to cut work hours. This approach, known as “work sharing”, also failed because the quantity of work did not increase. More people were simply sharing a same-sized pie. In a sense, this was “sharing the misery” . Since the crisis in confidence was immediate and complete, the economy did not have time to let the leisure and income which people enjoyed translate into increased consumer demand.

The Great Depression was therefore a problem of the business cycle rather than one arising from the long-term substitution of capital for labor. It was a problem of consumer and business confidence in which fear of the future kept people from spending. It was also primarily a financial crisis. In this environment, President Roosevelt had to improvise. He declared a bank holiday. He created federal deposit insurance. In a stirring speech, he declared that “the only thing we have to fear is fear itself”. If people lost their fear of the future and started spending again, the economy might revive.


  John Maynard Keynes

A significant innovation arising from Roosevelt’s “New Deal” was the idea that government could manage the business cycle through appropriate monetary and fiscal policies. By “monetary policy” is meant the Federal Reserve System’s management of credit and the money supply. Government has the power to create money. In its simplest instance, this means printing paper currency. However, increased money supply without an increased amount of goods and services brings inflation, or higher prices for the goods and services. The Federal Reserve System manages the supply of money with an eye to promoting stable economic growth. When banks extend credit for less worthy or profitable ventures, it tightens credit by raising the discount rate on funds loaned to banks and by its own transactions in financial markets. During recessions, on the other hand, it eases credit to encourage more borrowing and spending which will tend to increase employment and wages.

By “fiscal policy” is meant the federal government’s own spending. Before the New Deal, the federal government was content to spend money mainly on its traditional functions such as operating the courts, running the Post Office, and conducting wars. Roosevelt and his advisors realized, however, that if the American consumer was loathe to spend money on consumer products, the government could spend on public-works projects. It could spend for the sake of spending. The U.S. government would borrow the money and then spend it to provide economic stimulus. And so, the New Deal is associated with projects such as the Works Progress Administration (WPA), the Tennessee Valley Authority (TVA), and the National Recovery Administration (NRA).

John Maynard Keynes, a British economist, was author of “The General Theory of Employment, Interest, and Money”, published in 1936. When he came to Washington to advise the Roosevelt Administration, it caused quite a stir. Basically, Lord Keynes advocated increased government spending as a cure for the Great Depression. More spending without increased tax revenues would, of course, increase the national debt. However, Keynesian economists argued that budget deficits were defensible during low points in the business cycle because increased expenditures by the government would stimulate the economy and bring it more quickly out of a recession. Then, in times of prosperity, government could run budget surpluses and pay down the debt. Proper management of its fiscal policies required that government balance the budget over the entire business cycle, not in each year.

It should be understood, however, that the U.S. economy remained in a depressed state for ten years. Keynesian spending, while helpful, did not lend the Great Depression. What did the trick was America’s entry into World War II. The federal government borrowed heavily to finance this war. American consumers were meanwhile unable to purchase consumer products because of war-time shortages. After the war, consumers went on an enormous and prolonged buying spree.

At the same time, the federal government had made a permanent investment in war. It had created what President Eisenhower called “the military-industrial complex”. Without admitting it, politicians now waged wars for the purpose of maintaining employment as well as for “national defense”. We had found a new “product”, so to speak, which could be included in GNP. Wars were a component of our national prosperity.

Although Keynes’ name is associated with fiscal stimulus, that does not mean that this economist excluded other measures. According to Guardian columnist David Spencer, Keynes in a 1945 letter to T.S. Eliot “ suggested that unemployment could be lowered by the reduction in working time ... this was the ‘ultimate solution’ to the unemployment problem. Reducing work time not only extended the time during which workers could spend income and hence generate employment, but it also allowed jobs to be spread out more evenly across the available workforce, thereby reducing unemployment.”



Arthur Laffer and Supply-Side Economics

By the early 1970s, Keynesian economics seemed to have won the day. “We are all Keynesians,” President Nixon famously declared. The Reagan years, however, brought a new twist to the idea of running strategic budget deficits. This time the deficits would be created by tax cuts rather than increased government spending. The Kennedy administration had shown some positive results from cutting taxes.

Economist Arthur Laffer is credited with introducing “supply-side economics” during a luncheon in which he sketched its concepts on a paper napkin. The basic idea is that high rates of taxation discourage personal initiative and enterprise. If government lowers the tax rate, such initiative will be encouraged. Entrepreneurs of all sorts will be motivated to work harder to start and grow businesses. That, in turn, will result in more employment, more income, and greater tax revenues for the government. Laffer advanced the paradoxical proposition that the federal government could actually increase revenues by cutting the tax rates. Rate reductions in the upper tax brackets were deemed especially important since the most talented entrepreneurs apt to be in that category.

President Reagan did cut taxes significantly. The national economy was helped by this stimulus although Laffer’s promise of balancing the budget never materialized. Reagan’s budget director, David Stockman, resigned in protest over the high federal deficits. Those deficits continued during the administration of the first President Bush when the business cycle again turned down. A billionaire business man, Ross Perot, raised the issue of financial integrity. He founded the Reform Party, became its candidate for President, and won 19% of the vote in 1992. Bill Clinton won that election. In the eight years of his administration, the federal budget-deficit was gradually brought under control.

The election of George W. Bush as President in 2000 brought a revival of the supply-side scheme. The new President initiated a new round of tax cuts in the upper brackets. Meanwhile his administration conducted wars in Afghanistan and Iraq following the September 11, 2001 airplane attacks on the World Trade Center and the Pentagon. A surge of pork-barrel spending took place in the Republican-controlled Congress. Spurred both by tax cuts and increased spending, the federal budget had never been so out of control. Moreover, our national debt was now owed to foreign central banks rather than to U.S. citizens - “ourselves” as Franklin Roosevelt had once put it. The combination of high levels of government and personal debt and the loss of domestic production and jobs to outsourcing have created a potential economic crisis unprecedented in U.S. history.

E.F. Schumacher and Appropriate Technology

Another economist, German-born but British, developed a new perspective on the role of labor-saving machines in modern economies. “Fritz” Schumacher was the son of an economics professor at the University of Berlin, who left Germany during the Nazi years and became an economic advisor to Britain’s National Coal Board. He is best known as the father of appropriate technology whose concepts are expressed in the book, “Small is Beautiful.”

In the 1960s, Schumacher lived for awhile in South America. He was struck by the devastation wrought by modern capitalism as peasant farmers practicing small-scale agriculture were forced off their land to make way for plantation-style agriculture that produced for the export market. This surplus population migrated to the big cities where they lived in “shanty towns” on the outskirts of the city. Schumacher conceived the idea that developing countries were ill-advised to invest in large-scale projects that would increase industrial efficiency at the cost of increasing redundant labor.

The developing nations, he said, were poor in capital but rich in labor. Why not, then, use the available labor to maximum advantage even if this meant forgoing advanced technology? Perhaps a machine that was obsolete and priced accordingly would be a better deal for nations of the Third World than one exhibiting “state-of-the-art” technology. Economic planners would do well to look at the whole picture, not just at efficiency of production but also the utilization of labor.

Schumacher’s ideas found official favor in India. They also helped to inspire the anti-globalization movement. Opponents of free trade are wary of the capitalist emphasis upon improving global economic efficiency. Apart from increased transportation and energy costs, the free-trade system disrupts local economies. The Wal-Mart model of business, victorious in price-based competition, is destructive in terms of eliminating the small “ma-and-pa” stores that contribute to community life, exporting First World jobs to low-wage countries, and providing degraded wages and benefits to the remaining workers. Schumacher insisted that economics had to be viewed as a package with religion and other elements of a community’s culture.



The McCarthy-McGaughey Critique of the Long-Hours Policy

Eugene McCarthy and William McGaughey are coauthors of “Nonfinancial Economics: the Case for Shorter Hours of Work,” published in 1989. They started from the position that U.S. policymakers have rejected the proposal to reduce work hours. Compared with other industrial nations, the United States has become a bastion of opposition to this idea. Working hours in the United States have, in fact, been increasing. Academic “experts” and media shills for big business trumpet that fact as a sign of our workers’ greater industriousness and vitality compared with, say, French workers. The argument expressed in Nonfinancial Economics is that the product of all this effort counts for nothing. We have become a nation of smiling slaves.

In expressing his opposition to the shorter-workweek proposal, economist Milton Friedman wrote: “ The type of proposal you make ... was a very popular proposal in the 1930s during the Great Depression ... If you compare the total output of this country now to what it was in the 30s, it is clear that that was wrong then. I believe it is wrong now. Such a solution is a make work solution rather than a solution which opens up wider opportunities for everybody.” To that statement, McCarthy and McGaughey would respond, “It is not at all clear that what we have today is better than what we might have had if Americans had remained on the path of shorter hours. We believe that, indeed, the wrong choice was made then. But it is never too late to change course.”

In Nonfinancial Economics, McCarthy and McGaughey compared economic output today with that in previous times. They interpreted the shift from employment in goods-producing sectors such as agriculture, manufacturing, and mining into government, retail trade, and “services” as an indication of the deteriorating quality of production in real human terms. Proportionately fewer workers work to produce things useful and wanted by people. More work is to handle functions that have worked their way into the economy because someone is willing to fund them. Many of these functions are “necessary evils”. Economic growth in financial terms does not equate with an increased benefit for people.

Consider one type of production which could beneficially be avoided. The Great Depression of the 1930s was effectively ended when the United States entered World War II. Instead of automobiles, we began producing tanks and aircraft. Certainly, one can justify the decision of the U.S. Government to enter this war in terms of defeating the Axis powers. As an economic proposition, however, war leaves much to be desired. People will accept spending for this purpose not because it brings them happiness or comfort but because politicians say the wars are necessary. War is what McCarthy and McGaughey called an example of “economic waste”. If it were possible, one would have been better off in avoiding the whole experience.

War is not the only example of this type of “product” included in our tally of economic output. Nonfinancial Economics presents the following list of such products:

“1. Goods and services for which there is an insufficient demand are aggressively marketed.
2. Products that cannot be sold in the domestic market are exported to foreign countries.
3. National rivalries lead to war.
4. Products are used to exhibit status or social rank rather than to satisfy other, more substantial, human needs.
5. Government legally mandates unnecessary activities.
6. People are socially compelled to spend money in observance of commercial holidays.
7. The seller of a products decides what or how much of it the purchaser will buy.
8. Personal consumption is required to gain income.
9. The system of career development breeds incompetent personnel.
10. Goods and services that used to be free come to be sold commercially.
11. Considerable economic resources are thrown into self-defeating routines of ruin and repair.”

Nonfinancial Economics includes a discussion of each category. “Routines of ruin and repair”, for instance, would describe the self-liquidating cycle of crime and punishment. For various reasons - some of which are related to our shortage of leisure and well-paying jobs - U.S. society suffers from high levels of crime. We incarcerate more people per capita than any other country. Such an expensive apparatus related to criminal justice must be maintained to keep society safe, we are told. However, if the crime did not exist, we would not choose to spend our money on such things. No crime and no punishment would be better than what we have now. However, GNP would also be much lower.

The category of “goods and services that used to be free” refers primarily to services that the mother of a family provides without charge when she stays at home to care for children. She cleaned the house, did laundry, cooked and served meals, and babysat small children. In the past half century, there has been a huge increase in the employment rate of married women. Now, as such women are forced to seek employment outside the home, the family must pay for day-care services, for meals eaten at restaurants, etc. While these commercial services are undeniably valuable in human terms, the gain in GNP related to them does not denote a change in the quantity of service but merely reflects the switch from a provider who did not charge for the service to one which does. Dollars have been attached to the service, bringing corresponding growth in GNP.

So many of the “growth industries” in the U.S. economy are “wasteful” in nature. While the rapidly expanding gambling industry does provide a certain amount of fun and excitement, its service also consistently delivers financial misery. The medical industry is much more expensive than it used to be. With an unholy alliance between doctors and drug companies, American consumers are being forced by the seller to take many expensive medications. The Iraq war shows that war remains a significant government expenditure. With its exploding cost, higher education may also be an area of waste. Young people do not go to college for the joy of learning but because of parental social-climbing ambitions and the students’ fear that they will be ineligible for high-paying jobs of the future if they do not now pay an enormous sum of money to the educators.

What would U.S. society become if, fifty or sixty years ago, its policymakers had instead chosen leisure? Labor productivity might have continued to improve. Employment in productive industries such as manufacturing and agriculture might have been higher. With respect to the nature of output, it’s difficult to say. One can suppose that, with more free time, working people might have provided certain services for themselves which they presently purchase from professionals. One might assume that more well-paying jobs might have meant less crime and so our criminal-justice apparatus might have been smaller. Would the “get-rich-quick” appeal of gambling have been so strong if people had more free time? Who knows? Would people in a leisure-oriented society develop new meaningful activities that contribute to human knowledge and culture; or would they, as the cynics suggest, lose their sense of direction and become personally dissipated?

However, past decisions cannot be undone. We must look to the future. If the federal government should now pass a law that provides financial incentives for employers to reduce work hours, there would be immediate pressure to increase employment in those industries. Increased labor productivity might partially offset that need. Some unneeded work might cease to be done. But the big question is whether production and employment would shift back from the enterprises of “waste” into truly valuable economic functions. Given shrinking labor resources, would we choose to produce food or would we continue to produce wars and criminal justice?

Hopefully, some of those “wasteful” functions that have wormed their way into society would be discontinued or severely curtailed; but one never knows. Many such industries hype their function shamelessly, passing themselves off as devotees of “excellence” or another higher virtue rather than the price-gouging hucksters that they actually are. Many are mandated by governments under the control of self-interested groups. It would take a combination of new incentives to reduce work time and the elimination of “sacred cow” privileges to create the kind of society that we wish to have. Behind this vision stands value judgments (on the nature of waste) which would make any such program of reform difficult to implement. Don’t hold your breath if you expect the Bureau of Labor Statistics to begin distinguishing between “useful” and “wasteful” categories of enterprise or employment. Whoever distributes the dollars will make that choice.

***** ****** ***** ****** ***** ******* ***** ****** ***** ******

In summary, then, we have theoretical schemes of economic improvement which look for financial stimulus to overcome down swings in the business cycle. We also have schemes that seek to remedy the humanly damaging effects of displacing human labor with technology. The scheme of E.F. Schumacher envisions moderation in the introduction of labor-saving equipment lest local industries be destroyed. The scheme of Nonfinancial Economics envisions a return to the philosophy that the loss of jobs to productivity-enhancing technology can be largely or partially offset by shorter work hours. All economic schemes seek materially to improve people’s lives. The competing visions will be politically judged.


Click for a translation into:

French - Spanish - German - Portuguese - Italian       

to: Summary Page