Gloedenlife home ?This analysis has its close counterpart in the employment market

Marx and Friedman: Perspectives on Unemployment

By Anthony Emmanuel

 

Note: This essay came about as a rumination on the NAIRU (NonAccelerating Inflation Rate of Unemployment) and differing perspectives on science and ideology within economic analysis. My thanks to Gary Langer for his inspiration.

Copyright 2003. Do not reprint or quote without permission.

 

 

Introduction

Karl Marx and Milton Friedman have both referred to a level of unemployment necessary to maintain stability in market economies.

But both work from a perspective that relates the proof of this level they have found (in their respective moments of history) to deeper beliefs of an ideological nature. For Friedman, it is a belief in markets that finds support from his evidence of the failure of government-led demand policy. For Marx, it is a belief that markets benefit only the capitalist and not the worker that finds support in his evidence.

 

Unemployment according to Milton Friedman

Friedman sets his proposition about a ?natural? rate of unemployment under a section titled ?What monetary policy cannot do? in the transcription of his landmark lecture in 1966 for the American Economic Review.

What it cannot do, in his analysis, is to be directed in such a way as to control a target rate of unemployment. Friedman writes, ??the monetary authority controls nominal quantities?It cannot use its control over nominal quantities to peg a real quantity.?(Friedman 11) His proposition about a ?natural? rate of unemployment rests on expectations regarding real wages and prices. He writes, ? A lower level of unemployment [than the natural rate] will produce upward pressure on real wage rates. A higher level of unemployment is an indication that there is an excess supply labor that will produce downward pressure on real wage rates.?(Friedman 8) Further on, when showing an example of price and wage increases, he explains, ?Suppose?that everyone anticipates that prices will rise?[t]hen wages must rise at that rate simply to keep real wages unchanged. An excess supply of labor will be reflected in a less rapid rise in nominal wages than in anticipated prices, not in an absolute decline in wages.?(Friedman 9) He then continues with his example showing that because of anticipated inflation, there would be a rise in unemployment because, ?under the influence of earlier anticipations, wages kept rising at a pace that was higher than the new price rise, though lower than earlier. This is result experienced and to be expected, of all attempts to reduce the rate of inflation below that widely anticipated.?(Friedman 9) ?Real? wages and the expectations of workers and owners are behind his ?natural? rate. This was to set his propositions in contradistinction with theories such as that behind the Phillips curve, which also showed a balance between unemployment and inflation but only from the perspective of nominal amounts.[1]

Ultimately, the ?natural? rate of unemployment, as shown by Friedman, refers to some threshold level of unemployment below which inflation will rise. But it appears that this rate is related as much to structural changes within the labor market and to institutional considerations as to monetary policy. Friedman writes that, ??many of the market characteristics that determine [natural rate] level are man-made and policy-made?? (Friedman 9) And it also appears by Friedman?s own admission, that this rate is an unknown quantity. He writes that, ? One problem is that [monetary authority] cannot know what the ?natural? rate.?(Friedman 10) And he concludes by stating, ??there is always a temporary trade-off between inflation and unemployment; there, is no permanent trade-off.?(Friedman 11) With this, he makes final the distinction between his propositions and the somewhat similar Philips Curve.

 

Friedman: Ideology and Science

Mark Skousen writes of Friedman that, ?In his autobiography, Friedman says he was "cured" of Keynesian thinking "shortly after the end of the war," but doesn't elaborate. In a recent letter, he denies ever being a thorough Keynesian. ?I was never a Keynesian in the sense of being persuaded of the virtues of government intervention as opposed to free markets.?? Perhaps in the manner of a good convert, Friedman adheres strictly to the letter of his new dogma and allows for overcompensation towards his formers beliefs. This he sums up by writing,? The wide acceptance of [Keynesian] views in the economics profession meant that for some two decades monetary policy was believed by all but a few reactionary souls to have been rendered obsolete by new economic knowledge. Money did not matter.?(Friedman 2)

But Friedman saw the re-ascendance of monetary policy as necessary. In his findings, misdirected monetary policy had been the cause of the Great Depression. For him, ?The Great Contraction [Depression] is tragic testimony to the power of monetary policy?not, as Keynes and so many of his contemporaries believed, evidence of its impotence.?(Friedman 3) And he believed the post-World War 2 inflation to be because of misdirected Keynesian prescriptions: ?These views produces a widespread adoption of cheap money policies after the war. And they received a rude shock when these policies failed in country after country??(Friedman 2)

But his thoughts on monetary policy went further than his historical studies of the failure of Keynesian policy. He declares monetary policy to be the ultimate tool of growth and stability. But not directed monetary policy, as this is too prone to error due to the ?long and variable lags? he predicts afflict the ability to make policy. For him, ?The Great Contraction might not have occurred at all, and if it had, it would have been far less severe, if the monetary authority had avoided mistakes, or if the monetary arrangements had been those of an earlier time when there was no central authority with the power to make the kinds of mistakes that the Federal Reserve System made.?(Friedman 12) For him the only role of monetary policy was to get out of the way of itself.

He suggests, using the words of John Stuart Mill, that money is a machine. And he goes further writing, ? True, money is only a machine, but it is an extraordinarily efficient machine.?(Friedman 12) And he claims that, ?Every other major contraction in this country has been either produced by monetary disorder or greatly exacerbated by monetary disorder.? He continues by asserting that monetary policy can, ??provide a stable background for the economy--keep the machine well-oiled, to continue Mill?s analogy.?(Friedman 13) He goes further, writing, ?Our economic system will work best when producers and consumers, employers and employees, can proceed with full confidence that the average level of prices will behave in a known way in the future?preferably that it will be highly stable? (Friedman 13)

He makes observations that relate directly to an ideology of the proper course of the economy in writing ?But steady monetary growth would provide a monetary climate favorable to the effective operation of those basic forces of enterprise, ingenuity, invention, hard work, and thrift that are the true springs of economic growth. That is the most that we can ask from monetary policy at our present stage of knowledge.? (Friedman 16) And given that he didn?t see fiscal policy as efficacious, then he seems to proposing a policy of non-intervention. His observations support a laissez-faire ideology.

The message was clear: Hands off the levers, let the machine run with minimal settings.

 

Unemployment according to Karl Marx

Marx describes the accumulator (whom I shall refer to as ?the capitalist?): ? His aim is augmentation of his capital, production of commodities containing more labour than he pays for, containing therefore a portion of value that costs him nothing, and that is nevertheless realized when the commodities are sold. Production of surplus-value is the absolute law of this mode of production.?(Marx 4)

Marx ties the demand for labor to the need to accumulate, that is, to profit. For Marx, the accumulation of capital is the cause of shifts in employment. He writes, ?To put it mathematically: the rate of accumulation is the independent, not the dependent, variable; the rate of wages, the dependent, not the independent variable.?(Marx 4)

Marx writes that, ?Since the demand for labour is determined not by the amount of capital as a whole, but by its variable constituent alone, that demand falls progressively with the increase of the total capital, instead of, as previously assumed, rising in proportion to it?. With the growth of the total capital, its variable constituent or the labour incorporated in it, also does increase, but in a constantly diminishing proportion?. it is capitalistic accumulation itself that constantly produces?a relativity[sic] redundant population of labourers, i.e., a population of greater extent than suffices for the average needs of the self-expansion of capital, and therefore a surplus-population.?(Marx 11)

Marx goes further, declaring that the existence of a surplus of laborers is not just a consequence of the system, but an important component within it: ?But if a surplus labouring population is a necessary product of accumulation or of the development of wealth on a capitalist basis, this surplus-population becomes, conversely, the lever of capitalistic accumulation, nay, a condition of existence of the capitalist mode of production. It forms a disposable industrial reserve army, that belongs to capital quite as absolutely as if the latter had bred it at its own cost.?(Marx 11) This surplus grows, ??because the technical conditions of the process of production themselves?machinery, means of transport, [etc.] now admit the rapidest transformation of masses of surplus-product into additional means of production?Overpopulation supplies these masses.?(Marx 12) This population comes about precisely because of their own labors,? The labouring population therefore produces, along with the accumulation capital produced by it, the means by which it itself is made relatively superfluous, is turned in to a relative surplus-population; and it does this to an always increasing extent.?(Marx 11)

For Marx, it is only by the addition of the surplus workers who, ?nourishes capital?(Marx 5) that makes wages rise. Once the unemployment rate of these workers goes below the point of surplus, ?a smaller part of revenue is capitalized accumulation lags, and the movement of rise in wages receives a check. The rise of wages therefore is confined within limits that not only leave intact the foundations of the capitalistic system, but also secure its reproduction on progressive scale.?(Marx 5)

 

So it seems that, for Marx, the stability of the market led system relies on a rate of unemployment. But the forces of an invisible hand do not set this rate. The hand is quite visible and it belongs to the capitalist. He considers,

?The demand for labour is not identical with increase of capital, nor supply of labour with increase of the working-class. [The dice are fixed]. Capital works on both sides at the same time. If its accumulation, on the one hand, increases the demand for labour, it increases on the other the supply labourers by the ?setting free? of them, whilst at the same time the pressure of the unemployed compels those that are employed to furnish more labour, and therefore makes the supply of labour, to a certain extent, independent of the supply of labourers. The action of the law of supply and demand of labour on this basis completes the despotism of capital.?(Marx 16)

I have used this long passage to make clear the connection Marx sees between exploitation by capitalist with a rate of unemployment. He believes the system requires some workers to be unemployed, but not because of drags on growth of total economy through inflation as Friedman would suggest. For Marx, the system is only about the growth of capital to be accumulated by those few who have provided the capital and hire the workers: ?the law of capitalistic accumulation, metamorphosed by economists into pretended law of Nature, in reality merely states that the very nature of accumulation excludes every diminution in the degree of exploitation of labour?It cannot be otherwise in a mode of production in which labourer exists to satisfy the needs of self-expansion of existing values, instead of, on the contrary, material wealth existing to satisfy the needs of development on the part of the labourer.(Marx 5)

Marx also sees the unemployed or surplus-population, as he calls it, in, ??three forms, the floating, the latent, the stagnant.?(Marx 16) Thus he seems to innovate the structure of unemployment we now know. [2]

He also seems to disparage an early version of the monetarists stating,? The so-called currency school concludes from this that with high prices too much, with low prices too little money is in circulation. Their ignorance and complete misunderstanding of facts are worthily paralleled by the economists, who interpret the above phenomena of accumulation by saying that there are now too few, now too many wage-labourers.?(Marx 5)

Friedman and Marx: Ideology and Science

Joan Robinson wrote, ?We must go round about to find the roots of our own beliefs?economics itself?has always been partly a vehicle for the ruling ideology of each period as well as partly a method of scientific investigation.?(Robinson 1)

If we are to believe in a separation of positive and normative statements in economics (a seeming impossibility) it may be said that to identify those parts of Friedman?s and Marx?s respective argument that should be resisted because of their normative properties would require one to indulge fully in an normative counterargument. That is, for one to say that the evidence of economics is separate from the belief system that created it.

Friedman?s ideology is in his faith in market economies and the need to husband its growth without managing its movements. He seemingly separates the science of his perspective from ideology, referring to his historical research into the primacy of Keynesian interventionist policy and its observed failings up to and including the post-World War 2 period. His belief system is subsumed in his findings. He promotes an almost self-perpetuating engine for economic stability through almost non-existent monetary policy. He does not question the reason for the need of this stability or its outcomes. He writes, ?There is wide agreement about the major goals of economic policy: high employment, stable prices, and rapid growth.?(Friedman 1) The natural question is ?agreement among whom?? For Friedman the question is merely reflexive. His beliefs are present in the statement and his proposal supporting the efficient way to achieving the goals in the statement.

This is distinct from Marx, who questions the whole structure of the market economy. He examines the engine only to point out the flaws in the entire vehicle. Economic analysis, as he saw it, was ?economic apologetics?. He presents examples of theory only to brush them away as ?effrontery? (Marx 15) The fate of worker is to be exploited and the prospect of improvement because of movements in the structure of the labor-wage construct is, for him, unlikely because, ? A rise in the price of labor, as a consequence of accumulation of capital, only means, in fact, that the length and weight of the golden chain the wage-worker has already forged for himself, allow of a relaxation of the tension of it.?(Marx 4)

Friedman?s perspective is obvious in his use of language. The term ?natural? seems to imply a state of perfection. That this perfection is reliant on non-interventionist monetary policy set in motion and then left to run itself gives one the impression of a deity creating a state of nature and then watching it run from afar. For Marx, the system is set to work to the advantage of those who hold capital. The intervention is implied and complete. Their respective science found in their historical analyses and statistical gatherings is in the support of their perspective. Which came first, the ideology or the science? I cannot speak for either gentleman. But the ideology is certainly supported by the evidence. And their respective perspective certainly would have influenced their viewing of the evidence.

 

 

 

 

Bibliography

Friedman, Milton ?The Role of Monetary Policy?, The American Economic Review, Volume 58, Issue 1. March 1968.

 

Marx, Karl Capital: Volume 1.

Marx, Karl The German Ideology. Part 1

Robinson, Joan Economic Philosophy, Aldine Publishing. Chicago. 1962

Skousen, Mark ?The Freeman?, Volume 48, Number7. July 1998

 



[1] As he noted himself writing, ?You will recognize the close similarity between this statement and the celebrated Philips Curve. The similarity is not coincidental?But unfortunately it [Phillips Curve] contains a basic defect?the failure to distinguish between nominal wages and real wages.? (Friedman 8)

[2] Involuntary unemployment seemingly the innovation of Keynes.