Mass Unemployment Is a Failure of Capitalism

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Yves here. While Wolff’s discussion of unemployment is useful, my favorite is Michal Kalecki’s classic esssay on the political obstacles to achieving full employment. If you have not previously read it, you must stop now and do so. Key section:

We have considered the political reasons for the opposition to the policy of creating employment by government spending. But even if this opposition were overcome — as it may well be under the pressure of the masses — the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a ‘disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.

Kalecki in 1943 anticipated UBI-type proposals and negative interest rates.

By Richard D. Wolff, professor of economics emeritus at the University of Massachusetts, Amherst, and a visiting professor in the Graduate Program in International Affairs of the New School University, in New York. Wolff’s weekly show, “Economic Update,” is syndicated by more than 100 radio stations and goes to 55 million TV receivers via Free Speech TV. His two recent books with Democracy at Work are Understanding Marxism and Understanding Socialism, both available at Produced by Economy for All, a project of the Independent Media Institute

The difficulties caused to workers by record unemployment during the pandemic are a product of capitalism. Most of the time, employers decide to hire or fire workers depending on which choice maximizes employers’ profits. Profit, not the full employment of workers nor of means of production, is “the bottom line” of capitalism and thus of capitalists. That is how the system works. Capitalists are rewarded when their profits are high and punished when they are not. It’s nothing personal; it’s just business.

Unemployment is a choice mostly made by employers. In many cases of unemployment, employers had the option not to fire employees. They could have kept all employed but reduced their hours or days or else rotated off-work times among employees. Employers can choose to retain idled employees on payrolls and suffer losses they hope will be temporary.

However, unemployment is received almost everywhere and by almost all as a negative, unwanted experience. Workers want jobs. Employers want employees producing profitable output. Governments want the tax revenues that flow from employees and employers actively collaborating.

So why has the capitalist system periodically produced economic downturns wherever it has settled across the last three centuries? They have happened, on average, every four to seven years. The United States has had three crashes so far this century: “dot-com” in 2000; “sub-prime mortgage” in 2008; and now “coronavirus” in 2020. Thus the United States conforms to capitalism’s “norm.” Capitalists do not want unemployment, but they regularly generate it. It is a basic contradiction of their system.

There are good reasons why capitalism produces and reproduces unemployment over time. It draws benefits (as well as suffers losses) from doing so. Reproducing a “reserve army of the unemployed” enables periodic upsurges in capital investment to draw more employees without driving up wages. Rising wages—and thus falling profits—would accompany investment surges if all workers were already fully employed before such surges. Unemployment also disciplines the working class. The unemployed, often desperate to get jobs, give employers the opportunity to replace existing employees with unemployed candidates willing to work for less. Unemployment thus operates as a downward pressure on wages and salaries and thereby a boost for profits. In short, capitalism both wants and does not want unemployment; it expresses this tension by periodically adding to and drawing down a reserve army of the unemployed that it continually maintains.

That reserve army exposes a stark reality that no ideological gloss ever fully erases. While unemployment serves capitalism, it does not well serve society. That key difference is most glaringly in evidence when unemployment is very high, as it is today. Consider that today’s many unemployed millions continue much of their consumption while ceasing much of their production. While they continue to take their means of consumption from socially produced wealth, they no longer produce nor thereby add to social wealth as they did when employed.

Unemployment thus entails wealth redistribution. Part of the wealth produced by those who are still employed must be redistributed away from them and to the unemployed. Taxes accomplish that redistribution publicly. Employees and employers, labor and capital struggle over whose taxes will fund the consumption of the unemployed. Such redistribution struggles can be and often are bitter and socially divisive. In the private sphere of households, portions of the incomes and wealth of the employed likewise get redistributed to enable consumption by the unemployed: spouses share, as do parents and children, relatives, friends, and neighbors. Working classes always redistribute their incomes and wealth to cope with the unemployment capitalism so regularly imposes on them. Such redistributions typically cause or aggravate many tensions and conflicts within the working class.

Many public and private redistribution struggles could be avoided if, for example, public re-employment replaced private unemployment. If the state became the employer of last resort, those fired by private employers could immediately be rehired by the state to do socially useful work. Governments would stop paying unemployment benefits and instead pay wages to the re-employed, obtain in return real goods and services, and distribute them to the public. The 1930s New Deal did exactly that for millions fired by private employers. A similar alternative to private capitalist employment and unemployment (but not part of the New Deal) would be to organize the unemployed into worker co-op enterprises performing socially useful work on contract with the government.

This last alternative is the best because it could develop a new worker-co-op sector of the U.S. economy. That would provide the U.S. public with direct experience in comparing the capitalist with the worker-co-op sector in terms of working conditions, product quality and price, civic responsibility, etc. On that concrete, empirical basis, societies could offer people a real, democratic choice as to what mix of capitalist and worker-co-op sectors of the economy they prefer.

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  1. xkeyscored

    societies could offer people a real, democratic choice

    And one that’s long overdue. Even if we take democracy as meaning voting one way or another every few years, I don’t recall any such endorsement of our current economic system, though admittedly some votes affect the details. On the contrary, the more I’ve learned about it over the years, the more it seems to be the present outcome of unfinished class struggles, with the interests of a minority continuing to dominate.

    And if we take democracy as meaning we, the people, decide our future, then there’s even less that’s democratic about capitalism. The harder we work at destroying our future, the more capitalism rewards us. Useful work that enriches us is denigrated and frequently unpaid. We don’t make these decisions, ‘the market’ does. Call it a bazaarocracy then, not a democracy. Better still, democratise it. Let’s start doing work that needs doing. And stop the work that makes our future bleaker.

    1. Rod

      “Let’s start doing work that needs doing. And stop the work that makes our future bleaker.”

      Simple and clear. Not complicated, and I would suggest the definition of that ‘Work” start by following your simple axiom

  2. Christopher Herbert

    Federal income taxes, in my view, are primarily used to reduce the wealth of the rich. Taxes destroy currency, in other words, which is the main purpose of taxation. On the other hand, Congressional spending creates new currency. It is how Congress pays its bills. From that point of view, every dollar in circulation today was created this way. Looked at in a slightly different way, dollars in circulation are just those dollars not taxed away. If this basic framework is accurate, and I believe it is, then unemployment is a political choice made by Congress. Capitalism is inherently unstable. Given that fact, there will be periods where capitalists fire employees. Congress should fund a ‘national job guarantee’ program where the government employs those who have been fired. There are literally millions of jobs that capitalists avoid because they are not profitable. But they are beneficial nonetheless. Put the unemployed to work there, and when capitalism regains its footing and starts hiring anew, there will be a well fed, better educated employee base from which to hire.

    1. nothing but the truth

      its not clear how you reached “unemployment is a political choice made by Congress” but anyway.

      businesses want to make money. work is just incidental. Thats why the end game is to convert productive businesses into rent extraction.

      all employment is eventually about access to resources. As resources become expensive (rising collateral ), the owners want to increase margins and employ less workers to use the resource.

      1. eg

        Unemployment (and its cousin, underemployment) is created when the monetary sovereign fails to run a deficit sufficient to offset the demand destruction caused by the private sector’s (all users of the currency over which the sovereign exercises a monopoly of issue — so businesses, households and subsovereign governments like states and municipalities) propensity to save plus any trade deficit.

        Sovereign spending determines whether or not there is a deficit sufficient to support full employment. This is a political decision, NOT an economic one.

        So to the extent that your US Congress is monetarily sovereign (and I believe that it is when it so chooses), “unemployment is a political choice by Congress.”

        1. nothing but the truth

          i hope i’m wrong but this sounds like saying obesity exists because the photoshop guy didn’t fix it.

          unemployment has to be analyzed in terms of real factors of production. or at least attempt to. to see it as a purely money (accounting) issue does no make sense. accounting is after the fact to make sense of economic activity.

          once all non labour resources are taken (utilized), marginal increase in labour supply will be detrimental to labour.

          1. eg

            nothing but the truth, I’m talking about the government as ELR — employer of last resort (Federal Job Guarantee). By definition, this position is NOT detrimental to labor. It is detrimental to oligarchs.

          2. Yves Smith Post author

            Please go read Kalecki as I advised EVERYONE to do. He lays it would. The short version is businesses don’t want full employment because they won’t have enough control over workers. Therefore government needs to provide the missing demand and investment.

  3. TheHoarseWhisperer

    One of the foundational assumption underlying capitalism is that markets optimize for efficiency. You participate by taking financial risk (investment) and you reap the rewards (profit) if your decision where and when to invest was correct.

    And because efficiency is – prima facie – good, the tenured hand-maidens of capitalism ensconced at the Econ departments of our universities have created the myth that markets are good and by extension – – capitalism is also good. Things like unemployment are “collateral damage” – a necessary sacrifice that has to be made (if you are sitting in in Econ 101 at Princeton, usually this means “… by someone else.”)

    Over time, my layman’s observations of the economy have lead me to believe that capitalism as practiced today strives not simply to reach maximum profit, but to reach maximum profit while bending risk to 0.

    In other words taking profit without taking on risk is the name of the game. We saw this during the financial crisis, all of the Obama administration and it continues strong today. For anyone who needs an unequivocal example, Google “Jon Corzine” and “fiduciary duty”.

    However, not everybody gets a shot at this game – you need access. Financial, political – there are different paths but they all lead through the establishment. TINA…

    Employment in a system so rigged is akin to conscription into the markets for the majority of the population. (There are numerous studies that describe how unhappy most people are with their paying jobs.)

    The author suggests at the end that there is a remedy – – worker coops, etc. With all due respect, I don’t believe that there is a remedy. In my opinion, the only viable remedy is through education of the young and this is as much of a pipe dream as worker cooperatives in Alabama.

    1. xkeyscored

      I’m not sure I agree with your first paragraph, or at least the phrase fundamental assumption. Yes, capitalists participate by investing and reaping rewards if they’re lucky. And proles participate by selling their labour where they can and using their remuneration to pay for the right to live.

      But who makes this supposedly fundamental assumption that any of this maximises efficiency, let alone that doing so is good? Neither the proles nor capital really. They get on with pursuing their interests. Capital wants profits, which might come through gross inefficiency as with monopolies. And most proles know that increased efficiency – one worker doing what five used to do – means increased misery.

      I don’t think it’s fundamental at all. It smacks to me of a justification dreamed up after the fact, dressed up as a logically self-evident axiom that cannot be questioned. This is the way we do things, and if there has to be an explanation, how about it’s the most efficient way of doing things, and don’t ask why or why efficiency’s good. Enter the economics profession to elaborate all this into a kind of religious code to be propagandised. You’re being conscripted into making crap nobody needs with huge environmental and social footprints because that’s efficient so shut up and be grateful.

      1. TheHoarseWhisperer

        Capitalism is a construct. I do not affirm the veracity of the assumptioms it rests on. Quite on the contrary, I believe that you and I are most likely in agreement that some of these assumptions would not withstand rigorous examination in light of the historical record and common sense.

        My point is that like many constructed systems, capitalism rests on a set of assumptions (axioms as you aptly put it) which are never questioned by the information nexus of society. One of these axioms that capitalism rests on is “markets are efficient”. This is never questioned – economists mostly disagree on the degree of “freedom” the market should have.

        As long as people are taught these axioms at schools, read about them in the newspapers and “everywhere you get your podcasts” , there is no [peaceful] solution to the problems of capitalism. If the majority of the population believes in the precepts, we are always going to look as a society for a solution based on marginal fixes. How laughable of a solution was Dodds – Frank act? What did it really fix?

        1. Philip

          Dodds – Frank act was never intended as a ‘solution’ to bad bank practices, it’s purpose was to regulate them! Make those practices legal, but increase the cost to banks to make them think twice. And deliberately/coincidentally it created a large number of well paid regulator jobs for members of the professional and managerial class, the bed rock of the Democrat party?

  4. Jesper

    This bit:

    Unemployment is a choice mostly made by employers. In many cases of unemployment, employers had the option not to fire employees. They could have kept all employed but reduced their hours or days or else rotated off-work times among employees. Employers can choose to retain idled employees on payrolls and suffer losses they hope will be temporary.

    Is key for me. That choice can be made by governments by legislating and enforcing maximum working hours or worded in a possibly more appealing way – legislating for more time off, longer paid vacations, longer paid parental leave, earlier retirements etc.

    1. nothing but the truth

      i paid my workers for 6 weeks for doing nothing, gambling on the PPP “loan”. Luckily i got it.

      I opened this week. Endless bitching and moaning. Workers have gotten used to money without work.

      Businesses will find worker expectations difficult

      1. periol

        Were they moaning about having to work, or were they moaning about working during a pandemic? Maybe they noticed that every day this week, 20k-30k people were receiving positive COVID-19 results in America?

        Maybe they’re scared going back to work puts them in danger of getting a positive test result too? People don’t always come out and say they’re scared, they usually find other ways to express it.

      1. Jesper

        No, I do not agree with that.
        Legislation can be changed, enforcement can be had but governments have decided not to act on behalf of the common good and that is a failure.
        Capitalism is a way to describe the world, the criteria for capitalism is whether or not it describes the world accurately enough – and it does.
        The current failure is that of elected officials (individuals) as they have allowed themselves to be seduced and/or corrupted.

  5. Alice X

    I don’t mean to be over simplistic but the essential element in capitalism is the matter of power relationship. Kalecki comes closer to stating this directly but Wolff has a fly by with his state organized worker co-ops. The anarchists have long viewed that power is always the problem, whether held by the individual capitalists or a state. Absent that, there remains the problem that people are not angels. In a sense, mass unemployment is not so much a failure of capitalism, but a by-product.

    1. Krystyn Podgajski

      You are right on about it being about power. I often say that the only difference between slavery and wage-slavery is that a wage slave has a slight chance of becoming a slave master one day. That gross hope of power is what keeps this disturbing system alive.

      1. Travis Bickle

        Ditto that.

        And it’s a perspective necessary absorbed by the ambitious as they make their way up the managerial ladder in corporate life. It is easily noticeable in the proprietary attitude often adopted intuitively from these striver’s role models, who give them their first tentative bit of power over others.

        This attitude tellingly shows up in referring to “my” people, which is usually accompanied by a degree of chest-swelling pride, depending on the scope of ownership being alluded to. There are managers who see their roles more in terms of responsibility to be borne, but they are not exhibiting the deeper understanding that will get them promoted by those higher up the food chain, where at each level the perspective of owning/controlling human chattel is internalized more explicitly.

    2. Jen

      That’s why they never succeed. Power doesnt need to always be seen as a negative. One of the great lessons from Foucault.

  6. Dirk77

    I read this piece as a bittersweet love letter to capitalism of the last century, with the dot com crash being the last event. As Ian Welsh pointed out two days ago, the one virtue of capitalism is that it is supposed to reward the efficient and punish the inefficient, with workers needing to move to other firms as a collateral effect. Yet, as any reader of this blog knows, capitalism doesn’t even do that anymore in the US. Now we have bailout after bailout to wall st or big business, with the corresponding criminogenic environment. These days, if you aren’t on the make you are not just a loser, but immoral. And heaven forbid you actually produce something other people need. Yanis [Greek last name I can’t spell] has a TED talk(!) in which he discusses the two paths society can take from here. One path is employee owned firms as a way of eliminating the capital-worker struggle. I recall this idea has arisen on NC before, this article itself touches upon worker co-ops, and the commenters above mention it. I’m not sure how employee owned firms are supposed to work and I’m not a utopian, but it is interesting. As Victor Hugo said, nothing is more powerful than an idea whose time has come. We certainly could use some social experimenting.

  7. Susan the other

    I’m right there with Richard Wolff. He abhors inequality. Kalecki was at the forefront of fighting fascism – and he treated the subject methodically and with genteel language. Much like Mariner Eccles – who himself a banker – iirc – nonetheless coined the term “banksters”. Fascism was a bitter taste of what capitalism could become if left to its own devices and totally at the mercy of the profit imperative with nothing to balance it out. For fixing today’s mess, I’d follow both Galecki and Richard Wolff. But Wolff has my devotion because he looks at the necessity now for Green Jobs. Because treating the devastation of society is beyond disregarding. And also ecause treating the devastation of the planet is beyond disregarding. Certainly beyond genteel language. Imo there’s no room left for gentility. Government jobs, green jobs and jobs ensuring the security of the country, as in agriculture, medical care, education – wherever – are the only answer. Not just for capitalism to recover, but for society and the planet to recover. And then to maintain. I couldn’t help thinking as I read Kalecki’s 1943 essay that the MIC is the biggest culprit. We maintained it long beyond its shelf life just to have an engine that turned the economy – maintained employment and profits for all. Now it has become a monolith with vested interests of its own. So it was too much a bargain with the devil. We wasted two generations of people who could have been establishing an equitable economy for everyone and proper maintenance of the planet. Instead we sold it all down the river for profits and power. Sand castles.

  8. gunnar

    On the one hand the MMT people say the government controls the expansion of money and credit and on the other hand they describe that system as “capitalist.” Which one is it?

    1. Massinissa

      Both. What makes the two mutually exclusive? I don’t think Adam Smith’s conception of capitalism excludes this possibility, considering currency has almost always been government controlled.

      If you define Capitalism another way, pray tell when that ‘Capitalism’ you speak of has ever existed?

      1. gunnar

        It can’t be both. One is central planning and by “capitalist” we must mean free price discovery.

        If you control the supply of money you control the price of money and to a large extent you decide who gets funded and who doesn’t. In a free market system the market decides the price of money. The centralization of money and credit is one of the 12 main tenets of the Communist Manifesto.

  9. shinola

    From the Kalecki essay:

    “The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism.”

    Now, keeping this in mind, read ‘The Intercept’ article “Screen New Deal” in today’s Links (marked as today’s Must Read). I can’t help but think that the Public Private Partnership sort of thing proposed by Eric Schmidt, Bill Gates & other Silicon Valley types for a massive public surveillance system is just this – a big step toward a New Fascism.

    In every crisis lies opportunity, don’cha know.

    1. Lee Christmas

      What makes Capitalism so efficient? I don’t see efficient distribution of resources, yet alone equitable distribution.

      Even before this recent crisis, we had massive amounts of food waste. It has been estimated that up to 1/3 of food gets wasted before it even reaches our plate. Add to that a certain amount of waste we all commit by overbuying, or buying something that goes bad quickly. What is efficient about this?

      It has been said to me that we either have too much food and some goes to waste, or not enough and we have empty shelves. This is efficient?

      And of those with enough to waste–an extra car in your driveway, an extra home somewhere else, the extra food in your pantry that you don’t eat because you ordered in–what do they say to those without enough? “This is the most efficient system.”

      It is incredibly efficient at funneling all resources, and thus, power, to a select few. This tempers the strength of democracy, as Alexander Hamilton was eager to accomplish.

      It’s difficult for me to imagine that we’re not heading towards a neo-fascist, neo-feudal situation and marking the ballot every 2-4 years is like turning the wheel of the car on the Disneyland ride “Autopia.”

  10. Aumua

    Having watched a number of his videos, I find myself reading this in Professor Wolff’s voice haha. He has a very distinctive and acerbic way of talking.

  11. k teh

    All the isms are feudalism.

    Rent was cheap until the 70s, which was much better for building wealth.

    Food was more expensive, which was much better in terms of cost of health.

    Parents took responsibility for educating their children, which was much more effective.

    I know a lot of women would rather work than stay home, but printing a mountain of debt to make it happen was a really, really bad idea.

    Every cycle, the financiers replace the bottom rungs on the economic ladder and replenish the credit system. And who gets wiped out – women and minorities.

    The only thing that has changed with all that debt is that the 10% protecting the 1% , throwing their own under the bus every cycle, more fairly represents physical demographics. judging a book by its cover is a poor basis for decision.

    Work means that wealth was actually created in the process. What is called work these days is not work.

    Real food, real education and real wealth doesn’t come from government. All the data says so. If women want to work outside the home, and they do, the workweek must be 24 hours and wages to rent must go up accordingly.

    The hard way or the easy way is the only question. The landlords are going to get culled.

    And with that, I will leave it to Skippy.

  12. jbp

    Why should full employment be the goal as opposed to everyone having adequate resources to live a fulfilling life? As we move forward with automation, AI, big tech, etc the only way to produce full employment will be by:
    1. Legislating inefficiency (ie banning self checkout at the supermarket, not letting you pump your own gas, banning automated assembly lines).
    2. Directly creating unnecessary jobs.
    Neither option leads to fulfilling, meaningful work.

    The obvious solution is high marginal tax rates and a universal basic income. This way we all reap the benefits of advancing technology.

    Given a choice between working as a cashier or pumping gas vs UBI, who would actually choose the menial job? And how does society benefit from legislating into existence these menial, unnecessary jobs? There is no “dignity of work” when your job is repetitive and unfulfilling.

    I worked for years in retail (and pumped gas through high school) before going to medical school and becoming a doctor (I was one of the oldest students at my medical school). You couldn’t pay me enough to go back to some of the jobs I held. It wasn’t that the pay and benefits were terrible (although they were pretty bad), it was the lack of progress and feeling that I was wasting my life away on repetitive, pointless tasks. Granted, some people may enjoy these jobs but they are definitely in the minority.

    1. eg

      In contrast to your #2, lots of “necessary” jobs (Green New Deal) are NOT created by the private sector because there are no profits to be had by hiding “externalities”

      The ELR/Job Guarantee is superior to the UBI both in terms of productivity and social inclusion.

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