On some determinants of
the level, growth and
quality of employment
Unemployment under capitalism
Unlike the marginalist theory that posited or assumed
that full employment was the norm under capitalism,
Marx, Kalecki and Keynes argued that unemployment
was the norm rather the exception under capitalism.
There were two major areas of difference between
Marx and Kalecki on the one hand and Keynes on the
other:
1. The formulation of the reasons why unemployment
was the norm rather than the exception.
2. The assessment of the ability of capitalism to resolve
this problem through state action.
Similarities on the issue
Critique of J. B. Say’s Law
Keynes: “Say’s Law, that the aggregate demand price of
output as a whole is equal to its aggregate supply price
for all volumes of output, is equivalent to the
proposition that there is no obstacle to full
employment. If, however, this is not the true law
relating the aggregate demand and supply functions,
there is a vitally important chapter of economic theory
which remains to be written and without which all
discussions concerning the volume of aggregate
employment are futile.”
Similarities on the issue
Marx: “Nothing can be more childish than the dogma, that
because every sale is a purchase and every purchase a sale,
therefore the circulation of commodities necessarily implies
an equilibrium of sales and purchases.”
Though capitalists could, in times of depression, invest to
expand production they will not do so because there is no
inducement to do so in the form of the ‘prior’ prospect of
selling the resulting production at an adequate profit. Idea
captured by the concepts of “hoarding” (or “liquidity
preference” in Keynes).
Problem aggravated by the atomistic decision making typical
of capitalist societies with private ownership.
Difference: Keynes on the
possibility of full employment
Autonomous government expenditure that is not driven by
the inducement to invest can be undertaken so as to serve as
a countercyclical stimulus driving demand and growth.
Such expenditure not constrained by current income
because:
It expands production and tax revenues
Governments (unlike firms and households) have the right to
raise taxes to cover the interest and amortisation
commitments associated with debt.
Government action such as a reduction in interest rates can
encourage private investment and revive expenditure and
growth.
Marx on persistent
unemployment
Structural determinants of unemployment which work back
on aggregate demand:
Because of of competition, capitalists are always seeking to
reduce costs of production by utilising labour-displacing
machinery or other means of securing the same output with
less labour, thus continuously creating unemployment
Capitalism needs “an industrial reserve army” both in order
to discipline labour and keep wages down to a level which
makes production profitable.
As the system tends to full-employment, real wages rise,
product wages increase and profits are squeezed, resulting in a
cutback in investment that slows growth in output AND
employment.
Is near-full employment more
likely than not?
Keynes: Yes
If the state and capital can be persuaded to act in the
best interests of the system
Marx and Kalecki: No
Unemployment and inequality squeeze consumption in
the lower income groups—a tendency that is not
necessarily compensated by investment and upper
income group demand (Rosa Luxemberg, the extreme
view)
Capitalists respond to rising employment early once the
lessons have been learnt
Features of classical industrialization
Outlay on labour or the wage bill was kept to the minimum
possible in order to maximize profits, through the ‘extensive’
exploitation of labour that raises absolute surplus value by the
lengthening of the working day or the widespread use of the
underpaid labour of women and children.
Shift to “intensive’ methods of labour exploitation involving a rise
in relative surplus value through a two routes – a reduction in
necessary labour, ensured by reducing the cost of wage-goods (in
which colonial exploitation played a major role) and a rise in
labour productivity through the substitution of machinery for
living labour.
Thus unemployment, segmented labour markets and poor
labouring conditions seemed to tally with what Marx and Kalecki
conceptualised.
The export of unemployment
Early industrializers partly overcame the problem
of growing unemployment inherent in their
capitalist growth and technical change by
exporting their unemployment abroad
The most direct form of export of unemployment was the
physical migration of population
Second, unemployment was exported by industrializing countries
like Britain, for example, through the flooding the subjugated
already populous tropical colonies with its cotton textiles and
other manufactured goods under discriminating commercial
policy
Third, unemployment was exported by the imperialist country
through a more complex route in which tropical colonies were
made to finance capital exports by the imperialist power
The Golden Age
However, these features came to be seen as exceptional
during the Golden Age between the Second World
War and the 1970s.
The experience, with the Great Depression and the
New Deal, the influence of Keynesianism, the need for
“reconstruction” and “development” in order to avoid
another World War and to combat the socialist threat
encouraged a shift to state spending and the welfare
state that seemed to make recessions and depressions
phenomena of a past gone by.
The defeat of Keynesianism
Once the productivity spin-offs of war-related defence research had
worn off and falling unemployment and the dole increased
working class power and the real wage rate, wages rose relative to
prices. Product wages fell and profits were squeezed. The age of
“New Paradigm”—reasonable growth, low inflation and low
unemployment—was over.
The profits squeeze and the crisis paved the way for a backlash
against Keynesianism. Shift to a ‘fake’ monetarism, involving fiscal
conservatism and the substitution of debt finance private
expenditure for debt financed public expenditure to stimulate
growth.
Periodic crises followed. Resolution of the crises sought through
austerity for the majority and support for a minority of firms and
agents. Damaging impact on labour markets.
Relevance for the UDCs
Capitalist expansion and colonialism as the preKeynesian “solution” to periodic crises affected
them both in terms of the level of accumulation
and the structural features of their economies.
Colonial extraction that allowed for the import
of cheap raw materials and wage goods and kept
down raw material costs and wage rates to
moderate inflation not an option.
No singificant possibility of exporting
unemployment.
Impact through agriculture
Reproduction of backward forms of production forms and
consolidation of land monopoly.
Reinforcement of extra economic systems of domination
and coercion and of patriarchy
Land monopoly results in institutional barriers to landaugmenting investments that constrain growth in output
and marketable surpluses from agriculture.
Two implications:
Limited growth of mass market for manufactures
Binding supply side constraint on availability of essential wage
goods.
The “irrelevance of
Keynesianism”
One view, Keynesianism irrelevant to developing
countries since they are supply constrained systems.
Debt financed expenditures would not provoke trigger
quantity adjustments in the form of increases in
output, but price adjustment that lead to inflation.
Second view builds on this to argue that since, beyond
a point, governments are “sensitive” to the erosion of
real wages due to inflation, public expenditures
“automatically” contract, undermining the Keynesian
countercyclical response.
Implications
Unless institutional reform (land redistribution and
cooperativisation or socialisation) is adopted in UDCs,
the problem of the unemployment characteristic of
capitalism is like to be more intense. So would be the
problem of clearing the “backlog” of the unemployed.
A huge reserve army and the reproduction of
backwardness intensifies the adverse impact of nonmarket forms of coercion such as caste, community
hierarchies and patriarchy on wages and the conditions
of labour on the degree of exploitation.
The specificity of PostRevolution, pre-Reform China
The experience in post-Revolution China different
from that in post-Independence India (for example) for
three, among other, reasons:
China adopted a system with almost no private
ownership making it a supply-constrained rather than a
demand-constrained system.
China implemented radical land reforms
Employment guaranteed
The wage level and productivity increase were of course a
problem
China post-Reform
Unemployment and underemployment return as problems
with rural reform, public enterprise restructuring and
relaxation of rules on labour movement.
Problem partly addressed by the administratively supported
investment-driven strategy.
Incremental demand for labour also driven by the
mercantilist, export-prioritising strategy and the internal
income effects it has.
In the early stages employment conditions worse because of
lax labour regulation and China’s own version of forms of
non-market coercion.
Technology and
unemployment
Since reforms open economic borders as part of the export
effort, the adverse effect of integration on employment
growth felt.
Imports adversely affect domestic production and
employment
With recent date technologies imported from abroad,
labour productivity rises and the responsiveness of
employment to output growth falls.
Years of high GDP growth with persisting unemployment
and a highly segmented labour market, with a highly
‘exploitative’ component.
The situation now
Indications that China has reached the Lewis turning point,
having exhausted its inexhaustible reserve at a constant low wage.
Does that mean that an external-demand driven transition of the
South Korean kind is possible?
Rising wages could undermine export competitiveness.
Investment rates are increasingly proving unsustainable because of
the debt overhang.
This requires shifting to an internal demand-driven, consumptionand wage-led strategy.
But with China increasingly a private-enterprise economy would
the profit squeeze hurt investment further making the transition
difficult?
The Indian case
Crisis in India far more severe. Attempt to pursue a
supply-side, investment-goods driven strategy without
implementing land reforms leads to inflation and the
post-1960s secular stagnation.
Partially “successful” effort in the 1980s to resolve the
impasse by relying on external debt ends with the
balance of payments crisis.
Shift to a typical neoliberal strategy implemented with
the degree of gradualism inevitable in a quasi-federal
democracy. Acceleration since 1990s.
India-specific problems 1
Export success post-reform restricted largely to IT and ITenabled services. India fails to emerge as a manufactured
exporter based either on the prowess of a restructured
domestic industry or on the inflow of relocative foreign
capital.
Growth substantially services-led
Moreover, even services export sector characterised by a low
elasticity of employment with respect to output
Growth rate till 2003 not very different from earlier, so
problem of un- and under-unemployment worsens.
India-specific problems 2
Reform in India (unlike in China) associated with a
gradual shift away from proactive fiscal policies with
high capital expenditures for two reasons:
Emphasis on tax forbearance
Emphasis on fiscal deficit reduction in the name of
fiscal consolidation
Induces a contractionary bias into the system that
further constraints growth
This tendency strengthened by the growing presence of
foreign finance in the domestic economy
Temporary reprieve
Increased capital inflows results in huge infusion of liquidity
into the system
Sharp rise in credit-deposit ratio from 20-22% average
during 19990s to 56 per cent by 2012
Debt financed consumption and investment boom
But largely driving capital intensive demand so employment
fall-out not significant.
Signs that the process, like that in the 1980s, not
sustainable.
Implications
The level of un- and underemployment low and the
quality of employment deteriorates
Reform and services-led growth encourages
“outsourcing”, implying the formal sector intrusion
into those segments of labour markets that are
characterised by non-market forms of coercion
Worst kinds of labour market features persist and
intensify.
An explanatory note
The argument here is NOT that is and when an
economy reaches a state of near full-employment
historically evolved discrimination based on noneconomic characteristics would end, even in the labour
market.
Rather, the argument is that so long as unemployment
and a large labour reserve are realities, social systems of
discrimination would be used to segment labour
markets and resort to discriminatory practices in search
of profits.