Much of the world finds itself facing spiraling unemployment. Many economists are touting government welfare programs, such as minimum wage and unemployment benefits, as ways of relieving the problem. In fact, these programs are the very things causing the situation to worsen. Economists Richard Vedder and Lowell Gallaway disprove Keynesian theories on employment in a brilliant book first published in 1993, by the Independent Institute. Vedder and Gallaway, instead, focus their intentions on the true cause of unemployment—wage rigidity as a result of government intervention in the free market. They come to the conclusion that unemployment correlates with high real wages, and suggest that the true solution to unemployment is to allow companies to reduce workers’ w
ages in line with falls in productivity. Although they argue, largely, from the Austrian perspective (although, sometimes they seemingly support Monetarist theories, as well), they prove their thesis with a mix of both logic and econometrics, making a very compelling case for the free market and against government intervention in workers’ wages.
They do this in a relatively short book (around three hundred pages), which is set up in such a way where it clearly states the thesis and then applies it to historical circumstances. The first three chapters deal with how unemployment became a predominate issue in economics, Keynesian theories on unemployment and then the Neoclassical/Austrian approach to the issue. Thereafter, the book covers unemployment from a historical perspective, starting with the recession of 1921. In this case, the book’s argument against government intervention begins very early, as the two authors compare the recession of 1921 and the depression of 1929. They prove that in many cases the drop in productivity and increase in unemployment was more dramatic than that of 1929–1933, but thanks to the free market the economy bottomed-out quickly and was allowed to recover quickly, leading to the boom of 1922–1929 (the book does not argue for any theory on the business cycle, and does not deal with the boom years). They also link the continued decrease in productivity with rising unemployment, giving their own flavor to a business cycle theory. Just as well, they cover employment during the New Deal era—especially, how the New Deal hampered a real recovery—and then employment after the end of the Second World War. The book goes on to cover unemployment after the Korean War, through the Vietnam War and then throughout the 1970s.
These historical examples are set up to provide empirical evidence in support of their thesis. Through statistics, logic and econometrics they prove their arguments brilliantly and thoroughly, shattering Keynesian theories on unemployment. Indeed, the book is very devastating in regards to disproving that government-led central planning can solve the unemployment problem and stimulate a recovery during times of recession and depression. In recent years, this publication has become all too important, and all too ignored. It would do much good for people to read Vedder and Gallaway’s work, especially as unemployment continues to increase in the United States and Europe—and, on aggregate, real wages are not being allowed to fall in order to hasten a recuperation in these countries. Instead, the government is taking the exact steps which Vedder and Gallaway suggest to avoid. Contrary to many books on economics, Vedder and Gallaway exhaustively use a wide array of sources at their disposal to reinforce their points and to make their case all the more legitimate. In fact, it would not be a hyperbole to say that this is, by far, one of the very best books published on the subject of unemployment.
From the book:
Two-thirds of the way through the 1990s, it appears that this century’s last decade rates fairly poorly in terms of its unemployment experience, continuing the generally high unemployment rates observed in the era since 1970. To be sure, the average rate unemployment rate was lower than in the 1980s. Yet, even in good years unemployment has been high by historical standards. For example, in 1996 is the twenty-third consecutive year in which the annual unemployment rate exceeded 5 percent, a rate above the typical (median) rate in six of the century’s decades. The best years in the 1990s (as in the 1970s and 1980s) had higher rates of unemployment than in typical years in all decades before 1970, excepting the Depression decade of the 1930s. This reflects a continuing high natural rate of unemployment…
…the 1990 recession, like many that preceded it, resulted in large part from policy-induced wage shocks…
…If we accept the thesis of economic stagnation in the United States, how do we differ from, say, James Tobin’s position that there is a “malaise” in America? The answer is that we differ, not on the reality of the stagnation in economic growth, but on the question of its implications. The Tobin-style variant of the stagnationist argument is designed to make a case for new federal government initiatives that, allegedly, will “get the economy going,” or stimulate wage growth, or help the poor. The basic philosophical position of such arguments is that we need more federal government, not less.
It is here that we disagree. At this stage of American history, we see the federal government as too large. Its size, relative to the overall economy, is such that is generating the economic outcomes that give rise to the idea that we live in an age of economic stagnation. We are not unique in this view, nor is it confined to just the contemporary age. Thirty-five years ago, Wilhelm Ropke wrote, “There is no likelihood that the indispensable minimum of government organized security will be lacking in this era … On the other hand, it is very likely that the minimum may be dangerously exceeded, to the detriment of the people, the health of our society, and the strength of our economy.” How prophetic!
In the face of heightened government intervention in the labor market, Vedder and Gallaway’s words are becoming all too important.
