Unemployed? Blame the Austrians!

Unemployed? Blame the Austrians!

That may seem an odd idea. The small, charming country of waltzes and Sachertorten to blame for today’ exorbitant unemployment rates? How could that be?

Well, I am not suggesting we blame present-day Austrians. The problem is historical. Beginning in the nineteenth century, a group of Viennese academics developed a distinctive variety of libertarian (free-market) economics, which still influences us today. The most famous member of this group was Ludwig von Mises (1881 – 1973). He is hugely admired by American conservatives and their imitators elsewhere. A big think-tank in Auburn, Alabama, the Ludwig von Mises Institute, runs conferences, publishes books, maintains a huge website and even makes documentary films.

Mises was a formidable character, extremely opinionated, who expressed himself with a vehemence rare among professors. He preached a relentless hatred anything that could possibly be linked with socialism. He castigated trade unions, state welfare, market regulation, state ownership, economic planning, everything that did not fit his approved pattern of untrammeled market freedom.

Yet he himself admitted that his philosophy would not work under certain conditions; and those conditions seem to be the ones we have to live with today.

Mises assumed that labour is the scarcest input in production. All other inputs (energy, materials, capital) are more abundant than labour. Therefore, there is no reason why the economy should not always grow fast enough to keep everyone employed. And indeed, according to Mises, if we leave markets free and avoid any interference with them, the economy will do just that: "on the labour market of a market society there are buyers for every supply of labour offered".

In Mises’ scenario, using up more and more energy and materials creates no problem, since these things are abundant. The only limit on economic growth is the supply of labour. And since, to quote Mises, "in our world there is no abundance, but a shortage of manpower", so labour will always command at least an adequate price (adequate rate of pay). No need, then, for trade unions, minimum wage rates, laws to protect labour. All that obsolete nonsense belongs to the past, to the days when the transcendent merits of free markets were not fully understood, when governments and unions stupidly intervened in markets and denied them their full, glorious freedom.

This argument perhaps made some sense when Mises wrote it, in 1949. In those days, unemployment was low and there were few concerns about supplies of natural resources. World population was around 2.5 billion or 38% of its present level. Today most people, other than diehard conservatives, recognize that we need to use natural resources with restraint; not only because supplies are limited, but also because their excessive consumption damages our environment.

Mises was not unaware that this situation might one day arise. He wrote: "we may try to imagine the conditions within a world in which all material factors of production are so fully employed that there is no opportunity to employ all men [note: no mention of women] or to employ them to the extent that they are ready to work. In such a world labour is abundant". In this world of Mises’ imagination, what would happen? Note carefully the grim words of the guru himself: "If it were a market society, wage rates paid would not be enough to prevent starvation. Those seeking employment would be ready to go to work for any wages, however low, even if insufficient for the preservation of their lives….There is no need…to discuss the problems of such a world. Our world is different".

Today, however, the world of abundant labour is not just imaginary. We do indeed need to discuss the problems that Mises dismissed so curtly. Unemployment is too high worldwide. Wages are too low in very many places, even in rich America. We cannot restore full employment by going for unrestrained growth, lest we drive the prices of energy and other resources through the ceiling and risk catastrophic damage to our environment. In fact, one may well argue that prices are already through the ceiling and the environment is already in grave danger.

So there we have it, straight from the pen of Mises, high priest of the free market. Once labour becomes abundant rather then scarce, his model no longer works. But much of the world persists in trying to follow it.

Quotations are from Mises, ’Human Action’ (William Hodge & Co. Ltd., London, 1949), chapter 7