Table Of ContentA THEORY OF FULL EMPLOYMENT
A THEORY OF FULL EMPLOYMENT
by
Y.S. BRENNER
and
N. BRENNER-GOLOMB
University of Utrecht
The Netherlands
~.
"
Springer-Science+Business Media, B.V.
Library of Congress Cataloging-in-Publication Data
Brenner, Y.S.
A theory of full employment / Y.S. Brenner and N. Brenner-Golomb.
p. cm.
Includes bibliographical references and index.
ISBN 978-94-010-3730-3 ISBN 978-94-007-0793-1 (eBook)
DOI 10.1007/978-94-007-0793-1
1. Employment (Economic theory) 2. Labor economics. 3. Full
employment policies. 4. Economic policy. 1. Brenner-Golomb, N.
II. Title.
HD5701.5.B73 1996
339.5--dc20 95-42650
CIP
Copyright © 1996 by Springer Science+Business Media Dordrecht
Originally publlshed by Kluwer Academic Publishers in 1996
Softcover reprint of the hardcover 1s t edition 1996
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system or transmitted in any form or by any means, mechanical,
photo-copying, recording, or otherwise, without the prior written permis sion of
the publisher, Springer-Science+Business Media, B.V.
Printed on acid-free paper.
CONTENTS
Foreword vii
1. Introduction I
2. The new feudalism: managerial oligarchy 7
3. The new market structure: globalization 13
4. The new significance ofservices 19
5. The failure ofthe neoclassical synthesis 29
6. The distribution ofnational income between investment and
consumption 35
7. Overproduction, underconsumption and the business cycle 41
8. Distribution: some methodological observations 51
9. Distribution ofnational income between strata ofsociety 59
10. Distribution between the private and the public sector 69
II. The problem of the "Social Welfare Function" 79
12. The disintegration ofwestern civilized society 85
13. Truth and expediency: some introductory philosophical
observations 97
14. Truth and expediency: some philosophical observations concerning
science 117
15. Truth and expediency: philosophical observations concerning
the humanities 137
16. The political dimension 153
17. Conclusions 173
Glossary 185
Cited literature 203
Index 213
FOREWORD
This book hasthree purposes. First,toconvince professional economists who study
the behaviour ofthe economic system as awhole that they must re-examine some
ofthe assumptions behind the reigning economic theories. Second, to explain to
the general public why the currently fashionable economic policies cannot solve
the problem ofmassive long term unemployment. Third, to show that ifpeople's
political engagement is revived there is hope for escaping from the economic
morass and moral wasteland into which, ever since the 1970s, the fashionable
policies have been leading us.
To elucidate the theoretical problem the authors pass in review several recent
structural developments and consider their effect on the economy. To encourage
renewed public political engagement they draw attention to the risks involved in
allowing things to drift on in the present direction.
The avowed purpose of the book imposes the need to present it in a manner
accessible atonce toprofessional macroeconomists and toawider public ofpeople
concerned about today's malaise, politicians, sociologists or philosophers and
others. This imposes the need not to encumber readers with the customary glut of
academic references inthe text, and torefer only to the best known and politically
most influential theories and to authors who are also widely known to people who
are not professional economists. However to reassure readers who may have
doubts about the appropriate interpretation ofthese authors' views, a list of cited
literature is appended to the text which should enable them to find the book or
article from which the quotation or the attributed opinions were gleaned. In
addition a glossary ofterms is also appended so that those who are not familiar
with economic or philosophical terminology can find the meaning ofthe terms we
use without resort to special dictionaries.
Although several suggestions are made as to how economic theory must be
restructured to suit the new circumstances, and what action should be taken to
escape the wasteland of the spirit into which the fashionable policies are leading
us, the authors do not presume to offer easy answers. All they can do is indicate
why, if people will abandon outworn "habits of thought" and think about
alternatives, and renew their political engagement, there is hope to find useful
employment for all who are able and willing to work and to put an end to the fear
ofdestitution.
The authors wish to thank Dr. Eric Clavering, as well as the members ofthe
department ofsocial economics of Utrecht University, for the helpful comments
on the various early drafts of the book, and Mrs. Maiumi Sadler-Hamada for the
time she spent preparing it for publication.
I. INTRODUCTION
For more than a thousand years the world of the Almagest ruled supreme.
Ptolemy's perception of a finite world contained in the sphere ofthe fixed stars,
with the earth stationary at its centre, and the sun and other heavenly bodies
revolving about it in their orbits like "jewels in their fixed mountings", remained
unshaken. ln spite of the continual need to modify this perception ofthe universe
to fit the calendar itwas not abandoned. It seemed self-evident and was confirmed
by the Holy Scriptures. The earth was stationary in the centre of the universe.
Apples landed beneath their trees, not way behind them as they would have done
ifthe earth was moving; and there was no perpetual storm constantly blowing from
the east. It made no difference that people saw that objects falling from the top of
the mast of moving ship landed at the foot of the mast on deck and not in the
ship's wake. Such is the power of "received beliefs". The most ingenious ideas
were advanced to modify Ptolemy's model, but the alternative, a rotating earth
revolving around the sun, was plainly too far-fetched to be considered.
When early in the 16th century Copernicus dared to suggest that the sun and
not the earth isat the centre ofthe solar system, his hypothesis was suppressed for
thirty years and published only a year after his death. When Galileo made
Copernicus's heliocentric theory plausible hewas banned bythe Church authorities
and made to recant and placed under house arrest for the last years ofhis life. One
could improve and supplement the Ptolemaic system, not challenge its essential
"truth".
Like the astronomers ofold who kept on "improving" the Ptolemaic system,
Paul Samuelson, Robert Solow and others tried to bring the economic orthodoxy
closer to reality. Ingeniously they lumped together indigenous self-adjusting
elements into proxy variables, such as "real national income per head" or "capital
labour ratio", and made them part of formulae for predicting the effects of
exogenous factors on these fictitious variables representing the equilibrating
economic system. Sir John Hicks transformed Keynes's critique into a "special
case" ofsticky wages which originate outside the economic order and do not form
an inherent part of it. Dissent from the economics mainstream dogma was either
internalized or marginalised by the establishment. Arthur Cecil Pigou, inderision,
called Keynes "a new Galileo" because he denied the validity ofsome major tenets
of the ruling doctrine. More recent critics are either not published at all or
published in journals and books which are seldom read by anyone but the
converted.
The point isthat while scientists' philosophical background seldom influences
their answers it does determine their questions, and the final outcome can depend
on this. Economists educated in the neoclassical mechanistic paradigm are ill
equipped to ask questions about the organic long-term dynamic process of our
complex economic life. To obtain rigour by quantification they leave out of their
models the so-called exogenous variables. They admit that such variables as
technological innovation, changes in social conduct, the emancipation of women,
the increasing alertness to environmental hazards, may influence the economic
system, but they pretend that these factors are not themselves also influenced by
the economic system. They assume a one-way traffic and ignore that most ofthe
forces labelled exogenous do not develop in an economic vacuum. They simply
disregard the mutual influence of social and economic factors by introducing
unrealistic assumptions such as "ceteris paribus". These assumptions may be
expedient for the prediction of short-run microeconomic processes, but are a
travesty where long-term macroeconomic processes are concerned. They transform
Economics into scholastics - calculating how many angels can simultaneously
dance on the point of one pin.
Professor Milton Friedman tells us that he is less concerned whether an
economic theory istrue ornot than whether or not his recommendations obtain the
expected results. There isofcourse nothing wrong with pragmatic predictions, but
they are poor substitute for fundamental science. Donald McCloskey believes that
economics and other sciences must be read as rhetoric. Pragmatic decisions and
rhetoric are important because they are politically effective, but expediency is the
hallmark of the bureaucrat, not of the scientist. The scientist's hallmark is the
search for truth.
In his Nobel Lecture Professor Friedman claimed that there is little difference
between economics and the natural sciences because "in both there is no certain
substantive knowledge". He is wrong; there is a fundamental difference.
Individuals and entire societies learn from experience: molecules do not. The
reason why neoclassical economics makes proselytes is therefore not its superior
scientific status but the illusion of objectivity it conveys. It answers scientists'
deep-rooted urge to obtain precision by quantification. But as Ray Marshall, the
US Secretary of Labour in the Carter Administration, once said: "it is better to be
approximately right than rigorously wrong".
There may be different perceptions of the universe and various ways of
explaining how it functions, but the universe is "given" while social institutions
and individuals' modes of conduct aretransient. They are the historical product of
societies. Man cannot change the fact that apples fall down and not up, but by
formulating a law of gravity he can calculate the required initial velocity for
sending a rocket to the moon. Yet man's reaching the moon does not invalidate
gravitation. But institutional changes can make nonsense of the behavioural
assumptions upon which our economic theories are founded. The notion of a
rational utility-maximizing individual is absurd in a Feudal context, or in an
environment in which greed constitutes a mortal sin unless utility includes the
expectation ofreward in a life hereafter.
Unlike neoclassical economics, modem science recognises the two-way traffic
between disciplines. Classical physics never produced a comprehensive theory of
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matter. It described the behaviour ofmechanisms taking some material constants
(such as density, elasticity etc.) as given. But with the knowledge gained in
chemistry many questions, like why copper melts at 1083 centigrade, which were
not discussed in classical physics, could be answered. This does not mean that the
laws ofclassical physics were overthrown by physical chemistry. But itdoes show
the limitations ofearlier classical theories. It is the same with economics; until its
reciprocal relationship with other social sciences is established it will remain
debilitated. It must sweep some ofthe most important questions under the carpet.
It must proclaim unemployment voluntary or define it into obscurity. Professor
Friedman does this by introducing the term natural unemployment. This he defines
as the level ofunemployment "that would be ground out by the Walrasian system
of general equilibrium equations provided there is embedded in them the actual
structural characteristics of labour and commodity markets, including market
imperfections, stochastic variability indemands and supplies, the cost ofgathering
information about job vacancies and labour availabilities, the cost ofmobility and
so on". In other words, natural unemployment is all the unemployment which
equilibrium economics cannot account for because its sources impinge upon the
neoclassical system from outside. Like Pontius Pilatus, neoclassical economics
washes the curse of unemployment from its hands, creating the impression that
mankind was on earth to serve the economy and not economic science to serve the
needs ofman.
Similarly mainstream economic theory cannot reconcile short-term with long
run expectations when they run in opposite directions, nor solve the problems
which arise when private and public interests are in conflict. Neoclassical
economics either ignores such questions or denies their actuality. The one it
declares none of its business because "proper economics" is only concerned with
short term problems; the other it proclaims solved because an "invisible hand"
leads people pursuing their own interest to promote that ofsociety more effectively
than when they intend to do so. In essence, therefore, neoclassical economics
endows rationality with a short-run individualistic subjective value-laden meaning
which makes economic theory scientifically untenable. It presents laws oflimited
validity in a manner which gives the impression that they are of universal
applicability - as if the adding up of micro events produces a true reflection of
macro reality. This is the same as concluding that our earth is flat from the
observation that the oceans are not drained ofwater, and liquids flow offuneven
surfaces.
It is perfectly rational for a profit-maximizing entrepreneur to expand
production when demand for his produce is increasing. Should his competitors be
doing the same the combined output may exceed demand and his profit
expectations will be thwarted. This is an information problem which can perhaps
be solved. But what when the maximizing entrepreneur experiences a fall in
demand? Competition will make itrational for him to reduce prices ifhe can, and
ifthe business rivals do the same, to scale down his volume ofproduction. In fact,
given acompetitive market, he isleft with no other alternative and his competitors
are forced to do the same. But scaling down the volume ofoutput implies laying
3
off labour. With this the problem shifts from the micro to the macro level. The
question becomes whether the income effect of falling prices, or lower interest
rates, and perhaps the demand for labour to produce new cost-reducing equipment,
is sufficiently powerful to make good the diminution in consumers' demand. If it
is powerful enough then before long surplus stocks will be depleted and the higher
real wages ofthose who are still employed will usher in recovery. But what ifthe
loss in incomes caused by unemployment is larger than the gain in real earnings
due to the lower prices? Then the entrepreneur is facing a dilemma because in the
long run the revival ofhis profits requires an upturn in employment. In the short
run, individually in a competitive market, he has no alternative but to dismiss
redundant labour, but terminating the depression demands overall employment to
be sustained. In other words, contingent necessity imposes on the individual
producer the need to act contrary to his best advantage in the long-run.
This contradiction between what is rational and indeed unavoidable for an
individual entrepreneur, and what is rational from a wider and long-term point of
view, is by no means hypothetical. It was the reality of the 1930s when neither
poor wages nor low interest rates led to a restoration of entrepreneurs' profit
expectations, investment and recovery. It is true that when entrepreneurs believe
the recession to be short - part ofthe familiar business cycle - low costs may well
encourage them to invest even though the immediate returns may not be very
profitable. But this will hardly happen once they lose faith in imminent revival.
Once this faith is lost, only an independent agent, who is free from the short-term
rationale ofthe market place, can offer solace. In Post-War Regulated Capitalism
this role was assigned to the state. Not fettered by the rationality ofthe individual
profit-maximizing entrepreneur, but guided by another kind of logic, the state
became a corrective agent. Itstask was to intervene where individual self-interest
comes into conflict with the common good. What was not sufficiently recognized
was that the state isalso no free agent and that it functions in a dynamic cultural
environment, that its policies reflect power structures. As Professor Gellner
observed, an egalitarian society which incorporates everyone in a shared moral
citizenship and high culture, without poverty, oppression or arbitrariness, and with
perpetual economic and cognitive growth, is not inscribed into any historical plan.
A stored surplus needs to be guarded and its distribution enforced and no principle
ofdistribution is either self-validating or self-enforcing. Conflict is inevitable, and
the victors have no interest in permitting a return match. Herein lies the root cause
of political coercion.
In essence the utilitarian individualism underlying Neoclassical economics
resembles a Newtonian system. Like particles individuals are endowed with some
kind ofself-centred materialistic gravitation and driven by competition to constant
motion, while the entire system is held together by their relative positioning. This
is a mechanistic and not an organic perception. It excludes all variables which are
not subject to the self-adjusting mechanism ascribed to competition. Collective
hazards, such as nuclear disaster, water and air pollution and the prospect oflong
term mass unemployment, are seen as forces which originate outside the economic
system whose control is assigned to the pragmatic, "exogenous", intervention of
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the state. The multiplicity of these corrections, and the growth of a large state
controlled economic sector, which is not primarily informed by profit
maximization, gave rise to many useful modifications in neoclassical models but
the belief in the soundness of the conception as a whole persevered. Like
Ptolemaic astronomers, neoclassical economists "corrected" the system but refused
to examine its overall validity. They took and continue to take the results of
institutional and social changes as data without asking in how far the economy
itself precipitated them. They ignore the dynamics of socialization processes but
calculate their volume and cost. Postulating that long-term massive unemployment
or the proliferation ofcrime originate outside the "proper" economic system, they
relegate the one to the progress of technology, trade union power, population
accretion, or the legacy of the Welfare State, and the other to the realm of
psychology and sociology. In most other modem sciences such a mechanistic
"isolationist" approach is a stage long passed.
Sombart was of the opinion that the economic philosophy behind the Free
Market is dominated by three principles: acquisition, competition and rationality.
The purpose of all endeavours is acquisition, the means to this end competition,
and the methods employed strictly rational. He believed that the spirit of
acquisition seizes not only upon all phenomena within the economic realm but
reaches over into the entire cultural sphere, including social relations, and tends
to establish the supremacy of business interests over all other values. "Distinct
from the purposes of its owner the capitalistic enterprise takes on a separate
intelligence - it becomes the locus of economic rationality which is quite
independent ofthe personality ofthe owner and the staff." As a result ofthis the
system imposes on society a purely utilitarian valuation of people, objects and
events. The motives of entrepreneurs can be many: the desire for power, the
craving for acclaim, the impulsion to serve the common good and the simple urge
to action, but by virtue ofan inner necessity they all become subordinate to profit
making, because without economic success these desires cannot be attained.
This is a fairly accurate description ofpre-war Capitalism. Behind all this there
was the constant fear ofdestitution: employers were afraid ofbeing driven out of
business and reduced to the ranks ofthe proletariat, and workers feared destitution
and starvation. It can therefore be said that the dynamic element in old-style
capitalism was a two-pronged mechanism ofcompetition - competition between
entrepreneurs for their respective shares of the market, and competition between
employers and workers for their share in the fruits ofproduction. Fearful ofbeing
driven out of business by more efficient competitors, entrepreneurs were
inexorably driven to search for and introduce superior technological and
organizational methods of production, and facing an increasingly well-organized
and powerful labour force they were pressed to introduce improvements which
could help them raise output per worker sufficiently to maintain the necessary
profit to finance the innovations and to compensate them for the rising wages.
Though it was not the exclusive driving force, this dual mechanism was not only
the dynamic but also the progressive element in old-style capitalism - the element
which increased mankind's ascendancy over nature and gave it the power to
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